AUBURN NATIONAL BANCORPORATION, INC - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
☒
For the quarterly period ended
September 30, 2023
☐
For the transition period __________ to __________
Commission File Number:
0-26486
Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
63-0885779
(I.R.S. Employer
Identification No.)
100 N. Gay Street
Auburn
,
Alabama
36830
334
)
821-9200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
Yes
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
AUBN
NASDAQ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at November 6, 2023
Common Stock, $0.01 par value per share
3,493,614
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
PAGE
Item 1
3
4
5
6
7
8
Item 2
28
45
46
47
48
49
50
51
Item 3
52
Item 4
52
Item 1
52
Item 1A
52
Item 2
53
Item 3
53
Item 4
53
Item 5
53
Item 6
54
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30,
December 31,
(Dollars in thousands, except share data)
2023
2022
Assets:
Cash and due from banks
$
16,350
$
11,608
Federal funds sold
416
9,300
Interest-bearing bank deposits
12,845
6,346
Cash and cash equivalents
29,611
27,254
Securities available-for-sale
373,286
405,304
Loans
545,610
504,458
Allowance for credit losses
(6,778)
(5,765)
Loans, net
538,832
498,693
Premises and equipment, net
45,666
46,575
Bank-owned life insurance
17,010
19,952
Other assets
26,319
26,110
Total assets
$
1,030,724
$
1,023,888
Liabilities:
Deposits:
Noninterest-bearing
$
279,458
$
311,371
Interest-bearing
685,143
638,966
Total deposits
964,601
950,337
Federal funds purchased and securities sold under agreements to repurchase
1,741
2,551
Accrued expenses and other liabilities
2,931
2,959
Total liabilities
969,273
955,847
Stockholders' equity:
Preferred stock of $
.01
200,000
no shares issued
—
—
Common stock of $
.01
8,500,000
issued
3,957,135
39
39
Additional paid-in capital
3,801
3,797
Retained earnings
118,326
116,600
Accumulated other comprehensive loss, net
(49,013)
(40,920)
Less treasury stock, at cost -
463,521
453,683
and December 31, 2022, respectively
(11,702)
(11,475)
Total stockholders’ equity
61,451
68,041
Total liabilities and stockholders’ equity
$
1,030,724
$
1,023,888
See accompanying notes to consolidated financial statements
4
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Interest income:
Loans, including fees
$
6,373
$
5,097
$
18,146
$
14,638
Securities:
Taxable
1,783
1,808
5,474
4,691
Tax-exempt
402
441
1,209
1,275
Federal funds sold and interest-bearing bank deposits
85
426
442
767
Total interest income
8,643
7,772
25,271
21,371
Interest expense:
Deposits
2,334
524
4,934
1,661
Short-term borrowings
37
5
68
15
Total interest expense
2,371
529
5,002
1,676
Net interest income
6,272
7,243
20,269
19,695
Provision for credit losses
105
250
(191)
—
Net interest income after provision for credit losses
6,167
6,993
20,460
19,695
Noninterest income:
Service charges on deposit accounts
148
158
456
446
Mortgage lending
110
126
345
566
Bank-owned life insurance
87
97
311
293
Other
520
427
1,336
1,259
Securities gains, net
—
44
—
44
Total noninterest income
865
852
2,448
2,608
Noninterest expense:
Salaries and benefits
2,844
2,975
8,809
8,901
Net occupancy and equipment
755
794
2,341
1,955
Professional fees
261
235
898
704
Other
1,502
1,411
4,743
3,814
Total noninterest expense
5,362
5,415
16,791
15,374
Earnings before income taxes
1,670
2,430
6,117
6,929
Income tax expense
182
432
737
1,049
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Net earnings per share:
Basic and diluted
$
0.43
$
0.57
$
1.54
$
1.67
Weighted average shares outstanding:
Basic and diluted
3,496,411
3,507,318
3,499,518
3,513,068
See accompanying notes to consolidated financial statements
5
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Other comprehensive loss, net of tax:
Unrealized net loss on securities
(9,941)
(17,223)
(8,093)
(46,533)
Reclassification adjustment for net gain on securities
recognized in net earnings
—
(33)
—
(33)
Other comprehensive loss
(9,941)
(17,256)
(8,093)
(46,566)
Comprehensive loss
$
(8,453)
$
(15,258)
$
(2,713)
$
(40,686)
See accompanying notes to consolidated financial statements
6
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Unaudited)
Accumulated
Common
Additional
other
Shares
Common
paid-in
Retained
comprehensive
Treasury
(Dollars in thousands, except share data)
Outstanding
Stock
capital
earnings
(loss) income
stock
Total
Quarter ended September 30, 2023
Balance, June 30, 2023
3,499,412
$
39
$
3,800
$
117,781
$
(39,072)
$
(11,572)
$
70,976
Net earnings
—
—
—
1,488
—
—
1,488
Other comprehensive loss
—
—
—
—
(9,941)
—
(9,941)
Cash dividends paid ($
.27
—
—
—
(943)
—
—
(943)
Stock repurchases
(5,883)
—
—
—
—
(130)
(130)
Sale of treasury stock
85
—
1
—
—
—
1
Balance, September 30, 2023
3,493,614
$
39
$
3,801
$
118,326
$
(49,013)
$
(11,702)
$
61,451
Quarter ended September 30, 2022
Balance, June 30, 2022
3,509,940
$
39
$
3,796
$
111,994
$
(28,419)
$
(11,303)
$
76,107
Net earnings
—
—
—
1,998
—
—
1,998
Other comprehensive loss
—
—
—
—
(17,256)
—
(17,256)
Cash dividends paid ($
.265
—
—
—
(929)
—
—
(929)
Stock repurchases
(4,640)
—
—
—
—
(128)
(128)
Sale of treasury stock
55
—
1
—
—
—
1
Balance, September 30, 2022
3,505,355
$
39
$
3,797
$
113,063
$
(45,675)
$
(11,431)
$
59,793
Nine months ended September 30, 2023
Balance, December 31, 2022
3,503,452
$
39
$
3,797
$
116,600
$
(40,920)
$
(11,475)
$
68,041
Cumulative effect of change in accounting
standard
—
—
—
(821)
—
—
(821)
Net earnings
—
—
—
5,380
—
—
5,380
Other comprehensive loss
—
—
—
—
(8,093)
—
(8,093)
Cash dividends paid ($
.81
—
—
—
(2,833)
—
—
(2,833)
Stock repurchases
(10,108)
—
—
—
—
(229)
(229)
Sale of treasury stock
270
—
4
—
—
2
6
Balance, September 30, 2023
3,493,614
$
39
$
3,801
$
118,326
$
(49,013)
$
(11,702)
$
61,451
Nine months ended September 30, 2022
Balance, December 31, 2021
3,520,485
$
39
$
3,794
$
109,974
$
891
$
(10,972)
$
103,726
Net earnings
—
—
—
5,880
—
—
5,880
Other comprehensive loss
—
—
—
—
(46,566)
—
(46,566)
Cash dividends paid ($
.795
—
—
—
(2,791)
—
—
(2,791)
Stock repurchases
(15,280)
—
—
—
—
(460)
(460)
Sale of treasury stock
150
—
3
—
—
1
4
Balance, September 30, 2022
3,505,355
$
39
$
3,797
$
113,063
$
(45,675)
$
(11,431)
$
59,793
See accompanying notes to consolidated financial statements
7
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(Dollars in thousands)
2023
2022
Cash flows from operating activities:
Net earnings
$
5,380
$
5,880
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
(191)
—
Depreciation and amortization
1,278
1,098
Premium amortization and discount accretion, net
1,834
2,450
Net gain on securities available-for-sale
—
(44)
Net gain on sale of loans held for sale
(81)
(315)
Net gain on other real estate owned
—
(162)
Loans originated for sale
(3,417)
(8,711)
Proceeds from sale of loans
3,482
10,292
Increase in cash surrender value of bank-owned life insurance
(259)
(294)
Income recognized from death benefit on bank-owned life insurance
(52)
—
Net decrease (increase) in other assets
47
(15,570)
Net increase in accrued expenses and other liabilities
2,672
14,102
Net cash provided by operating activities
10,693
8,726
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
19,377
38,871
Purchase of securities available-for-sale
—
(93,106)
Increase in loans, net
(41,025)
(15,644)
Net purchases of premises and equipment
(170)
(5,540)
Proceeds from bank-owned life insurance death benefit
216
—
Proceeds from surrender of bank-owned life insurance
3,037
—
Increase in FHLB stock
(164)
(74)
Proceeds from sale of other real estate owned
—
536
Net cash used in investing activities
(18,729)
(74,957)
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
(32,717)
5,570
Net increase (decrease) in interest-bearing deposits
46,982
(21,875)
Net decrease in federal funds purchased and securities sold
under agreements to repurchase
(810)
(835)
Stock repurchases
(229)
(460)
Dividends paid
(2,833)
(2,791)
Net cash provided by (used in) financing activities
10,393
(20,391)
Net change in cash and cash equivalents
2,357
(86,622)
Cash and cash equivalents at beginning of period
27,254
156,259
Cash and cash equivalents at end of period
$
29,611
$
69,637
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
4,384
$
1,705
Income taxes
800
1,031
See accompanying notes to consolidated financial statements
8
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individuals and
commercial customers in Lee County, Alabama and surrounding areas through its wholly owned subsidiary, AuburnBank
(the “Bank”). The Company does not have any segments other than banking that are considered material.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not
include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited
consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair
statement of the financial position and the results of operations for all periods presented. All such adjustments are of a
normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of
operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further
information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2022.
The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Significant intercompany transactions and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term
include the determination of allowance for credit losses on investment securities and loans, fair value of financial
instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update (“ASU” or “updates”) 2014-09,
from Contracts with Customers
, codified at
606. The Company adopted ASC
606 using the modified retrospective transition method. The majority of the Company’s revenue stream is generated from
interest income on loans and securities which are outside the scope of ASC 606.
The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, interchange
fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The
following is a summary of the revenue streams that fall within the scope of ASC 606:
●
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either
(i) transaction-based, for which the performance obligations are satisfied when the individual transaction is
processed, or (ii) set periodic service charges, for which the performance obligations are satisfied over the period
the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic
service charges are recognized over the service period.
●
Gains on sales of OREO
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale
exists, including a determination that the institution will collect substantially all of the consideration to which it is
entitled. In addition to the loan-to-value ratio, where the seller provides the purchaser with financing, the analysis
is based on various other factors, including the credit quality of the purchaser, the structure of the loan, and any
other factors that we believe may affect collectability.
9
Subsequent Events
The Company has evaluated the effects of events and transactions through the date of this filing that have occurred
subsequent to September 30, 2023. The Company does not believe there were any material subsequent events during this
period that would have required further recognition or disclosure in the unaudited consolidated financial statements
included in this report.
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current -period presentation. These
reclassifications had no material effect on the Company’s previously reported net earnings or total stockholders’ equity.
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an
estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current
conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost,
including loan receivables and held-to-maturity debt securities, and some off -balance sheet credit exposures such as
unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount
expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the
modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of CECL on January 1, 2023 included an increase in the allowance for credit
losses on loans of $
1.0
for credit losses on unfunded loan commitments of $
0.1
recorded a net decrease to retained earnings of $
0.8
CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be
reported in accordance with previously applicable accounting standards.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have
any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined
that an allowance for credit losses on available for sale securities was not deemed material.
