UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

(Mark One)

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June

For the quarterly period ended September 30, 2015

 

[  ]

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period                    to                    

Commission File Number: 0-26486

 

 

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware 63-0885779

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn, Alabama 36830

(334) 821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx                                         No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx                                         No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
 (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes¨ Nox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at July 31,October 30, 2015

Common Stock, $0.01 par value per share

  3,643,448

3,643,478 shares


AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

 

PART I.  FINANCIAL INFORMATION

PAGE

Item 1

Financial Statements

Consolidated Balance Sheets (Unaudited) as of June 30, 2015 and December 31, 2014

  3

Consolidated Statements of Earnings (Unaudited) for the quarter and six months ended June  30, 2015 and 2014

  4

Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and six months ended June 30, 2015 and 2014

  5

Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2015 and 2014

  6

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June  30, 2015 and 2014

  7

Notes to Consolidated Financial Statements (Unaudited)

  8

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations30
Table 1 –Explanation of Non-GAAP Financial Measures48
Table 2 –Selected Quarterly Financial Data49
Table 3 –Selected Financial Data50
Table 4 –Average Balances and Net Interest Income Analysis – for the quarter ended June 30, 2015 and 201451
Table 5 –Average Balances and Net Interest Income Analysis – for the six months ended June 30, 2015 and 201452
Table 6 –Loan Portfolio Composition53
Table 7 –Allowance for Loan Losses and Nonperforming Assets54
Table 8 –Allocation of Allowance for Loan Losses55
Table 9 –CDs and Other Time Deposits of $100,000 or more56

Item 3

Quantitative and Qualitative Disclosures About Market Risk

57

Item 4

Controls and Procedures

57

PART II.  OTHER INFORMATION

Item 1

Legal Proceedings

57
Item 1A

Risk Factors

57

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3

Defaults Upon Senior Securities

57

Item 4

Mine Safety Disclosures

57

Item 5

Other Information

57

Item 6

Exhibits

58
PART I. FINANCIAL INFORMATION  PAGE 

 

 
Item 1 Financial Statements  
  Consolidated Balance Sheets (Unaudited)
as of September 30, 2015 and December 31, 2014
   3          
  Consolidated Statements of Earnings (Unaudited)
for the quarter and nine months ended September 30, 2015 and 2014
   4          
  Consolidated Statements of Comprehensive Income (Unaudited)
for the quarter and nine months ended September 30, 2015 and 2014
   5          
  Consolidated Statements of Stockholders’ Equity (Unaudited)
for the nine months ended September 30, 2015 and 2014
   6          
  Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 2015 and 2014
   7          
  Notes to Consolidated Financial Statements (Unaudited)   8          
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations   31          
  Table 1  Explanation of Non-GAAP Financial Measures   49          
  Table 2  Selected Quarterly Financial Data   50          
  Table 3  Selected Financial Data   51          
  Table 4  Average Balances and Net Interest Income Analysis – for the quarter ended September 30, 2015 and 2014   52          
  Table 5  Average Balances and Net Interest Income Analysis – for the nine months ended September 30, 2015 and 2014   53          
  Table 6  Loan Portfolio Composition   54          
  Table 7  Allowance for Loan Losses and Nonperforming Assets   55          
  Table 8  Allocation of Allowance for Loan Losses   56          
  Table 9  CDs and Other Time Deposits of $100,000 or more   57          
Item 3 Quantitative and Qualitative Disclosures About Market Risk   58          
Item 4 Controls and Procedures   58          
PART II. OTHER INFORMATION  
Item 1 Legal Proceedings   58          
Item 1A Risk Factors   58          
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   58          
Item 3 Defaults Upon Senior Securities   58          
Item 4 Mine Safety Disclosures   58          
Item 5 Other Information   58          
Item 6 Exhibits   59          


PART 1.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

(Dollars in thousands, except share data)  

June 30,

2015

   

December 31,

2014

   

     September 30,     

 

    2015    

   

     December 31,   

 

     2014   

 

 

 

Assets:

        

Cash and due from banks

  $15,914     $12,856     $15,552     $12,856   

Federal funds sold

   46,050      68,507      56,915      68,507   

Interest bearing bank deposits

   46,265      2,140      37,133      2,140   

 

 

Cash and cash equivalents

   108,229      83,503      109,600      83,503   

 

 

Securities available-for-sale

   252,906      267,603      250,142      267,603   

Loans held for sale

   3,875      1,974      3,551      1,974   

Loans, net of unearned income

   408,495      402,954      422,572      402,954   

Allowance for loan losses

   (4,886)     (4,836)     (5,127)     (4,836)  

 

 

Loans, net

   403,609      398,118      417,445      398,118   

 

 

Premises and equipment, net

   11,029      10,807      11,666      10,807   

Bank-owned life insurance

   17,198      18,004      17,314      18,004   

Other real estate owned

   499      534      278      534   

Other assets

   8,888      8,688      7,998      8,688   

 

 

Total assets

  $          806,233     $          789,231     $817,994     $789,231   

 

 

Liabilities:

        

Deposits:

        

Noninterest-bearing

  $149,736     $130,160     $155,614     $130,160   

Interest-bearing

   566,258      563,230      568,697      563,230   

 

 

Total deposits

   715,994      693,390      724,311      693,390   

Federal funds purchased and securities sold under agreements to repurchase

   2,912      4,681      3,447      4,681   

Long-term debt

   7,217      12,217      7,217      12,217   

Accrued expenses and other liabilities

   3,057      3,144      3,420      3,144   

 

 

Total liabilities

   729,180      713,432      738,395      713,432   

 

 

Stockholders’ equity:

        

Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares

   —        —        —         —      

Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares

   39       39      39      39   

Additional paid-in capital

   3,765      3,763      3,766      3,763   

Retained earnings

   78,602      76,193      79,710      76,193   

Accumulated other comprehensive income, net

   1,285      2,443      2,722      2,443   

Less treasury stock, at cost - 313,707 shares and 313,807 shares at June 30, 2015 and December 31, 2014, respectively

   (6,638)     (6,639)  

Less treasury stock, at cost - 313,657 shares and 313,807 shares at September 30, 2015 and December 31, 2014, respectively

   (6,638)     (6,639)  

 

 

Total stockholders’ equity

   77,053      75,799      79,599      75,799   

 

 

Total liabilities and stockholders’ equity

  $806,233     $789,231     $817,994     $789,231   

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

 

         Quarter ended June 30,                   Six Months Ended June 30,              Quarter ended September 30,         Nine Months Ended September 30,     
(In thousands, except share and per share data) 2015   2014   2015   2014  

 

2015

   2014 2015   2014 

 

 

Interest income:

                   

Loans, including fees

 $ 5,217   $   4,766    $   10,223   $   9,556    $ 5,090    $4,953        $ 15,313    $14,509   

Securities:

                   

Taxable

  949      1,214       1,989      2,390     939     1,171     2,928     3,561   

Tax-exempt

  654      607       1,305      1,234     664     622     1,969     1,856   

Federal funds sold and interest bearing bank deposits

  51      30       90      72     57     33     147     105   

 

 

Total interest income

  6,871      6,617       13,607      13,252     6,750     6,779     20,357     20,031   

 

 

Interest expense:

                   

Deposits

  1,020      1,255       2,122      2,512     1,017     1,221     3,139     3,733   

Short-term borrowings

  4            10          4         14     14   

Long-term debt

  59      104       164      208     59     105     223     313   

 

 

Total interest expense

  1,083      1,364       2,296      2,729     1,080     1,331     3,376     4,060   

 

 

Net interest income

  5,788      5,253       11,311      10,523     5,670     5,448     16,981     15,971   

Provision for loan losses

   —        —        —        (400)    200     300     200     (100)  

 

 

Net interest income after provision for loan losses

  5,788      5,253       11,311      10,923     5,470     5,148     16,781     16,071   

 

 

Noninterest income:

                   

Service charges on deposit accounts

  209      219       415      432     209     228     624     660   

Mortgage lending

  457      348       791      734     362     534     1,153     1,268   

Bank-owned life insurance

  112      125       513      251     116     124     629     375   

Other

  389      377       766      715     358     366     1,124     1,081   

Securities gains (losses), net:

                   

Realized gains, net

   —        12       3      38   

Realized gains (losses), net

  11     (235)    14     (197)  

Total other-than-temporary impairments

   —        —        —        (333)     —        —        —        (333)  

 

 

Total securities gains (losses), net

   —        12       3      (295)    11     (235)    14     (530)  

 

 

Total noninterest income

  1,167      1,081       2,488      1,837     1,056     1,017     3,544     2,854   

 

 

Noninterest expense:

                   

Salaries and benefits

  2,291      2,221       4,559      4,502     2,255     2,199     6,814     6,701   

Net occupancy and equipment

  362      341       720      693     405     346     1,125     1,039   

Professional fees

  218      225       419      431     191     204     610     635   

FDIC and other regulatory assessments

  118      129       243      274     120     125     363     399   

Other real estate owned, net

  1      (62)      18      56     1��    (237)    19     (181)  

Prepayment penalties on long-term debt

   —        —        362      —       —        —       362     —     

Other

  1,039      938       2,022      1,784     920     947     2,942     2,731   

 

 

Total noninterest expense

  4,029      3,792       8,343      7,740     3,892     3,584     12,235     11,324   

 

 

Earnings before income taxes

  2,926      2,542       5,456      5,020     2,634     2,581     8,090     7,601   

Income tax expense

  776      683       1,444      1,340     724     709     2,168     2,049   

 

 

Net earnings

 $ 2,150   $   1,859    $   4,012   $   3,680    $ 1,910    $1,872    $ 5,922    $5,552   

 

 

Net earnings per share:

                   

Basic and diluted

 $ 0.59   $   0.51    $   1.10   $   1.01    $ 0.52    $0.51    $ 1.63    $1.52   

 

 

Weighted average shares outstanding:

                   

