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For the fiscal year ended December 31, 2018
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For the transition period fromto
Commission File Number:0-26486
Auburn National Bancorporation, Inc.
(Exact name of registrant as specified in charter)
Registrant’s telephone number, including area code: (334)821-9200
Securities registered pursuant to Section 12 (b) of the Act:
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Securities registered to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports
Indicate by check mark whetherSecurities
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☑
(Check
one):2021.
7, 2022.
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portfolio reviews;
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the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions;
cyber-attacks and data breaches that may compromise our systems, our
vendor systems or customers’ information;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 stress tests and other evaluations;
the risks that our deferred tax assets (“DTAs”),
if any, could be reducedif estimates of future taxable income from●
The Company directly owned all the common equity in Auburn National Bancorporation Capital Trust I (the “Trust”), a Delaware statutory trust, which was formed in 2003 for the purpose of issuing $7.0 million of floating rate capital securities. In October 2016, the Company purchased $4.0 million par amount of outstanding trust preferred securities issued by the Trust. These securities were sold by the FDIC, as receiver of a failed bank that had held the trust preferred securities. The Company used dividends from the Bank to purchase these trust preferred securities and has deemed an equivalent amount of the related junior subordinated debentures issued by the Company as no longer outstanding. The Company realized apre-tax gain of $0.8 million on the early extinguishment of debt in this transaction. Following the transaction, the Company had outstanding $3.2 million in junior subordinated debentures held by the trust related to the remaining $3.0 million of trust preferred securities outstanding and not purchased by the Company. At December 31, 2017, the outstanding principal amount of debentures related to those trust preferred securities and were included in the Company’s Tier 1 capital for regulatory purposes. On April 27, 2018, the Trust formally redeemed all of its issued and outstanding trust preferred securities at par. All junior subordinated debentures related to the Trust were redeemed and retired as a result of the action. At December 31, 2018 the Company has no outstanding trust preferred securities or junior subordinated debentures, and the Trust has been dissolved.
Services
”
Between 2010 and 2022, the Auburn-Opelika MSA grew an estimated 23.9%,
the second fastest growing MSA inEmployees
In
The BHC Act requires prior Federal Reserve approval for,
among other things, the acquisition by a bank holding companyOn January 30, 2020, the Federal Reserve adopted new rules, effective
September 30, 2020 simplifyingPublic Law113-250 was enacted on December 18, 2014. This law directedAs a result of legislation in 2014 and 2018, the Federal Reserve to publish, within six months, changes to the Federal Reserve’shas revised its Small Bank
The Economic Growth, Regulatory Relief and Consumer Protection Act (P.L.115-174) (the “2018 Growth Act”) became law on May 24, 2018. The Growth Act directed the Federal Reserve to further raise the Small BHC Policy’s consolidated asset threshold from $1 billion to $3 billion. The Federal Reserve issued an interim final rule implementing this change effective August 30, 2018.
The Federal Reserve has confirmed in 2018 that the Company is eligible for treatment as
Community Reinvestment Act and Consumer Laws
The CRA performance of a banking organization’s depository institution subsidiaries is considered by the Federal Reserve and other applicable Federal bank regulators in connection with bank holding company and bank mergers and acquisition and branch applications. A less than satisfactory CRA rating will slow, if not preclude, acquisitions, and new banking centers and other expansion activities and will prevent a bank holding company from becoming a financial holding company.
As a result of the GLB Act,
The CFPB has a broad mandate to regulate consumer financial products and
services, whether or not offered by banks orThe Bank is subject to the CFPB’s
integrated disclosure rules under the Truth in LendingAct and the Real EstateOther Laws
Economic Security Act (“CARES Act”)
was enacted on March 27, 2020. Section 4013 ofNew federal Financial Crimes Enforcement Network (“FinCEN”) rules effective May 2018 require banks to know the beneficial owners of customers that are not natural persons, update customer information in order to develop a customer risk profile, and generally monitor such matters.
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Payment of Dividends
and Repurchases of Capital
InstrumentsUnder
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or “HVCRE” changes in Section 214 of the 2018
Growth Act.The new rules defineRule
In addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies not subject●
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The federal bank regulators have authority to require additional capital.
The Dodd–Frank Act significantly modified the capital rules applicable to the Company and required increased capital, generally.
The generally applicable prompt corrective action leverage and risk-based capital standards (the “generally applicable standards”), including the types of instruments that may be counted as Tier 1 capital, will be applicable on a consolidated basis to depository institution holding companies (except for companies subject to the Small BHC Policy), as well as their bank and thrift subsidiaries.
The generally applicable standards in effect prior to the Dodd-Frank Act will be “floors” for the regulators’ capital standards.
Bank holding companies with assets of less than $15 billion as of December 31, 2009, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital, but trust preferred securities issued by a bank holding company (other than those with assets of less than $1 billion that meet the Federal Reserve’s “qualitative standards” under the Small BHC Policy) after May 19, 2010, will no longer count as Tier 1 capital.
Information concerning the Company’s and the Bank’s regulatory capital ratios at December 31, 2018 is included in Note 18 of the consolidated financial statements that accompany this report.
Depository institutions that are “adequately capitalized” for bank regulatory purposes
must receive a waiver from the FDICBasel III Capital Rules
The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These new U.S. capital rules are called the “Basel III Capital Rules,” and generally werefully phased-in on January 1, 2019.
The Basel III Capital Rules limit Tier 1 capital to common stock and noncumulative perpetual preferred stock, as well as certain qualifying trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010, each of which were grandfathered in Tier 1 capital for bank holding companies with less than $15 billion in assets. The Basel III Capital Rules also introduced a new capital measure, “Common Equity Tier I Capital” or “CET1.” CET1 includes common stock and related surplus, retained earnings and, subject to certain adjustments, minority common equity interests in subsidiaries. CET1 is reduced by deductions for:
Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”), which are treated separately, net of associated deferred tax liabilities (“DTLs”);
Deferred tax assets (“DTAs”) arising from operating losses and tax credit carryforwards net of allowances and DTLs;
Gains on sale from any securitization exposure; and
Defined benefit pension fund net assets (i.e., excess plan assets), net of associated DTLs.
The Company made aone-time election in 2015 and, as a result, CET1 will not be adjusted for certain accumulated other comprehensive income (“AOCI”).
Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made):
MSAs, net of associated DTLs;
DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of any valuation allowances and DTLs; and
Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.
Noncumulative perpetual preferred stock, Tier 1 minority interest not included in CET1, subject to limits, and current Tier 1 capital instruments issued to the U.S. Treasury, including shares issued pursuant to the TARP or SBLF programs, will qualify as additional Tier I capital. All other qualifying preferred stock, subordinated debt and qualifying minority interests will be included in Tier 2 capital.
In addition to the minimum risk-based capital requirements, a new “capital conservation buffer” of CET1 capital of at least 2.5% of total risk weighted assets, will be required. The capital conservation buffer will be calculated as thelowest of:
the banking organization’s CET1 capital ratio minus 4.5%;
the banking organization’s tier 1 risk-based capital ratio minus 6.0%; and
the banking organization’s total risk-based capital ratio minus 8.0%.
In 2018, the capital conservation trigger was 1.875% or less.
Full compliance with the capital conservation buffer is required by January 1, 2019. At such time, permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and enforcement actions:
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The various capital elements and total capital under the Basel III Capital Rules, at January 1, 2018 were and as fully phased in on January 1, 2019 are:
January 1, 2018 | Fully Phased In January 1, 2019 | |||
Minimum CET1 | 4.50% | 4.50% | ||
CET1 Conservation Buffer | 1.875% | 2.50% | ||
Total CET1 | 6.375% | 7.0% | ||
Deductions from CET1 | 100% | 100% | ||
Minimum Tier 1 Capital | 6.0% | 6.0% | ||
Minimum Tier 1 Capitalplus conservation buffer | 7.875% | 8.5% | ||
Minimum Total Capital | 8.0% | 8.0% | ||
Minimum Total Capitalplus conservation buffer | 9.875% | 10.5% |
Changes in Risk-Weightings
The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy. Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting to MSRs, DTAs that cannot be realized through net operating loss carry-backs and significant (greater than 10%) investments in other financial institutions. A 150% risk-weighted category applies to “high volatility commercial real estate loans,” or “HVCRE,” which are credit facilities for the acquisition, construction or development of real property, excludingone-to-four family residential properties or commercial real estate projects where: (i) theloan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “as completed” value before the loan was made.
The Basel III Capital Rules also changed some of the risk weightings used to determine risk-weighted capital adequacy. Among other things, the Basel III Capital Rules:
Assigned a 250% risk weight to MSRs;
Assigned up to a 1,250% risk weight to structured securities, including private label mortgage securities, trust preferred CDOs and asset backed securities;
Retained existing risk weights for residential mortgages, but assign a 100% risk weight to most commercial real estate loans and a 150% risk-weight for HVCRE;
Assigned a 150% risk weight to past due exposures (other than sovereign exposures and residential mortgages);
Assigned a 250% risk weight to DTAs, to the extent not deducted from capital (subject to certain maximums);
Retained the existing 100% risk weight for corporate and retail loans; and
Increased the risk weight for exposures to qualifying securities firms from 20% to 100%.
HVCRE loans currently have a risk weight of 150%. Section 214 of the 2018 Growth Act, restricts the federal bank regulators from applying this risk weight except to certain ADC loans. The federal bank regulators issued a notice of a proposed rule on September 18, 2018 to implement Section 214 of the 2018 Growth Act, by revising the definition HVCRE. If this proposal is adopted, it is expected that this proposal could reduce the Company’s risk weighted assets and thereby may increase the Company’s risk-weighted capital.
Illustrations of Current Prompt Corrective Action Rules
Under the Basel III Capital Rules, the prompt corrective action rules and categories changed as of January 1, 2015. The following illustrates the current range of well capitalized, to undercapitalized, to critically undercapitalized categories. The adequately capitalized and significantly undercapitalized categories are not included in the following illustration.
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Section 201 of the 2018 Growth Act provides that banks and bank holding companies
with consolidated assets of less thanThe Financial Accounting Standards Board (“FASB”) has adopted ASU2016-13 “Financial Instruments – Credit Losses” which applies a current expected credit losses (“CECL”) model to financial instruments. It is effectiveremain well-capitalized for fiscal years after December 31, 2019 for the Company and other public companies. The CECL may affect the amount, timing and variability of the Company’s credit charges, and therefore its net income and regulatory capital. The Federal Reserve and other federal bank regulators adopted a three-yearphase-in of CECL’s effects on regulatory capital on December 21, 2018 (the “CECL CapitalPhase-In”).
purposes.
The Federal Reserve adopted, in September 2014, a normalization of monetary policy that includes gradually raising the Federal Reserve’s target range forreduced the Federal Funds rate target by 50
enhances other Small
FDIC Insurance Assessments
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The FDIC issued a restoration
plan on September 15, 2020In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on FICO bonds, which mature during 2017 through 2019. FICO assessments are set by the FDIC quarterly on each institution’s FDIC Assessment Base. The FICO Assessment rate was 0.560 basis points in the first quarter of 2017, and 0.540 basis points through December 31, 2017. FICO assessments have been set at 0.460 basis points in the first quarter of 2018, 0.440 basis points in the second quarter of 2018 and 0.320 basis points for the third and fourth quarters of 2018. FICO assessments of approximately $40 thousand and $20 thousand were paid to the FDIC in 2017 and 2018, respectively. The FICO assessments should continue to decline through 2019 when the last FICO bonds mature and such assessments end.
Lending Practices
Total reported
loans for construction, land development, and other land of 100% or more of a bank’stotal capital; orTotal reported
loans secured by multifamily and nonfarm nonresidential properties andloans for construction, landThe federal bank regulators continue to look at the risks of various assets and asset categories and risk management. In December 2015, the Federal Reserve and other bank regulators issued an interagency statement to highlight prudent risk management practices from existing guidance that regulated financial institutions should implement along with maintaining capital levels commensurate with the level and nature of their CRE concentration risk.
Other Dodd-Frank Act Provisions
Financial Stability Oversight Council
The Dodd-Frank Act created the Financial Stability Oversight Council or “FSOC”, which is chaired by the Secretary of the Treasury and composed of representatives from various financial services regulators. The FSOC has responsibility for identifying risks and responding to emerging threats to financial stability.
Section 956 of the Dodd-Frank Act prohibits incentive-based compensation arrangements
that encourage inappropriate riskProvide employees incentives that appropriately balance risk and reward;
Be supported by strong corporate governance, including active and effective
oversight by the organization’sboardOther
The Dodd-Frank Act requires an estimated240-300 rulemakings and an estimated 130 studies. Many of these rules and studies have been completed. Generally, the Dodd-Frank Act and the related rules are complex, have increased our compliance costs, as well as costs imposed on the markets and on others with whom we do business. Many of the rules lack authoritative interpretative guidance from the applicable government agencies.
Credit Ratings
The Dodd-Frank Act includes a number of provisions that are targeted at improving the reliability of credit ratings. The federal bank regulators and the SEC have adopted rules to implement the Securities Act’s requirement to delete references to rating agency ratings for various purposes, including “investment securities,” which are permissible bank investments.
Derivatives
The Dodd-Frank Act requires a new regulatory system for the U.S. market for swaps and otherover-the counter derivatives, which includes strict capital and margin requirements, central clearing of standardizedover-the-counter derivatives, and heightened supervision ofover-the-counter derivatives dealers and major market participants. These rules likely have increased the costs and collateral required to utilize derivatives, that we may determine are useful to reduce our interest rate and other risks.
The President Biden has frozen new rulemaking generally,
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On July 6, 2018,
We are evaluating the 2018 Growth Act and its likely effects on us. We believe it will facilitatehas positively affected our business, subject to its interpretation and implementation by our regulators. business.
On November 21, 2018,July 9, 2019, the federal banking agencies, together with the SEC and the
On December 21, 2018, the federal banking agencies issued for public comment a proposal that would amend the Volcker rule consistent with the
In addition,
LIBOR transition.
Congress is also considering LIBOR transition legislation.
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We are exposed to the U.S. economy and market conditions generally. Local employment and local economic conditions may be affected increasingly because of the growth of automobile manufacturing and related suppliers located in our markets and nearby. These businesses are adversely affected by higher interest rates and experience cyclicality of sales.