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures” on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan
refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU
2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated financial statements.
10
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in
the process of collection, or when management believes, after considering economic and business conditions and collection
efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days
after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net
amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from
both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company’s loan loss estimation process includes procedures to appropriately consider the unique characteristics of its
respective loan segments (commercial and industrial, construction and land development, commercial real estate,
residential real estate, and consumer loans). These segments are further disaggregated into loan classes, the level at which
credit quality is monitored. See Note 5, Loans and Allowance for Credit Losses, for additional information about our loan
portfolio.
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model for each loan segment, except consumer
loans. The weighted average remaining life method is used to estimate credit loss assumptions for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering the forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic factors, and LGD, which is the estimate
of the amount of net loss in the event of default. This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis. The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial, construction and land development,
commercial real estate, and residential real estate loans. In addition, forecasted changes in the Alabama home price index
is considered in the model for construction and land development and residential real estate loans; forecasted changes in the
national commercial real estate (“CRE”) price index is considered in the model for commercial real estate and multifamily
loans; and forecasted changes in the Alabama gross state product is considered in the model for multifamily loans.
Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates
of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments and principal
payments (“curtailments”) when appropriate. Management's determination of the contract term excludes expected
extensions, renewals, and modifications unless the extension or renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company. To the extent the lives of the loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion period.
11
The weighted average remaining life method was deemed most appropriate for the consumer loan segment because
consumer loans contain many different payment structures, payment streams and collateral. The weighted average
remaining life method uses an annual charge-off rate over several vintages to estimate credit losses. The average annual
charge-off rate is applied to the contractual term adjusted for prepayments.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are
believed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may
increase reserve levels and include adjustments for lending management experience and risk tolerance, loan review and
audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying
collateral, external factors and economic conditions not already captured.
Loans secured by real estate with balances equal to or greater than $500 thousand and loans not secured by real estate with
balances equal to or greater than $250 thousand that do not share risk characteristics are evaluated on an individual basis.
When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the
expected credit losses are based on the estimated fair value of collateral held at the reporting date, adjusted for selling costs
as appropriate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s consolidated
statements of earnings. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment
at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77 thousand upon the adoption of
ASC 326. At September 30, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other
liabilities was $
0.2
Provision for Credit Losses
The composition of the provision for (recoveries of) credit losses for the respective periods is presented below.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Provision for credit losses:
Loans
$
158
$
250
$
(133)
$
—
Reserve for unfunded commitments (1)
(53)
70
(58)
35
Total provision for credit losses
$
105
$
320
$
(191)
$
35
(1)
Reserve requirements for unfunded commitments were reported as a component of other noninterest expense prior
to the adoption of ASC 326.
12
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for
the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of
securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30, 2023 and
2022, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods are presented below
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Basic and diluted:
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Weighted average common shares outstanding
3,496,411
3,507,318
3,499,518
3,513,068
Net earnings per share
$
0.43
$
0.57
$
1.54
$
1.67
NOTE 3: VARIABLE INTEREST ENTITIES
Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or other legal structure that does not have
equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities.
At September 30, 2023, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated
VIE, discussed below.
New Markets Tax Credit Investment
The New Markets Tax Credit (“NMTC”) program provides federal tax incentives to investors to make investments in
distressed communities and promotes economic improvement through the development of successful businesses in these
communities. The NMTC is available to investors over seven years and is subject to recapture if certain events occur
during such period. At September 30, 2023 and December 31, 2022, respectively, the Company had one such investment in
the amounts of $1.8 million and $2.1 million, respectively, which was included in other assets in the consolidated balance
sheets. The Company’s equity investment in the NMTC entity meets the definition of a VIE. While the Company’s
investment exceeds 50% of the outstanding equity interests, the Company does not consolidate the VIE because it does not
meet the characteristics of a primary beneficiary since the Company lacks the power to direct the activities of the VIE.
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
1,807
$
1,807
Other assets
13
NOTE 4: SECURITIES
At September 30, 2023 and December 31, 2022, respectively, all securities within the scope of ASC 320,
Investments –
Debt and Equity Securities,
were classified as available-for-sale. The fair value and amortized cost for securities available-
for-sale by contractual maturity at September 30, 2023 and December 31, 2022, respectively, are presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
September 30, 2023
Agency obligations (a)
$
15,063
49,036
58,651
—
122,750
—
17,152
$
139,902
Agency MBS (a)
—
10,095
26,845
155,517
192,457
—
39,581
232,038
State and political subdivisions
300
981
15,488
41,310
58,079
—
8,717
66,796
Total available-for-sale
$
15,363
60,112
100,984
196,827
373,286
—
65,450
$
438,736
December 31, 2022
Agency obligations (a)
$
4,935
50,746
69,936
—
125,617
—
15,826
$
141,443
Agency MBS (a)
—
7,130
27,153
183,877
218,160
—
33,146
251,306
State and political subdivisions
300
642
15,130
45,455
61,527
11
5,681
67,197
Total available-for-sale
$
5,235
58,518
112,219
229,332
405,304
11
54,653
$
459,946
(a) Includes securities issued by U.S. government agencies or government-sponsored entities.
Securities with aggregate fair values of $
224.6
208.3
respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan
Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required or permitted by law.
Other assets on the accompanying consolidated balance sheets include non-marketable equity investments. The carrying
amounts of non-marketable equity investments were $
1.4
1.2
2022. Non-marketable equity investments include FHLB of Atlanta tock, Federal Reserve Bank of Atlanta (“FRB”) stock,
and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at September 30, 2023 and December 31, 2022, respectively,
segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or
longer, are presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
September 30, 2023:
Agency obligations
$
—
—
122,750
17,152
$
122,750
17,152
Agency MBS
84
3
192,373
39,578
192,457
39,581
State and political subdivisions
12,726
755
44,313
7,962
57,039
8,717
Total
$
12,810
758
359,436
64,692
$
372,246
65,450
December 31, 2022:
Agency obligations
$
55,931
4,161
69,686
11,665
$
125,617
15,826
Agency MBS
70,293
5,842
147,867
27,304
218,160
33,146
State and political subdivisions
44,777
2,176
13,043
3,505
57,820
5,681
Total
$
171,001
12,179
230,596
42,474
$
401,597
54,653
14
For the securities in the previous table, the Company assesses whether or not it intends to sell or is more likely than not that
the Company will be required to sell the securities before recovery of the amortized cost basis, which may be maturity.
Because the Company currently does not intend to sell those securities that have an unrealized loss at September 30, 2023
and it is not more-likely-than-not that the Company will be required to sell the security before recovery of their amortized
cost bases, which may be maturity, the Company has determined that no provision for credit loss is necessary. In addition,
the Company evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit
deterioration, which would require the recognition of a provision to increase the allowance for credit losses. Such
evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings
and any other known adverse conditions related to the specific security. The unrealized losses associated with available-for-
sale securities at September 30, 2023 are driven by changes in market interest rates and are not due to the credit quality of
the securities, and accordingly, no allowance for credit losses is considered necessary for available-for-sale securities at
September 30, 2023. These securities will continue to be monitored as a part of the Company's ongoing evaluation of credit
quality. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable
that the issuers can make all contractual principal and interest payments.
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Gross realized gains
$
—
44
$
—
44
Realized gains, net
$
—
44
$
—
44
NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES
September 30,
December 31,
(Dollars in thousands)
2023
2022
Commercial and industrial
$
66,014
$
66,212
Construction and land development
70,129
66,479
Commercial real estate:
Owner occupied
66,237
61,125
Hotel/motel
36,992
33,378
Multi-family
47,634
41,084
Other
131,101
128,986
Total commercial real estate
281,964
264,573
Residential real estate:
Consumer mortgage
60,024
45,370
Investment property
57,126
52,278
Total residential real estate
117,150
97,648
Consumer installment
10,353
9,546
Total Loans
$
545,610
$
504,458
Loans secured by real estate were approximately 86.0% of the Company’s total loan portfolio at September 30, 2023. At
September 30, 2023, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and
surrounding areas.
The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for
determining its allowance for credit losses. As part of the Company’s quarterly assessment of the allowance, the loan
portfolio included the following portfolio segments: commercial and industrial, construction and land development,
commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio
segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute,
risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk.
15
The following describes the risk characteristics relevant to each of the portfolio segments and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or other needs
for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural
production. Generally, the primary source of repayment is the cash flow from business operations and activities of the
borrower.
Construction and land development (“C&D”) —
includes both loans and credit lines for the purpose of purchasing,
carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit
lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate (“CRE”) —
includes loans in these classes:
●
Owner occupied
owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary
source of repayment is the cash flow from business operations and activities of the borrower, who owns the
property.
●
Hotel/motel
– includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon
income generated from the hotel/motel securing the loan. The underwriting of these loans takes into consideration
the occupancy and rental rates, as well as the financial health of the borrower.
●
Multi-family
for 5 or more unit residential properties and apartments leased to residents. Generally , the primary source of
repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans
takes into consideration the occupancy and rental rates, as well as the financial health of the respective borrowers.
●
Other
multi-family properties, and which are not owner occupied. Loans in this class include loans for neighborhood
retail centers, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to
local and other businesses. Generally, the primary source of repayment is dependent upon income generated from
the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates,
as well as the financial health of the borrower.
Residential real estate (“RRE”) —
includes loans in these two classes:
●
Consumer mortgage
consumers that are secured by a primary residence or second home. These loans are underwritten in accordance
with the Bank’s general loan policies and procedures which require, among other things, proper documentation of
each borrower’s financial condition, satisfactory credit history , and property value.
●
Investment property
Generally, the primary source of repayment is dependent upon income generated from leasing the property
securing the loan. The underwriting of these loans takes into consideration the rental rates and property values, as
well as the financial health of the borrowers.
Consumer installment —
includes loans to individuals, which may be secured by personal property or are unsecured. Loans
include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with
the Bank’s general loan policies and procedures which require, among other things, proper documentation of each
borrower’s financial condition, satisfactory credit history, and, if applicable, property values.