Basic and diluted

  3,643,413      3,643,295       3,643,389      3,643,228     3,643,455     3,643,328     3,643,411     3,643,262   

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

             Quarter ended June 30,                       Six Months Ended June 30,                 Quarter ended September 30,        Nine Months Ended September 30,    
(Dollars in thousands)   2015   2014        2015   2014      

 

2015

 2014 2015 2014 

 

 

Net earnings

 $   2,150   $   1,859   $   4,012   $   3,680   $ 1,910   $1,872    $ 5,922   $5,552   

Other comprehensive (loss) income, net of tax:

            

Unrealized net holding (loss) gain on securities

    (1,842)      2,937       (1,156)      5,502   

Other comprehensive income (loss), net of tax:

      

Unrealized net holding gain (loss) on securities

  1,444   (335)    288   5,167   

Reclassification adjustment for net (gain) loss on securities recognized in net earnings

    —          (8)      (2)      186     (7 149     (9 335   

 

 

Other comprehensive (loss) income

    (1,842)      2,929       (1,158)      5,688   

Other comprehensive income (loss)

  1,437   (186)    279   5,502   

 

 

Comprehensive income

 $   308    $   4,788    $   2,854    $   9,368    $ 3,347   $1,686    $ 6,201   $11,054   

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

           Common Stock           Additional
paid-in
   Retained     Accumulated
other
comprehensive
 Treasury              Common Stock     

   Additional   

 

paid-in

     Retained     

Accumulated

 

other

 

comprehensive

    Treasury      
(Dollars in thousands, except share data) Shares Amount      capital   earnings     (loss) income stock       Total   

 

Shares

     Amount     capital earnings income stock         Total         

 

 

Balance, December 31, 2013

 3,957,135   $ 39   $ 3,759   $   71,879    $(4,552)   $ (6,640)   $           64,485    3,957,135   $39   $3,759   $71,879    $(4,552 $(6,640 $64,485   

Net earnings

  —        —        —         3,680     —         —         3,680     —      —      —     5,552    —      —     5,552   

Other comprehensive income

  —        —        —         —      5,688      —         5,688     —      —      —      —     5,502    —     5,502   

Cash dividends paid ($0.43 per share)

  —        —        —         (1,567)    —         —         (1,567)  

Cash dividends paid ($0.645 per share)

  —      —      —     (2,351  —      —     (2,351)  

Sale of treasury stock (210 shares)

  —        —       4      —       —                  —      —     4    —      —     1     

 

 

Balance, June 30, 2014

 3,957,135   $ 39   $ 3,763   $   73,992   $1,136    $ (6,639)   $   72,291   

Balance, September 30, 2014

 3,957,135   $39   $3,763   $75,080    $950   $(6,639 $73,193   

 

 

Balance, December 31, 2014

 3,957,135   $ 39   $ 3,763   $   76,193   $2,443    $ (6,639)   $   75,799    3,957,135   $39   $3,763   $76,193    $2,443   $(6,639 $75,799   

Net earnings

  —        —        —         4,012    —         —         4,012     —      —      —     5,922    —      —     5,922   

Other comprehensive loss

  —        —        —         —      (1,158)     —         (1,158)  

Cash dividends paid ($0.44 per share)

  —        —        —         (1,603)    —         —         (1,603)  

Sale of treasury stock (100 shares)

  —        —       2      —       —                

Other comprehensive income

  —      —      —      —     279    —     279   

Cash dividends paid ($0.66 per share)

  —      —      —     (2,405  —      —     (2,405)  

Sale of treasury stock (150 shares)

  —      —     3    —      —     1     

 

 

Balance, June 30, 2015

 3,957,135   $ 39    $ 3,765   $   78,602    $1,285    $ (6,638)   $   77,053   

Balance, September 30, 2015

 3,957,135   $39   $3,766   $79,710    $2,722   $(6,638 $79,599   

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,          Nine Months Ended September 30,     
(In thousands) 2015    2014  2015 2014 

 

 

Cash flows from operating activities:

        

Net earnings

 $ 4,012    $ 3,680    $ 5,922   $ 5,552    

Adjustments to reconcile net earnings to net cash provided by operating activities:

        

Provision for loan losses

   —        (400)    200    (100)   

Depreciation and amortization

  545     366     863    557    

Premium amortization and discount accretion, net

  804     776     1,186    1,150    

Net (gain) loss on securities available-for-sale

  (3)    295     (14  530    

Net gain on sale of loans held for sale

  (644)    (494)    (942  (880)   

(Decrease) increase in MSR valuation allowance

  (39)    43     (52  31    

Net loss on other real estate owned

      42   

Net loss (gain) on other real estate owned

  6    (204)   

Loss on prepayment of long-term debt

  362      —        362     —      

Loans originated for sale

  (38,404)    (29,459)    (55,956  (44,185)   

Proceeds from sale of loans

  36,883     24,847    54,882    43,469    

Increase in cash surrender value of bank-owned life insurance

  (237)    (251)    (353  (375)   

Income recognized from death benefit on bank-owned life insurance

  (276)     —        (276   —      

Net decrease in other assets

  237     71   

Net (decrease) increase in accrued expenses and other liabilities

  (84)    694   

Net decrease (increase) in other assets

  293    (82)   

Net increase in accrued expenses and other liabilities

  280    8,200    

 

 

Net cash provided by operating activities

  3,161     210     6,401    13,663    

 

 

Cash flows from investing activities:

        

Proceeds from sales of securities available-for-sale

   —        18,354      —      37,132    

Proceeds from maturities of securities available-for-sale

  16,698     18,127     23,981    47,241    

Purchase of securities available-for-sale

  (4,637)    (34,273)    (7,249  (70,943)   

Increase in loans, net

  (5,491)    (3,021)    (19,527  (12,126)   

Net purchases of premises and equipment

  (415)    (19)    (1,189  (19)   

Proceeds from bank-owned life insurance death benefit

  1,319      —        1,319     —      

Decrease in FHLB stock

  191     235     191    235    

Proceeds from sale of other real estate owned

  30     2,652     250    3,322    

 

 

Net cash provided by investing activities

  7,695     2,055   

Net cash (used in) provided by investing activities

  (2,224  4,842    

 

 

Cash flows from financing activities:

        

Net increase in noninterest-bearing deposits

  19,576     4,615     25,454    1,732    

Net increase in interest-bearing deposits

  3,028     10,722     5,467    10,187    

Net decrease in federal funds purchased and securities sold under agreements to repurchase

  (1,769)    (47)  

Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase

  (1,234  971    

Repayments or retirement of long-term debt

  (5,362)     —        (5,362   —      

Dividends paid

  (1,603)    (1,567)    (2,405  (2,351)   

 

 

Net cash provided by financing activities

  13,870     13,723     21,920    10,539    

 

 

Net change in cash and cash equivalents

  24,726     15,988     26,097    29,044    

Cash and cash equivalents at beginning of period

  83,503     54,222     83,503    54,222    

 

 

Cash and cash equivalents at end of period

 $ 108,229    $ 70,210     $109,600    $83,266    

 

 
        

 

 

Supplemental disclosures of cash flow information:

        

Cash paid during the period for:

        

Interest

 $ 2,366    $ 2,777     $3,503    $4,125    

Income taxes

  1,241     506     1,803    963    

Supplemental disclosure of non-cash transactions:

        

Real estate acquired through foreclosure

   —        394      —      449    

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individual and corporate customers in Lee County, Alabama and surrounding counties through its wholly owned subsidiary, AuburnBank (the “Bank”). The Company does not have any segments other than banking that are considered material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I is an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to JuneSeptember 30, 2015. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2015, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

 

  ASU 2014-01,Accounting for Investments in Qualified Affordable Housing Projects;

 

  ASU 2014-04,Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure;

 

  ASU 2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity;

 

  ASU 2014-11,Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures; and

 

  ASU 2014-14,Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.

Information about these pronouncements is described in more detail below.

ASU 2014-01,Accounting for Investments in Qualified Affordable Housing Projects, amends the criteria a company must meet to elect to account for investments in qualified affordable housing projects using a method other than the cost or equity methods. If the criteria are met, a company is permitted to amortize the initial investment cost in proportion to and over the same period as the total tax benefits the company expects to receive. The amortization of the initial investment cost and tax benefits are to be recorded in the income tax expense line. The Update also requires new disclosures about all investments in qualified affordable housing projects regardless of the accounting method used. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU 2014-04,Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, clarifies the timing of when a creditor is considered to have taken physical possession of residential real estate collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate owned. A creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure, or (2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal agreement. The Update also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in residential real estate mortgage loans that are in the process of foreclosure. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU 2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, changes the definition and reporting requirements for discontinued operations. Under the new guidance, an entity’s disposal of a component or group of components must be reported in discontinued operations if the disposal is a strategic shift that has or will have a significant effect on the entity’s operations and financial results. Major strategic shifts include disposals of a major geographic area or line of business. This guidance also requires new disclosures on discontinued operations. These changes were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU 2014-11,Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, changes current accounting and expands secured borrowing accounting for repurchase-to-maturity transactions and repurchase financings. This guidance requires new disclosures for certain repurchase agreements and similar transactions that identify which items are accounted for as secured borrowings and which items are accounted for as sales. These changes were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU No. 2014-14,Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, clarifies how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

NOTE 2: BASIC AND DILUTED EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At JuneSeptember 30, 2015 and 2014, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted earnings per share calculation.

The basic and diluted earnings per share computations for the respective periods are presented below.

 

               Quarter ended June 30,                        Six Months Ended June 30,                   Quarter ended September 30,           Nine Months Ended September 30,     
(In thousands, except share and per share data)   2015   2014 2015   2014  

 

2015

   2014 2015   2014 

 

 

Basic and diluted:

                 

Net earnings

 $   2,150    $1,859   $ 4,012    $3,680   $ 1,910    $1,872   $ 5,922    $5,552  

Weighted average common shares outstanding

    3,643,413     3,643,295    3,643,389     3,643,228    3,643,455     3,643,328    3,643,411     3,643,262  

 

 

Earnings per share

 $   0.59    $0.51   $ 1.10    $1.01   $ 0.52    $0.51   $ 1.63    $1.52  

 

 

NOTE 3: VARIABLE INTEREST ENTITIES

Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust, or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.