We expect●
The Federal Reserve adopted in September 2014 a normalization of monetary policy (the “Federal Reserve Normalization Policy”), which includes gradually raising the Federal Reserve’s target range for the Federal Funds rate to more normal levels and gradually reducing the Federal Reserve’s holdings of U.S. government and agency securities. The Federal Reserve’s target Federal Funds rate has increased nine times since December 2015 in 25 basis point increments from 0.25% to 2.50% on December 20, 2018. Although the Federal Reserve considers theis
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Our ability to borrow from and engage in other business with other financial institutionseffective as hedges based on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, including, among other things, investor expectations and changes in regulations.
Failures of other financial institutions in our markets and increasing consolidation of financial services companies as a result of market conditions could increase our deposits and assets and necessitate additional capital, and could have unexpected adverse effects upon us and our business.
The “Volcker Rule,” including final regulations adopted in December 2013, may affect us adversely by reducing market liquidity and securities inventories at those institutions where we buy and sell securities for our portfolio and increasing thebid-ask spreads on securities we purchase or sell. These rules have decreased the range of permissible investments, such as certain collateralized loan obligation (“CLO”) interests, which we could otherwise use to diversify our assets and for asset/liability management. The 2018 Growth Act removed Volcker Rule restrictions generally on banks under $10 billion in assets, and the federal banking agencies have asked for public comment on a proposal that is intended to simplify and tailor compliance requirements relating to the Volcker Rule.
The soundness of other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, commercial banks, and investment funds, our correspondent banks and other financial institutions. Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in equity securities and obligations of other financial institutions, could be adversely affected by the actions, financial condition, and profitability of such other financial institutions with which we deal, including, without limitation, the FHLB and our correspondent banks. At December 31, 2018, the amortized cost of the Bank’s investments in FHLB and our correspondent bank’s common stock was approximately $1.1 million. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor or counterparty confidence in certain institutions and could lead to losses or defaults by other institutions, and in some cases, failure of such institutions. Any losses, defaults by, or failures of, the institutions we do business with could adversely affect our holdings of the debt of and equity in, such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, financial condition and earnings.
Nonperforming and similar assets take significant time to resolveand may adversely affect our results of operationsand
At December 31, 2018, our nonaccrual
future, much of which is affectedby the economy and the levels of interest rates,
been determined.
Notwithstanding changes made by the 2018 Growth Act, the effects of the CFPB changes to
Increasing interest rates
The Federal National Mortgage Association (“
Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae, Freddie Mac, and FHA loans. Declines in real estate values, low home sales volumes, financial stress on borrowers as a result of job losses or reduced incomes, interest rate increases, generally, including resets on adjustable rate mortgage loans, maturities of second lien mortgages or other factors have adversely affected borrowers during recent years. Higher interest rate and changes in mortgage loan rules, could result in fewer mortgage originations, higher delinquencies and greater charge-offs in future periods, as well as increased regulation capital requirement which would adversely affect our financial condition, including capital and liquidity, andbusinesses, our results of operations. In the event our allowance for loan losses is insufficient to cover such losses, if any, our earnings, capital and liquidity could be adversely affected. Fannie Mae and Freddie Mac, the largest purchasers of residential mortgage loans, remain in federal conservatorshipoperations and the returns on capital
Fannie MaeIn contrast, rising
Fannie Mae and Freddie Mac remain in conservatorship, and although legislation has been introduced at various times to restructure Fannie Mae and Freddie Mac to take them out of conservatorship and substantially change the way they conduct businessus.
In February 2018, Fannie Mae reported that the 2017 Tax Act had reduced its DTAs, and that it had a net worth deficit of $3.7 billion as of December 31, 2017. To eliminate its net worth deficit, the Treasury Department provided Fannie Mae with $3.7 billion of capital in the first quarter of 2018. Fannie Mae reported that it had a net worth of $6.2 billion as of December 31, 2018. Freddie Mac had a net worth deficit of $312 million at December 31, 2017, and the Treasury Department provided Freddie Mac with $312 million of capital in the first quarter of 2018. Freddie Mac reported that it had a net worth of $4.5 billion as of December 31, 2018.
Since Fannie Mae and Freddie Mac dominate the residential mortgage markets, any changes in their structure and operations,banking transactions, as well as their respective capital,the quality and values of our investments
earnings.
Our future success is dependent on our ability to compete effectively in highly competitive markets.
The East Alabama banking markets in which we do business are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. We compete for loans, deposits and other financial services in our markets with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and insurance brokerage firms. Marketplace lenders operating nationwide over the internet are growing rapidly. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to draw upon. The Dodd-Frank Act allows others to branch into our markets more easily from other states. Failures of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets.
Our success depends on local economic conditions where we operate.
Our success depends on the general economic conditions in the geographic markets we serve in Alabama. The local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the Southeastern United States in general, or in one or more of our local markets could negatively affect our results of operations and our profitability. Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in our markets and nearby. Auto sales are cyclical and are affected adversely by higher interest rates.
Our cost of funds may increase as a resultof general economic conditions, interest rates, inflationand competitive
Although
operations.
The Company is an entity separate and distinct from the Bank.
The Company is an entity separate and distinct from the Bank. Company transactions with the Bank are limited by Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. We depend upon the Bank’s earnings and dividends, which are limited by law and regulatory policies and actions, for cash to pay the Company’s debt and corporate obligations, and to pay dividends to our shareholders. If the Bank’s ability to pay dividends to the Company was terminated or limited, the Company’s liquidity and financial condition could be materially and adversely affected.
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We are subject to extensive regulation that could limit or restrict
Weat banks, generally,
The current President and members of his political party in Congress have promoted and supported regulatory relief for the banking industry. The nature, effects and timing of administrative and legislative change, including the 2018 Growth Act, and possible changes in regulations or regulatory approach, as a result of a Democrat-controlled House of Representatives elected in 2018, cannot be predicted. The federal bank regulators and the Treasury Department, as well as the Congress and the President, are evaluating the regulation of banks, other financial services providers and the financial markets and such changes, if any, could require us to maintain more capital and liquidity, and restrict our activities, which could adversely affect our growth, profitability and financial condition. Our consumer finance products, including residential mortgage loans, are subject to CFPB regulations and evolving standards reflecting CFPB releases, rule-making and enforcement actions.
equity.
The 2017 Tax Act may have adverse effects on certain of our customers and our businesses.
The 2017 Tax Act will benefit the Bank by reducing the maximum U.S. corporate income tax rate on its taxable income from 35% to 21%. This benefit may be diminished by the complexity, uncertainty and possible adverse effects of this legislation on certain of our borrowers, including limitations on the deductibility of:
residential mortgage interest;
state and local taxes, including property taxes; and
business interest expenses.
These changes may adversely affect borrowers’ cash flows and the values and liquidity of collateral we hold to secure our loans. Fewer borrowers may be able to meet the CFPB’s “ability to repay” standards under the Truth in Lending Act and CFPB regulations, which include the borrower’s ability to pay taxes and assessments. Demand for loans by qualified borrowers could be reduced, and therefore competition among lenders could increase. Customer behaviors toward incurring and repaying debt could also change as a result of the 2017 Tax Act. As a result, the 2017 Tax Act could materially and adversely affect our business and results of operations, at least before taking into account our lower U.S. corporate income tax rate.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected.
We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank. If we fail to meet these capital and other regulatory requirements, including more rigorous requirements arising from our regulators’ implementation of Basel III, our financial condition, liquidity and results of operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed”, including meeting the Basel III capital conservation buffers, for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance, our ability to raise brokered deposits, our ability to pay dividends on our common stock and our ability to make acquisitions, and we would no longer meet the requirements for becoming a financial holding company. These could also affect our ability to use discretionary bonuses to attract and retain quality personnel. The Basel III Capital Rules include a new minimum ratio of common equity tier 1 capital, or CET1, to risk-weighted assets of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets.See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels currently and on afully phased-in basis and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements for the following reasons:
losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities;
difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions;
declines in the value of our securities portfolios;
revisions to the regulations or their application by our regulators that increase our capital requirements;
reductions in the value of our DTAs; and other adverse developments; and
unexpected growth and an inability to increase capital timely.
A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could adversely affect customer confidence, and our:
ability to grow;
the costs of and availability of funds;
FDIC deposit insurance premiums;
ability to raise or replace brokered deposits;
ability to make acquisitions or engage in new activities;
flexibility if we become subject to prompt corrective action restrictions;
ability to make discretionary bonuses to attract and retain quality personnel;
ability to make payments of principal and interest on our capital instruments; and
ability to pay dividends on our capital stock.
The Dodd-Frank Act restricts our future issuance of trust preferred securities and cumulative preferred securities as eligible Tier 1 risk-based capital for purposes of the regulatory capital guidelines for bank holding companies.
We repurchased and retired all our outstanding trust preferred securities in 2018, and the Dodd-Frank Act does not permit us to issue new trust preferred securities as Tier 1 capital. Accordingly, should we determine it is advisable, or should our regulators require us, based upon new capital or liquidity regulations or otherwise, to raise additional Tier 1 risk-based capital, we would not be able to issue additional trust preferred securities. Under the Federal Reserve’s Small BHC Policy, the Company could issue senior or secured debt, the proceeds of which could be down-streamed as capital to the Bank as capital. We also could issue noncumulative preferred stock or common equity. To the extent we issue new equity, it could result in dilution to our existing shareholders. To the extent we issue preferred stock, dividends on the preferred stock, unlike distributions paid on trust preferred securities, would not be tax deductible.
We may needto raise additional capital in the future, but that capitalmay not be available when it is needed or on
Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results.
We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities, involve various risks including:
risks of unknown or contingent liabilities;
unanticipated costs and delays;
risks that acquired new businesses will not perform consistent with our growth and profitability expectations;
risks of entering new markets or product areas where we have limited experience;
risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures;
exposure to potential asset quality issues with acquired institutions;
difficulties, expenses and delays of integrating the operations and personnel of acquired institutions;
potential disruptions to our business;
possible loss of key employees and customers of acquired institutions;
potential short-term decreases in profitability; and
diversion of our management’s time and attention from our existing operations and business.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, we also may consider the acquisition of other businesses. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory approvals could contain conditions that reduce the anticipated benefits of any transaction. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.
Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services and a growing demand for mobile and user-based banking applications. In addition to allowing us to analyze our customers better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs, risks associated with fraud and compliance with anti-money laundering and other laws, and various operational risks. Largely unregulated “fintech” businesses have increased their participation in the lending and payments business, and have increased competition in these businesses. Our future success will depend, in part, upon our ability to use technology to provide products and services that meet our customers’ preferences and create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, and data breaches. We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective than anticipated. Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly,non-banking firms are using technology to compete with traditional lenders for loans and other banking services.
Operational risks are inherent in our businesses.
Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third parties; failure to document transactions properly or to obtain proper authorization; failure to comply with applicable regulatory requirements and conduct of business rules in the various jurisdictions where we do business or have customers; failures in the models we generate and rely on; equipment failures, including those caused by natural disasters or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen problems encountered while implementing major new computer systems or, upgrades to existing systems or inadequate access to data or poor response capabilities in light of such business continuity and data security system failures; or the inadequacy or failure of systems and controls, including those of our suppliers or counterparties. In addition, we face certain risks inherent in the ownership and operation of our bank premises and other real-estate, including liability for “slip and fall” and other accidents on our properties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, it is not possible to be certain that such actions have been or will be effective in controlling each of the operational risks faced by us.
Potential gaps in our risk management policies and internal audit procedures may leave us exposed unidentified or unanticipated risk, which could negatively affect our business.
Our enterprise risk management and internal audit program is designed to mitigate material risks and loss to us. We have developed and continue to develop risk management and internal audit policies and procedures to reflect the ongoing review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may not identify every risk to which we are exposed, and our internal audit process may fail to detect such weaknesses or deficiencies in our risk management framework. Many of our methods for managing risk and exposures use observed historical market behavior to model or project potential future exposure. Models used by our business are based on assumptions and projections. These models may not operate properly or our inputs and assumptions may be inaccurate. As a result, these methods may not fully predict future exposures, which can be significantly greater than historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete,up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will closely follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, we may have to implement more extensive and perhaps different risk management policies and procedures under new or pending regulations. All of these could adversely affect our financial condition and results of operations.
Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.
Various federal and state laws enforced by the bank regulators and other agencies protect the privacy and security of customers’non-public personal information. Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. We rely on various internal processes and controls to protect the confidentiality of client information that is accessible to, or in the possession of, us and our employees. It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack. Such personal data could also be compromised by third party hackers via intrusions into our systems or those of service providers or persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment. If we fail to maintain adequate internal controls, or if our employees fail to comply with our policies and procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of client information could occur. Such internal control inadequacies ornon-compliance could materially damage our reputation, lead to civil or criminal penalties, or both, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
Our information systems may experience interruptions and security breaches.
We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our customers’ privacy and our customer relationships, generally. Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Although we do not believe that we and our third-party service providers have been subject to a cyber-attack, other financial service institutions and their service providers have reported security breaches in their websites or other systems, some of which have involved sophisticated and targeted attacks, including use of stolen access credentials, malware, ransomware, phishing, structured query language injection attacks and distributeddenial-of-service attacks, among other means. Such cyber-attacks may also be directed at disrupting the operations of public companies or their business partners, which are intended to effect unauthorized fund transfers, obtain unauthorized access to confidential information, to destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyberattacks and other means. Denial of service attacks have been launched against a number of large financial services institutions, and we may be subject to these types of attacks in the future. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.
Despite our cybersecurity policies and procedures and our Board of Director’s and Management’s efforts to monitor and ensure the integrity of our and our service providers’ systems, we may not be able to anticipate all types of security threats, nor may we be able to implement preventive measures effective against all such security threats. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as the use of mobile banking and other internet-based products and services continues to grow.
Security breaches or failures may have serious adverse financial and other consequences, including significant legal and remediation costs, disruptions to operations, misappropriation of confidential information, damage to systems operated by us or our third-party service providers, as well as damages to our customers and our counterparties. In addition to the immediate costs of any failure, interruption or security breach, including those at our third-party service providers, these events could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism or other external events could have significant effects on our business.
Severe weather and natural disasters, including hurricanes, tornados, drought and floods, acts of war or terrorism or other external events could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base; impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our associates may take excessive risks which could negatively affect our financialcondition and business.