16
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of
September 30, 2023 and December 31, 2022.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
September 30, 2023:
Commercial and industrial
$
65,813
39
—
65,852
162
$
66,014
Construction and land development
70,129
—
—
70,129
—
70,129
Commercial real estate:
Owner occupied
65,230
206
—
65,436
801
66,237
Hotel/motel
36,992
—
—
36,992
—
36,992
Multi-family
47,634
—
—
47,634
—
47,634
Other
131,101
—
—
131,101
—
131,101
Total commercial real estate
280,957
206
—
281,163
801
281,964
Residential real estate:
Consumer mortgage
59,799
—
—
59,799
225
60,024
Investment property
57,087
14
—
57,101
25
57,126
Total residential real estate
116,886
14
—
116,900
250
117,150
Consumer installment
10,297
56
—
10,353
—
10,353
Total
$
544,082
315
—
544,397
1,213
$
545,610
December 31, 2022:
Commercial and industrial
$
65,764
5
—
65,769
443
$
66,212
Construction and land development
66,479
—
—
66,479
—
66,479
Commercial real estate:
Owner occupied
61,125
—
—
61,125
—
61,125
Hotel/motel
33,378
—
—
33,378
—
33,378
Multi-family
41,084
—
—
41,084
—
41,084
Other
126,870
—
—
126,870
2,116
128,986
Total commercial real estate
262,457
—
—
262,457
2,116
264,573
Residential real estate:
Consumer mortgage
45,160
38
—
45,198
172
45,370
Investment property
52,278
—
—
52,278
—
52,278
Total residential real estate
97,438
38
—
97,476
172
97,648
Consumer installment
9,506
40
—
9,546
—
9,546
Total
$
501,644
83
—
501,727
2,731
$
504,458
17
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the
standard asset classification system used by the federal banking agencies. The following table presents credit quality
indicators for the loan portfolio segments and classes by year of origination as of September 30, 2023. These categories are
utilized to develop the associated allowance for credit losses using historical losses adjusted for qualitative and
environmental factors and are defined as follows:
●
Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if
any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
●
Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or
inadequately protect the Company’s position at some future date. These loans are not adversely classified and do
not expose an institution to sufficient risk to warrant an adverse classification.
●
Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment,
even though they are currently performing. These loans are characterized by the distinct possibility that the
Company may incur a loss in the future if these weaknesses are not corrected .
●
Nonaccrual – includes loans where management has determined that full payment of principal and interest is not
expected.
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
September 30, 2023:
Commercial and industrial
Pass
$
8,403
15,220
14,164
5,760
7,447
8,138
6,283
$
65,415
Special mention
—
—
—
—
—
—
348
348
Substandard
56
—
27
—
6
—
—
89
Nonaccrual
—
—
—
—
162
—
—
162
Total commercial and industrial
8,459
15,220
14,191
5,760
7,615
8,138
6,631
66,014
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
Pass
34,977
30,923
1,735
1,562
131
162
639
70,129
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
34,977
30,923
1,735
1,562
131
162
639
70,129
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
10,489
7,476
18,785
10,639
4,359
9,965
3,408
65,121
Special mention
263
—
—
—
—
—
—
263
Substandard
—
—
—
—
52
—
—
52
Nonaccrual
—
—
—
—
801
—
—
801
Total owner occupied
10,752
7,476
18,785
10,639
5,212
9,965
3,408
66,237
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
6,437
9,981
3,234
1,539
3,952
11,849
—
36,992
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
6,437
9,981
3,234
1,539
3,952
11,849
—
36,992
Current period gross charge-offs
—
—
—
—
—
—
—
—
18
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
September 30, 2023:
Multi-family
Pass
12,436
18,185
1,972
6,163
3,825
3,126
1,927
47,634
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
12,436
18,185
1,972
6,163
3,825
3,126
1,927
47,634
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
16,532
36,560
32,107
14,053
10,902
19,004
914
130,072
Special mention
—
—
—
873
—
—
—
873
Substandard
—
—
—
156
—
—
—
156
Nonaccrual
—
—
—
—
—
—
—
—
Total other
16,532
36,560
32,107
15,082
10,902
19,004
914
131,101
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
18,918
20,284
2,731
2,694
1,492
12,771
79
58,969
Special mention
—
—
—
—
—
250
—
250
Substandard
—
—
—
—
—
580
—
580
Nonaccrual
—
—
—
118
—
107
—
225
Total consumer mortgage
18,918
20,284
2,731
2,812
1,492
13,708
79
60,024
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
11,594
12,822
9,564
12,984
5,763
2,373
1,473
56,573
Special mention
42
—
—
—
—
—
—
42
Substandard
—
249
—
237
—
—
—
486
Nonaccrual
—
—
—
—
—
25
—
25
Total investment property
11,636
13,071
9,564
13,221
5,763
2,398
1,473
57,126
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
4,699
4,189
861
251
126
167
—
10,293
Special mention
—
—
1
2
—
—
—
3
Substandard
12
24
8
13
—
—
—
57
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
4,711
4,213
870
266
126
167
—
10,353
Current period gross charge-offs
34
37
13
1
—
—
—
85
Total loans
Pass
124,485
155,640
85,153
55,645
37,997
67,555
14,723
541,198
Special mention
305
—
1
875
—
250
348
1,779
Substandard
68
273
35
406
58
580
—
1,420
Nonaccrual
—
—
—
118
963
132
—
1,213
Total loans
$
124,858
155,913
85,189
57,044
39,018
68,517
15,071
$
545,610
Total current period gross charge-offs
$
34
37
13
1
—
—
—
85
19
(Dollars in thousands)
Mention
Substandard
Accruing
Nonaccrual
Total loans
December 31, 2022:
Commercial and industrial
$
65,550
7
212
443
$
66,212
Construction and land development
66,479
—
—
—
66,479
Commercial real estate:
Owner occupied
60,726
238
161
—
61,125
Hotel/motel
33,378
—
—
—
33,378
Multi-family
41,084
—
—
—
41,084
Other
126,700
170
—
2,116
128,986
Total commercial real estate
261,888
408
161
2,116
264,573
Residential real estate:
Consumer mortgage
44,172
439
587
172
45,370
Investment property
51,987
43
248
—
52,278
Total residential real estate
96,159
482
835
172
97,648
Consumer installment
9,498
1
47
—
9,546
Total
$
499,574
898
1,255
2,731
$
504,458
The following table is a summary of the Company’s nonaccrual loans by major categories as of September 30, 2023 and
December 31, 2022.
CECL
Incurred Loss
September 30, 2023
December 31, 2022
Nonaccrual
Nonaccrual
Total
Loans with
Loans with an
Nonaccrual
Nonaccrual
(Dollars in thousands)
No Allowance
Allowance
Loans
Loans
Commercial and industrial
$
162
—
162
$
443
Commercial real estate
801
—
801
2,116
Residential real estate
250
—
250
172
Total
$
1,213
—
1,213
$
2,731
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to
determine expected credit losses:
(Dollars in thousands)
Real Estate
Business Assets
Total Loans
September 30, 2023:
Commercial and industrial
$
—
162
$
162
Commercial real estate
801
—
801
Total
$
801
162
$
963
Allowance for Credit Losses
The Company adopted ASC 326 on January 1, 2023, which introduced the CECL methodology for estimating all expected
losses over the life of a financial asset. Under the CECL methodology, the allowance for credit losses is measured on a
collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics
with the collectively evaluated pools, evaluations are performed on an individual basis.
20
The following table details the changes in the allowance for credit losses by portfolio segment for the respective periods.
September 30, 2023
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
1,198
1,005
3,788
529
114
$
6,634
Charge-offs
—
—
—
—
(18)
(18)
Recoveries
1
—
—
2
1
4
Net recoveries (charge-offs)
1
—
—
2
(17)
(14)
Provision for credit losses
16
68
15
20
39
158
Ending balance
$
1,215
1,073
3,803
551
136
$
6,778
Nine months ended:
Beginning balance
$
747
949
3,109
828
132
$
5,765
Impact of adopting ASC 326
532
(17)
873
(347)
(22)
1,019
Charge-offs
—
—
—
—
(85)
(85)
Recoveries
197
—
—
12
3
212
Net recoveries (charge-offs)
197
—
—
12
(82)
127
Provision for credit losses
(261)
141
(179)
58
108
(133)
Ending balance
$
1,215
1,073
3,803
551
136
$
6,778
September 30, 2022
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
761
576
2,523
753
103
$
4,716
Charge-offs
(13)
—
—
—
(3)
(16)
Recoveries
2
—
—
8
6
16
Net (charge-offs) recoveries
(11)
—
—
8
3
—
Provision for loan losses
(18)
213
38
22
(5)
250
Ending balance
$
732
789
2,561
783
101
$
4,966
Nine months ended:
Beginning balance
$
857
518
2,739
739
86
$
4,939
Charge-offs
(17)
—
—
—
(67)
(84)
Recoveries
6
—
22
22
61
111
Net (charge-offs) recoveries
(11)
—
22
22
(6)
27
Provision for loan losses
(114)
271
(200)
22
21
—
Ending balance
$
732
789
2,561
783
101
$
4,966
21
The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio
segment and impairment methodology as of September 30, 2022 as determined, prior to the adoption of ASC 326.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(In thousands)
losses
in loans
losses
in loans
losses
in loans
September 30, 2022:
Commercial and industrial
$
732
70,685
—
—
732
70,685
Construction and land development
789
54,773
—
—
789
54,773
Commercial real estate
2,561
249,860
—
170
2,561
250,030
Residential real estate
783
91,598
—
—
783
91,598
Consumer installment
101
7,551
—
—
101
7,551
Total
$
4,966
474,467
—
170
4,966
474,637
(1)
Represents loans collectively evaluated for impairment, prior to the adopton of ASC 326, in accordance with ASC 450-20,
Loss
Contingencies, and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)
Represents loans individually evaluated for impairment, prior to the adoption of ASC 326, in accordance with ASC 310-30,
Receivables, and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
22
Impaired loans
The following tables present impaired loans at December 31, 2022 as determined under ASC 310 prior to the adoption of
ASC 326. Loans that have been fully charged-off are not included in the following tables. The related allowance generally
represents the following components that correspond to impaired loans:
●
Individually evaluated impaired loans equal to or greater than $500 thousand secured by real estate (nonaccrual
construction and land development, commercial real estate, and residential real estate loans).
●
Individually evaluated impaired loans equal to or greater than $250 thousand not secured by real estate
(nonaccrual commercial and industrial and consumer installment loans).
The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated
for impairment at December 31, 2022.
December 31, 2022
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial and industrial
$
210
(1)
209
$
—
Commercial real estate:
Owner occupied
858
(3)
855
Total commercial real estate
858
(3)
855
—
Total
1,068
(4)
1,064
—
With allowance recorded:
Commercial and industrial
234
—
234
$
59
Commercial real estate:
Owner occupied
1,261
—
1,261
446
Total commercial real estate
1,261
—
1,261
446
Total
1,495
—
1,495
505
Total impaired loans
$
2,563
(4)
2,559
$
505
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
23
Pursuant to the adoption of ASU 2022-02, effective January 1, 2023, the Company prospectively discontinued the
recognition and measurement guidance previously required for troubled debt restructurings (TDRs). As of September 30,
2023, the Company had no loans that would have previously required disclosure as TDRs.
The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the
amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the quarter
and nine months ended September 30, 2022 as determined under ASC 310 prior to the adoption of ASC 326.
Quarter ended September 30, 2022
Nine months ended September 30, 2022
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
173
—
$
199
—
Total commercial real estate
173
—
199
—
Residential real estate:
Investment property
—
—
6
—
Total residential real estate
—
—
6
—
Total
$
173
—
$
205
—
NOTE 6: MORTGAGE SERVICING RIGHTS, NET
Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the
corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using
assumptions that market participants would use in estimating future net servicing income, including estimates of
prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee
income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs
under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period
of, estimated net servicing income.
The Company generally sells, without recourse, conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae,
where the Company services the mortgages sold and records MSRs. MSRs are included in other assets on the
accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted
as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage
lending income.