At JuneSeptember 30, 2015, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE, discussed below.

Trust Preferred Securities

The Company owns the common stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust I, which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. This trust meets the definition of a VIE of which the Company is not the primary beneficiary; the trust’s only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures of approximately $7.2 million are included in long-term debt and the Company’s equity interest of $0.2 million in the business trust is included in other assets. Interest expense on the junior subordinated debentures is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of JuneSeptember 30, 2015.

 

(Dollars in thousands)  

Maximum

Loss Exposure

   

Liability

Recognized

      Classification 

 

Type:

        

Trust preferred issuances

   N/A     $7,217       Long-term debt  

 

NOTE 4: SECURITIES

At JuneSeptember 30, 2015 and December 31, 2014, respectively, all securities within the scope of Accounting Standards Codification (“ASC”) 320,Investments – Debt and Equity Securities,were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturity at JuneSeptember 30, 2015 and December 31, 2014, respectively, are presented below.

 

 

 

 

 
           1 year   1 to 5   5 to 10   After 10   Fair         Gross Unrealized Amortized   

 

 

 
(Dollars in thousands)           or less   years   years   years   Value           Gains   Losses Cost   

 

1 year

 

or less

   

 

1 to 5

 

years

   

 

5 to 10

 

years

   

 

After 10

 

years

   

 

Fair

 

Value

   

 

          Gross Unrealized

   

Amortized

 

Cost

 
(Dollars in thousands)   

 

Gains

   Losses   

 

 

June 30, 2015

               

September 30, 2015

                

Agency obligations (a)

 $5,007     26,033     14,870     14,309     60,219     509      869    $ 60,579     $      5,007     26,185     19,546     9,817     60,555     720     408    $60,243    

Agency RMBS (a)

       1,994     15,340     104,779     122,113     1,156      995     121,952           1,767     14,470     101,066     117,303     1,539     301     116,065    

State and political subdivisions

       1,055     13,121     56,398     70,574     2,525      290     68,339           1,059     13,232     57,993     72,284     2,861     96     69,519    

 

 

Total available-for-sale

 $5,007     29,082     43,331     175,486     252,906     4,190      2,154    $ 250,870     $5,007     29,011     47,248     168,876     250,142     5,120     805    $245,827    

 

 

December 31, 2014

                               

Agency obligations (a)

 $     30,947     14,869     14,433     60,249     375      830    $ 60,704     $     30,947     14,869     14,433     60,249     375     830    $60,704    

Agency RMBS (a)

            14,523     120,520     135,043     1,597      616     134,062           —       14,523     120,520     135,043     1,597     616     134,062    

State and political subdivisions

       502     15,520     56,289     72,311     3,379      34     68,966           502     15,520     56,289     72,311     3,379     34     68,966    

 

 

Total available-for-sale

 $     31,449     44,912     191,242     267,603     5,351      1,480    $ 263,732     $     31,449     44,912     191,242     267,603     5,351     1,480    $   263,732    

 

 

(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $140.3$136.1 million and $132.2 million at JuneSeptember 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets are cost-method investments. The carrying amounts of cost-method investments were $1.4 million and $1.6 million at JuneSeptember 30, 2015 and December 31, 2014, respectively. Cost-method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at JuneSeptember 30, 2015 and December 31, 2014, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

 

           Less than 12 Months                       12 Months or Longer           Total          Less than 12 Months                      12 Months or Longer         Total 
(Dollars in thousands) 

Fair  

Value  

   Unrealized
Losses
   

Fair  

Value  

   Unrealized
Losses
 Fair
      Value      
     Unrealized  
Losses
  

 

Fair

 

Value

   

 

Unrealized  

 

Losses  

      

Fair

 

Value

   

Unrealized  

 

Losses  

 

Fair

 

    Value    

   

Unrealized  

 

Losses  

 

 

 

June 30, 2015:

            

September 30, 2015:

              

Agency obligations

 $  —         —         24,089     869   $ 24,089     869   $  —         —           24,550     408   $ 24,550     408  

Agency RMBS

  28,866     558     19,464     437    48,330     995    18,567     94       19,031     207    37,598     301  

State and political subdivisions

  13,050     290     —         —        13,050     290    7,705     96       —         —        7,705     96  

 

 

Total

 $ 41,916     848     43,553     1,306   $ 85,469     2,154   $ 26,272     190       43,581     615   $ 69,853     805  

 

 

December 31, 2014:

                          

Agency obligations

 $  —         —         24,126     830   $ 24,126     830   $  —         —           24,126     830   $ 24,126     830  

Agency RMBS

  9,078     22     42,744     594    51,822     616    9,078     22       42,744     594    51,822     616  

State and political subdivisions

  4,257     34     —         —        4,257     34    4,257     34       —         —        4,257     34  

 

 

Total

 $ 13,335     56     66,870     1,424   $ 80,205     1,480   $ 13,335     56       66,870     1,424   $         80,205     1,480  

 

 

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.

In determining whether a loss is temporary, the Company considers all relevant information including:

 

the length of time and the extent to which the fair value has been less than the amortized cost basis;
adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);
the historical and implied volatility of the fair value of the security;
the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
failure of the issuer of the security to make scheduled interest or principal payments;
any changes to the rating of the security by a rating agency; and
recoveries or additional declines in fair value subsequent to the balance sheet date.
the length of time and the extent to which the fair value has been less than the amortized cost basis;
adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);
the historical and implied volatility of the fair value of the security;
the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
failure of the issuer of the security to make scheduled interest or principal payments;
any changes to the rating of the security by a rating agency; and
recoveries or additional declines in fair value subsequent to the balance sheet date.

Agency obligations

The unrealized losses associated with agency obligations 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.

Agency RMBS

The unrealized losses associated with agency residential mortgage-backed securities (“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.

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by changes in interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a bond insurer, but management did not rely on the guarantee in making its investment decision. These securities will continue to be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost basis of these securities.

Cost-method investments

At JuneSeptember 30, 2015, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of an issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the security. As a result, there is a risk that other-than-temporary impairment charges may occur in the future.

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At JuneSeptember 30, 2015 and December 31, 2014, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.

Other-Than-Temporary Impairment

The following table presents details of the other-than-temporary impairment related to securities.

 

         Quarter ended June 30,               Six Months Ended June 30,          Quarter ended September 30,        Nine Months Ended September 30,   
(Dollars in thousands)  2015   2014      2015          2014  

 

        2015        

           2014                    2015                   2014         

 

 

Other-than-temporary impairment charges

           

Other-than-temporary impairment charges (included in earnings):

Other-than-temporary impairment charges (included in earnings):

  

Debt securities:

                     

Agency RMBS

 $  —       $   —       $  —        $   333       $      $—       $      $333      

 

 

Total debt securities

   —          —         —           333              —              333      

 

 

Total other-than-temporary impairment charges

 $  —       $   —       $  —        $   333      

Total other-than-temporary impairment charges (included in earnings):

 $      $—       $      $333      

 

 

Other-than-temporary impairment on debt securities:

           

Other-than-temporary impairment on debt securities:

  

Recorded as part of gross realized losses:

                     

Securities with intent to sell

   —          —         —           333              —              333      

 

 

Total other-than-temporary impairment on debt securities

 $  —       $   —       $  —        $   333       $      $—       $      $333      

 

 

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales of securities.

 

               Quarter ended June 30,                  Six Months Ended June 30,        Quarter ended September 30,         Nine Months Ended September 30,     
(Dollars in thousands)     2015   2014           2015             2014  

 

         2015         

             2014                    2015                      2014           

 

 

Gross realized gains

 $   —        $12       $   3    $38    $ 11    $429     $ 14    $467   

Gross realized losses

   —       (664)      —       (664)  

 

 

Realized gains, net

 $   —        $12       $   3    $38   

Realized gains (losses), net

 $ 11    $(235)    $ 14    $(197)  

 

 

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

 

(In thousands)  

June 30,

2015

 

December 31,

2014

   

September 30,

 

2015

 

December 31,

 

2014

 

 

 

Commercial and industrial

  $57,310   $54,329     $47,925   $54,329   

Construction and land development

   38,854   37,298      41,592   37,298   

Commercial real estate:

      

Owner occupied

   42,343   52,296      48,445   52,296   

Other

   141,781   139,710      153,004   139,710   

 

 

Total commercial real estate

   184,124   192,006      201,449   192,006   

Residential real estate:

      

Consumer mortgage

   69,448   66,489      71,415   66,489   

Investment property

   45,591   41,152      46,448   41,152   

 

 

Total residential real estate

   115,039   107,641      117,863   107,641   

Consumer installment

   13,632   12,335      14,362   12,335   

 

 

Total loans

   408,959   403,609      423,191   403,609   

Less: unearned income

   (464 (655)     (619 (655)  

 

 

Loans, net of unearned income

  $            408,495   $            402,954     $          422,572   $          402,954   

 

 

Loans secured by real estate were approximately 82.7%85.3% of the Company’s total loan portfolio at JuneSeptember 30, 2015. At JuneSeptember 30, 2015, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio segments and classes.

Commercial and industrial (“C&I”) — includes loans to finance business operations, equipment purchases, or other needs for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower.

Construction and land development (“C&D”) — includes both loans and credit lines for the purpose of purchasing, carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is dependent upon the sale or refinance of the real estate collateral.

Commercial real estate (“CRE”) — includes loans disaggregated into two classes: (1) owner occupied and (2) other.

Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property.

Other – primarily includes loans to finance income-producing commercial and multi-family properties that are not owner occupied. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, warehouses, and apartments leased to local businesses and residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Residential real estate (“RRE”) — includes loans disaggregated into two classes: (1) consumer mortgage and (2) investment property.

Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value.

Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

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 with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and, if applicable, property value.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of JuneSeptember 30, 2015 and December 31, 2014.

 

(In thousands)  Current   Accruing
  30-89 Days  
Past Due
   Accruing
 Greater than 
90 days
   Total
    Accruing    
Loans
   Non-
    Accrual    
 

Total

    Loans    

      Current     

Accruing

 

  30-89 Days  

 

Past Due

 

Accruing

 

  Greater than  

 

90 days

 

Total

 

    Accruing    

 

Loans

 

Non-

 

    Accrual    

 

Total

 

    Loans    

 

   

 

 

   

 

 

June 30, 2015:

            

September 30, 2015:

       

Commercial and industrial

  $57,258     6     —       57,264     46    $ 57,310    $47,807   37    —      47,844   81      $ 47,925   

Construction and land development

   38,080     12     160     38,252     602     38,854    40,886    —      112   40,998   594     41,592   

Commercial real estate:

                   

Owner occupied

   41,659     —       —       41,659     684     42,343    47,586   182    —      47,768   677     48,445   

Other

   141,781     —       —       141,781     —       141,781    150,891    —       —      150,891   2,113     153,004   

 

 

Total commercial real estate

   183,440     —       —       183,440     684     184,124    198,477   182    —      198,659   2,790     201,449   

Residential real estate:

                   

Consumer mortgage

   68,947     246     228     69,421     27     69,448    70,929   301    —      71,230   185     71,415   

Investment property

   45,368     169     54     45,591     —       45,591    46,414   34    —      46,448    —       46,448   

 

 

Total residential real estate

   114,315     415     282     115,012     27     115,039    117,343   335    —      117,678   185     117,863   

Consumer installment

   13,609     23     —       13,632     —       13,632    14,342   20    —      14,362    —       14,362   

 

 

Total

  $406,702     456     442     407,600     1,359    $ 408,959    $    418,855   574   112   419,541   3,650      $   423,191   

 

 

December 31, 2014:

                   

Commercial and industrial

  $54,106     168     —       54,274     55    $ 54,329    $54,106   168    —      54,274   55      $ 54,329   

Construction and land development

   36,483     210     —       36,693     605     37,298    36,483   210    —      36,693   605     37,298   

Commercial real estate:

                   

Owner occupied

   51,832     201     —       52,033     263     52,296    51,832   201    —      52,033   263     52,296   

Other

   139,710     —       —       139,710     —       139,710    139,710    —       —      139,710    —       139,710   

 

 

Total commercial real estate

   191,542     201     —       191,743     263     192,006    191,542   201    —      191,743   263     192,006   

Residential real estate:

                   

Consumer mortgage

   64,713     1,736     —       66,449     40     66,489    64,713   1,736    —      66,449   40     66,489   

Investment property

   40,503     495     —       40,998     154     41,152    40,503   495    —      40,998   154     41,152   

 

 

Total residential real estate

   105,216     2,231     —       107,447     194     107,641    105,216   2,231    —      107,447   194     107,641   

Consumer installment

   12,290     45     —       12,335     —       12,335    12,290   45    —      12,335    —       12,335   

 

 

Total

  $    399,637     2,855     —       402,492     1,117    $ 403,609    $399,637   2,855    —      402,492   1,117      $ 403,609   

 

 

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segement. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At JuneSeptember 30, 2015 and December 31, 2014, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2014, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period and continues to use this methodology.

Prior to June 30, 2014, the Company calculated average losses for all loan segments using a rolling 8 quarter historical period (except for the commercial real estate loan segment, which used a 6 quarter historical period). If the Company continued to calculate average losses for all loan segments other than commercial real estate using a rolling 8 quarter historical period and for the commercial real estate segment using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.0 million at June 30, 2014. Other than the changes discussed above, the Company has not made any material changes to its calculation of historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods.

 

  September 30, 2015 
(In thousands)  Commercial and
industrial
   

 

Construction
and land
development

   Commercial
real estate
   Residential
real estate
   Consumer
installment
   Total 

 

Quarter ended:

            

Beginning balance

  $            681      640      2,146     1,180      239     $        4,886   

Charge-offs

   —        —        —        (26)     (23)     (49)  

Recoveries

   13           —        71           90   

 

Net recoveries (charge-offs)

   13           —        45      (21)     41   

Provision for loan losses

   (190)     (17)     533     (122)     (4)     200   

 

Ending balance

  $504      627      2,679     1,103      214     $5,127   

 

Nine months ended:

            

Beginning balance

  $639      974      1,928     1,119      176     $4,836   

Charge-offs

   (58)     —        —        (86)     (45)     (189)  

Recoveries

   17      13      —        236      14      280   

 

Net (charge-offs) recoveries

   (41)     13      —        150      (31)     91   

Provision for loan losses

   (94)     (360)     751     (166)     69      200   

 

Ending balance

  $504      627      2,679     1,103      214     $5,127   
  June 30, 2015 

 
  

 

 

 
  September 30, 2014 
(In thousands)  Commercial and
industrial
 Construction
and land
development
 Commercial
real estate
  Residential 
real estate
 Consumer
   installment   
   Total   Commercial and
industrial
   

 

Construction
and land
development

   Commercial
real estate
   Residential
real estate
   Consumer
installment
   Total 

 

 

Quarter ended:

                 

Beginning balance

  $644   830   1,888   1,153   207       $4,722     $639      907      1,913      1,095      174     $4,728   

Charge-offs

   —      —      —      —     (5 (5)     —        —        —        (287)     (39)     (326)  

Recoveries

   3   4    —     151   11   169      35           —        13           52   

 

 

Net recoveries (charge-offs)

   3   4    —     151   6   164      35           —        (274)     (36)     (274)  

Provision for loan losses

   34   (194 258   (124 26    —        (5)     (13)     22      262      34      300   

 

 

Ending balance

  $681   640   2,146   1,180   239       $4,886     $669      895      1,935      1,083      172     $4,754   

 

 

Six months ended:

     

Nine months ended:

            

Beginning balance

  $639   974   1,928   1,119   176       $4,836     $386      366      3,186      1,114      216     $5,268   

Charge-offs

   (58  —      —     (59 (23 (140)     (46)     (236)     —       (358)     (83)     (723)  

Recoveries

   4   9    —     165   12   190      71          118      103      13      309   

 

 

Net (charge-offs) recoveries

   (54 9    —     106   (11 50   

Net recoveries (charge-offs)

   25      (232)     118      (255)     (70)     (414)  

Provision for loan losses

   96   (343 218   (45 74    —        258      761      (1,369)     224      26      (100)  

 

 

Ending balance

  $681   640   2,146   1,180   239       $            4,886     $669      895      1,935      1,083      172     $4,754   

 

 
  June 30, 2014 
  

 

 

 
(In thousands)  Commercial and
industrial
 Construction
and land
development
 Commercial
real estate
 Residential
real estate
 Consumer
installment
   Total 

 

Quarter ended:

     

Beginning balance

  $482   214   2,493   1,256   266       $4,711   

Charge-offs

   (46  —      —     (41 (8 (95)  

Recoveries

   32   1    —     74   5   112   

 

Net (charge-offs) recoveries

   (14 1    —     33   (3 17   

Provision for loan losses

   171   692   (580 (194 (89  —     

 

Ending balance

  $639   907   1,913   1,095   174       $4,728   

 

Six months ended:

     

Beginning balance

  $386   366   3,186   1,114   216       $5,268   

Charge-offs

   (46 (236  —    (72 (44 (398)  

Recoveries

   36   3  118   91   10   258   

 

Net (charge-offs) recoveries

   (10 (233 118   19   (34 (140)  

Provision for loan losses

   263   774   (1,391 (38 (8 (400)  

 

Ending balance

  $639   907   1,913   1,095   174       $4,728   

 

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of JuneSeptember 30, 2015 and 2014.

 

 Collectively evaluated (1)   Individually evaluated (2)   Total 
   Allowance     Recorded      Allowance      Recorded      Allowance      Recorded 
 for loan      investment      for loan      investment      for loan       investment          Collectively evaluated (1)       Individually evaluated (2)   Total 
(In thousands) losses   in loans   losses   in loans   losses   in loans  

 

  Allowance

 

  for loan

 

  losses

   

 

Recorded

 

investment

 

in loans

   

 

    Allowance

 

    for loan

 

    losses

   

 

Recorded    

 

investment    

 

in loans    

   

 

    Allowance

 

    for loan

 

    losses

   

 

Recorded    

 

investment    

 

in loans    

 

 

 

June 30, 2015:

            

September 30, 2015:

            

Commercial and industrial

 $ 681     57,246      —       64      681     57,310    $ 504     47,869     —       56     504     47,925    

Construction and land development

  640     38,252      —       602      640     38,854     627     40,999     —       593     627     41,592    

Commercial real estate

  1,672     182,465      474     1,659      2,146     184,124     1,719     197,693     960     3,756     2,679     201,449    

Residential real estate

  1,180     115,039      —       —        1,180     115,039     1,103     117,863     —       —       1,103     117,863    

Consumer installment

  239     13,632      —       —        239     13,632     214     14,362     —       —       214     14,362    

 

 

Total

 $ 4,412     406,634      474     2,325      4,886     408,959    $ 4,167     418,786     960     4,405     5,127     423,191    

 

 

June 30, 2014:

            

September 30, 2014:

            

Commercial and industrial

 $ 639     51,959      —       95      639     52,054    $ 669     52,785     —       83     669     52,868    

Construction and land development

  907     31,498      —       963      907     32,461     895     33,574     —       615     895     34,189    

Commercial real estate

  1,744     185,302      169     1,939      1,913     187,241     1,733     188,150     202     1,927     1,935     190,077    

Residential real estate

  1,095     102,040      —       881      1,095     102,921     1,083     105,672     —       883     1,083     106,555    

Consumer installment

  174     11,686      —       —        174     11,686     172     11,535     —       —       172     11,535    

 

 

Total

 $ 4,559     382,485      169     3,878      4,728     386,363    $ 4,552     391,716     202     3,508     4,754     395,224    

 

 

 

(1)

(1)    Represents loans collectively evaluated for impairment in accordance with ASC 450-20,Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.