As a banking enterprise, we
We maycould be unable to attractmaterially and retain key people to support our business.
Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basisadversely
or limit future
dividends.A substantial legal liability or a significant federal, state or other regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal costs, divert management resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing business, financial condition and results of operations. Even if we ultimately prevail in the litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of our securities specifically, or the securities of our industry, generally.
The Federal Reserve may require us to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve, which examines us, expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended the Federal Deposit Insurance Corporation Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial strength to their depository institution subsidiaries. Under this requirement, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.”
Failures to comply with the fair lending laws, CFPB regulationsregulations or the Community Reinvestment Act, or CRA, could
|
The Bank also owns
$0.70 per share.
The Bank’s Notasulga branch was opened
in August 2001. This branch is located in Notasulga, Alabama, about 15miles
|
|
|
Closing Price Per Share (1) | Cash Dividends Declared | |||||||||||
High | Low | |||||||||||
2018 | ||||||||||||
First Quarter | $ 39.25 | $ 35.50 | $ 0.24 | |||||||||
Second Quarter | 50.99 | 37.40 | 0.24 | |||||||||
Third Quarter | 53.50 | 38.31 | 0.24 | |||||||||
Fourth Quarter | 41.50 | 28.88 | 0.24 | |||||||||
2017 | ||||||||||||
First Quarter | $ 33.69 | $ 30.75 | $ 0.23 | |||||||||
Second Quarter | 37.79 | 32.65 | 0.23 | |||||||||
Third Quarter | 37.71 | 34.82 | 0.23 | |||||||||
Fourth Quarter | 40.25 | 33.25 | 0.23 | |||||||||
(1) The price information represents actual transactions. |
|
Period Ending | ||||||||||||||||||||||||
Index | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | ||||||||||||||||||
Auburn National Bancorporation, Inc. | 100.00 | 97.93 | 126.92 | 138.44 | 176.60 | 147.15 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 114.75 | 122.74 | 133.62 | 173.22 | 168.30 | ||||||||||||||||||
SNL Southeast Bank | 100.00 | 112.63 | 110.87 | 147.18 | 182.06 | 150.42 |
Not applicable.
|
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTSOFYear ended December 31 | ||||||||||
(Dollars in thousands, except per share data) | 2018 | 2017 | ||||||||
Net interest income (a) | $ | 26,183 | $ | 25,731 | ||||||
Less:tax-equivalent adjustment | 613 | 1,205 | ||||||||
Net interest income (GAAP) | 25,570 | 24,526 | ||||||||
Noninterest income | 3,325 | 3,441 | ||||||||
Total revenue | 28,895 | 27,967 | ||||||||
Provision for loan losses | — | (300 | ) | |||||||
Noninterest expense | 17,874 | 16,784 | ||||||||
Income tax expense | 2,187 | 3,637 | ||||||||
Net earnings | $ | 8,834 | $ | 7,846 | ||||||
Basic and diluted net earnings per share | $ | 2.42 | $ | 2.15 | ||||||
2020.
The Company recorded no provision allowance
Noninterest income2021.
Noninterest expense was $17.9 million compared to $16.8 million in 2017. This increase in noninterest expense was primarily due to increases in salaries and benefits expense of $0.6 million and a $0.4 million losstax benefit related to misappropriationa New Markets Tax
Income tax expense was $2.2 million in 2018 and $3.6 million in 2017 reflecting an2021.
2021.
As part of the Company’s quarterly assessment
of the allowance, management divides the loan portfolio into five segments:ongoing COVID-19
The Company is required to own certain stock as a condition of membership, such as
Federal Home Loan Bank (“FHLB”)Year ended December 31 | ||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||
(Dollars in thousands) | Average Balance | Yield/ Rate | Average Balance | Yield/ Rate | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Loans and loans held for sale | $ | 457,610 | 4.76% | $ | 442,101 | 4.70% | ||||||||||||||
Securities - taxable | 181,485 | 2.23% | 197,108 | 2.15% | ||||||||||||||||
Securities -tax-exempt (a) | 71,065 | 4.11% | 69,881 | 5.07% | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Total securities | 252,550 | 2.76% | 266,989 | 2.91% | ||||||||||||||||
Federal funds sold | 28,689 | 1.93% | 32,342 | 1.05% | ||||||||||||||||
Interest bearing bank deposits | 31,339 | 1.81% | 41,317 | 1.04% | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Total interest-earning assets | 770,188 | 3.88% | 782,749 | 3.75% | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Deposits: | ||||||||||||||||||||
NOW | 125,533 | 0.34% | 125,935 | 0.20% | ||||||||||||||||
Savings and money market | 220,810 | 0.39% | 230,121 | 0.37% | ||||||||||||||||
Certificates of deposits | 184,010 | 1.27% | 198,457 | 1.18% | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Total interest-bearing deposits | 530,353 | 0.68% | 554,513 | 0.62% | ||||||||||||||||
Short-term borrowings | 2,634 | 0.68% | 3,476 | 0.52% | ||||||||||||||||
Long-term debt | 1,022 | 4.50% | 3,217 | 3.89% | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Total interest-bearing liabilities | 534,009 | 0.69% | 561,206 | 0.64% | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
Net interest income and margin (a) | $ | 26,183 | 3.40% | $ | 25,731 | 3.29% | ||||||||||||||
|
|
|
|
|
a decline in the Company’s net interest
margin (tax-equivalent),partially offset by balance sheet growth.government stimulus and relief programs and customers’ increased savings.
opportunities.
Net recoveries were $33 thousand,absolute level of loans, loan growth, the credit quality,
recoveries.
Year ended December 31 | ||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||
| ||||||||
Service charges on deposit accounts | $ | 749 | $ | 746 | ||||
Mortgage lending | 655 | 777 | ||||||
Bank-owned life insurance | 435 | 442 | ||||||
Securities gains, net | — | 51 | ||||||
Other | 1,486 | 1,425 | ||||||
| ||||||||
Total noninterest income | $ | 3,325 | $ | 3,441 | ||||
|
Year ended December 31 | ||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||
| ||||||||
Origination income | $ | 311 | $ | 504 | ||||
Servicing fees, net | 344 | 272 | ||||||
Decrease in MSR valuation allowance | — | 1 | ||||||
| ||||||||
Total mortgage lending income | $ | 655 | $ | 777 | ||||
|
The decrease2020.
decreased amortization expense.
Year ended December 31 | ||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||
Salaries and benefits | $ | 10,653 | $ | 10,011 | ||||
Net occupancy and equipment | 1,465 | 1,471 | ||||||
Professional fees | 902 | 966 | ||||||
FDIC and other regulatory assessments | 310 | 346 | ||||||
Other | 4,544 | 3,990 | ||||||
| ||||||||
Total noninterest expense | $ | 17,874 | $ | 16,784 | ||||
|
The increase in other noninterest expense was primarily due to a $0.4 million lossdecrease in deferred
report.
2020.
December 31, 2018 | ||||||||||||||||||||||
(Dollars in thousands) | 1 year
or less | 1 to 5
years | 5 to 10
years | After 10
years | Total
Fair Value | |||||||||||||||||
| ||||||||||||||||||||||
Agency obligations | $ | 14,437 | 19,865 | 16,869 | — | 51,171 | ||||||||||||||||
Agency RMBS | — | — | 8,368 | 110,230 | 118,598 | |||||||||||||||||
State and political subdivisions | — | 3,682 | 7,726 | 58,624 | 70,032 | |||||||||||||||||
| ||||||||||||||||||||||
Totalavailable-for-sale | $ | 14,437 | 23,547 | 32,963 | 168,854 | 239,801 | ||||||||||||||||
| ||||||||||||||||||||||
Weighted average yield: | ||||||||||||||||||||||
Agency obligations | 1.96% | 1.71% | 2.11% | — | 1.91% | |||||||||||||||||
Agency RMBS | — | — | 2.49% | 2.50% | 2.50% | |||||||||||||||||
State and political subdivisions | — | 3.87% | 3.02% | 3.22% | 3.23% | |||||||||||||||||
| ||||||||||||||||||||||
Totalavailable-for-sale | 1.96% | 2.05% | 2.42% | 2.75% | 2.59% | |||||||||||||||||
|
December 31 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
(In thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||
| ||||||||||||||||||||||
Commercial and industrial | $ | 63,467 | 59,086 | 49,850 | 52,479 | 54,329 | ||||||||||||||||
Construction and land development | 40,222 | 39,607 | 41,650 | 43,694 | 37,298 | |||||||||||||||||
Commercial real estate | 261,896 | 239,033 | 220,439 | 203,853 | 192,006 | |||||||||||||||||
Residential real estate | 102,597 | 106,863 | 110,855 | 116,673 | 107,641 | |||||||||||||||||
Consumer installment | 9,295 | 9,588 | 8,712 | 10,220 | 12,335 | |||||||||||||||||
| ||||||||||||||||||||||
Total loans | 477,477 | 454,177 | 431,506 | 426,919 | 403,609 | |||||||||||||||||
Less: unearned income | (569) | (526) | (560) | (509) | (655) | |||||||||||||||||
| ||||||||||||||||||||||
Loans, net of unearned income | $ | 476,908 | 453,651 | 430,946 | 426,410 | 402,954 | ||||||||||||||||
|
2021.
Purchased loan participations included in the Company’s loan portfolio were approximately $5.4 million and $1.4 million as of December 31, 2018 and 2017, respectively. All purchased loan participations are underwritten by the Company independent of the selling bank. In addition, all loans, including purchased participations, are evaluated for collectability during the course of the Company’s normal loan review procedures. If the Company deems a participation loan impaired, it applies the same accounting policies and procedures described under “Critical Accounting Policies – Allowance for Loan Losses”.
2020.
We periodically analyze
our commercial loan portfolio to determine if a concentration of creditrisk exists in any one orDecember 31 | ||||||||||||
|
| |||||||||||
(In thousands) | 2018 | 2017 | ||||||||||
| ||||||||||||
Hotel/motel | $ | 47,936 | $ | 22,384 | ||||||||
Lessors of1-4 family residential properties | 46,374 | 47,323 | ||||||||||
Multi-family residential properties | 40,455 | 52,167 | ||||||||||
Shopping centers | 35,789 | 39,966 | ||||||||||
Office buildings |
| 25,421
|
|
| 24,483
|
| ||||||
|
Policies.”
Year ended December 31 | ||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||
| ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at beginning of period | $ | 4,757 | 4,643 | 4,289 | 4,836 | 5,268 | ||||||||||||||||
Charge-offs: | ||||||||||||||||||||||
Commercial and industrial | (52 | ) | (449 | ) | (97 | ) | (100 | ) | (46 | ) | ||||||||||||
Construction and land development | — | — | — | — | (235 | ) | ||||||||||||||||
Commercial real estate | (38 | ) | — | (194 | ) | (866 | ) | — | ||||||||||||||
Residential real estate | (26 | ) | (107 | ) | (182 | ) | (89 | ) | (438 | ) | ||||||||||||
Consumer installment | (52 | ) | (40 | ) | (67 | ) | (59 | ) | (89 | ) | ||||||||||||
| ||||||||||||||||||||||
Total charge-offs | (168 | ) | (596 | ) | (540 | ) | (1,114 | ) | (808 | ) | ||||||||||||
Recoveries: | ||||||||||||||||||||||
Commercial and industrial | 70 | 461 | 29 | 22 | 71 | |||||||||||||||||
Construction and land development | — | 347 | 1,212 | 17 | 8 | |||||||||||||||||
Commercial real estate | 19 | — | — | — | 119 | |||||||||||||||||
Residential real estate | 79 | 115 | 127 | 313 | 112 | |||||||||||||||||
Consumer installment | 33 | 87 | 11 | 15 | 16 | |||||||||||||||||
| ||||||||||||||||||||||
Total recoveries | 201 | 1,010 | 1,379 | 367 | 326 | |||||||||||||||||
| ||||||||||||||||||||||
Net recoveries (charge-offs) | 33 | 414 | 839 | (747 | ) | (482 | ) | |||||||||||||||
Provision for loan losses | — | (300 | ) | (485 | ) | 200 | 50 | |||||||||||||||
| ||||||||||||||||||||||
Ending balance | $ | 4,790 | 4,757 | 4,643 | 4,289 | 4,836 | ||||||||||||||||
| ||||||||||||||||||||||
as a % of loans | 1.00 | % | 1.05 | 1.08 | 1.01 | 1.20 | ||||||||||||||||
as a % of nonperforming loans | 2,691 | % | 160 | 196 | 158 | 433 | ||||||||||||||||
Net (recoveries) charge-offs as a % of average loans | (0.01 | ) % | (0.09 | ) | (0.19 | ) | 0.18 | 0.12 | ||||||||||||||
|
Net recoveries were $33 thousand, or 0.01%, of average loans in 2018, compared to recoveries of $0.4 million, or 0.09%, in 2017.
Ouraddition our regulators, as an
December 31 | ||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||
| ||||||||||||||||||||||||
Nonperforming assets: | ||||||||||||||||||||||||
Nonperforming (nonaccrual) loans | $ | 178 | 2,972 | 2,370 | 2,714 | 1,117 | ||||||||||||||||||
Other real estate owned | 172 | — | 152 | 252 | 534 | |||||||||||||||||||
| ||||||||||||||||||||||||
Total nonperforming assets | $ | 350 | 2,972 | 2,522 | 2,966 | 1,651 | ||||||||||||||||||
| ||||||||||||||||||||||||
as a % of loans and other real estate owned | 0.07 | % | 0.66 | 0.59 | 0.70 | 0.41 | ||||||||||||||||||
as a % of total assets | 0.04 | % | 0.35 | 0.30 | 0.36 | 0.21 | ||||||||||||||||||
Nonperforming loans as a % of total loans | 0.04 | % | 0.66 | 0.55 | 0.64 | 0.28 | ||||||||||||||||||
Accruing loans 90 days or more past due | $ | — | — | — | — | — | ||||||||||||||||||
|
December 31 | ||||||||||
(In thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Nonaccrual loans: | ||||||||||
Commercial and industrial | $ | — | 31 | |||||||
Commercial real estate | — | 2,188 | ||||||||
Residential real estate | 178 | 739 | ||||||||
Consumer installment | — | 14 | ||||||||
| ||||||||||
Total nonaccrual loans / nonperforming loans | $ | 178 | 2,972 | |||||||
|
Due to the weakening credit status of a borrower, the Company may elect to formally restructure certain loans to facilitate a repayment plan that minimizes the potential losses that we might incur. Restructured loans, or troubled debt restructurings (“TDRs”), are classified as impaired loans, and if the loans are on nonaccrual status as of the date of restructuring, the loans are included in the nonaccrual loan balances noted above. Nonaccrual loan balances do not include loans that have been restructured that were performing as of the restructure date. At December 31, 2018 and 2017, the Company had $0.2 and $0.5 million, respectively, in accruing TDRs.