24
The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
MSRs, net:
Beginning balance
$
1,050
$
1,259
$
1,151
$
1,309
Additions, net
7
13
16
110
Amortization expense
(46)
(64)
(156)
(211)
Ending balance
$
1,011
$
1,208
$
1,011
$
1,208
Valuation allowance included in MSRs, net:
Beginning of period
$
—
$
—
$
—
$
—
End of period
—
—
—
—
Fair value of amortized MSRs:
Beginning of period
$
2,312
$
2,547
$
2,369
$
1,908
End of period
2,351
2,478
2,351
2,478
NOTE 7: FAIR VALUE
Fair Value Hierarchy
“Fair value” is defined by ASC 820,
Fair Value Measurements and Disclosures
, and focuses on the exit price, i.e., the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal
market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date.
GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets.
Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the
asset or liability, either directly or indirectly.
Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the
inputs market participants would use in pricing the asset or liability.
Level changes in fair value measurements
Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The
Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when
transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For the nine months ended September 30, 2023, there
were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.
25
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company
obtains pricing data from third party pricing services. These third party pricing services consider observable data that may
include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis,
management reviews the pricing data received from the third party pricing services for reasonableness given current market
conditions. As part of its review, management may obtain non-binding third party broker/dealer quotes to validate the fair
value measurements. In addition, management will periodically submit pricing information provided by the third party
pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the
prices provided by the third party pricing service with its own prices and will review the significant assumptions and
valuation methodologies used with management.
The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of
September 30, 2023 and December 31, 2022, respectively, by caption, on the accompanying consolidated balance sheets by
ASC 820 valuation hierarchy (as described above).
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
September 30, 2023:
Securities available-for-sale:
Agency obligations
$
122,750
—
122,750
—
Agency MBS
192,457
—
192,457
—
State and political subdivisions
58,079
—
58,079
—
Total securities available-for-sale
373,286
—
373,286
—
Total assets at fair value
$
373,286
—
373,286
—
December 31, 2022:
Securities available-for-sale:
Agency obligations
$
125,617
—
125,617
—
Agency MBS
218,160
—
218,160
—
State and political subdivisions
61,527
—
61,527
—
Total securities available-for-sale
405,304
—
405,304
—
Total assets at fair value
$
405,304
—
405,304
—
Assets and liabilities measured at fair value on a nonrecurring basis
Collateral Dependent Loans
Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The
fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of
comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determined values based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of
the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's
underlying financial condition.
26
Mortgage servicing rights, net
MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or
estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of
MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the
present value of estimated future net servicing income using assumptions that market participants would use in estimating
future net servicing income, including estimates of mortgage prepayment speeds, discount rates, default rates, costs to
service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the
Company will review broker surveys and other market research to validate significant assumptions used in the model. The
significant unobservable inputs include mortgage prepayment speeds or the constant prepayment rate (“CPR”) and the
weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of
the Company’s MSRs are classified within Level 3 of the valuation hierarchy.
The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of
September 30, 2023 and December 31, 2022, respectively, by caption, on the accompanying consolidated balance sheets
and by FASB ASC 820 valuation hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
September 30, 2023:
Loans, net
(1)
963
—
—
963
Other assets
(2)
1,011
—
—
1,011
Total assets at fair value
$
1,974
—
—
1,974
December 31, 2022:
Loans, net
(3)
2,054
—
—
2,054
Other assets
(2)
1,151
—
—
1,151
Total assets at fair value
$
3,205
—
—
3,205
(1)
Loans considered collateral dependent under ASC 326.
(2)
Represents MSRs, net, carried at lower of cost or estimated fair value.
(3)
Loans considered impaired under ASC 310-10-35 Receivables, prior to the adoption of ASC 326. This amount reflects the recorded
investment in impaired loans, net of any related allowance for loan losses.
Quantitative Disclosures for Level 3 Fair Value Measurements
At September 30, 2023 and December 31, 2022, the Company had no Level 3 assets measured at fair value on a recurring
basis. For Level 3 assets measured at fair value on a non-recurring basis at September 30, 2023 and and December 31,
2022, the significant unobservable inputs used in the fair value measurements and the range of such inputs with respect to
such assets are presented below.
Range of
Weighted
Carrying
Significant
Unobservable
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Inputs
of Input
September 30, 2023:
Collateral dependent loans
$
963
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,011
Discounted cash flow
Prepayment speed or CPR
7.1
-
19.7
7.3
Discount rate
9.5
-
11.5
9.5
December 31, 2022:
Impaired loans
$
2,054
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,151
Discounted cash flow
Prepayment speed or CPR
5.2
-
18.6
7.5
Discount rate
9.5
-
11.5
9.5
27
Fair Value of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial instruments, whether or not
recognized on the face of the balance sheet, where it is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather are good-faith estimates of the fair
value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar
loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently
offered for deposits with similar remaining maturities.
The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial
instruments at September 30, 2023 and December 31, 2022 are presented below. This table excludes financial instruments
for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value
included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included
noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits. Fair value approximates
carrying value in these financial liabilities due to these products having no stated maturity. Additionally, financial
liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased
and securities sold under agreements to repurchase.
The following table summarizes our fair value estimates:
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
September 30, 2023:
Financial Assets:
Loans, net (1)
$
538,832
$
501,725
$
—
$
—
$
501,725
Financial Liabilities:
Time Deposits
$
193,575
$
189,310
$
—
$
189,310
$
—
December 31, 2022:
Financial Assets:
Loans, net (1)
$
498,693
$
484,007
$
—
$
—
$
484,007
Financial Liabilities:
Time Deposits
$
150,375
$
150,146
$
—
$
150,146
$
—
(1) Represents loans, net of allowance for credit losses. The fair value of loans was measured using an exit price notion.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since 1984. As a bank holding
company, the Company may diversify into a broader range of financial services and other business activities than currently
are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the Bank.
The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including
Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April 1995. The
Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”). The Bank has been a member of the FHLB of Atlanta since 1991. Certain of the statements made in this
discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are
“forward-looking statements” as more fully described under “Special Cautionary Notice Regarding Forward-Looking
Statements” below.
The following discussion and analysis is intended to provide a better understanding of various factors related to the results
of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed consolidated financial statements and related
notes for the quarters and nine months ended September 30, 2023 and 2022, as well as the information contained in our
annual report on Form 10-K for the year ended December 31, 2022 and our interim reports on Form 10-Q for the quarters
ended March 31, 2023 and June 30, 2023.
Special Cautionary Notice Regarding Forward-Looking Statements
Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” “Description of
Property” and elsewhere, are “forward-looking statements” within the meaning and protections of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different from future results, performance,
achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “designed”, “plan,” “point to,”
“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target”, “view”, and other similar words and expressions of
the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
●
the effects of future economic, business and market conditions and changes, foreign, domestic and local, including
inflation, seasonality, natural disasters or climate change, such as rising sea and water levels, hurricanes and
tornados, COVID-19 or other epidemics or pandemics including supply chain disruptions, inventory volatility, and
changes in consumer behaviors;
●
the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or other events that may affect
general economic conditions;
29
●
governmental monetary and fiscal policies, including the continuing effects of fiscal and monetary stimuli in
response to the COVID-19 crisis, followed by changes in monetary policies beginning in March 2022 in response
to inflation, including increases in the Federal Reserve’s target federal funds rate and reductions in the Federal
Reserve’s holdings of securities;
●
legislative and regulatory changes, including changes in banking, securities and tax laws, regulations and rules and
their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost
of FDIC insurance, including changes in various capital, liquidity and other rule proposals, as well as changes in
supervisory and examination focus, in light of three regional bank failures in California and New York in March
and May 2023;
●
the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan
portfolio reviews;
●
the risks of inflation, changes in market interest rates and the shape of the yield curve on the levels, composition
and costs of deposits and borrowings, the values of our securities and loans, loan demand and mortgage loan
originations, and the values and liquidity of loan collateral, securities, and interest-sensitive assets and liabilities,
and the risks and uncertainty of the amounts realizable on collateral;
●
the risks of further increases in market interest rates creating additional unrealized losses on our securities
available for sale, which adversely affect our stockholders’ equity (including tangible stockholders’ equity) for
financial reporting purposes;
●
changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;
●
changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that
may be included as capital for regulatory purposes;
●
changes in the prices, values and sales volumes of residential and commercial real estate;
●
the effects of competition from a wide variety of local, regional, national and other providers of financial,
investment and insurance services, including the disruptive effects of financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank and credit unions, which are not subject
to federal income taxation;
●
the failure of assumptions and estimates underlying the establishment of allowances for credit losses, including
asset impairments, losses valuations of assets and liabilities and other estimates;
●
the timing and amount of rental income from third parties following the June 2022 opening of our new
headquarters;
●
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
●
changes in technology or products that may be more difficult, costly, or less effective than anticipated;
●
cyber-attacks and data breaches that may compromise our systems, our vendors’ systems or customers’
information;
●
the risks that our deferred tax assets (“DTAs”) included in “other assets” on our consolidated balance sheets, if
any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less
than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss
carry-forwards that we may be able to utilize for income tax purposes; and
30
●
other factors and risks described herein and under “Risk Factors” in our annual report on Commission Form 10-K
as of and for the year ended December 31, 2022 or in any of our subsequent reports that we make with the
Securities and Exchange Commission (the “Commission” or “SEC”) under the Exchange Act.
All written or oral forward-looking statements that are we make or are attributable to us are expressly qualified in their
entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are
made.
Summary of Results of Operations
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2023
2022
2023
2022
Net interest income (a)
$
6,380
$
7,360
$
20,591
$
20,034
Less: tax-equivalent adjustment
108
117
322
339
Net interest income (GAAP)
6,272
7,243
20,269
19,695
Noninterest income
865
852
2,448
2,608
Total revenue
7,137
8,095
22,717
22,303
Provision for credit losses
105
250
(191)
—
Noninterest expense
5,362
5,415
16,791
15,374
Income tax expense
182
432
737
1,049
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Basic and diluted earnings per share
$
0.43
$
0.57
$
1.54
$
1.67
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $5.4 million for the first nine months of 2023, compared to $5.9 million for the first nine
months of 2022. Basic and diluted earnings per share were $1.54 per share for the first nine months of 2023, compared to
$1.67 per share for the first nine months of 2022.
Net interest income (tax-equivalent) was $20.6 million for the first nine months of 2023, a 3% increase compared to $20.0
million for the first nine months of 2022. This increase was primarily due to improvements in the Company’s net interest
margin. The Company’s net interest margin (tax-equivalent) was 2.97% for the first nine months of 2023 compared to
2.67% for the first nine months of 2022. This increase was primarily due to a more favorable asset mix and higher yields
on interest earning assets. These higher yields on interest earning assets were partially offset by increased cost of funds.
Average loans for the first nine months of 2023 were $514.7 million, a 16% increase from the first nine months of 2022.
See “Results of Operations – Average Balance Sheet and Interest Rates” and “Net Interest Income and Margin” below.
At September 30, 2023, the Company’s allowance for credit losses was $6.8 million, or 1.24% of total loans, compared to
$5.8 million, or 1.14% of total loans, at December 31, 2022, and $5.0 million, or 1.05% of total loans, at September 30,
2022. The implementation of CECL required pursuant to Accounting Standards Codification (“ASC”) 326, which was
effective January 1, 2023, increased our allowance for credit losses by $1.0 million, or 0.20% of total loans, as a day one
transition adjustment.