(2)

Represents loans individually evaluated for impairment in accordance with ASC 310-30,Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

 

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows:

Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected

Nonaccrual – includes loans where management has determined that full payment of principal and interest is not expected.

 

(In thousands)  Pass   

Special

Mention

   Substandard
Accruing
       Nonaccrual   Total loans   Pass   Special
Mention
   Substandard
Accruing
   Nonaccrual   Total loans 

 

 

June 30, 2015:

          

September 30, 2015:

          

Commercial and industrial

  $52,662      4,219      383      46     $57,310     $43,379      4,136      329      81     $47,925    

Construction and land development

   37,495      130      627      602      38,854      40,360      60      578      594      41,592    

Commercial real estate:

                    

Owner occupied

   40,323      1,112      224      684      42,343      47,260      284      224      677      48,445    

Other

   139,324      2,178      279      —        141,781      150,577      37      277      2,113      153,004    

 

 

Total commercial real estate

   179,647      3,290      503      684      184,124      197,837      321      501      2,790      201,449    

Residential real estate:

                    

Consumer mortgage

   63,688      2,001      3,732      27      69,448      65,983      1,407      3,840      185      71,415    

Investment property

   43,935      490      1,166      —        45,591      44,839      485      1,124      —        46,448    

 

 

Total residential real estate

   107,623      2,491      4,898      27      115,039      110,822      1,892      4,964      185      117,863    

Consumer installment

   13,436      29      167      —        13,632      14,137      97      128      —        14,362    

 

 

Total

  $390,863      10,159      6,578      1,359     $408,959     $      406,535      6,506      6,500      3,650     $  423,191    

 

 

December 31, 2014:

                    

Commercial and industrial

  $49,550      4,348      376      55     $54,329     $49,550      4,348      376      55     $54,329    

Construction and land development

   35,911      226      556      605      37,298      35,911      226      556      605      37,298    

Commercial real estate:

                    

Owner occupied

   49,900      1,905      228      263      52,296      49,900      1,905      228      263      52,296    

Other

   136,801      2,253      656      —        139,710      136,801      2,253      656      —        139,710    

 

 

Total commercial real estate

   186,701      4,158      884      263      192,006      186,701      4,158      884      263      192,006    

Residential real estate:

                    

Consumer mortgage

   59,646      1,912      4,891      40      66,489      59,646      1,912      4,891      40      66,489    

Investment property

   39,348      624      1,026      154      41,152      39,348      624      1,026      154      41,152    

 

 

Total residential real estate

   98,994      2,536      5,917      194      107,641      98,994      2,536      5,917      194      107,641    

Consumer installment

   12,200      21      114      —        12,335      12,200      21      114      —        12,335    

 

 

Total

  $     383,356                  11,289      7,847      1,117     $  403,609     $383,356      11,289      7,847      1,117     $403,609    

 

 

Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-off do not appear in the following tables. The related allowance generally represents the following components that correspond to impaired loans:

Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans).

Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans).

Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans).

Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans).

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at JuneSeptember 30, 2015 and December 31, 2014.

 

    June 30, 2015 
(In thousands)    Unpaid principal 
balance (1)
   Charge-offs and
payments applied
(2)
  Recorded
  investment (3)  
      Related allowance  

 

    

 

 

 

With no allowance recorded:

        

Commercial and industrial

 $  64     —      64      

Construction and land development

   2,596     (1,994  602      

Commercial real estate:

        

Owner occupied

   316     (72  244      

 

    

Total commercial real estate

   316     (72  244      

 

    

Total

 $  2,976     (2,066  910      

 

    

With allowance recorded:

        

Commercial real estate:

        

Owner occupied

   1,269     (70  1,199       382   

Other

   216     —      216       92   

 

    

 

 

 

Total commercial real estate

   1,485     (70  1,415       474   

 

    

 

 

 

Total

 $  1,485     (70  1,415     $  474   

 

    

 

 

 

Total impaired loans

 $  4,461     (2,136  2,325     $  474   

 

    

 

 

 

(1) Unpaid principal balance represents the contractual obligation due from the customer.
    September 30, 2015 
(In thousands)   Unpaid principal
balance (1)
   

 

Charge-offs and
payments applied
(2)

  Recorded
investment (3)    
     Related allowance   

 

    

 

 

 

With no allowance recorded:

        

Commercial and industrial

 

$

  56         56       

Construction and land development

   2,590     (1,997  593       

Commercial real estate:

        

Owner occupied

   312     (75  237       

 

    

Total commercial real estate

   312     (75  237       

 

    

Total

 

$

  2,958     (2,072  886       

 

    

With allowance recorded:

        

Commercial real estate:

        

Owner occupied

   1,476     (70  1,406        427    

Other

   2,130     (17  2,113        533    

 

    

 

 

 

Total commercial real estate

   3,606     (87  3,519        960    

 

    

 

 

 

Total

 

$

  3,606     (87  3,519      $  960    

 

    

 

 

 

 

Total impaired loans

 

 

$

  6,564     (2,159  4,405      $  960    

 

    

 

 

 

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.

    December 31, 2014 
(In thousands)    Unpaid principal 
balance (1)
   Charge-offs and
payments applied
(2)
  Recorded
  investment (3)  
      Related allowance  

 

    

 

 

 

With no allowance recorded:

        

Commercial and industrial

 $    70     —      70      

Construction and land development

   2,822     (2,217  605      

Commercial real estate:

        

Owner occupied

   331     (68  263      

 

    

Total commercial real estate

   331     (68  263      

Residential real estate:

        

Consumer mortgages

   934     (192  742      

Investment property

   180     (26  154      

 

    

Total residential real estate

   1,114     (218  896      

 

    

Total

 $    4,337     (2,503  1,834      

 

    

With allowance recorded:

        

Commercial real estate:

        

Owner occupied

   846     —      846       102   

Other

   591     —      591       92   

 

    

 

 

 

Total commercial real estate

   1,437     —      1,437       194   

 

    

 

 

 

Total

 $    1,437     —      1,437     $  194   

 

    

 

 

 

Total impaired loans

 $    5,774     (2,503  3,271     $  194   

 

    

 

 

 

(1) Unpaid principal balance represents the contractual obligation due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.

    December 31, 2014 
(In thousands)   Unpaid principal
balance (1)
   

 

Charge-offs and
payments applied
(2)

   Recorded
investment (3)    
      Related allowance 

 

    

 

 

 

With no allowance recorded:

         

Commercial and industrial

 

$

  70     —         70       

Construction and land development

   2,822     (2,217)     605       

Commercial real estate:

         

Owner occupied

   331     (68)     263       

 

    

Total commercial real estate

   331     (68)     263       

Residential real estate:

         

Consumer mortgages

   934     (192)     742       

Investment property

   180     (26)     154       

 

    

Total residential real estate

   1,114     (218)     896       

 

    

Total

 

$

  4,337     (2,503)     1,834       

 

    

With allowance recorded:

         

Commercial real estate:

         

Owner occupied

   846     —         846        102    

Other

   591     —         591        92    

 

    

 

 

 

Total commercial real estate

   1,437     —         1,437        194    

 

    

 

 

 

Total

 

$

  1,437     —         1,437      $     194    

 

    

 

 

 

 

Total impaired loans

 

$

  5,774     (2,503)     3,271      $     194    

 

    

 

 

 

(1) Unpaid principal balance represents the contractual obligation due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the respective periods.

 

 Quarter ended June 30, 2015   Six months ended June 30, 2015 
 Average   Total interest   Average   Total interest 
 recorded   income   recorded   income          Quarter ended September 30, 2015           Nine months ended September 30, 2015   
(In thousands)       investment              recognized              investment              recognized         

 

Average

 

recorded

 

investment

   

 

Total interest

 

income

 

recognized

   

 

Average

 

recorded

 

investment

   

 

Total interest

 

income

 

recognized

 

 

 

Impaired loans:

                 

Commercial and industrial

 $   64     1     66        

$

   58     1     63       

Construction and land development

  608     —       613     —         596     —       608     —     

Commercial real estate:

                 

Owner occupied

  1,202     9     1,143     21       1,433     11     1,273     32   

Other

  466     8     538     18       921     —       610     18   

 

 

Total commercial real estate

  1,668     17     1,681     39       2,354     11     1,883     50   

Residential real estate:

                 

Consumer mortgages

  512     158     648     173       —       —       454     173   

Investment property

  100     76     130     76       —       —       91     76   

 

 

Total residential real estate

  612     234     778     249       —       —       545     249   

 

 

Total

 $   2,952     252     3,138     290    

$

   3,008     12     3,099     302   

 

 

 Quarter ended June 30, 2014   Six months ended June 30, 2014 
 Average   Total interest   Average   Total interest 
 recorded   income   recorded   income        Quarter ended September 30, 2014           Nine months ended September 30, 2014   
(In thousands)       investment               recognized               investment               recognized        

Average

 

recorded

 

investment

   

Total interest

 

income

 

recognized

   

Average

 

recorded

 

investment

   

Total interest

 

income

 

recognized

 

 

 

Impaired loans:

                

Commercial and industrial

  103          111        

$

 88     2     105       

Construction and land development

  1,098     —        1,343     —       730     —       1,159     —     

Commercial real estate:

                

Owner occupied

  1,142          1,468     21     1,129     9     1,367     31   

Other

  949          994     17     801     4     935     20   

 

 

Total commercial real estate

  2,091     17      2,462     38     1,930     13     2,302     51   

Residential real estate:

                

Consumer mortgages

  724     —        736     —       716     5     752       

Investment property

  165     —        168     —       162     —       166     —     

 

 

Total residential real estate

  889     —        904     —       878     5     918       

 

 

Total

  4,181     19      4,820     42    $ 3,626     20     4,484     62   

 

 

Interest income recognized for the nine months ended September 30, 2015 included interest recoveries of $225 thousand related to two impaired residential real estate loans that paid off in June 2015. Excluding the interest recoveries on these two loans, interest income recognized on impaired loans for the nine months ended September 30, 2015 would have been $77 thousand.