At December 31, 2018 and 2017,2021 there were no loans 90 days past due and still accruing interest.
interest, compared
to $0.1 million atDecember 31 | ||||||||||
(In thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Other real estate owned: | ||||||||||
Residential | $ | 172 | — | |||||||
| ||||||||||
Total other real estate owned | $ | 172 | — | |||||||
|
December 31 | ||||||||||
(In thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Potential problem loans: | ||||||||||
Commercial and industrial | $ | 522 | 119 | |||||||
Construction and land development | 741 | 468 | ||||||||
Commercial real estate | 688 | 733 | ||||||||
Residential real estate | 4,506 | 4,253 | ||||||||
Consumer installment | 71 | 78 | ||||||||
| ||||||||||
Total potential problem loans | $ | 6,528 | 5,651 | |||||||
|
December 31 | ||||||||||
(In thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Performing loans past due 30 to 89 days: | ||||||||||
Commercial and industrial | $ | 100 | 8 | |||||||
Construction and land development | 225 | — | ||||||||
Commercial real estate | — | — | ||||||||
Residential real estate | 1,740 | 1,058 | ||||||||
Consumer installment | 41 | 57 | ||||||||
| ||||||||||
Total performing loans past due 30 to 89 days | $ | 2,106 | 1,123 | |||||||
|
December 31 | ||||||||||
(In thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Noninterest bearing demand | $ | 201,648 | 193,917 | |||||||
NOW | 120,769 | 146,999 | ||||||||
Money market | 161,464 | 173,251 | ||||||||
Savings | 59,075 | 55,421 | ||||||||
Certificates of deposit under $100,000 | 62,207 | 69,960 | ||||||||
Certificates of deposit and other time deposits of $100,000 or more | 108,620 | 107,711 | ||||||||
Brokered certificates of deposit | 10,410 | 10,400 | ||||||||
| ||||||||||
Total deposits | $ | 724,193 | 757,659 | |||||||
|
FDIC
insurance limits.Long-term debt includes junior subordinated debentures related to trust preferred securities.
The average rates paid on long-term debt were 4.50% in 2018 and 3.89% in 2017.
2020, respectively.
all net income over the preceding four quarters. The interim
final rule only affects the capital buffers, and+/- 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
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
2021.
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
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
2021.
The
repurchases.
Payments due by period | ||||||||||||||||||||
(Dollars in thousands) | Total | 1 year
or less | 1 to 3
years | 3 to 5
years | More than
5 years | |||||||||||||||
| ||||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Deposit maturities (1) | $ | 724,193 | 651,319 | 45,518 | 27,356 | — | ||||||||||||||
Operating lease obligations | 718 | 152 | 161 | 120 | 285 | |||||||||||||||
| ||||||||||||||||||||
Total | $ | 724,911 | 651,471 | 45,679 | 27,476 | 285 | ||||||||||||||
|
|
2021:
Since 2009, we have
In 2018,
We service all residential
mortgage loans originated and sold by us to Fannie Mae. As servicer,our primary duties are to:
|
|
|
|
Value Measurement; and
|
Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.
●
ASU2016-13,
On October 16, 2019,
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
ASU 2018- 15,Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contractaligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that includeinternal-use software license). This ASU requires entities to use the guidance in FASB ASC350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
Table 1– Explanation ofNon-GAAP Financial Measures
Year ended December 31 | ||||||||||||||||||||||
(In thousands) |
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||
| ||||||||||||||||||||||
Net interest income (GAAP) | $ | 25,570 | 24,526 | 22,732 | 22,718 | 21,453 | ||||||||||||||||
Tax-equivalent adjustment | 613 | 1,205 | 1,276 | 1,342 | 1,288 | |||||||||||||||||
| ||||||||||||||||||||||
Net interest income(Tax-equivalent) | $ | 26,183 | 25,731 | 24,008 | 24,060 | 22,741 | ||||||||||||||||
|
Year ended December 31
Year ended December 31 | ||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||
| ||||||||||||||||||||||
Income statement | ||||||||||||||||||||||
Tax-equivalent interest income (a) | $ | 29,859 | 29,325 | 28,092 | 28,495 | 28,105 | ||||||||||||||||
Total interest expense | 3,676 | 3,594 | 4,084 | 4,435 | 5,364 | |||||||||||||||||
| ||||||||||||||||||||||
Tax equivalent net interest income (a) | 26,183 | 25,731 | 24,008 | 24,060 | 22,741 | |||||||||||||||||
| ||||||||||||||||||||||
Provision for loan losses | — | (300 | ) | (485 | ) | 200 | 50 | |||||||||||||||
Total noninterest income | 3,325 | 3,441 | 3,383 | 4,532 | 3,933 | |||||||||||||||||
Total noninterest expense | 17,874 | 16,784 | 15,348 | 16,372 | 15,104 | |||||||||||||||||
| ||||||||||||||||||||||
Net earnings before income taxes andtax-equivalent adjustment | 11,634 | 12,688 | 12,528 | 12,020 | 11,520 | |||||||||||||||||
Tax-equivalent adjustment | 613 | 1,205 | 1,276 | 1,342 | 1,288 | |||||||||||||||||
Income tax expense | 2,187 | 3,637 | 3,102 | 2,820 | 2,784 | |||||||||||||||||
| ||||||||||||||||||||||
Net earnings | $ | 8,834 | 7,846 | 8,150 | 7,858 | 7,448 | ||||||||||||||||
| ||||||||||||||||||||||
Per share data: | ||||||||||||||||||||||
Basic and diluted net earnings | $ | 2.42 | 2.15 | 2.24 | 2.16 | 2.04 | ||||||||||||||||
Cash dividends declared | $ | 0.96 | 0.92 | 0.90 | 0.88 | 0.86 | ||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||
Basic and diluted | 3,643,780 | 3,643,616 | 3,643,504 | 3,643,428 | 3,643,278 | |||||||||||||||||
Shares outstanding | 3,643,868 | 3,643,668 | 3,643,523 | 3,643,478 | 3,643,328 | |||||||||||||||||
Book value | $ | 24.44 | 23.85 | 22.55 | 21.94 | 20.80 | ||||||||||||||||
Common stock price | ||||||||||||||||||||||
High | $ | 53.50 | 40.25 | 31.31 | 30.39 | 25.80 | ||||||||||||||||
Low | 28.88 | 30.75 | 24.56 | 23.15 | 22.10 | |||||||||||||||||
Period-end | $ | 31.66 | 38.90 | 31.31 | 29.62 | 23.64 | ||||||||||||||||
To earnings ratio | 13.08 | x | 18.09 | 13.98 | 13.78 | 11.59 | ||||||||||||||||
To book value | 130 | % | 163 | 139 | 135 | 114 | ||||||||||||||||
Performance ratios: | ||||||||||||||||||||||
Return on average equity | 10.14 | % | 9.17 | 9.65 | 9.98 | 10.53 | ||||||||||||||||
Return on average assets | 1.08 | % | 0.94 | 0.98 | 0.98 | 0.97 | ||||||||||||||||
Dividend payout ratio | 39.67 | % | 42.79 | 40.18 | 40.74 | 42.16 | ||||||||||||||||
Average equity to average assets | 10.63 | % | 10.30 | 10.14 | 9.79 | 9.17 | ||||||||||||||||
Asset Quality: | ||||||||||||||||||||||
Allowance for loan losses as a % of: | ||||||||||||||||||||||
Loans | 1.00 | % | 1.05 | 1.08 | 1.01 | 1.20 | ||||||||||||||||
Nonperforming loans | 2,691 | % | 160 | 196 | 158 | 433 | ||||||||||||||||
Nonperforming assets as a % of: | ||||||||||||||||||||||
Loans and other real estate owned | 0.07 | % | 0.66 | 0.59 | 0.70 | 0.41 | ||||||||||||||||
Total assets | 0.04 | % | 0.35 | 0.30 | 0.36 | 0.21 | ||||||||||||||||
Nonperforming loans as % of loans | 0.04 | % | 0.66 | 0.55 | 0.64 | 0.28 | ||||||||||||||||
Net (recoveries) charge-offs as a % of average loans | (0.01 | ) % | (0.09 | ) | (0.19 | ) | 0.18 | 0.12 | ||||||||||||||
Capital Adequacy: | ||||||||||||||||||||||
CET 1 risk-based capital ratio | 16.49 | % | 16.42 | 16.44 | 15.28 | na | ||||||||||||||||
Tier 1 risk-based capital ratio | 16.49 | % | 16.98 | 17.00 | 16.57 | 17.45 | ||||||||||||||||
Total risk-based capital ratio | 17.38 | % | 17.91 | 17.95 | 17.44 | 18.54 | ||||||||||||||||
Tier 1 leverage ratio | 11.33 | % | 10.95 | 10.27 | 10.35 | 10.32 | ||||||||||||||||
Other financial data: | ||||||||||||||||||||||
Net interest margin (a) | 3.40 | % | 3.29 | 3.05 | 3.17 | 3.15 | ||||||||||||||||
Effective income tax rate | 19.84 | % | 31.67 | 27.57 | 26.41 | 27.21 | ||||||||||||||||
Efficiency ratio (b) | 60.57 | % | 57.53 | 56.03 | 57.26 | 56.62 | ||||||||||||||||
Selected period end balances: | ||||||||||||||||||||||
Securities | $ | 239,801 | 257,697 | 243,572 | 241,687 | 267,603 | ||||||||||||||||
Loans, net of unearned income | 476,908 | 453,651 | 430,946 | 426,410 | 402,954 | |||||||||||||||||
Allowance for loan losses | 4,790 | 4,757 | 4,643 | 4,289 | 4,836 | |||||||||||||||||
Total assets | 818,077 | 853,381 | 831,943 | 817,189 | 789,231 | |||||||||||||||||
Total deposits | 724,193 | 757,659 | 739,143 | 723,627 | 693,390 | |||||||||||||||||
Long-term debt | — | 3,217 | 3,217 | 7,217 | 12,217 | |||||||||||||||||
Total stockholders’ equity | 89,055 | 86,906 | 82,177 | 79,949 | 75,799 | |||||||||||||||||
|
|
|
Year ended December 31
Year ended December 31 | ||||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||
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) | $ | 457,610 | $ 21,766 | 4.76% | $ | 442,101 | $ 20,781 | 4.70% | ||||||||||||||||||||
Securities - taxable | 181,485 | 4,051 | 2.23% | 197,108 | 4,229 | 2.15% | ||||||||||||||||||||||
Securities -tax-exempt (2) | 71,065 | 2,921 | 4.11% | 69,881 | 3,545 | 5.07% | ||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total securities | 252,550 | 6,972 | 2.76% | 266,989 | 7,774 | 2.91% | ||||||||||||||||||||||
Federal funds sold | 28,689 | 554 | 1.93% | 32,342 | 341 | 1.05% | ||||||||||||||||||||||
Interest bearing bank deposits | 31,339 | 567 | 1.81% | 41,317 | 429 | 1.04% | ||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total interest-earning assets | 770,188 | 29,859 | 3.88% | 782,749 | 29,325 | 3.75% | ||||||||||||||||||||||
Cash and due from banks | 13,802 | 13,386 | ||||||||||||||||||||||||||
Other assets | 35,539 | 34,291 | ||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total assets | $ | 819,529 | $ | 830,426 | ||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||
NOW | $ | 125,533 | 428 | 0.34% | $ | 125,935 | 248 | 0.20% | ||||||||||||||||||||
Savings and money market | 220,810 | 855 | 0.39% | 230,121 | 852 | 0.37% | ||||||||||||||||||||||
Certificates of deposits | 184,010 | 2,329 | 1.27% | 198,457 | 2,351 | 1.18% | ||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total interest-bearing deposits | 530,353 | 3,612 | 0.68% | 554,513 | 3,451 | 0.62% | ||||||||||||||||||||||
Short-term borrowings | 2,634 | 18 | 0.68% | 3,476 | 18 | 0.52% | ||||||||||||||||||||||
Long-term debt | 1,022 | 46 | 4.50% | 3,217 | 125 | 3.89% | ||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total interest-bearing liabilities | 534,009 | 3,676 | 0.69% | 561,206 | 3,594 | 0.64% | ||||||||||||||||||||||
Noninterest-bearing deposits | 195,924 | 180,891 | ||||||||||||||||||||||||||
Other liabilities | 2,489 | 2,788 | ||||||||||||||||||||||||||
Stockholders’ equity | 87,107 | 85,541 | ||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total liabilities and and stockholders’ equity | $ | 819,529 | $ | 830,426 | ||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Net interest income and margin | $ | 26,183 | 3.40% | $ | 25,731 | 3.29% | ||||||||||||||||||||||
|
|
|
|
|
|
|
Year ended December 31
Years ended December 31, 2018 vs. 2017 | Years ended December 31, 2017 vs. 2016 | |||||||||||||||||||||||||||||
Net |
Due to change in | Net | Due to change in | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
(Dollars in thousands) | Change | Rate (2) | Volume (2) | Change | Rate (2) | Volume (2) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||
Loans and loans held for sale | $ | 985 | 247 | 738 | $ | 328 | (138) | 466 | ||||||||||||||||||||||
Securities - taxable | (178) | 171 | (349) | 947 | 298 | 649 | ||||||||||||||||||||||||
Securities -tax-exempt (1) | (624) | (673) | 49 | (209) | (279) | 70 | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Total securities | (802) | (502) | (300) | 738 | 19 | 719 | ||||||||||||||||||||||||
Federal funds sold | 213 | 284 | (71) | 92 | 272 | (180) | ||||||||||||||||||||||||
Interest bearing bank deposits | 138 | 319 | (181) | 75 | 373 | (298) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Total interest income | $ | 534 | 348 | 186 | $ | 1,233 | 526 | 707 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||
NOW | $ | 180 | 181 | (1) | $ | (85) | (93) | 8 | ||||||||||||||||||||||
Savings and money market | 3 | 39 | (36) | (38) | (29) | (9) | ||||||||||||||||||||||||
Certificates of deposits | (22) | 161 | (183) | (267) | (99) | (168) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Total interest-bearing deposits | 161 | 381 | (220) | (390) | (221) | (169) | ||||||||||||||||||||||||
Short-term borrowings | — | 6 | (6) | 3 | — | 3 | ||||||||||||||||||||||||
Long-term debt | (79) | 20 | (99) | (103) | 24 | (127) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Total interest expense | 82 | 407 | (325) | (490) | (197) | (293) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
Net interest income | $ | 452 | (59) | 511 | $ | 1,723 | 723 | 1,000 | ||||||||||||||||||||||
|
|
|
|
|
Years ended December 31, 2021 vs. 2020
December 31 | ||||||||||||||||||||
|
| |||||||||||||||||||
(In thousands) |
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| ||||||||||||||||||||
Commercial and industrial | $ | 63,467 | 59,086 | 49,850 | 52,479 | 54,329 | ||||||||||||||