The Company recorded a negative provision for credit losses during the first nine months of 2023 of $0.2 million,
compared to none during the first nine months of 2022. The provision for credit losses under CECL is reflective of the
Company’s credit risk profile and the future economic outlook and forecasts. Our CECL model is largely influenced by
economic factors including, most notably, the anticipated unemployment rate. The negative provision for credit losses
during the first nine months of 2023 was primarily related to the resolution of a collateral dependent nonperforming loan,
with a recorded investment of $1.3 million and a corresponding allowance of $0.5 million, that was collected in full during
the second quarter of 2023. This was partially offset by an increase in the calculation of current expected credit losses due
to loan growth during the first nine months of 2023.
31
Noninterest income was $2.4 million in the first nine months of 2023, compared to $2.6 million in the first nine months of
2022. The decrease in noninterest income was primarily due to a decrease in mortgage lending income of $0.2 million as a
result of higher market interest rates for mortgage loans.
Noninterest expense was $16.8 million in the first nine months of 2023, compared to $15.4 million for the first nine months
of 2022. The increase in noninterest expense was primarily due to an increase in net occupancy and equipment expense of
$0.4 million related to the Company’s new headquarters, which opened in June 2022, professional fees expense of $0.2
million, and other noninterest expense of $0.9 million.
Income tax expense was $0.7 million for the first nine months of 2023 compared to $1.0 million for the first nine months of
2022. This decrease was due to a decline in the level of earnings before taxes and the Company’s effective tax rate. The
Company's effective tax rate for the first nine months of 2023 was 12.05%, compared to 15.14% in the first nine months of
2022. The Company’s effective income tax rate is principally affected by tax-exempt earnings from the Company’s
investment in municipal securities, bank-owned life insurance (“BOLI”), and New Markets Tax Credits (“NMTCs”).
The Company paid cash dividends of $0.81 per share in the first nine months of 2023, an increase of 2% from the same
period of 2022. The Company repurchased 10,108 shares for $0.2 million during the first nine months of 2023. At
September 30, 2023, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well
capitalized” under current regulatory standards with a total risk-based capital ratio of 15.98%, a tier 1 leverage ratio of
10.26% and a common equity tier 1 (“CET1”) ratio of 15.01% at September 30, 2023. At September 30, 2023, the
Company’s equity to total assets ratio was 5.96%, compared to 6.65% at December 31, 2022, and 5.74% at September 30,
2022.
For the third quarter of 2023, net earnings were $1.5 million, or $0.43 per share, compared to $2.0 million, or $0.57 per
share, for the third quarter of 2022. Net interest income (tax-equivalent) was $6.4 million for the third quarter of 2023
compared to $7.4 million for the third quarter of 2022. This decrease was primarily due to decline in the Company’s net
interest margin. The Company’s net interest margin (tax-equivalent) was 2.73% in the third quarter of 2023 compared to
3.00% in the third quarter of 2022. The decrease was primarily due to increased cost of funds and changes in our deposit
mix, which was partially offset by a more favorable asset mix and higher yields on interest earning assets. The Company
recorded a provision for credit losses during the third quarter of 2023 of $0.1 million, compared to $0.3 million for the third
quarter 2022. Noninterest income was $0.9 million for both the third quarter of 2023 and 2022. Noninterest expense was
$5.4 million in the third quarter of 2023 and 2022. Income tax expense was $0.2 million for the third quarter of 2023,
compared to $0.4 million for the third quarter of 2022. This decrease was due to a decline in the level of earnings before
taxes and the Company’s effective tax rate. The Company's effective tax rate for the third quarter of 2023 was 10.90%,
compared to 17.78% in the third quarter of 2022. The Company’s effective income tax rate is principally impacted by tax-
exempt earnings from the Company’s investment in municipal securities, bank-owned life insurance, and New Markets Tax
Credits.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these principles conform with U.S. GAAP and with
general practices within the banking industry. The accounting policies which we believe to be most critical in preparing our
Consolidated Financial Statements are presented in the section titled “Critical Accounting Policies” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2022. On January 1, 2023, we adopted FASB ASU 2016-13
Financial
Instruments - Credit Losses
(Topic 326) which significantly changes our methodology for determining our allowance for
credit losses, and ASU 2022-02
, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and
Vintage Disclosures
which eliminated the accounting guidance for TDRs, while enhancing disclosure requirements for
certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. See
Note 1.
Summary of Significant Accounting Policies
in the Notes to our Consolidated Financial Statements elsewhere in this Form
10-Q for further information related to these changes. There have been no other significant changes to our Critical
Accounting Estimates as described in our Form 10-K.
32
RESULTS OF OPERATIONS
Average Balance Sheet and Interest Rates
Nine months ended September 30,
2023
2022
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
514,706
4.71%
$
442,613
4.42%
Securities - taxable
344,136
2.13%
371,595
1.69%
Securities - tax-exempt
54,615
3.75%
60,034
3.59%
Total securities
398,751
2.35%
431,629
1.95%
Federal funds sold
4,372
4.86%
54,924
0.76%
Interest bearing bank deposits
8,118
4.66%
73,630
0.82%
Total interest-earning assets
925,947
3.70%
1,002,796
2.89%
Deposits:
NOW
189,586
0.75%
201,792
0.13%
Savings and money market
291,988
0.63%
335,005
0.20%
Time deposits
168,000
1.99%
155,824
0.84%
Total interest-bearing deposits
649,574
1.02%
692,621
0.32%
Short-term borrowings
3,748
2.43%
3,969
0.50%
Total interest-bearing liabilities
653,322
1.02%
696,590
0.32%
Net interest income and margin (tax-equivalent)
$
20,591
2.97%
$
20,034
2.67%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $20.6 million for the first nine months of 2023, a 3% increase compared to $20.0
million for the first nine months of 2022. This increase was primarily due to improvements in the Company’s net interest
margin (tax-equivalent). The Company’s net interest margin (tax-equivalent) was 2.97% in the first nine months of 2023
compared to 2.67% in the first nine months of 2022. This increase was primarily due to a more favorable asset mix and
higher yields on interest earning assets. These higher yields on interest earning assets were partially offset by increased
cost of funds. The cost of funds increased to 102 basis points, compared to 32 basis points in the first nine months of 2022.
Since March of 2022, the Federal Reserve increased the target federal funds range from 0 – 0.25% to 5.25 – 5.50%.
The tax-equivalent yield on total interest-earning assets increased by 81 basis points to 3.70% in the first nine months of
2023 compared to 2.89% in the first nine months of 2022. This increase was primarily due to changes in our asset mix and
higher market interest rates on interest earning assets.
The cost of total interest-bearing liabilities increased by 70 basis points to 1.02% in the first nine months of 2023 compared
to 0.32% in the first nine months of 2022. Our deposit costs may continue to increase as the Federal Reserve maintains or
increases its target federal funds rate, market interest rates increase, and as customer behaviors change as a result of
inflation and higher market interest rates, and we compete for deposits against other banks, money market mutual funds,
Treasury securities and other interest bearing alternative investments.
The Company continues to deploy various asset liability management strategies to manage its risks from interest rate
fluctuations. Deposit and loan pricing remain competitive in our markets. We believe this challenging rate environment
will continue throughout 2023. Our ability to compete and manage our deposit costs until our interest-earning assets
reprice and we generate new fixed rate loans with current market interest rates will be important to our net interest margin
during the monetary tightening cycle that we believe will continue throughout 2023 and into 2024.
33
Provision for Credit Losses
On January 1, 2023, we adopted ASC 326, which introduces the current expected credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loans. Accordingly, the provision for credit
losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation,
is adequate to provide coverage for all expected credit losses. The Company recorded a negative provision for credit losses
during the first nine months of 2023 of $0.2 million, compared to none during the first nine months of 2022. Provision
expense is affected by organic loan growth in our loan portfolio, our internal assessment of the credit quality of the loan
portfolio, our expectations about future economic conditions and net charge-offs. Our CECL model is largely influenced
by economic factors including, most notably, the anticipated unemployment rate, which may be affected by monetary
policy. The negative provision for credit losses during the first nine months of 2023 was primarily related to the resolution
of a collateral dependent nonperforming loan, with a recorded investment of $1.3 million and a corresponding allowance of
$0.5 million, that was collected in full during the second quarter of 2023. This was partially offset by an increase in the
calculation of current expected credit losses due to loan growth during the first nine months of 2023.
Our allowance for credit losses reflects an amount we believe appropriate, based on our allowance assessment
methodology, to adequately cover all expected credit losses as of the date the allowance is determined. At September 30,
2023, the Company’s allowance for credit losses was $6.8 million, or 1.24% of total loans, compared to $5.8 million, or
1.14% of total loans, at December 31, 2022, and $5.0 million, or 1.05% of total loans, at September 30, 2022. The
implementation of CECL, as of January 1, 2023, increased our allowance for credit losses by $1.0 million, or 0.20% of total
loans, as a day one transition adjustment to ASC 326.
Noninterest Income
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Service charges on deposit accounts
$
148
$
158
$
456
$
446
Mortgage lending income
110
126
345
566
Bank-owned life insurance
87
97
311
293
Securities gains, net
—
44
—
44
Other
520
427
1,336
1,259
Total noninterest income
$
865
$
852
$
2,448
$
2,608
The Company’s income from mortgage lending is primarily attributable to the (1) origination and sale of mortgage loans
and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage
loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are
netted against the commission expense associated with these originations. The Company’s normal practice is to originate
mortgage loans for sale in the secondary market and to either sell or retain the associated MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation
allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s mortgage lending income.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Origination income
$
20
$
39
$
81
$
315
Servicing fees, net
90
87
264
251
Total mortgage lending income
$
110
$
126
$
345
$
566
34
The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of mortgage loans. Origination income decreased as market interest rates on
mortgage loans increased and mortgage loan volumes also decreased. The decrease in origination income was partially
offset by an increase in mortgage servicing fees, net of related amortization expense as mortgage prepayment speeds
slowed, resulting in decreased amortization expense.
Income from bank-owned life insurance was $311 thousand and $293 thousand for the nine months ended September 30,
2023 and 2022, respectively. Excluding a $52 thousand non-taxable death benefit received during 2023, income from
bank-owned life insurance would have been $259 thousand and $293 thousand for the nine months ended September 30,
2023 and 2022, respectively.
Noninterest Expense
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Salaries and benefits
$
2,844
$
2,975
$
8,809
$
8,901
Net occupancy and equipment
755
794
2,341
1,955
Professional fees
261
235
898
704
Other
1,502
1,411
4,743
3,814
Total noninterest expense
$
5,362
$
5,415
$
16,791
$
15,374
Salaries and benefits decreased for both the quarter and nine months ended September 30, 2023. A decrease in the number
of full-time equivalents was partially offset by routine annual increases in salaries and wages.
The increase in net occupancy and equipment expenses was primarily due to increased expenses related to the Company’s
new headquarters in downtown Auburn. This amount includes depreciation expense and other costs associated with
operating the new headquarters. The Company relocated its main office branch and bank operations into its newly
constructed headquarters during June 2022.