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business, management may grant concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date, or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts due, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In making the determination of whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each modification. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by establishing a valuation allowance as part of the allowance for loan losses or a charge-off to the allowance for loan losses. In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of JuneSeptember 30, 2015 and December 31, 2014.

 

 TDRs 
           Related  TDRs 
(In thousands)         Accruing           Nonaccrual               Total         Allowance          Accruing   Nonaccrual   Total     

Related

 

        Allowance

 

   

 

 

    

 

 

June 30, 2015

        

September 30, 2015

         

Commercial and industrial

 $ 64      —        64    $  —      

$

 56     —        56      $     —      

Construction and land development

   —        602      602      —        —       593     593        —      

Commercial real estate:

                 

Owner occupied

  828      244      1,072     84     1,036     237     1,273       130    

Other

  216      —        216     92   

   

 

 

    

 

 

Total commercial real estate

  1,044      244      1,288     176     1,036     237     1,273       130    

   

 

 

    

 

 

Total

 $ 1,108      846      1,954        $ 176    $ 1,092     830     1,922      $    130    

   

 

 

    

 

 

December 31, 2014

                 

Commercial and industrial

 $ 70      —        70    $  —      

$

 70     —        70      $     —      

Construction and land development

   —        605      605      —        —       605     605        —      

Commercial real estate:

                 

Owner occupied

  846      263      1,109     102     846     263     1,109       102    

Other

  591      —        591     92     591     —        591       92    

   

 

 

    

 

 

Total commercial real estate

  1,437      263      1,700     194     1,437     263     1,700       194    

Residential real estate:

                 

Consumer mortgages

  742      —        742      —       742     —        742        —      

Investment property

   —        154      154      —        —       154     154        —      

   

 

 

    

 

 

Total residential real estate

  742      154      896      —       742     154     896        —      

   

 

 

    

 

 

Total

 $ 2,249      1,022      3,271    $ 194    $ 2,249     1,022     3,271      $    194    

   

 

 

    

 

 

At JuneSeptember 30, 2015, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

The following table summarizes loans modified in a TDR during the respective periods both before and after their modification.

 

  Quarter ended June 30,   Six months ended June 30, 
            Pre-     Post -             Pre-     Post - 
            modification     modification             modification     modification 
      Number         outstanding     outstanding       Number         outstanding     outstanding 
      of         recorded     recorded       of         recorded     recorded  Quarter ended September 30, Nine months ended September 30, 
(Dollars in thousands)      contracts         investment     investment       contracts         investment     investment  

      Number      

 

of

 

contracts

 

Pre-

 

modification

 

outstanding

 

recorded

 

investment

 

Post -

 

      modification      

 

outstanding

 

recorded

 

investment

 

      Number      

 

of

 

contracts

 

Pre-

 

modification

 

outstanding

 

recorded

 

investment

 

Post -

 

  modification  

 

outstanding

 

recorded

 

investment

 

 

 

2015:

                  

Commercial and industrial

   1    $61     66     1    $61     66     —     $—      —     1   $61   66    

Construction and land development

   —       —       —       1     116     113     —      —      —     1   116   113    

Commercial real estate:

                  

Owner occupied

 1   216   218   1   216   218    

Other

   —       —       —       1     592     592     —      —      —     1   592   592    

 

 

Total commercial real estate

   —       —       —       1     592     592    1   216   218   2   808   810    

 

 

Total

   1    $61     66     3    $769     771    1   $216   218   4   $985   989    

 

 

2014:

      

Commercial real estate:

      

Other

 1   $590   592   1   $590   592    

 

Total commercial real estate

 1   590   592   1   590   592    

Residential real estate:

      

Consumer mortgages

 1   712   712   1   712   712    

 

Total residential real estate

 1   712   712   1   712   712    

 

Total

 2   $1,302   1,304   2   $1,302   1,304    

 

The majority of the loans modified in a TDR during the quarter and sixnine months ended JuneSeptember 30, 2015, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate. There were no loans modified in a TDR during the six months ended June 30, 2014.

The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. There were no loans modified in a TDR which had a payment default during the six months ended June 30, 2014.

 

                                                                                                            
  Quarter ended June 30,  Six months Ended June 30,  Quarter ended September 30,  Nine months Ended September 30,
(Dollars in thousands)  

Number of

Contracts

   

    Recorded

    investment(1)

      

Number of

Contracts

   

    Recorded

    investment(1)

      

  Number of  

 

Contracts

   

Recorded

 

investment(1)

      

  Number of  

 

Contracts

   

Recorded

 

investment(1)

    

2015:

                        

Commerical real estate:

            

Commercial real estate:

            

Owner occupied

   —      $—              $261        —      $—           1    $261      

     

 

 

   

     

 

 

   

Total commercial real estate

   —       —               261        —       —           1     261      

Residential real estate:

                        

Investment property

   —       —               150        —       —           1     150      

     

 

 

   

     

 

 

   

Total residential real estate

   —       —               150        —       —           1     150      

     

 

 

   

     

 

 

   

Total

   —      $—              $411        —      $—           2    $411      

     

 

 

   

     

 

 

   

2014:

            

Commercial real estate:

            

Owner occupied

   1    $272        1    $272      

     

 

 

   

Total commercial real estate

   1     272        1     272      

     

 

 

   

Total

   1    $272        1    $272      

     

 

 

   

(1) Amount as of applicable month end during the respective period for which there was a payment default.

NOTE 6: MORTGAGE SERVICING RIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

The Company has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income.

The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods.

 

    Quarter ended June 30,    Six Months Ended June 30, 
(Dollars in thousands)               2015                               2014                      2015                               2014           

 

 

MSRs, net:

        

Beginning balance

 $  2,355        $2,368         $  2,388    $2,350  

Additions, net

   154         105     265     203  

Amortization expense

   (199)         (84)     (333)     (164)  

Decrease (increase) in valuation allowance

   49         (43)     39     (43)  

 

 

Ending balance

 $  2,359        $2,346   $  2,359    $2,346  

 

 

Valuation allowance included in MSRs, net:

        

Beginning of period

 $  63        $—      $  53    $—     

End of period

   14         43     14     43  

 

 

Fair value of amortized MSRs:

        

Beginning of period

 $  3,066        $3,386   $  3,238    $3,452  

End of period

   3,014         3,228     3,014     3,228  

 

 

             Quarter ended September 30,                   Nine Months Ended September 30,       
(Dollars in thousands)    

 

2015

   2014     2015     2014 

 

 

MSRs, net:

          

Beginning balance

  $  2,359    $2,346    $  2,388    $2,350  

Additions, net

    174     168      440     371  

Amortization expense

    (171)     (89)      (505)     (253)  

Decrease (increase) in valuation allowance

    13     12      52     (31)  

 

 

Ending balance

  $  2,375    $2,437    $  2,375    $2,437  

 

 

Valuation allowance included in MSRs, net:

          

Beginning of period

  $  14    $43    $  53    $—     

End of period

    1     31      1     31  

 

 

Fair value of amortized MSRs:

          

Beginning of period

  $  3,014    $3,228    $  3,238    $3,452  

End of period

    3,052     3,314      3,052     3,314  

 

 

NOTE 7: DERIVATIVE INSTRUMENTS

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.

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 is negative, the Company owes the customer or counterparty and therefore, has no credit risk.

A summary of the Company’s interest rate swap agreements at JuneSeptember 30, 2015 and December 31, 2014 is presented below.

 

      Other   Other 
                Assets                     Liabilities         
      Estimated   Estimated       Other

 

          Assets          

   Other

 

        Liabilities        

 
(Dollars in thousands)          Notional           Fair Value   Fair Value       Notional   

Estimated

Fair Value

   

Estimated

Fair Value

 

 

 

June 30, 2015:

      

September 30, 2015:

      

Pay fixed / receive variable

  $4,492     —        552     $            4,404     —        524   

Pay variable / receive fixed

   4,492     552      —        4,404     524      —     

 

 

Total interest rate swap agreements

  $8,984     552      552     $8,808     524      524   

 

 

December 31, 2014:

            

Pay fixed / receive variable

  $4,667     —        634     $4,667     —        634   

Pay variable / receive fixed

   4,667     634      —        4,667     634      —     

 

 

Total interest rate swap agreements

  $9,334     634      634     $9,334     634      634   

 

 

NOTE 8: FAIR VALUE

Fair Value Hierarchy

“Fair value” is defined by ASC 820,Fair Value Measurements and Disclosures, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the sixnine months ended JuneSeptember 30, 2015, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company obtains pricing from third party pricing services. These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtain non-binding third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used with management.

Interest 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.

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of JuneSeptember 30, 2015 and December 31, 2014, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

 

(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)

         Amount   

Quoted Prices in

 

Active Markets

 

for

 

Identical Assets

 

(Level 1)

   

Significant

 

Other

 

        Observable        

 

Inputs

 

(Level 2)

   

Significant

 

    Unobservable    

 

Inputs

 

(Level 3)

 

 

 

June 30, 2015:

        

September 30, 2015:

        

Securities available-for-sale:

                

Agency obligations

  $60,219          60,219     —        $60,555          60,555     —      

Agency RMBS

   122,113          122,113     —         117,303          117,303     —      

State and political subdivisions

   70,574          70,574     —         72,284          72,284     —      

 

 

Total securities available-for-sale

   252,906          252,906     —         250,142          250,142     —      

Other assets(1)

   552          552     —         524          524     —      

 

 

Total assets at fair value

  $253,458          253,458     —        $      250,666          250,666     —      

 

 

Other liabilities(1)

  $552          552     —        $524          524     —      

 

 

Total liabilities at fair value

  $552          552     —        $524          524     —      

 

 

December 31, 2014:

                

Securities available-for-sale:

                

Agency obligations

  $60,249          60,249     —        $60,249          60,249     —      

Agency RMBS

   135,043          135,043     —         135,043          135,043     —      

State and political subdivisions

   72,311          72,311     —         72,311          72,311     —      

 

 

Total securities available-for-sale

   267,603          267,603     —         267,603          267,603     —      

Other assets(1)

   634          634     —         634          634     —      

 

 

Total assets at fair value

  $    268,237          268,237     —        $268,237          268,237     —      

 

 

Other liabilities(1)

  $634          634     —        $634          634     —      

 

 

Total liabilities at fair value

  $634          634     —        $634          634     —      

 

 

(1)Represents the fair value of interest rate swap agreements.