Construction and land development | 40,222 | 39,607 | 41,650 | 43,694 | 37,298 | |||||||||||||||
Commercial real estate | 261,896 | 239,033 | 220,439 | 203,853 | 192,006 | |||||||||||||||
Residential real estate | 102,597 | 106,863 | 110,855 | 116,673 | 107,641 | |||||||||||||||
Consumer installment | 9,295 | 9,588 | 8,712 | 10,220 | 12,335 | |||||||||||||||
| ||||||||||||||||||||
Total loans | 477,477 | 454,177 | 431,506 | 426,919 | 403,609 | |||||||||||||||
Less: unearned income | (569) | (526) | (560) | (509) | (655) | |||||||||||||||
| ||||||||||||||||||||
Loans, net of unearned income | 476,908 | 453,651 | 430,946 | 426,410 | 402,954 | |||||||||||||||
Less: allowance for loan losses | (4,790) | (4,757) | (4,643) | (4,289) | (4,836) | |||||||||||||||
| ||||||||||||||||||||
Loans, net | $ | 472,118 | 448,894 | 426,303 | 422,121 | 398,118 | ||||||||||||||
|
2021
December 31, 2018 | ||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
1 year | 1 to 5 | After 5 | Adjustable | Fixed | ||||||||||||||||||||||||
(Dollars in thousands) |
or less | years | years | Total | Rate | Rate | Total | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Commercial and industrial | $ | 37,237 | 9,600 | 16,630 | 63,467 | 21,505 | 41,962 | 63,467 | ||||||||||||||||||||
Construction and land development | 22,910 | 16,420 | 892 | 40,222 | 16,016 | 24,206 | 40,222 | |||||||||||||||||||||
Commercial real estate | 34,196 | 98,083 | 129,617 | 261,896 | 11,932 | 249,964 | 261,896 | |||||||||||||||||||||
Residential real estate | 9,654 | 26,347 | 66,596 | 102,597 | 50,992 | 51,605 | 102,597 | |||||||||||||||||||||
Consumer installment | 3,359 | 5,372 | 564 | 9,295 | 422 | 8,873 | 9,295 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total loans | $ | 107,356 | 155,822 | 214,299 | 477,477 | 100,867 | 376,610 | 477,477 | ||||||||||||||||||||
|
74
December 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Amount | %* | Amount | %* | Amount | %* | Amount | %* | Amount | %* | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 778 | 13.3 | $ | 653 | 13.0 | $ | 540 | 11.6 | $ | 523 | 12.3 | $ | 639 | 13.5 | |||||||||||||||||||||||||||||||||||||||||||
Construction and land development | 700 | 8.4 | 734 | 8.7 | 812 | 9.7 | 669 | 10.2 | 974 | 9.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 2,218 | 54.9 | 2,126 | 52.7 | 2,071 | 51.0 | 1,879 | 47.8 | 1,928 | 47.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 946 | 21.5 | 1,071 | 23.5 | 1,107 | 25.7 | 1,059 | 27.3 | 1,119 | 26.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer installment | 148 | 1.9 | 173 | 2.1 | 113 | 2.0 | 159 | 2.4 | 176 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses | $ | 4,790 | $ | 4,757 | $ | 4,643 | $ | 4,289 | $ | 4,836 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
2021
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
ITEM 8.FINANCIAL STATEMENTSAND SUPPLEMENTARYDATA Index Page |
|
Report of Independent Registered Public Accounting Firm
The
of
and Subsidiary
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 12, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
December 31 | ||||||||||
|
| |||||||||
(Dollars in thousands, except share data) | 2018 | 2017 | ||||||||
Assets: | ||||||||||
Cash and due from banks | $ | 13,043 | $ | 12,942 | ||||||
Federal funds sold | 26,918 | 41,540 | ||||||||
Interest bearing bank deposits | 25,115 | 51,046 | ||||||||
| ||||||||||
Cash and cash equivalents | 65,076 | 105,528 | ||||||||
| ||||||||||
Securitiesavailable-for-sale | 239,801 | 257,697 | ||||||||
Loans held for sale | 383 | 1,922 | ||||||||
Loans, net of unearned income | 476,908 | 453,651 | ||||||||
Allowance for loan losses | (4,790) | (4,757) | ||||||||
| ||||||||||
Loans, net | 472,118 | 448,894 | ||||||||
| ||||||||||
Premises and equipment, net | 13,596 | 13,791 | ||||||||
Bank-owned life insurance | 18,765 | 18,330 | ||||||||
Other assets | 8,338 | 7,219 | ||||||||
| ||||||||||
Total assets | $ | 818,077 | $ | 853,381 | ||||||
| ||||||||||
Liabilities: | ||||||||||
Deposits: | ||||||||||
Noninterest-bearing | $ | 201,648 | $ | 193,917 | ||||||
Interest-bearing | 522,545 | 563,742 | ||||||||
| ||||||||||
Total deposits | 724,193 | 757,659 | ||||||||
Federal funds purchased and securities sold under agreements to repurchase | 2,300 | 2,658 | ||||||||
Long-term debt | — | 3,217 | ||||||||
Accrued expenses and other liabilities | 2,529 | 2,941 | ||||||||
| ||||||||||
Total liabilities | 729,022 | 766,475 | ||||||||
| ||||||||||
Stockholders’ equity: | ||||||||||
Preferred stock of $.01 par value; authorized 200,000 shares; issued shares - none | — | — | ||||||||
Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares | 39 | 39 | ||||||||
Additionalpaid-in capital | 3,779 | 3,771 | ||||||||
Retained earnings | 95,635 | 90,299 | ||||||||
Accumulated other comprehensive loss, net | (3,763) | (566) | ||||||||
Less treasury stock, at cost - 313,267 shares and 313,467 shares at December 31, 2018 and 2017, respectively | (6,635) | (6,637) | ||||||||
| ||||||||||
Total stockholders’ equity | 89,055 | 86,906 | ||||||||
| ||||||||||
Total liabilities and stockholders’ equity | $ | 818,077 | $ | 853,381 | ||||||
|
Year ended December 31 | ||||||||||||
(Dollars in thousands, except share and per share data) |
2018 | 2017 | ||||||||||
| ||||||||||||
Interest income: | ||||||||||||
Loans, including fees | $ | 21,766 | $ | 20,781 | ||||||||
Securities: | ||||||||||||
Taxable | 4,051 | 4,229 | ||||||||||
Tax-exempt | 2,308 | 2,340 | ||||||||||
Federal funds sold and interest bearing bank deposits | 1,121 | 770 | ||||||||||
| ||||||||||||
Total interest income | 29,246 | 28,120 | ||||||||||
| ||||||||||||
Interest expense: | ||||||||||||
Deposits | 3,612 | 3,451 | ||||||||||
Short-term borrowings | 18 | 18 | ||||||||||
Long-term debt | 46 | 125 | ||||||||||
| ||||||||||||
Total interest expense | 3,676 | 3,594 | ||||||||||
| ||||||||||||
Net interest income | 25,570 | 24,526 | ||||||||||
Provision for loan losses | — | (300 | ) | |||||||||
| ||||||||||||
Net interest income after provision for loan losses | 25,570 | 24,826 | ||||||||||
| ||||||||||||
Noninterest income: | ||||||||||||
Service charges on deposit accounts | 749 | 746 | ||||||||||
Mortgage lending | 655 | 777 | ||||||||||
Bank-owned life insurance | 435 | 442 | ||||||||||
Other | 1,486 | 1,425 | ||||||||||
Securities gains, net | — | 51 | ||||||||||
| ||||||||||||
Total noninterest income | 3,325 | 3,441 | ||||||||||
| ||||||||||||
Noninterest expense: | ||||||||||||
Salaries and benefits | 10,653 | 10,011 | ||||||||||
Net occupancy and equipment | 1,465 | 1,471 | ||||||||||
Professional fees | 902 | 966 | ||||||||||
FDIC and other regulatory assessments | 310 | 346 | ||||||||||
Other | 4,544 | 3,990 | ||||||||||
| ||||||||||||
Total noninterest expense | 17,874 | 16,784 | ||||||||||
| ||||||||||||
Earnings before income taxes | 11,021 | 11,483 | ||||||||||
Income tax expense | 2,187 | 3,637 | ||||||||||
| ||||||||||||
Net earnings | $ | 8,834 | $ | 7,846 | ||||||||
| ||||||||||||
Net earnings per share: | ||||||||||||
Basic and diluted | $ | 2.42 | $ | 2.15 | ||||||||
| ||||||||||||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 3,643,780 | 3,643,616 | ||||||||||
|
Year ended December 31 | ||||||||||||||||
|
| |||||||||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||||||||
| ||||||||||||||||
Net earnings | $ | 8,834 | $ | 7,846 | ||||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Unrealized net holding (loss) gain on all other securities | (3,197) | 263 | ||||||||||||||
Reclassification adjustment for net gain on securities recognized in net earnings | — | (32) | ||||||||||||||
| ||||||||||||||||
Other comprehensive (loss) income | (3,197) | 231 | ||||||||||||||
| ||||||||||||||||
Comprehensive income | $ | 5,637 | $ | 8,077 | ||||||||||||
|
Accumulated | ||||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||||
Common Stock | paid-in | Retained | comprehensive | Treasury | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
(Dollars in thousands, except share data) |
Shares | Amount | capital | earnings | loss | stock | Total | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balance, December 31, 2016 | 3,957,135 | $ | 39 | 3,767 | 85,716 | (708 | ) | (6,637 | ) | $ | 82,177 | |||||||||||||||||
Net earnings | — | — | — | 7,846 | — | — | 7,846 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | 231 | — | 231 | |||||||||||||||||||||
Reclassification of certain tax effects | — | — | — | 89 | (89 | ) | — | — | ||||||||||||||||||||
Cash dividends paid ($0.92 per share) | — | — | — | (3,352 | ) | — | — | (3,352 | ) | |||||||||||||||||||
Sale of treasury stock (145 shares) | — | — | 4 | — | — | — | 4 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balance, December 31, 2017 | 3,957,135 | $ | 39 | $ | 3,771 | $ | 90,299 | $ | (566 | ) | $ | (6,637 | ) | $ | 86,906 | |||||||||||||
| ||||||||||||||||||||||||||||
Net earnings | — | — | — | 8,834 | — | — | 8,834 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (3,197 | ) | — | (3,197) | ||||||||||||||||||||
Cash dividends paid ($0.96 per share) | — | — | — | (3,498 | ) | — | — | (3,498) | ||||||||||||||||||||
Sale of treasury stock (200 shares) | — | — | 8 | — | — | 2 | 10 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balance, December 31, 2018 | 3,957,135 | $ | 39 | $ | 3,779 | $ | 95,635 | $ | (3,763 | ) | $ | (6,635 | ) | $ | 89,055 | |||||||||||||
|
Year ended December 31 | ||||||||||||
|
| |||||||||||
(In thousands) | 2018 | 2017 | ||||||||||
| ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net earnings | $ | 8,834 | $ | 7,846 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
Provision for loan losses | — | (300) | ||||||||||
Depreciation and amortization | 938 | 1,016 | ||||||||||
Premium amortization and discount accretion, net | 2,025 | 2,133 | ||||||||||
Deferred tax expense | 71 | 356 | ||||||||||
Net gain on securities available for sale | — | (51) | ||||||||||
Net gain on sale of loans held for sale | (311) | (504) | ||||||||||
Net gain on other real estate owned | — | (5) | ||||||||||
Loans originated for sale | (27,681) | (29,796) | ||||||||||
Proceeds from sale of loans | 29,323 | 29,651 | ||||||||||
Increase in cash surrender value of bank owned life insurance | (435) | (442) | ||||||||||
Net (increase) decrease in other assets | (221) | 592 | ||||||||||
Net decrease in accrued expenses and other liabilities | (402) | (1,095) | ||||||||||
| ||||||||||||
Net cash provided by operating activities | $ | 12,141 | $ | 9,401 | ||||||||
| ||||||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from sales of securitiesavailable-for-sale | 8,770 | 10,374 | ||||||||||
Proceeds from maturities of securitiesavailable-for-sale | 22,673 | 32,945 | ||||||||||
Purchase of securitiesavailable-for-sale | (19,841) | (59,160) | ||||||||||
Increase in loans, net | (24,749) | (22,291) | ||||||||||
Net purchases of premises and equipment | (240) | (1,618) | ||||||||||
Increase in FHLB stock | (20) | (13) | ||||||||||
Proceeds from sale of other real estate owned | 1,353 | 157 | ||||||||||
| ||||||||||||
Net cash used in investing activities | $ | (12,054) | $ | (39,606) | ||||||||
| ||||||||||||
Cash flows from financing activities: | ||||||||||||
Net increase in noninterest-bearing deposits | 7,731 | 12,027 | ||||||||||
Net (decrease) increase in interest-bearing deposits | (41,197) | 6,489 | ||||||||||
Net decrease in federal funds purchased and securities sold under agreements to repurchase | (358) | (708) | ||||||||||
Repayments or retirement of long-term debt | (3,217) | — | ||||||||||
Dividends paid | (3,498) | (3,352) | ||||||||||
| ||||||||||||
Net cash (used in) provided by financing activities | $ | (40,539) | $ | 14,456 | ||||||||
| ||||||||||||
Net change in cash and cash equivalents | $ | (40,452 | ) | $ | (15,749 | ) | ||||||
Cash and cash equivalents at beginning of period | 105,528 | 121,277 | ||||||||||
| ||||||||||||
Cash and cash equivalents at end of period | $ | 65,076 | $ | 105,528 | ||||||||
| ||||||||||||
| ||||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 3,616 | $ | 3,624 | ||||||||
Income taxes | 2,688 | 3,289 | ||||||||||
Supplemental disclosure ofnon-cash transactions: | ||||||||||||
Real estate acquired through foreclosure | $ | 1,525 | $ | — | ||||||||
|
Use
Accounting Standards Adopted in 2018
Inits financial results.
|
|
|
|
Information about these pronouncements is described in more detail below.
implemented ASU2014-09,,
Service charges on deposits, investment services, ATM
and interchange fees – Fees from these services are either
Subsequent Events The Company has evaluated the effects |
ASU2016-01,Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, enhances events or transactions through
ASU2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. Theadopt any new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASUNo. 2016-15 on January 1, 2018. ASUNo. 2016-15 did not have a material impact on the Company’s Consolidated Financial Statements.