The increase in other noninterest expense was due to various items including FDIC assessments, software costs, ATM and
checkcard expenses, impairment related to a new market tax credit investment, due to the remaining tax credit being less
than the Company’s investment, and a gain on sale of other real estate owned that was realized in the 2022.
Income Tax Expense
Income tax expense was $0.7 million for the first nine months of 2023 compared to $1.0 million for the the first nine
months of 2022. This decrease was due to a decline in the level of earnings before taxes and the Company’s effective tax
rate. The Company’s effective income tax rate for the first nine months of 2023 was 12.05%, compared to 15.14% in the
first nine months of 2022. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from
the Company’s investments in municipal securities, bank-owned life insurance, and New Markets Tax Credits.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $373.3 million at September 30, 2023, compared to $405.3 million at December 31,
2022. This decrease reflects a $21.2 million decrease in the amortized cost basis of securities available-for-sale and a
decrease in the fair value of securities available-for-sale of $10.8 million. The average annualized tax-equivalent yields
earned on total securities were 2.35% in the first nine months of 2023 and 1.95% in the first nine months of 2022.
35
Loans
2023
2022
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
66,014
61,880
59,602
66,212
70,715
Construction and land development
70,129
63,874
66,500
66,479
54,773
Commercial real estate
281,964
275,801
267,962
264,573
249,527
Residential real estate
117,150
109,834
101,975
97,648
91,469
Consumer installment
10,353
9,022
9,002
9,546
7,551
Total loans
$
545,610
520,411
505,041
504,458
474,035
Total loans were $545.6 million at September 30, 2023, an 8% increase compared to $504.5 million at December 31, 2022.
Four loan categories represented the majority of the loan portfolio at September 30, 2023: commercial real estate (52%),
residential real estate (21%), commercial and industrial (12%) and construction and land development (13%).
Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at September 30,
2023.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $8.7 million,
or 2% of total loans, and $7.4 million, or 1%, of total loans at September 30, 2023 and December 31, 2022, respectively.
For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only
payments at September 30, 2023 and December 31, 2022. The Company’s residential real estate mortgage portfolio does
not include any option or hybrid ARM loans, subprime loans, or any material amount of other consumer mortgage products
which are generally viewed as high risk.
The average yield earned on loans and loans held for sale was 4.71% in the first nine months of 2023 and 4.42% in the first
nine months of 2022.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of
current economic conditions, including inflation and the continuing increases in market interest rates, remaining COVID-19
pandemic effects including supply chain disruptions, reduced commercial office occupancy levels, housing supply
shortages and inflation on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in
making loans and evaluating collateral, reduced credit availability , (especially for commercial real estate) generally and
higher costs of financing properties, which reduce the transaction and dollar volumes of commercial real estate property
sales. Other risks we face include, among other things, real estate industry concentrations, competitive pressures from a
wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-
existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of
applicable laws and regulations. Various projects financed earlier that were based on lower interest rate assumptions than
currently in effect may not be as profitable or successful at the higher interest rate currently in effect and currently expected
in the future.
The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized
loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have
established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by
prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of
capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of
approximately $23.2 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $20.8 million. Our loan policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit. At September 30, 2023, the Bank had one
loan relationship exceeding our internal limit.
36
We periodically analyze our commercial and industrial and commercial real estate loan portfolios to determine if a
concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk -based capital at September 30, 2023 and December 31, 2022.
September 30,
December 31,
(Dollars in thousands)
2023
2022
Lessors of 1-4 family residential properties
$
57,126
$
52,278
Multi-family residential properties
47,634
41,084
Hotel/motel
36,992
33,378
Allowance for Credit Losses
The Company maintains the allowance for credit losses at a level that management believes appropriate to adequately cover
the Company’s estimate of expected losses in the loan portfolio. The allowance for credit losses was $6.8 million at
September 30, 2023 compared to $5.8 million at December 31, 2022, which management believed to be adequate at each of
the respective dates. The assumptions, judgments and estimates, as well as the methodologies and models associated with
the determination of the allowance for credit losses are described under “Critical Accounting Policies.”
On January 1, 2023, we adopted ASC 326, which introduces the current expected credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loan portfolio. Accordingly, beginning in
2023, the allowance for credit losses represents an amount that, in management's evaluation, is adequate to provide
coverage for all expected future credit losses on outstanding loans. As of September 30, 2023 and December 31, 2022, our
allowance for credit losses was approximately $6.8 million and $5.8 million, respectively, which our management believes
to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans was 1.24% at
September 30, 2023, compared to 1.14% at December 31, 2022.
The increase in the allowance for credit losses is largely the result of the implementation of ASC 326 on January 1, 2023,
which resulted in an adjustment to the opening balance of the allowance for credit losses of $1.0 million. Our CECL models
rely largely on projections of macroeconomic conditions to estimate future credit losses. Macroeconomic factors used in the
model include the Alabama unemployment rate, the Alabama home price index, the national commercial real estate price
index and the Alabama gross state product. Projections of these macroeconomic factors, obtained from an independent third
party, are utilized to predict quarterly rates of default. See Note 1 to our Financial Statements, above.
Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with
similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools,
evaluations are performed on an individual basis. Losses are predicted over a period of time determined to be reasonable
and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages.
At September 30, 2023, reasonable and supportable periods of 4 quarters were utilized followed by an 8 quarter straight line
reversion period to long term averages.
37
A summary of the changes in the allowance for credit losses and certain asset quality ratios for the third quarter of 2023 and
the previous four quarters is presented below.
2023
2022
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,634
6,821
5,765
4,966
4,716
Impact of adopting ASC 326
—
—
1,019
—
—
Charge-offs:
Commercial and industrial
—
—
—
(205)
(13)
Consumer installment
(18)
(56)
(11)
(3)
(3)
Total charge -offs
(18)
(56)
(11)
(208)
(16)
Recoveries
4
200
8
7
16
Net recoveries (charge-offs)
(14)
144
(3)
(201)
—
Provision for credit losses
158
(331)
40
1,000
250
Ending balance
$
6,778
6,634
6,821
5,765
4,966
as a % of loans
1.24
%
1.27
1.35
1.14
1.05
as a % of nonperforming loans
559
%
577
255
211
1,431
Net charge-offs (recoveries) as % of average loans (a)
0.01
%
(0.06)
—
0.04
—
(a) Net charge-offs (recoveries) are annualized.
Nonperforming Assets
At September 30, 2023 the Company had $1.2 million in nonperforming assets compared to $2.7 million at December 31,
2022. The decrease in nonperforming assets was primarily related to the resolution of a collateral dependent
nonperforming loan, with a recorded investment of $1.3 million, that was collected in full during the second quarter of
2023.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the third
quarter of 2023 and the previous four quarters.
2023
2022
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
1,213
1,149
2,680
2,731
347
Total nonperforming assets
$
1,213
1,149
2,680
2,731
347
as a % of loans and other real estate owned
0.22
%
0.22
0.53
0.54
0.07
as a % of total assets
0.12
%
0.11
0.26
0.27
0.03
Nonperforming loans as a % of total loans
0.22
%
0.22
0.53
0.54
0.07
38
The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2023 and the
previous four quarters.
2023
2022
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
$
162
178
432
443
—
Commercial real estate
801
819
2,103
2,116
170
Residential real estate
250
152
135
172
177
Consumer installment
—
—
10
—
—
Total nonaccrual loans
$
1,213
1,149
2,680
2,731
347
The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process of collection .
The Company had no loans 90 days or more past due and still accruing at September 30, 2023 and December 31, 2022,
respectively.
The Company had no OREO at September 30, 2023 or December 31, 2022.
Deposits
September 30,
December 31,
(In thousands)
2023
2022
Noninterest bearing demand
$
279,458
311,371
NOW
212,412
178,641
Money market
190,426
214,298
Savings
88,730
95,652
Certificates of deposit under $250,000
51,092
93,017
Certificates of deposit and other time deposits of $250,000 or more
142,483
57,358
Total deposits
$
964,601
950,337
Total deposits were $964.6 million at September 30, 2023, compared to $950.3 million at December 31, 2022. The
Company utilizes brokered deposits as an additional funding source. At September 30, 2023, the Company had $46.6
million in brokered deposits, compared to none at December 31, 2022. Excluding brokered deposits, customer deposits
decreased $32.3 million, or 3%, during the first nine months of 2023. This decrease reflects net outflows to higher yield
investment alternatives in a rising interest rate environment and increased customer spending. Noninterest-bearing deposits
were $279.5 million, or 29% of total deposits, at September 30, 2023, compared to $311.4 million, or 33% of total deposits
at December 31, 2022.
The average rate paid on total interest-bearing deposits was 1.02% in the first nine months of 2023 compared to 0.32% in
the first nine months of 2022.
At September 30, 2023, estimated uninsured deposits totaled $337.4 million, or 35% of total deposits, compared to $381.7
million, or 40% of total deposits at December 31, 2022. The decrease in the percentage of the Bank’s deposits that are
uninsured was in part due to customers’ increased use of the products facilitated by IntraFi that enable customers to
maximize FDIC deposit insurance coverage for their deposits. During 2023, the Bank began participating in the
Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which
provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC
insurance. The total of reciprocal deposits at September 30, 2023 was $31.6 million, or 3% of total deposits. Uninsured
amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank’s uninsured
deposits at September 30, 2023 and December 31, 2022 include approximately $185.7 million and $155.0 million,
respectively, of deposits of state, county and local governments that are collateralized by securities having an equal fair
value to such deposits.
39
The FDIC has proposed a special assessment on uninsured deposits of banks with over $5 billion in uninsured deposits to
the FDIC Deposit Insurance Fund’s costs of the systemic risk determination made in connection with two recent bank
failures. This proposal will not apply to AuburnBank.
Other Borrowings and Available Credit
The Company had no long-term debt at September 30, 2023 and December 31, 2022. The Bank utilizes short and long-
term non-deposit borrowings from time to time. Short-term borrowings generally consist of federal funds purchased and
securities sold under agreements to repurchase with an original maturity of one year or less. The Bank had available federal
funds lines totaling $61.0 million with no federal funds borrowings outstanding at September 30, 2023, and December 31,
2022, respectively. Securities sold under agreements to repurchase, which were entered into on behalf of certain customers
totaled $1.7 million and $2.6 million at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023
and December 31, 2022, the Bank had no borrowings from the Federal Reserve discount window and no borrowings under
the Federal Reserve’s new Bank Term Facility Program (“BTFP”), which opened March 12, 2023.
The Bank is a member of the FHLB of Atlanta and has borrowed, and may in the future borrow from time to time under the
FHLB of Atlanta’s advance program to obtain funding for its growth. FHLB advances include both fixed and variable
terms and are taken out with varying maturities, and are generally secured by eligible assets. The Bank had no borrowings
under FHLB of Atlanta’s advance program at September 30, 2023 and December 31, 2022, respectively. At those dates,
the Bank had $307.7 million and $312.6 million, respectively, of available lines of credit at the FHLB of Atlanta.
Advances include both fixed and variable terms and may be taken out with varying maturities.
The average rate paid on the Bank’s short-term borrowings was 2.43% in the first nine months of 2023 compared to 0.50%
in the first nine months of 2022.