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value hierarchy.

Impaired Loans

Loans considered impaired under ASC 310-10-35,Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

The fair value of impaired loans were primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned

Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the loan’s carrying amount or the fair value less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense.

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of JuneSeptember 30, 2015 and December 31, 2014, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

 

(Dollars in thousands)  

Carrying

Amount

   

Quoted Prices in

Active Markets

for

Identical Assets

(Level 1)

   

Other

Observable

Inputs

(Level 2)

   

Significant    

Unobservable    

Inputs    

(Level 3)    

   

  Carrying

 

  Amount

   

Quoted Prices in

 

Active Markets

 

for

 

Identical Assets

 

(Level 1)

   

Other

 

  Observable  

 

Inputs

 

(Level 2)

   

Significant

 

 Unobservable 

 

Inputs

 

(Level 3)

 

 

 

June 30, 2015:

        

September 30, 2015:

        

Loans held for sale

  $              3,875          3,875     —       $3,551          3,551     —     

Loans, net(1)

   1,851          —       1,851      3,445          —       3,445   

Other real estate owned

   499          —       499      278          —       278   

Other assets(2)

   2,359          —       2,359      2,375          —       2,375   

 

 

Total assets at fair value

  $8,584          3,875     4,709     $9,649          3,551     6,098   

 

 

December 31, 2014:

                

Loans held for sale

  $1,974          1,974     —       $1,974          1,974     —     

Loans, net(1)

   3,077          —       3,077      3,077          —       3,077   

Other real estate owned

   534          —       534      534          —       534   

Other assets(2)

   2,388          —       2,388      2,388          —       2,388   

 

 

Total assets at fair value

  $7,973          1,974     5,999     $            7,973          1,974     5,999   

 

 

 

(1)Loans considered impaired under ASC 310-10-35,Receivables. This amount reflects the recorded investment in

   impaired loans, net of any related allowance for loan losses.

(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At JuneSeptember 30, 2015, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at JuneSeptember 30, 2015, the significant unobservable inputs used in the fair value measurements are presented below.

 

(Dollars in thousands)

  

    Carrying    

    Amount    

       Valuation Technique                    Significant Unobservable Input            Weighted    
Average
of Input
   

 Carrying 

 

 Amount 

      Valuation Technique           Significant Unobservable Input       

    Weighted    

 

    Average    

 

    of Input    

 

      

 

    

 

  

 

 

Nonrecurring:

                    

Impaired loans

  $            1,851     Appraisal  Appraisal discounts (%)   22.4%     $ 3,445      Appraisal    Appraisal discounts (%)  24.4%    

Other real estate owned

   499     Appraisal  Appraisal discounts (%)   26.7%      278      Appraisal    Appraisal discounts (%)  12.9%    

Mortgage servicing rights, net

   2,359     Discounted cash flow  Prepayment speed or CPR (%)   10.3%      2,375      Discounted cash flow    Prepayment speed or CPR (%)  10.2%    
      Discount rate (%)   10.0%    

           Discount rate (%)  10.0%    

 

Fair Value of Financial Instruments

ASC 825,Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Loans held for sale

Fair values of loans held for sale are determined using quoted secondary market prices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar remaining maturities.

Long-term debt

The fair value of the Company’s fixed rate long-term debt is estimated using discounted cash flows based on estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate long-term debt approximates its fair value.

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at JuneSeptember 30, 2015 and December 31, 2014 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits due to these products having no stated maturity. In addition, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.

 

           Fair Value Hierarchy       
             Fair Value Hierarchy 
(Dollars in thousands) 

Carrying

amount

     

Estimated

fair value

     

        Level 1

inputs

   

Level 2

inputs

   

Level 3

Inputs

    

    Carrying

 

    amount

   

    Estimated

 

    fair value

   

            Level 1

 

    inputs

   

    Level 2

 

    inputs

   

    Level 3

 

    Inputs

 

 

 

June 30, 2015:

            

September 30, 2015:

               

Financial Assets:

                           

Loans, net (1)

 $403,609       $408,327     $     —        $—      $        408,327    $         417,445     $         426,383     $   —       $       —       $         426,383    

Loans held for sale

 3,875        3,897       —         3,897     —          3,551        3,646        —          3,646        —      

Financial Liabilities:

                           

Time Deposits

 $231,634       $233,385     $     —        $233,385    $—       $   225,167     $         226,197     $   —       $       226,197     $         —      

Long-term debt

 7,217        7,217       —         7,217     —          7,217        7,217        —          7,217        —      

 

 

December 31, 2014:

                           

Financial Assets:

                           

Loans, net (1)

 $398,118       $407,839     $     —        $—      $407,839    $   398,118     $         407,839     $   —       $       —       $         407,839    

Loans held for sale

 1,974        2,044       —         2,044     —          1,974        2,044        —          2,044        —      

Financial Liabilities:

                           

Time Deposits

 $        249,126       $        251,365     $     —        $        251,365    $—       $   249,126     $         251,365     $   —       $       251,365     $         —      

Long-term debt

 12,217        12,558       —         12,558     —          12,217        12,558        —          12,558        —      

 

 

(1) Represents loans, net of unearned income and the allowance for loan losses.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of Auburn National Bancorporation, Inc. (the “Company”) and its wholly owned subsidiary, AuburnBank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and sixnine months ended JuneSeptember 30, 2015 and 2014, as well as the information contained in our Annual Reportannual report on Form 10-K for the year ended December 31, 2014 and our Quarterly Reportquarterly reports on Form 10-Q for the quarterquarters ended March 31, 2015 and June 30, 2015.

Special Notice Regarding Forward-Looking Statements

Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to, the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, achievements, or financial condition of the Company to be materially different from future results, performance, achievements, or financial condition expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

 

the effects of future economic, business, and market conditions and changes, domestic and foreign, including seasonality;

 

governmental monetary and fiscal policies;

 

legislative and regulatory changes, including changes in banking, securities, and tax laws, regulations and rules and their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost of FDIC insurance;

 

changes in accounting policies, rules, and practices;

 

the risks of changes in interest rates on the levels, composition, and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities, and the risks and uncertainty of the amounts realizable and the timing of dispositions of assets by the FDIC where we may have a participation or other interest;

 

changes in borrower credit risks and payment behaviors;

 

changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;

 

changes in the prices, values, and sales volumes of residential and commercial real estate;

the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services;

the failure of assumptions and estimates underlying the establishment of allowances for possible loan and other asset impairments, losses, and other estimates;

 

changes in technology or products that may be more difficult, costly, or less effective than anticipated;

 

the effects of war, or other conflicts, acts of terrorism, or other catastrophic events that may affect general economic conditions;

 

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 risk that our deferred tax assets could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss carry-forwards that we may be able to utilize for income tax purposes; and

 

the other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form 10-K for the year ended December 31, 2014 and subsequent quarterly and current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

Business

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the Company’s principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches in Auburn, Opelika, Hurtsboro, Notasulga, and Valley, Alabama. In-store branches are located in the Kroger in Opelika and Wal-Mart SuperCenter stores in both Auburn and Opelika. The Bank also operates a commercial loan production office in Phenix City, Alabama.

Summary of Results of Operations

 

           Quarter ended June 30,                 Six Months Ended June 30,                  Quarter ended September 30,                    Nine Months Ended September 30,         
(Dollars in thousands, except per share amounts)   2015   2014 2015   2014  

 

2015

   

 

2014

    

 

2015

   

 

2014

 

 

 

Net interest income (a)

 

$

   6,126    $5,565       $ 11,984    $11,159   

$

 6,011    $5,769    $ 17,995    $16,928  

Less: tax-equivalent adjustment

    338     312    673     636    341     321     1,014     957  

 

 

Net interest income (GAAP)

    5,788     5,253    11,311     10,523    5,670     5,448     16,981     15,971  

Noninterest income

    1,167     1,081    2,488     1,837    1,056     1,017     3,544     2,854  

 

 

Total revenue

    6,955     6,334    13,799     12,360    6,726     6,465     20,525     18,825  

Provision for loan losses

    —        —        —        (400  200     300     200     (100

Noninterest expense

    4,029     3,792    8,343     7,740    3,892     3,584     12,235     11,324  

Income tax expense

    776     683    1,444     1,340    724     709     2,168     2,049  

 

 

Net earnings

 

$

   2,150    $1,859   $ 4,012    $3,680   

$

 1,910    $1,872    $ 5,922    $5,552  

 

 

Basic and diluted earnings per share

 

$

   0.59    $0.51   $ 1.10    $1.01   

$

 0.52    $0.51    $ 1.63    $1.52  

 

 

(a) Tax-equivalent. See “Table 1 - Explanation of Non-GAAP Financial Measures.”

Financial Summary

The Company’s net earnings were $4.0$5.9 million for the first sixnine months of 2015, compared to $3.7$5.6 million for the first sixnine months of 2014. Basic and diluted earnings per share were $1.10$1.63 per share for the first sixnine months of 2015, compared to $1.01$1.52 per share for the first sixnine months of 2014.