ASU2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, amends guidance on how the statement of cash flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Under the new guidance, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASUNo. 2016-18 on January 1, 2018. ASUNo. 2016-18 did not have a material impact on the Company’s Consolidated Financial Statements.
accounting guidance.
Other Real Estate Owned
Other real estate owned (“OREO”) includes properties acquired through, or in lieu of, loan foreclosure that are held for sale and are initially recorded at the lower of the loan’s carrying amount or fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value amount or fair value less cost to sell. Gains or losses realized upon sale of OREO and additional losses related to subsequent valuation adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs. The Company determines the fair value of MSRs at the date the loan is transferred. An estimate 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 rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees.
Derivative Instruments
In accordance with Accounting Standards Codification (“ASC”) Topic 815,Derivatives and Hedging, all derivative instruments are recorded on the consolidated balance sheet at their respective fair values. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If the derivative instrument is not designated as part of a hedging relationship, the gain or loss on the derivative instrument is recognized in earnings in the period of change. None of the derivatives utilized by the Company have been designated as a hedge.
return
Measureme
ntsSubsequent Events
The Company has evaluated the effects
Year ended December 31 | ||||||||||
(Dollars in thousands, except share and per share data) | 2018 | 2017 | ||||||||
Basic and diluted: | ||||||||||
Net earnings | $ | 8,834 | $ | 7,846 | ||||||
Weighted average common shares outstanding | 3,643,780 | 3,643,616 | ||||||||
Net earnings per share | $ | 2.42 | $ | 2.15 | ||||||
|
Regulation D ofVARIABLE
NOTE 4: SECURITIES
development
of successful businesses in these
|
| |||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||
Agency obligations (a) | $ | 14,437 | 19,865 | 16,869 | — | 51,171 | 25 | 1,200 | $ | 52,346 | ||||||||||||||||||||||
Agency RMBS (a) | — | — | 8,368 | 110,230 | 118,598 | 65 | 3,738 | 122,271 | ||||||||||||||||||||||||
State and political subdivisions | — | 3,682 | 7,726 | 58,624 | 70,032 | 518 | 692 | 70,206 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Totalavailable-for-sale | $ | 14,437 | 23,547 | 32,963 | 168,854 | 239,801 | 608 | 5,630 | $ | 244,823 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||
Agency obligations (a) | $ | — | 29,253 | 23,809 | — | 53,062 | 79 | 904 | $ | 53,887 | ||||||||||||||||||||||
Agency RMBS (a) | — | — | 11,201 | 121,871 | 133,072 | 330 | 1,639 | $ | 134,381 | |||||||||||||||||||||||
State and political subdivisions | — | 2,564 | 9,999 | 59,000 | 71,563 | 1,616 | 237 | $ | 70,184 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Totalavailable-for-sale | $ | — | 31,817 | 45,009 | 180,871 | 257,697 | 2,025 | 2,780 | $ | 258,452 | ||||||||||||||||||||||
|
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
(Dollars in thousands) | Fair
Value | Unrealized
Losses | Fair
Value | Unrealized
Losses | Fair
Value | Unrealized
Losses | ||||||||||||||||||||
| ||||||||||||||||||||||||||
December 31, 2018: | ||||||||||||||||||||||||||
Agency obligations | $ | 4,724 | 28 | 44,307 | 1,172 | 49,031 | $ | 1,200 | ||||||||||||||||||
Agency RMBS | 12,325 | 238 | 99,184 | 3,500 | 111,509 | 3,738 | ||||||||||||||||||||
State and political subdivisions | 14,840 | 181 | 14,384 | 511 | 29,224 | 692 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Total | $ | 31,889 | 447 | 157,875 | 5,183 | 189,764 | $ | 5,630 | ||||||||||||||||||
| ||||||||||||||||||||||||||
December 31, 2017: | ||||||||||||||||||||||||||
Agency obligations | $ | 14,381 | 99 | 20,353 | 805 | 34,734 | $ | 904 | ||||||||||||||||||
Agency RMBS | 53,440 | 363 | 50,729 | 1,276 | 104,169 | 1,639 | ||||||||||||||||||||
State and political subdivisions | 2,009 | 22 | 10,155 | 215 | 12,164 | 237 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Total | $ | 69,830 | 484 | 81,237 | 2,296 | 151,067 | $ | 2,780 | ||||||||||||||||||
|
●
●
●
●
●
●
Agency residential mortgage-backed securities (“RMBS”)The unrealized losses associated with agency RMBS were primarily driven by changes in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.
Year ended December 31 | ||||||||||
|
| |||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
Gross realized gains | $ | — | 51 | |||||||
| ||||||||||
Realized gains, net | $ | — | 51 | |||||||
|
December 31 | ||||||||||
|
| |||||||||
(In thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Commercial and industrial | $ | 63,467 | $ | 59,086 | ||||||
Construction and land development | 40,222 | 39,607 | ||||||||
Commercial real estate: | ||||||||||
Owner occupied | 56,413 | 44,192 | ||||||||
Multifamily | 40,455 | 52,167 | ||||||||
Other | 165,028 | 142,674 | ||||||||
| ||||||||||
Total commercial real estate | 261,896 | 239,033 | ||||||||
Residential real estate: | ||||||||||
Consumer mortgage | 56,223 | 59,540 | ||||||||
Investment property | 46,374 | 47,323 | ||||||||
| ||||||||||
Total residential real estate | 102,597 | 106,863 | ||||||||
Consumer installment | 9,295 | 9,588 | ||||||||
Total loans | 477,477 | 454,177 | ||||||||
Less: unearned income | (569) | (526) | ||||||||
Loans, net of unearned income | $ | 476,908 | $ | 453,651 | ||||||
|
segmentsand classes.
Constructionborrower,who owns the property.
Commercial real estate (“CRE”) —includes The underwriting of these loans disaggregatedtakes into three classes: (1) owner occupied (2) multi-familyconsideration
|
|
|
rental rates as well as the financial health of the borrower.
Consumer mortgage – primarily includes first or second lien mortgages and home equity lines to consumersthat are secured by a primary residence or second home. |
|
Consumer installment —includes loans to individuals both secured by personal property and unsecured. Loans include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance
(In thousands) | Current | Accruing
30-89 Days
Past Due | Accruing
Greater than
90 days | Total
Accruing
Loans | Non-
Accrual | Total
Loans | ||||||||||||||||||
| ||||||||||||||||||||||||
December 31, 2018: | ||||||||||||||||||||||||
Commercial and industrial | $ | 63,367 | 100 | — | 63,467 | — | $ | 63,467 | ||||||||||||||||
Construction and land development | 39,997 | 225 | — | 40,222 | — | 40,222 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | 56,413 | — | — | 56,413 | — | 56,413 | ||||||||||||||||||
Multifamily | 40,455 | — | — | 40,455 | — | 40,455 | ||||||||||||||||||
Other | 165,028 | — | — | 165,028 | — | 165,028 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total commercial real estate | 261,896 | — | — | 261,896 | — | 261,896 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Consumer mortgage | 54,446 | 1,599 | — | 56,045 | 178 | 56,223 | ||||||||||||||||||
Investment property | 46,233 | 141 | — | 46,374 | — | 46,374 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total residential real estate | 100,679 | 1,740 | — | 102,419 | 178 | 102,597 | ||||||||||||||||||
Consumer installment | 9,254 | 41 | — | 9,295 | — | 9,295 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 475,193 | 2,106 | — | 477,299 | 178 | $ | 477,477 | ||||||||||||||||
| ||||||||||||||||||||||||
December 31, 2017: | ||||||||||||||||||||||||
Commercial and industrial | $ | 59,047 | 8 | — | 59,055 | 31 | $ | 59,086 | ||||||||||||||||
Construction and land development | 39,607 | — | — | 39,607 | — | 39,607 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | 44,192 | — | — | 44,192 | — | 44,192 | ||||||||||||||||||
Multifamily | 52,167 | — | — | 52,167 | — | 52,167 | ||||||||||||||||||
Other | 140,486 | — | — | 140,486 | 2,188 | 142,674 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total commercial real estate | 236,845 | — | — | 236,845 | 2,188 | 239,033 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Consumer mortgage | 58,195 | 746 | — | 58,941 | 599 | 59,540 | ||||||||||||||||||
Investment property | 46,871 | 312 | — | 47,183 | 140 | 47,323 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total residential real estate | 105,066 | 1,058 | — | 106,124 | 739 | 106,863 | ||||||||||||||||||
Consumer installment | 9,517 | 57 | — | 9,574 | 14 | 9,588 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 450,082 | 1,123 | — | 451,205 | 2,972 | $ | 454,177 | ||||||||||||||||
|
2020.
Year ended December 31 | ||||||||
|
| |||||||
(In thousands) | 2018 | 2017 | ||||||
| ||||||||
Beginning balance | $ | 4,757 | $ | 4,643 | ||||
Charged-off loans | (168) | (596) | ||||||
Recovery of previouslycharged-off loans | 201 | 1,010 | ||||||
| ||||||||
Net recoveries | 33 | 414 | ||||||
Provision for loan losses | — | (300) | ||||||
| ||||||||
Ending balance | $ | 4,790 | $ | 4,757 | ||||
|
The Company regularlyre-evaluates its practices in determining the allowance
for loan losses. Since the fourth quarter ofongoing COVID-19
(in thousands) | Commercial and industrial | Construction and land Development | Commercial Real Estate | Residential Real Estate | Consumer Installment | Total | ||||||||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2016 | $ | 540 | 812 | 2,071 | 1,107 | 113 | $ | 4,643 | ||||||||||||||||
Charge-offs | (449) | — | — | (107 | ) | (40 | ) | (596) | ||||||||||||||||
Recoveries | 461 | 347 | — | 115 | 87 | 1,010 | ||||||||||||||||||
| ||||||||||||||||||||||||
Net recoveries | 12 | 347 | — | 8 | 47 | 414 | ||||||||||||||||||
Provision | 101 | (425 | ) | 55 | (44 | ) | 13 | (300) | ||||||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 653 | 734 | 2,126 | 1,071 | 173 | $ | 4,757 | ||||||||||||||||
| ||||||||||||||||||||||||
Charge-offs | (52) | — | (38 | ) | (26 | ) | (52 | ) | (168) | |||||||||||||||
Recoveries | 70 | — | 19 | 79 | 33 | 201 | ||||||||||||||||||
| ||||||||||||||||||||||||
Net recoveries | 18 | — | (19 | ) | 53 | (19 | ) | 33 | ||||||||||||||||
Provision | 107 | (34 | ) | 111 | (178 | ) | (6 | ) | — | |||||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2018 | $ | 778 | 700 | 2,218 | 946 | 148 | $ | 4,790 | ||||||||||||||||
|
2020.