CAPITAL ADEQUACY
The Company’s consolidated stockholders’ equity was $61.5 million and $68.0 million as of September 30, 2023 and
December 31, 2022, respectively. The decrease from December 31, 2022 was primarily driven by an other comprehensive
loss due to the change in unrealized gains/losses on securities available-for-sale, net of tax of $8.1 million, cash dividends
of $2.8 million, the cumulative effect of adopting CECL accounting standard of $0.8 million, and repurchases of the
Company’s stock of $0.2 million, partially offset by net earnings of $5.4 million. Total unrealized losses on available-for-
sale securities increased 20% from $54.7 million on December 31, 2022 to $65.5 million September 30, 2023. These
unrealized losses do not affect the Bank’s capital for regulatory capital purposes.
The Company paid cash dividends of $0.81 per share in the first nine months of 2023, an increase of 2% from the same
period in 2022. The Company’s share repurchases of $0.2 million since December 31, 2022 resulted in 10,108 fewer
outstanding common shares at September 30, 2023. These shares were repurchased at an average cost per share of $22.63.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and
related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital
conservation buffer was subject to a three-year phase-in period that began on January 1, 2016 and was fully phased-in on
January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than the required amount will be
subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to
executive officers. At September 30, 2023, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.
On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted a final rule that amended the
capital conservation buffer. The new rule revises the definition of “eligible retained income” for purposes of the maximum
payout ratio to allow banking organizations to more freely use their capital buffers to promote lending and other financial
intermediation activities, by making the limitations on capital distributions more gradual. The eligible retained income is
now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected
in net income; and (ii) the average of all net income over the preceding four quarters. This rule only affects the capital
buffers, and banking organizations were encouraged to make prudent capital distribution decisions.
40
The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s Small Bank Holding
Company Policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its
consolidated subsidiaries. The Bank’s tier 1 leverage ratio was 10.26%, CET1 risk-based capital ratio was 15.01%, tier 1
risk-based capital ratio was 15.01%, and total risk-based capital ratio was 15.98% at September 30, 2023. These ratios
exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital
ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.”
The Bank’s capital conservation buffer was 7.98% at September 30, 2023.
On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued a joint notice of proposed
rulemaking to implement the Basel III endgame components. The proposal which is subject to public comment and change
only applies to banks and holding companies with $100 billion or more of assets. The proposal includes provisions dealing
with:
●
Credit risk, which arises from the risk that an obligor fails to perform on an obligation;
●
Credit risk, which arises from the risk than an obligor fails to perform on an obligation;
●
Market risk, which results from changes in the value of trading positions;
●
Operational risk, which is the risk of losses resulting from inadequate or failed internal process, people, and
systems, or from external events; and
●
Credit valuation adjustment risk, which results from the risk of losses on certain derivative contracts.
The Basel III endgame regulatory proposals are not applicable to the Company or the Bank .
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within
the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability
Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO
measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and
deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic
value of equity (“EVE”) model.
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation modeling.
Forecasted levels of earning assets, interest-bearing liabilities, and off -balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings
simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the
variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s
flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:
●
+/- 20% for a gradual change of 400 basis points
●
+/- 15% for a gradual change of 300 basis points
●
+/- 10% for a gradual change of 200 basis points
●
+/- 5% for a gradual change of 100 basis points
While a gradual change in interest rates was used in the above analysis to provide an estimate of exposure under these
scenarios, our modeling under both a gradual and instantaneous change in interest rates indicates our balance sheet is
liability sensitive over the forecast period of 12 months.
At September 30, 2023, our earnings simulation model indicated that we were in compliance with the policy guidelines
noted above.
41
Economic Value of Equity
. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in
interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than
the following:
●
45% for an instantaneous change of +/- 400 basis points
●
35% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At September 30, 2023, our EVE model indicated that we were in compliance with our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayments and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may
differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the
Company’s established liquidity, loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit
needs of our customers. From time to time, the Company also may enter into back-to-back interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not
designated as hedging instruments. At September 30, 2023 and December 31, 2022, the Company had no derivative
contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
Liquidity Risk Management
Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations. The Company seeks to manage its liquidity to
manage or reduce its costs of funds by maintaining liquidity believed adequate to meet its anticipated funding needs, while
balancing against excessive liquidity that likely would reduce earnings due to the cost of foregoing alternative higher-
yielding assets.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and
dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of regulatory
restrictions on such dividends.
The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the
Company could also borrow money, or issue common stock or other securities. Primary uses of funds by the Company
include dividends paid to stockholders, Company stock repurchases, and payment of Company expenses.
42
Primary sources of funding for the Bank include customer deposits, other borrowings, interest payments on earning assets,
repayment and maturity of securities and loans, sales of securities, and the sale of loans, particularly residential mortgage
loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount
window and the Federal Reserve’s recent BTFP borrowing facility. In addition to these sources, the Bank is eligible to
participate in the FHLB of Atlanta’s advance program to obtain funding for growth and liquidity. Advances include both
fixed and variable terms and may be taken out with varying maturities. At September 30, 2023, the Bank had no FHLB of
Atlanta advances outstanding and available credit from the FHLB of $307.7 million. At September 30, 2023, the Bank also
had $61.0 million of available federal funds lines with no borrowings outstanding. Primary uses of funds include repayment
of maturing obligations and growing the loan portfolio.
Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known
contractual obligations and unfunded commitments, including loan commitments and reasonably expected borrower,
depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations
At September 30, 2023, the Bank had outstanding standby letters of credit of $0.8 million and unfunded loan commitments
outstanding of $60.1 million. Because these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed, to
fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of our securities available-
for-sale, or draw on its available credit facilities or raise deposits.
Mortgage lending activities
We generally sell residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these
loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various
representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the
representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien
securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan
criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other
matters.
As of September 30, 2023, the aggregate unpaid principal balance of residential mortgage loans, which we have originated
and sold, but retained the servicing rights, was $219.3 million. Although these loans are generally sold on a non-recourse
basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole
requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase
or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole
requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to
determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks
of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and
quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
The Company was not required to repurchase any loans during the first nine months of 2023 as a result of representation
and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at September 30, 2023.
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to:
(1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any
required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements
governing our rights and duties as servicer.
The agreements under which we act as servicer generally specifies standard s of responsibility for actions taken by us in
such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the
respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be
subject to termination if the breach is not cured within a specified period following notice. The standards governing
servicing and the possible remedies for violations of such standards are determined by our agreements with Fannie Mae and
Fannie Mae’s mortgage servicing guides. Remedies could include repurchase of an affected loan.
43
Although repurchase and make whole requests related to representation and warranty provisions and servicing activities
have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred
(make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on
their purchased loans. As of September 30, 2023, we do not believe that this exposure is material due to the historical level
of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie
Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate
this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor
portfolios.
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not
obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is
entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented herein have been prepared in
accordance with GAAP and practices within the banking industry which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance
than the effects of general levels of inflation.
Inflation can affect our noninterest expenses. It also can affect our customers’ behaviors, and can affect the interest rates we
have to pay on our deposits and other borrowings, and the interest rates we earn on our earning assets. The difference
between our interest expense and interest income is also affected by the shape of the yield curve and the speeds at which
our assets and liabilities, respectively, reprice in response to interest rate changes. The yield curve was inverted on
September 30, 2023, which means shorter term interest rates are higher than longer interest rates. This results in a lower
spread between our costs of funds and our interest income. In addition, net interest income could be affected by
asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the
same index. Higher market interest rates and sales of securities held by the Federal Reserve to reduce inflation generally
reduce economic activity and may reduce loan demand and growth. Inflation and related changes in market interest rates,
as the Federal Reserve acts to meet its long term inflation goal of 2%, also can adversely affect the values and liquidity of
our loans and securities, the value of collateral for our loans, and the success of our borrowers and such borrowers’
available cash to pay interest on and principal of our loans to them.
Inflation is running at levels unseen in decades and, while it has declined during 2023, it remains above the Federal
Reserve’s long term inflation goal of 2.0% annually. Beginning in March 2022, the Federal Reserve has been raising target
federal funds interest rates and reducing its securities holdings in an effort to reduce inflation. During 2022, the Federal
Reserve increased the target federal funds range from 0 – 0.25% to 4.25 – 4.50%. The target federal funds rate was
increased another 25 basis points on each of January 31, March 7, May 3 and July 26, 2023 to 5.25-5.50%, and further
increases in the target federal funds rate may be made if inflation remains elevated. The Federal Reserve has indicated it
will maintain higher target rates and restrictive monetary policy to meet its 2% inflation rate over the longer term and
maximum employment goals. Our deposit costs may increase as the Federal Reserve increases its target federal funds rate,
market interest rates increase, and as customer savings behaviors change as a result of inflation and customers seek higher
market interest rates on deposits and other alternative investments. Monetary efforts to control inflation may also affect
unemployment which is an important component in our CECL model used to estimate our allowance for credit losses.
44
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB but is not yet effective.
●
ASU 2023-02,
Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax
Credit Structures Using the Proportional Amortization Method
Information about this pronouncement is described in more detail below.
ASU 2023-02,
Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit
Structures Using the Proportional Amortization Method
, The amendments in this Update permit reporting entities to elect
to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are
received, using the proportional amortization method if certain conditions are met. The new standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company is currently
evaluating the impact of the new standard on the Company’s consolidated financial statements.
45
Table 1 – Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly
report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-
GAAP financial measures to their most directly comparable GAAP financial measures are presented below.