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 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
December 31, 2018: | ||||||||||||||||||||||||||
Commercial and industrial | $ | 778 | 63,467 | — | — | 778 | 63,467 | |||||||||||||||||||
Construction and land development | 700 | 40,222 | — | — | 700 | 40,222 | ||||||||||||||||||||
Commercial real estate | 2,218 | 261,739 | — | 157 | 2,218 | 261,896 | ||||||||||||||||||||
Residential real estate | 946 | 102,597 | — | — | 946 | 102,597 | ||||||||||||||||||||
Consumer installment | 148 | 9,295 | — | — | 148 | 9,295 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Total | $ | 4,790 | 477,320 | — | 157 | 4,790 | 477,477 | |||||||||||||||||||
| ||||||||||||||||||||||||||
December 31, 2017: | ||||||||||||||||||||||||||
Commercial and industrial | $ | 622 | 59,055 | 31 | 31 | 653 | 59,086 | |||||||||||||||||||
Construction and land development | 734 | 39,607 | — | — | 734 | 39,607 | ||||||||||||||||||||
Commercial real estate | 2,115 | 236,322 | 11 | 2,711 | 2,126 | 239,033 | ||||||||||||||||||||
Residential real estate | 1,071 | 106,863 | — | — | 1,071 | 106,863 | ||||||||||||||||||||
Consumer installment | 173 | 9,588 | — | — | 173 | 9,588 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Total | $ | 4,715 | 451,435 | 42 | 2,742 | 4,757 | 454,177 | |||||||||||||||||||
|
|
|
●
●
●
(In thousands) | Pass | Special Mention | Substandard Accruing | Nonaccrual | Total loans | |||||||||||||||
| ||||||||||||||||||||
December 31, 2018 |
| |||||||||||||||||||
Commercial and industrial | $ | 61,568 | 1,377 | 522 | — | $ | 63,467 | |||||||||||||
Construction and land development | 39,481 | — | 741 | — | 40,222 | |||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | 55,942 | 154 | 317 | — | 56,413 | |||||||||||||||
Multifamily | 40,455 | — | — | — | 40,455 | |||||||||||||||
Other | 163,449 | 1,208 | 371 | — | 165,028 | |||||||||||||||
| ||||||||||||||||||||
Total commercial real estate | 259,846 | 1,362 | 688 | — | 261,896 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Consumer mortgage | 50,903 | 1,374 | 3,768 | 178 | 56,223 | |||||||||||||||
Investment property | 45,463 | 173 | 738 | — | 46,374 | |||||||||||||||
| ||||||||||||||||||||
Total residential real estate | 96,366 | 1,547 | 4,506 | 178 | 102,597 | |||||||||||||||
Consumer installment | 9,149 | 75 | 71 | — | 9,295 | |||||||||||||||
| ||||||||||||||||||||
Total | $ | 466,410 | 4,361 | 6,528 | 178 | $ | 477,477 | |||||||||||||
| ||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Commercial and industrial | $ | 58,842 | 94 | 119 | 31 | $ | 59,086 | |||||||||||||
Construction and land development | 39,049 | 90 | 468 | — | 39,607 | |||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | 43,615 | 240 | 337 | — | 44,192 | |||||||||||||||
Multifamily | 52,167 | — | — | — | 52,167 | |||||||||||||||
Other | 139,695 | 395 | 396 | 2,188 | 142,674 | |||||||||||||||
| ||||||||||||||||||||
Total commercial real estate | 235,477 | 635 | 733 | 2,188 | 239,033 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Consumer mortgage | 54,101 | 1,254 | 3,586 | 599 | 59,540 | |||||||||||||||
Investment property | 46,463 | 53 | 667 | 140 | 47,323 | |||||||||||||||
| ||||||||||||||||||||
Total residential real estate | 100,564 | 1,307 | 4,253 | 739 | 106,863 | |||||||||||||||
Consumer installment | 9,430 | 66 | 78 | 14 | 9,588 | |||||||||||||||
| ||||||||||||||||||||
Total | $ | 443,362 | 2,192 | 5,651 | 2,972 | $ | 454,177 | |||||||||||||
|
●
December 31, 2018 | ||||||||||||||||||||
(In thousands) | Unpaid principal balance (1) | Charge-offs and payments applied (2) | Recorded investment (3) | Related allowance | ||||||||||||||||
|
|
| ||||||||||||||||||
With no allowance recorded: |
| |||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 157 | — | 157 | ||||||||||||||||
|
|
| ||||||||||||||||||
Total commercial real estate | 157 | — | 157 | |||||||||||||||||
|
|
| ||||||||||||||||||
Total impaired loans | $ | 157 | — | 157 | $ | — | ||||||||||||||
|
|
|
|
|
|
December 31, 2017 | ||||||||||||||||||||
(In thousands) | Unpaid principal balance (1) | Charge-offs and payments applied (2) | Recorded investment (3) | Related allowance | ||||||||||||||||
|
|
| ||||||||||||||||||
With no allowance recorded: |
| |||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Other | $ | 3,630 | (1,094 | ) | 2,536 | |||||||||||||||
| ||||||||||||||||||||
Total commercial real estate | 3,630 | (1,094 | ) | 2,536 | ||||||||||||||||
| ||||||||||||||||||||
Total | $ | 3,630 | (1,094 | ) | 2,536 | |||||||||||||||
| ||||||||||||||||||||
With allowance recorded: |
| |||||||||||||||||||
Commercial and industrial | $ | 52 | (21 | ) | 31 | $ | 31 | |||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | 175 | — | 175 | 11 | ||||||||||||||||
|
|
| ||||||||||||||||||
Total commercial real estate | 175 | — | 175 | 11 | ||||||||||||||||
|
|
| ||||||||||||||||||
Total | $ | 227 | (21 | ) | 206 | $ | 42 | |||||||||||||
|
|
| ||||||||||||||||||
Total impaired loans | $ | 3,857 | (1,115 | ) | 2,742 | $ | 42 | |||||||||||||
|
|
|
|
|
|
Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||||||||||
Average | Total interest | Average | Total interest | |||||||||||||
recorded | income | recorded | income | |||||||||||||
(In thousands) | investment | recognized | investment | recognized | ||||||||||||
| ||||||||||||||||
Impaired loans: |
| |||||||||||||||
Commercial and industrial | $ | 9 | — | $ | 50 | — | ||||||||||
Construction and land development | — | — | 11 | — | ||||||||||||
Commercial real estate: | ||||||||||||||||
Owner occupied | 166 | 9 | 184 | 10 | ||||||||||||
Other | 1,145 | — | 2,096 | 1 | ||||||||||||
| ||||||||||||||||
Total commercial real estate | 1,311 | 9 | 2,280 | 11 | ||||||||||||
| ||||||||||||||||
Total | $ | 1,320 | 9 | $ | 2,341 | 11 | ||||||||||
|
restructure.
TDRs | ||||||||||||||||||||||
(In thousands) | Accruing | Nonaccrual | Total | Related
Allowance | ||||||||||||||||||
|
|
| ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||
Owner occupied | $ | 157 | — | 157 | $ | — | ||||||||||||||||
|
|
| ||||||||||||||||||||
Total commercial real estate | 157 | — | 157 | — | ||||||||||||||||||
|
|
| ||||||||||||||||||||
Total | $ | 157 | — | 157 | $ | — | ||||||||||||||||
|
|
| ||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||
Commercial and industrial | $ | — | 31 | 31 | $ | 31 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||
Owner occupied | 175 | — | 175 | 11 | ||||||||||||||||||
Other | 287 | 1,431 | 1,718 | — | ||||||||||||||||||
|
|
| ||||||||||||||||||||
Total commercial real estate | 462 | 1,431 | 1,893 | 11 | ||||||||||||||||||
|
|
| ||||||||||||||||||||
Total | $ | 462 | 1,462 | 1,924 | $ | 42 | ||||||||||||||||
|
|
|
December 31, 2021 and 2020.
($ in thousands) | Number of contracts | Pre- modification outstanding recorded investment | Post- modification outstanding recorded investment | |||||||||||||
| ||||||||||||||||
December 31, 2018 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||
Other | 2 | $ | 1,447 | 1,447 | ||||||||||||
| ||||||||||||||||
Total commercial real estate | 2 | 1,447 | 1,447 | |||||||||||||
| ||||||||||||||||
Total | 2 | $ | 1,447 | 1,447 | ||||||||||||
| ||||||||||||||||
December 31, 2017 | ||||||||||||||||
Commercial and industrial | 1 | $ | 34 | 34 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Other | 1 | $ | 1,275 | 1,266 | ||||||||||||
| ||||||||||||||||
Total commercial real estate | 1 | 1,275 | 1,266 | |||||||||||||
| ||||||||||||||||
Total | 2 | $ | 1,309 | 1,300 | ||||||||||||
|
The majority
The following table summarizesrequired
($ in thousands) | Number of Contracts | Recorded investment (1) | ||||||||
| ||||||||||
December 31, 2018 | ||||||||||
Commercial real estate: | ||||||||||
Other | 1 | $ | 1,259 | |||||||
| ||||||||||
Total commercial real estate | 1 | 1,259 | ||||||||
| ||||||||||
Total | 1 | $ | 1,259 | |||||||
|
|
December 31 | ||||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Land | $ | 7,473 | 7,473 | |||||||
Buildings and improvements | 10,438 | 10,394 | ||||||||
Furniture, fixtures, and equipment | 3,357 | 3,161 | ||||||||
| ||||||||||
Total premises and equipment | 21,268 | 21,028 | ||||||||
Less: accumulated depreciation | (7,672) | (7,237) | ||||||||
| ||||||||||
Premises and equipment, net | $ | 13,596 | 13,791 | |||||||
|
below
Year ended December 31 | ||||||||||
|
| |||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Beginning balance | $ | 1,644 | 1,952 | |||||||
Additions, net | 208 | 224 | ||||||||
Amortization expense | (411) | (533) | ||||||||
Change in valuation allowance | — | 1 | ||||||||
| ||||||||||
Ending balance | $ | 1,441 | 1,644 | |||||||
| ||||||||||
Valuation allowance included in MSRs, net: | ||||||||||
Beginning of period | $ | — | 1 | |||||||
End of period | — | — | ||||||||
| ||||||||||
Fair value of amortized MSRs: | ||||||||||
Beginning of period | $ | 2,528 | 2,678 | |||||||
End of period | 2,697 | 2,528 | ||||||||
|
2020.
December 31 | ||||||||||
|
| |||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Unpaid principal balance | $ | 289,981 | 312,318 | |||||||
Weighted average prepayment speed (CPR) | 8.3 % | 10.2 | ||||||||
Discount rate (annual percentage) | 10.0 % | 10.0 | ||||||||
Weighted average coupon interest rate | 3.9 % | 3.8 | ||||||||
Weighted average remaining maturity (months) | 250 | 253 | ||||||||
Weighted average servicing fee (basis points) | 25.0 | 25.0 | ||||||||
|
(Dollars in thousands) | December 31, 2018 | |
| ||
2019 | $ 198 | |
2020 | 174 | |
2021 | 152 | |
2022 | 131 | |
2023 | 115 | |
|
(Dollars in thousands) | December 31, 2018 | |||
| ||||
2019 | $ | 108,363 | ||
2020 | 28,888 | |||
2021 | 16,630 | |||
2022 | 20,966 | |||
2023 | 6,390 | |||
| ||||
Total certificates of deposit and other time deposits | $ | 181,237 | ||
|
At December 31, 2018LEASE COMMITMENTS
2018 | 2017 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
(Dollars in thousands) | Amount | Avg. Rate | Amount | Avg. Rate | ||||||||||||
| ||||||||||||||||
Federal funds purchased: | ||||||||||||||||
As of December 31 | $ | — | — | $ | — | — | ||||||||||
Average during the year | 2 | 2.50 % | 9 | 2.01 % | ||||||||||||
Maximum outstanding at anymonth-end | — | — | ||||||||||||||
Securities sold under agreements to repurchase: | ||||||||||||||||
As of December 31 | $ | 2,300 | 0.50 % | $ | 2,658 | 0.50 % | ||||||||||
Average during the year | 2,632 | 0.50 % | 3,467 | 0.52 % | ||||||||||||
Maximum outstanding at anymonth-end | 3,241 | 4,152 | ||||||||||||||
|
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. The Bank had available federal fund lines totaling $41.0 equipment under operating leases. Rent expense for all
Securities sold under agreements to repurchase represent short-term borrowings with maturities less than one year collateralized by a portion of the Company’s securities portfolio. Securities with an aggregate carrying value of $5.6 million and $5.8 million at December 31, 2018 and 2017, respectively, were pledged to secure securities sold under agreements to repurchase.
NOTE 10: LONG-TERM DEBT
At December 31, 2018 and 2017, the composition of long-term debt is presented below.
2018 | 2017 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
(Dollars in thousands) | Amount | Avg. Rate | Amount | Avg. Rate | ||||||||||||
| ||||||||||||||||
Subordinated debentures, due 2033 | $ | — | — % | $ | 3,217 | 4.63% | ||||||||||
| ||||||||||||||||
Total long-term debt | $ | — | — % | $ | 3,217 | 4.63% | ||||||||||
|
The Company formed Auburn National Bancorporation Capital Trust I (the “Trust”), a wholly-owned statutory business trust, in 2003. The Trust issued $7.0 million of trust preferred securities that were sold to third parties. The proceeds from the sale of the trust preferred securities and trust common securities that we held, were used to purchase junior subordinated debentures of $7.2 million from the Company, which are presented as long-term debt in the consolidated balance sheets and qualify for inclusion in Tier 1 capital for regulatory capital purposes, subject to certain limitations. The debentures would have matured on December 31, 2033 and had been redeemable since December 31, 2008.
On April 27, 2018, the Trust formally redeemed all of its issued and outstanding trust preferred securities at par. The Company had repurchased $4.0 million par amount of trust preferred securities issued by the Trust in October 2016, at a discount. The additional amount paid on April 27, 2018 for trust preferred securities not previously purchased by the Company was approximately $3.0 million, including accrued and unpaid distributions. All junior subordinated debentures related to the Trust were redeemed and retired as a result of the action.
The Company now has no outstanding trust preferred securities or junior subordinated debentures, and the Trust has been dissolved.
NOTE 11: OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it includes net earnings and other comprehensive (loss) income. Other comprehensive (loss) income for theboth years ended December 31, 20182021 and 2017,2020.
Pre-tax | Tax benefit | Net of | ||||||||||
(In thousands) | amount | (expense) | tax amount | |||||||||
| ||||||||||||
2018: | ||||||||||||
Unrealized net holding loss on all other securities | $ | (4,269) | 1,072 | (3,197) | ||||||||
| ||||||||||||
Other comprehensive loss | $ | (4,269) | 1,072 | (3,197) | ||||||||
| ||||||||||||
2017: | ||||||||||||
Unrealized net holding gain on all other securities | $ | 417 | (154) | 263 | ||||||||
Reclassification adjustment for net gain on securities recognized in net earnings | (51) | 19 | (32) | |||||||||
| ||||||||||||
Other comprehensive income | $ | 366 | (135) | 231 | ||||||||
|
Year ended December 31 | ||||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Current income tax expense: | ||||||||||
Federal | $ | 1,685 | 2,782 | |||||||
State | 431 | 499 | ||||||||
| ||||||||||
Total current income tax expense | 2,116 | 3,281 | ||||||||
| ||||||||||
Deferred income tax expense (benefit): | ||||||||||
Federal | 56 | 384 | ||||||||
State | 15 | (28) | ||||||||
| ||||||||||
Total deferred income tax expense | 71 | 356 | ||||||||
| ||||||||||
Total income tax expense | $ | 2,187 | 3,637 | |||||||
|
2018 | 2017 | |||||||||||||||||
Percent of | Percent of | |||||||||||||||||
pre-tax | pre-tax | |||||||||||||||||
(Dollars in thousands) | Amount | earnings | Amount | earnings | ||||||||||||||
| ||||||||||||||||||
Earnings before income taxes | $ | 11,021 | 11,483 | |||||||||||||||
|
|
|
| |||||||||||||||
Income taxes at statutory rate | 2,315 | 21.0 % | 3,904 | 34.0 % | ||||||||||||||
Tax-exempt interest | (515) | (4.7) | (813) | (7.0) | ||||||||||||||
State income taxes, net of federal tax effect | 361 | 3.3 | 325 | 2.8 | ||||||||||||||
Bank-owned life insurance | (92) | (0.8) | (150) | (1.3) | ||||||||||||||
Federal tax reform impact | — | — | 370 | 3.2 | ||||||||||||||
Other | 118 | 1.0 | 1 | — | ||||||||||||||
Total income tax expense | $ | 2,187 | 19.8 % | 3,637 | 31.7 % | |||||||||||||
The
The Company had a net deferred tax assetsasset of $1.8 $0.4
December 31 | ||||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Deferred tax assets: | ||||||||||
Allowance for loan losses | $ | 1,203 | 1,195 | |||||||
Unrealized loss on securities | 1,262 | 190 | ||||||||
Other | 135 | 216 | ||||||||
Total deferred tax assets | 2,600 | 1,601 | ||||||||
| ||||||||||
Deferred tax liabilities: | ||||||||||
Premises and equipment | 280 | 241 | ||||||||
Originated mortgage servicing rights | 362 | 413 | ||||||||
Other | 168 | 158 | ||||||||
Total deferred tax liabilities | 810 | 812 | ||||||||
| ||||||||||
Net deferred tax asset | $ | 1,790 | 789 | |||||||
|
Year ended December 31 | ||||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
| ||||||||||
Net deferred tax asset: | ||||||||||
Balance, beginning of year | $ | 789 | 1,280 | |||||||
Deferred tax expense related to continuing operations | (71) | (356) | ||||||||
Stockholders’ equity, for accumulated other comprehensive loss (income) | 1,072 | (135) | ||||||||
| ||||||||||
Balance, end of year | $ | 1,790 | 789 | |||||||
|
NOTE 13: EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan that covers substantially all employees. Participants may contribute up to 10% of eligible compensation subject to certain limits based on federal tax laws. The Company’s matching contributions to the Plan are determined by the board of directors. Participants become 20% vested in their accounts after two years of service2021 and 100% vested after six years of service. Company matching contributions to the Plan were $131 thousand and $127 thousand for the years ended December 31, 2018 and 2017,2020, respectively,
Financial derivatives are reported at fair value in other assets or other liabilities on the accompanying consolidated balance sheets. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as part of a hedging relationship, the gain or loss is recognized in current earnings within other noninterest income on the accompanying consolidated statements of earnings. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company enters into offsetting positions in order to minimize the risk to the Company. These swaps qualify as derivatives, but are not designated as hedging instruments. At December 31, 2018 and December 31, 2017, the Company had no derivative contracts to assist in managing its own interest rate sensitivity.
Interest rate swap agreements involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no credit risk.
The Company had no interest rate swaps as of December 31, 2018. A summary of the Company’s interest rate swaps as of and for the year ended December 31, 2017 is presented below.
Other | ||||||||||||||||
Other
| Other
| noninterest
| ||||||||||||||
Assets | Liabilities | income | ||||||||||||||
Estimated
| Estimated
| Gains
| ||||||||||||||
(Dollars in thousands) | Notional | Fair Value | Fair Value | (Losses) | ||||||||||||
| ||||||||||||||||
December 31, 2017: | ||||||||||||||||
Pay fixed / receive variable | $ | 3,617 | — | 52 | $ | 189 | ||||||||||
Pay variable / receive fixed | 3,617 | 52 | — | (189) | ||||||||||||
| ||||||||||||||||
Total interest rate swap agreements | $ | 7,234 | 52 | 52 | $ | — | ||||||||||
|
NOTE 15: 13:
December 31 | ||||||||
(Dollars in thousands) |
2018 | 2017 | ||||||
| ||||||||
Commitments to extend credit | $ | 61,889 | $ | 57,014 | ||||
Standby letters of credit | 7,026 | 7,390 | ||||||
|
Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to
the Company has contracts with construction companiesfor an aggregate of $
include broker/dealer quotes, market spreads, cash flows, market consensus prepayment
speeds, benchmark yields, reportedInterest rate swap agreements
The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap agreements were based on information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as hedging instruments.
(Dollars in thousands) | Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| ||||||||||||||||
December 31, 2018: | ||||||||||||||||
Securitiesavailable-for-sale: | ||||||||||||||||
Agency obligations | $ | 51,171 | — | 51,171 | — | |||||||||||
Agency RMBS | 118,598 | — | 118,598 | — | ||||||||||||
State and political subdivisions | 70,032 | — | 70,032 | — | ||||||||||||
| ||||||||||||||||
Total securitiesavailable-for-sale | 239,801 | — | 239,801 | — | ||||||||||||
| ||||||||||||||||
Total assets at fair value | $ | 239,801 | — | 239,801 | — | |||||||||||
| ||||||||||||||||
December 31, 2017: | ||||||||||||||||
Securitiesavailable-for-sale: | ||||||||||||||||
Agency obligations | $ | 53,062 | — | 53,062 | — | |||||||||||
Agency RMBS | 133,072 | — | 133,072 | — | ||||||||||||
State and political subdivisions | 71,563 | — | 71,563 | — | ||||||||||||
| ||||||||||||||||
Total securitiesavailable-for-sale | 257,697 | — | 257,697 | — | ||||||||||||
Other assets(1) | 52 | — | 52 | — | ||||||||||||
| ||||||||||||||||
Total assets at fair value | $ | 257,749 | — | 257,749 | — | |||||||||||
| ||||||||||||||||
Other liabilities(1) | 52 | — | 52 | — | ||||||||||||
| ||||||||||||||||
Total liabilities at fair value | $ | 52 | — | 52 | — | |||||||||||
|
(1)Represents the
Impaired Loans
(Dollars in thousands) | Amount | Quoted Prices in
Active Markets
for
Identical Assets
(Level 1) | Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | ||||||||||||
| ||||||||||||||||
December 31, 2018: | ||||||||||||||||
Loans held for sale | $ | 383 | — | 383 | — | |||||||||||
Loans, net(1) | 157 | — | — | 157 | ||||||||||||
Other real estate owned | 172 | — | — | 172 | ||||||||||||
Other assets(2) | 1,441 | — | — | 1,441 | ||||||||||||
| ||||||||||||||||
Total assets at fair value | $ | 2,153 | — | 383 | 1,770 | |||||||||||
| ||||||||||||||||
December 31, 2017: | ||||||||||||||||
Loans held for sale | $ | 1,922 | — | 1,922 | — | |||||||||||
Loans, net(1) | 2,700 | — | — | 2,700 | ||||||||||||
Other assets(2) | 1,644 | — | — | 1,644 | ||||||||||||
| ||||||||||||||||
Total assets at fair value | $ | 6,266 | — | 1,922 | 4,344 | |||||||||||
|
|
|
(Dollars in thousands) | Carrying Amount | Valuation Technique | Significant Unobservable Input | Weighted
Average
of Input | ||||||||||||
|
|
|
|
|
|
| ||||||||||
Nonrecurring: | ||||||||||||||||
Impaired loans | $ | 157 | Appraisal | Appraisal discounts (%) | 10.0% | |||||||||||
Other real estate owned | 172 | Appraisal | Appraisal discounts (%) | 10.0% | ||||||||||||
Mortgage servicing rights, net | 1,441 | Discounted cash flow | Prepayment speed or CPR (%) | 8.3% | ||||||||||||
Discount rate (%) | 10.0% | |||||||||||||||
|
Long-term debt
The carrying
The carrying value, related estimated
Fair Value Hierarchy | ||||||||||||||||||||||
(Dollars in thousands) | Carrying
amount | Estimated
fair value | Level 1
inputs | Level 2
inputs | Level 3
Inputs | |||||||||||||||||
| ||||||||||||||||||||||
December 31, 2018: | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||
Loans, net (1) | $ | 472,118 | $ | 465,456 | $ | — | $ | — | $ | 465,456 | ||||||||||||
Loans held for sale | 383 | 397 | — | 397 | — | |||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||
Time Deposits | $ | 181,237 | $ | 181,168 | $ | — | $ | 181,168 | $ | — | ||||||||||||
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December 31, 2017: | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||
Loans, net (1) | $ | 448,894 | $ | 447,468 | $ | — | $ | — | $ | 447,468 | ||||||||||||
Loans held for sale | 1,922 | 1,950 | — | 1,950 | — | |||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||
Time Deposits | $ | 188,071 | $ | 185,564 | $ | — | $ | 185,564 | $ | — | ||||||||||||
Long-term debt | 3,217 | 3,217 | — | 3,217 | — | |||||||||||||||||
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Liabilities:
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The actual capital amounts and ratios for the Bank and the aforementioned minimums as
of December 31,Minimum for capital
| Minimum to be | |||||||||||||||||||||||
Actual | adequacy purposes | well capitalized | ||||||||||||||||||||||
(Dollars in thousands) |
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
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At December 31, 2018: | ||||||||||||||||||||||||
Tier 1 Leverage Capital | ||||||||||||||||||||||||
AuburnBank | $ | 91,719 | 11.33 % | $ | 32,368 | 4.00 % | $ | 40,461 | 5.00 % | |||||||||||||||
Common Equity Tier 1 Capital | ||||||||||||||||||||||||
AuburnBank | $ | 91,719 | 16.49 % | $ | 25,031 | 4.50 % | $ | 36,156 | 6.50 % | |||||||||||||||
Tier 1 Risk-Based Capital | ||||||||||||||||||||||||
AuburnBank | $ | 91,719 | 16.49 % | $ | 33,375 | 6.00 % | $ | 44,500 | 8.00 % | |||||||||||||||
Total Risk-Based Capital | ||||||||||||||||||||||||
AuburnBank | $ | 96,661 | 17.38 % | $ | 44,500 | 8.00 % | $ | 55,625 | 10.00 % | |||||||||||||||
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At December 31, 2017: | ||||||||||||||||||||||||
Tier 1 Leverage Capital | ||||||||||||||||||||||||
Auburn National Bancorporation | $ | 90,382 | 10.95 % | $ | 33,012 | 4.00 % | N/A | N/A | ||||||||||||||||
AuburnBank | 89,217 | 10.82 | 32,978 | 4.00 | $ | 41,222 | 5.00 % | |||||||||||||||||
Common Equity Tier 1 Capital | ||||||||||||||||||||||||
Auburn National Bancorporation | $ | 87,382 | 16.42 % | $ | 23,949 | 4.50 % | N/A | N/A | ||||||||||||||||
AuburnBank | 89,217 | 16.74 | 23,987 | 4.50 | $ | 34,648 | 6.50 % | |||||||||||||||||
Tier 1 Risk-Based Capital | ||||||||||||||||||||||||
Auburn National Bancorporation | $ | 90,382 | 16.98 % | $ | 31,932 | 6.00 % | N/A | N/A | ||||||||||||||||
AuburnBank | 89,217 | 16.74 | 31,983 | 6.00 | $ | 42,644 | 8.00 % | |||||||||||||||||
Total Risk-Based Capital | ||||||||||||||||||||||||
Auburn National Bancorporation | $ | 95,300 | 17.91 % | $ | 42,576 | 8.00 % | N/A | N/A | ||||||||||||||||
AuburnBank | 94,135 | 17.66 | 42,644 | 8.00 | $ | 53,305 | 10.00 % | |||||||||||||||||
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December 31 | ||||||||
(Dollars in thousands) |
2018 |
2017 | ||||||
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Assets: | ||||||||
Cash and due from banks | $ | 1,941 | 1,170 | |||||
Investment in bank subsidiary | 87,956 | 88,741 | ||||||
Other assets | 626 | 1,760 | ||||||
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Total assets | $ | 90,523 | 91,671 | |||||
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Liabilities: | ||||||||
Accrued expenses and other liabilities | $ | 1,468 | 1,548 | |||||
Long-term debt | — | 3,217 | ||||||
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Total liabilities | 1,468 | 4,765 | ||||||
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Stockholders’ equity | 89,055 | 86,906 | ||||||
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Total liabilities and stockholders’ equity | $ | 90,523 | 91,671 | |||||
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Year ended December 31 | ||||||||
(Dollars in thousands) |
2018 |
2017 | ||||||
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Income: | ||||||||
Dividends from bank subsidiary | $ | 6,533 | 3,471 | |||||
Noninterest income | 149 | 141 | ||||||
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Total income | 6,682 | 3,612 | ||||||
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Expense: | ||||||||
Interest expense | 51 | 125 | ||||||
Noninterest expense | 237 | 225 | ||||||
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Total expense | 288 | 350 | ||||||
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Earnings before income tax benefit and equity in undistributed earnings of bank subsidiary | 6,394 | 3,262 | ||||||
Income tax benefit | (28 | ) | (58 | ) | ||||
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Earnings before equity in undistributed earnings of bank subsidiary | 6,422 | 3,320 | ||||||
Equity in undistributed earnings of bank subsidiary | 2,412 | 4,526 | ||||||
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Net earnings | $ | 8,834 | 7,846 | |||||
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Year ended December 31
Year ended December 31 | ||||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||||
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Cash flows from operating activities: | ||||||||||
Net earnings | $8,834 | 7,846 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||
Net decrease (increase) in other assets | 1,134 | (879) | ||||||||
Net decrease in other liabilities | (70) | (109) | ||||||||
Equity in undistributed earnings of bank subsidiary | (2,412) | (4,526) | ||||||||
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Net cash provided by operating activities | 7,486 | 2,332 | ||||||||
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Cash flows from financing activities: | ||||||||||
Repayments or retirement of long-term debt | (3,217) | — | ||||||||
Dividends paid | (3,498) | (3,352) | ||||||||
| ||||||||||
Net cash used in financing activities | (6,715) | (3,352) | ||||||||
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Net change in cash and cash equivalents | 771 | (1,020) | ||||||||
Cash and cash equivalents at beginning of period | 1,170 | 2,190 | ||||||||
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Cash and cash equivalents at end of period | $ 1,941 | 1,170 | ||||||||
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NOTE 20: REVENUE RECOGNITION
On January 1, 2018, the Company implemented ASU2014-09, Revenue from Contracts with Customers, codified at ASC 606. The Company adopted ASC 606 using the modified retrospective transition method. As of December 31, 2017, the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made to the Company’s accumulated deficit during the year
The majority
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or 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.
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FINANCIAL DISCLOSURE
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Management of the Company
Because of inherent limitations in any system of internal control,systems, no matter how well designed, misstatements due have inherent limitations.
Management assessed the Company’s Chief Executive
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by Elliott Davis, LLC, the independent
annual report.
ReportITEM 9B.
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As of December 31, 2018 the Company had no compensation plans under which equity securities of the Company are authorized for issuance.
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2020 2020 2020 202020182021 and 2017 20182021 and 201720182021 and 201720182021 and 2017 20182021 and 20172020(b)Exhibits*The certifications attached as exhibits 32.1 and 32.2 to this annual report on Form10-K 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.(c)Financial Statement Schedules
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