2023
2022
Third
Second
First
Fourth
Third
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,272
6,888
7,109
7,471
7,243
Tax-equivalent adjustment
108
106
108
117
117
Net interest income (Tax -equivalent)
$
6,380
6,994
7,217
7,588
7,360
Nine months ended September 30,
(In thousands)
2023
2022
Net interest income (GAAP)
$
20,269
19,695
Tax-equivalent adjustment
322
339
Net interest income (Tax -equivalent)
$
20,591
20,034
46
Table 2 - Selected Quarterly Financial Data
2023
2022
Third
Second
First
Fourth
Third
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,380
6,994
7,217
7,588
7,360
Less: tax-equivalent adjustment
108
106
108
117
117
Net interest income (GAAP)
6,272
6,888
7,109
7,471
7,243
Noninterest income
865
791
792
3,898
852
Total revenue
7,137
7,679
7,901
11,369
8,095
Provision for credit losses
105
(362)
66
1,000
250
Noninterest expense
5,362
5,825
5,604
4,449
5,415
Income tax expense
182
288
267
1,454
432
Net earnings
$
1,488
1,928
1,964
4,466
1,998
Per share data:
Basic and diluted net earnings
$
0.43
0.55
0.56
1.27
0.57
Cash dividends declared
0.27
0.27
0.27
0.265
0.265
Weighted average shares outstanding:
Basic and diluted
3,496,411
3,500,064
3,502,143
3,504,344
3,507,318
Shares outstanding, at period end
3,493,614
3,499,412
3,500,879
3,503,452
3,505,355
Book value
$
17.59
20.28
21.03
19.42
17.06
Common stock price:
High
$
22.80
24.32
24.50
24.71
29.02
Low
20.85
18.80
22.55
22.07
23.02
Period end:
21.50
21.26
22.66
23.00
23.02
To earnings ratio
7.65
x
7.21
7.79
7.82
10.46
To book value
122
%
105
108
118
135
Performance ratios:
Annualized return on average equity
8.59
%
10.37
11.44
28.23
10.35
Annualized return on average assets
0.58
%
0.75
0.77
1.75
0.75
Dividend payout ratio
62.79
%
49.09
48.21
20.87
46.49
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.24
%
1.27
1.35
1.14
1.05
Nonperforming loans
559
%
577
255
211
1,431
Nonperforming assets as a % of:
Loans and foreclosed properties
0.22
%
0.22
0.53
0.54
0.07
Total assets
0.12
%
0.11
0.26
0.27
0.03
Nonperforming loans as a % of total loans
0.22
%
0.22
0.53
0.54
0.07
Annualized net charge-offs (recoveries) as % of average loans
0.01
%
(0.11)
—
0.16
—
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.01
%
15.33
15.45
15.39
15.39
Tier 1 risk-based capital ratio
15.01
%
15.33
15.45
15.39
15.39
Total risk-based capital ratio
15.98
%
16.31
16.48
16.25
16.16
Tier 1 leverage ratio
10.26
%
10.23
10.07
10.01
9.29
Other financial data:
Net interest margin (a)
2.73
%
3.03
3.17
3.27
3.00
Effective income tax rate
10.90
%
13.00
11.97
24.56
17.78
Efficiency ratio (b)
74.01
%
74.82
69.97
38.73
65.94
Selected average balances:
Securities
$
390,772
402,929
402,684
407,792
432,393
Loans, net of unearned income
529,382
512,066
502,158
490,163
457,722
Total assets
1,020,980
1,022,874
1,022,938
1,022,863
1,069,973
Total deposits
942,533
942,552
948,393
951,122
987,614
Total stockholders’ equity
69,269
74,404
68,655
63,283
77,191
Selected period end balances:
Securities
$
373,286
394,079
405,692
405,304
411,538
Loans, net of unearned income
545,610
520,411
505,041
504,458
474,035
Allowance for credit losses
6,778
6,634
6,821
5,765
4,966
Total assets
1,030,724
1,026,130
1,017,746
1,023,888
1,042,559
Total deposits
964,602
950,742
939,190
950,337
977,938
Total stockholders’ equity
61,451
70,976
73,640
68,041
59,793
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income. See
"Table 1 - Explanation of Non-GAAP Financial Measures."
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
47
Table 3 - Selected Financial Data
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2023
2022
Results of Operations
Net interest income (a)
$
20,591
20,034
Less: tax-equivalent adjustment
322
339
Net interest income (GAAP)
20,269
19,695
Noninterest income
2,448
2,608
Total revenue
22,717
22,303
Provision for credit losses
(191)
—
Noninterest expense
16,791
15,374
Income tax expense
737
1,049
Net earnings
$
5,380
5,880
Per share data:
Basic and diluted net earnings
$
1.54
1.67
Cash dividends declared
0.81
0.795
Weighted average shares outstanding:
Basic and diluted
3,499,518
3,513,068
Shares outstanding, at period end
3,493,614
3,505,355
Book value
$
17.59
17.06
Common stock price:
High
$
24.50
34.49
Low
18.80
23.02
Period end
21.50
23.02
To earnings ratio
7.65
x
10.46
To book value
122
%
135
Performance ratios:
Annualized return on average equity
10.15
%
8.76
Annualized return on average assets
0.70
%
0.72
Dividend payout ratio
52.60
%
47.60
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.24
%
1.05
Nonperforming loans
559
%
1,431
Nonperforming assets as a % of:
Loans and other real estate owned
0.22
%
0.07
Total assets
0.12
%
0.03
Nonperforming loans as a % of total loans
0.22
%
0.07
Annualized net recoveries as a % of average loans
(0.03)
%
(0.01)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.01
%
15.39
Tier 1 risk-based capital ratio
15.01
%
15.39
Total risk-based capital ratio
15.98
%
16.16
Tier 1 leverage ratio
10.26
%
9.29
Other financial data:
Net interest margin (a)
2.97
%
2.67
Effective income tax rate
12.05
%
15.14
Efficiency ratio (b)
72.88
%
67.90
Selected average balances:
Securities
$
398,751
431,629
Loans, net of unearned income
514,635
442,081
Total assets
1,022,257
1,092,216
Total deposits
944,471
996,900
Total stockholders’ equity
70,659
89,544
Selected period end balances:
Securities
$
373,286
411,538
Loans, net of unearned income
545,610
474,035
Allowance for credit losses
6,778
4,966
Total assets
1,030,724
1,042,559
Total deposits
964,602
977,938
Total stockholders’ equity
61,451
59,793
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income. See
"Table 1 - Explanation of Non-GAAP Financial Measures."
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
48
Table 4 - Average Balances and Net Interest Income Analysis
Quarter ended September 30,
2023
2022
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
529,521
$
6,373
4.77%
$
457,861
$
5,097
4.42%
Securities - taxable (2)
336,406
1,783
2.10%
373,529
1,808
1.92%
Securities - tax-exempt (2)(3)
54,366
510
3.72%
58,864
558
3.76%
Total securities
390,772
2,293
2.33%
432,393
2,366
2.17%
Federal funds sold
1,918
26
5.38%
38,994
200
2.03%
Interest bearing bank deposits
4,799
59
4.88%
45,343
226
1.98%
Total interest-earning assets
927,010
$
8,751
3.75%
974,591
$
7,889
3.21%
Cash and due from banks
14,345
14,503
Other assets
79,625
80,879
Total assets
$
1,020,980
$
1,069,973
Interest-bearing liabilities:
Deposits:
NOW
$
191,849
$
534
1.10%
$
195,655
$
70
0.14%
Savings and money market
283,152
661
0.93%
328,555
163
0.20%
Time deposits
183,539
1,139
2.46%
151,785
291
0.76%
Total interest-bearing deposits
658,540
2,334
1.41%
675,995
524
0.31%
Short-term borrowings
4,347
37
3.38%
3,759
5
0.50%
Total interest-bearing liabilities
662,887
$
2,371
1.42%
679,754
$
529
0.31%
Noninterest-bearing deposits
283,993
311,619
Other liabilities
4,831
1,409
Stockholders' equity
69,269
77,191
Total liabilities and stockholders' equity
$
1,020,980
$
1,069,973
Net interest income and margin (tax-equivalent)
$
6,380
2.73%
$
7,360
3.00%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
(2) Includes average net unrealized gains (losses) on investment securities available for sale
(3) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
49
Table 5 - Average Balances and Net Interest Income Analysis
Nine months ended September 30,
2023
2022
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
514,706
$
18,146
4.71%
$
442,613
$
14,638
4.42%
Securities - taxable (2)
344,136
5,474
2.13%
371,595
4,691
1.69%
Securities - tax-exempt (2)(3)
54,615
1,531
3.75%
60,034
1,614
3.59%
Total securities
398,751
7,005
2.35%
431,629
6,305
1.95%
Federal funds sold
4,372
159
4.86%
54,924
313
0.76%
Interest bearing bank deposits
8,118
283
4.66%
73,630
454
0.82%
Total interest-earning assets
925,947
$
25,593
3.70%
1,002,796
$
21,710
2.89%
Cash and due from banks
15,160
15,029
Other assets
81,150
74,391
Total assets
$
1,022,257
$
1,092,216
Interest-bearing liabilities:
Deposits:
NOW
$
189,586
$
1,067
0.75%
$
201,792
$
189
0.13%
Savings and money market
291,988
1,368
0.63%
335,005
494
0.20%
Time deposits
168,000
2,499
1.99%
155,824
978
0.84%
Total interest-bearing deposits
649,574
4,934
1.02%
692,621
1,661
0.32%
Short-term borrowings
3,748
68
2.43%
3,969
15
0.50%
Total interest-bearing liabilities
653,322
$
5,002
1.02%
696,590
$
1,676
0.32%
Noninterest-bearing deposits
294,897
304,279
Other liabilities
3,379
1,803
Stockholders' equity
70,659
89,544
Total liabilities and stockholders' equity
$
1,022,257
$
1,092,216
Net interest income and margin (tax-equivalent)
$
20,591
2.97%
$
20,034
2.67%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
(2) Includes average net unrealized gains (losses) on investment securities available for sale
(3) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
50
Table 6 - Allocation of Allowance for Credit Losses
2023
2022
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
1,215
12.1
$
1,198
11.9
$
1,232
11.8
$
747
13.1
$
732
14.9
Construction and land
development
1,073
12.9
1,005
12.3
1,021
13.2
949
13.2
789
11.6
Commercial real estate
3,803
51.6
3,788
53.0
3,966
53.0
3,109
52.4
2,561
52.6
Residential real estate
551
21.5
529
21.1
497
20.2
828
19.4
783
19.3
Consumer installment
136
1.9
114
1.7
105
1.8
132
1.9
101
1.6
Total allowance for
credit losses
$
6,778
$
6,634
$
6,821
$
5,765
$
4,966
* Loan balance in each category expressed as a percentage of total loans.
51
Table 7 – Estimated Uninsured Time Deposits by Maturity
(Dollars in thousands)
September 30, 2023
Maturity of:
3 months or less
$
17,953
Over 3 months through 6 months
5,154
Over 6 months through 12 months
36,255
Over 12 months
11,099
Total estimated uninsured time deposits
$
70,461
52
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK
MANAGEMENT” and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective to allow timely decisions regarding disclosure in its reports that the Company files or submits to
the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. There have been no
changes in the Company’s internal control over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The
Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory
proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s
financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2022.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I,
Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022,
which could materially affect our business, financial condition or future results. The risks described in our annual report on
Form 10-K are not the only the risks facing our Company. Increases in inflation and the resulting tightening of Federal
Reserve monetary policy by increased target interest rates and reductions in the Federal Reserve’s securities portfolio, have
and is expected to continue to affect the levels of interest rates, mortgage originations and income, the market values of our
securities portfolio and loans and have resulted in unrealized losses that have adversely affected our stockholders’ equity.
These have affected and are expected to continue to affect our deposit costs and mixes, and consumer savings and payment
behaviors. These may also affect our borrower’s operating costs, expected returns and cash flows available to service our
loans. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition, and/or operating results in the future.
53
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock during the third quarter of 2023 were as follows:
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
July 1 - July 31, 2023
948
21.89
948
4,495,859
August 1 - August 31, 2023
4,935
22.21
4,935
4,386,264
September 1 - September 30, 2023
—
—
—
4,386,264
Total
5,883
22.16
5,883
4,386,264
On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of Directors
had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022. The new program
authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the
earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan and
(iii) April 15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases,
and otherwise.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
54
ITEM 6. EXHIBITS
Exhibit
Number Description
3.1
3.2
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
**
***
The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q are “furnished” to the
Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be
deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
AUBURN NATIONAL BANCORPORATION, INC.
Date: November 7, 2023
By: /s/ David A. Hedges
David A. Hedges
President and CEO
Date: November 7, 2023
By: /s/
W.
James Walker, IV
W. James Walker, IV
Senior Vice President and Chief Financial Officer