Net interest income (tax-equivalent) was $12.0$18.0 million for the first sixnine months of 2015, an increase of 7%6% compared to the first sixnine months of 2014. The increase reflects management’s efforts to increase earnings by shifting the Company’s asset mix through loan growth, focusing on deposit pricing, and repaying higher-cost wholesale funding. Net interest income (tax-equivalent) for the first sixnine months of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) would have been $11.8$17.8 million for the first sixnine months of 2015, an increase of 5% compared to the first sixnine months of 2014. Average loans were $401.3$406.3 million in the first sixnine months of 2015, an increase of $23.1$24.4 million or 6%, from the first sixnine months of 2014. Average deposits were $702.6$706.8 million in the first sixnine months of 2015, an increase of $21.1$26.2 million or 3%4%, from the first sixnine months of 2014.

The Company recorded no$0.2 million in provision for loan losses for the first sixnine months of 2015, compared to a negative provision of $0.4$0.1 million for the first sixnine months of 2014. Provision expense reflects the absolute level of loans, loan growth, the credit quality of the loan portfolio, and the amount of net charge-offs.

Noninterest income was $2.5$3.5 million for the first sixnine months of 2015, compared to $1.8$2.9 million in the first sixnine months of 2014. The increase was primarily due to an increase in income from bank-owned life insurance of $0.3 million related to death benefits recognized in the first sixnine months of 2015 and an increase in net securities gains (losses) of $0.3$0.5 million due to other-than-temporary impairment charges recognizedlosses realized on the sale of securities in the first quarternine months of 20142014. These increases were partially offset by a decrease in mortgage lending of $0.1 million as servicing fees, net of related to available-for-sale, agency residential mortgage-backed securities the Company intended to sell at March 31, 2014, and subsequently sold in early April 2014.amortization expense declined.

Noninterest expense was $8.3$12.2 million in the first sixnine months of 2015, compared to $7.7$11.3 million in the first sixnine months of 2014. The increase was primarily due to prepayment penalties on long-term debt of $0.4 million incurred in the first sixnine months of 2015 when the company repaid $5.0 million of long-term debt with a weighted averagean interest rate of 3.59%, an increase in OREO expense, net of $0.2 million due to gains realized on the sale of certain OREO properties in the first nine months of 2014, and an increase in other noninterest expense of $0.2 million.

Income tax expense was $1.4$2.2 million for the first sixnine months of 2015, compared to $1.3$2.0 million for the first sixnine months of 2014. The Company’s income tax expense for the first sixnine months of 2015 reflects an effective income tax rate of 26.47%26.80%, compared to 26.69%26.96% for the first sixnine months of 2014. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

In the first sixnine months of 2015, the Company paid cash dividends of $1.6$2.4 million, or $0.44$0.66 per share. The Company’s balance sheet remains “well capitalized” under current regulatory guidelines with a total risk-based capital ratio of 17.78%17.33% and a Tier 1 leverage ratio of 10.39%10.37% at JuneSeptember 30, 2015.

In the secondthird quarter of 2015, net earnings were $2.2$1.9 million, or $0.59$0.52 per share, compared to $1.9 million, or $0.51 per share, for the secondthird quarter of 2014. Net interest income (tax-equivalent) was $6.1$6.0 million for the secondthird quarter of 2015, an increase of 10%4% compared to the second quarter of 2014. Net interest income (tax-equivalent) for the second quarter of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) would have been $5.9 million for the second quarter of 2015, an increase of 6% compared to the secondthird quarter of 2014. The Company recorded no$0.2 million in provision for loan losses in the second quarter of 2015 and 2014. Noninterest income was $1.2 million in the secondthird quarter of 2015 compared to $0.3 million in third quarter 2014. Noninterest income was $1.1 million in the secondthird quarter of 2015, compared to $1.0 million in the third quarter of 2014. Noninterest expense was $3.9 million in the third quarter of 2015, compared to $3.6 million in the third quarter of 2014. The increase was primarily due to an increase in mortgage lending incomeOREO expense, net due to gains realized on the sale of $0.1 million. Noninterest expense was $4.0 millioncertain OREO properties in the secondthird quarter of 2015, compared to $3.8 million in the second quarter of 2014. The increase was primarily due to an increase in net expenses related to OREO of $0.1 million and an increase in other noninterest expense of $0.1 million. Income tax expense was approximately $0.8 million for the second quarter of 2015, compared to $0.7 million for the secondthird quarter of 2015 and 2014. The Company’s effective tax rate for the secondthird quarter of 2015 was 26.52%27.49%, compared to 26.87%27.47% in the secondthird quarter of 2014.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At JuneSeptember 30, 2015 and December 31, 2014, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic

conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2014, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period and continues to use this methodology.

Prior to June 30, 2014, the Company calculated average losses for all loan segments using a rolling 8 quarter historical period (except for the commercial real estate loan segment, which used a 6 quarter historical period). If the Company continued to calculate average losses for all loan segments other than commercial real estate using a rolling 8 quarter historical period and for the commercial real estate segment using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.0 million at June 30, 2014. Other than the changes discussed above, the Company has not made any material changes to its calculation of historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity securities with an unrealized loss, the Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses).

For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

Fair Value Determination

U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value, including investments classified as available-for-sale and derivatives. ASC 820,Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. For more information regarding fair value measurements and disclosures, please refer to Note 8, Fair Value, of the consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates, prepayments, market volatility, and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired, with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other OREO.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at JuneSeptember 30, 2015. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

 

  Six Months Ended June 30,   Nine Months Ended September 30, 
                        2015                                                2014                          2015   2014 
(Dollars in thousands)  Average
Balance
   Yield/
Rate
   Average
Balance
   Yield/
Rate
   

Average

 

Balance

   

    Yield/    

 

Rate

   

Average

 

Balance

   

    Yield/    

 

Rate

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Loans and loans held for sale

    $404,106     5.10%      $380,449     5.07%      $      408,954     5.01%      $      384,370     5.05%  

Securities - taxable

   193,694     2.07%     210,223     2.29%     189,750     2.06%     210,680     2.26%  

Securities - tax-exempt

   68,115     5.86%     60,954     6.19%     68,549     5.82%     61,500     6.12%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

   261,809     3.06%     271,177     3.17%     258,299     3.06%     272,180     3.13%  

Federal funds sold

   60,789     0.21%     59,385     0.19%     59,639     0.22%     54,866     0.19%  

Interest bearing bank deposits

   24,449     0.23%     5,171     0.66%     27,589     0.23%     7,350     0.45%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   751,153     3.83%     716,182     3.91%     754,481     3.79%     718,766     3.90%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Deposits:

                

NOW

   114,739     0.31%     106,812     0.32%     114,973     0.30%     105,734     0.32%  

Savings and money market

   207,027     0.40%     189,830     0.51%     212,300     0.39%     190,223     0.51%  

Certificates of deposits less than $100,000

   93,933     1.06%     104,079     1.20%     92,510     1.04%     102,755     1.17%  

Certificates of deposits and other time deposits of $100,000 or more

   145,124     1.45%     157,509     1.59%     142,575     1.44%     156,833     1.58%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

   560,823     0.76%     558,230     0.91%     562,358     0.75%     555,545     0.90%  

Short-term borrowings

   4,167     0.48%     3,440     0.53%     3,758     0.50%     3,605     0.52%  

Long-term debt

   9,372     3.53%     12,217     3.43%     8,645     3.45%     12,217     3.43%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   574,362     0.81%     573,887     0.96%     574,761     0.79%     571,367     0.95%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income and margin (tax-equivalent)

    $11,984     3.22%      $11,159     3.14%      $17,995     3.19%      $16,928     3.15%  

  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income and Margin

Net interest income (tax-equivalent) was $12.0$18.0 million for the first sixnine months of 2015, compared to $11.2$16.9 million for the first sixnine months of 2014. This increase reflects management’s efforts to increase earnings by shifting the Company’s asset mix through loan growth, focusing on deposit pricing, and repaying higher-cost wholesale funding. Net interest income (tax-equivalent) for the first sixnine months of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) would have been $11.8$17.8 million for the first sixnine months of 2015, an increase of 5% compared to the first sixnine months of 2014.

The tax-equivalent yield on total interest-earning assets decreased by 811 basis points in the first sixnine months of 2015 from the first sixnine months of 2014 to 3.83%3.79%. This decrease was primarily due to declining yields on securities and increased pricing competition for quality loan opportunities in our markets, which has limited the Company’s ability to increase yields on new and renewed loans.

The cost of total interest-bearing liabilities decreased 1516 basis points in the first sixnine months of 2015 from the first sixnine months of 2014 to 0.81%0.79%. The net decrease was largely a result of the continued shift in our funding mix, as we increased our lower-cost interest bearing demand deposits (NOW accounts), and savings and money market accounts and concurrently reduced balances of higher-cost certificates of deposits and long-term debt.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations. The Company’s net interest margin could experience pressure due to lower reinvestment yields in the securities portfolio given the current interest rate environment, increased competition for quality loan opportunities, and fewer opportunities to reduce our cost of funds due to the low level of deposit rates currently.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. The Company recorded no$0.2 million in provision for loan losses for the first sixnine months of 2015, compared to a negative provision of $0.4$0.1 million for the first sixnine months of 2014. Provision expense reflects the absolute level of loans, loan growth, the credit quality of the loan portfolio, and the amount of net charge-offs.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance for loan losses as a percentage of total loans was 1.21% at September 30, 2015, compared to 1.20% at both June 30, 2015 andDecember 31, 2014. While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industry) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for loan losses.

Noninterest Income

 

                Quarter ended June 30,                              Six Months Ended June 30,                        Quarter ended September 30,                 Nine Months Ended September 30,       
(Dollars in thousands)  2015   2014   2015   2014   

 

2015

   2014   2015   2014 

 

 

Service charges on deposit accounts

    $209    $219       $415    $432       $209    $228       $624    $660   

Mortgage lending income

   457     348      791     734      362     534      1,153     1,268   

Bank-owned life insurance

   112     125      513     251      116     124      629     375   

Securities gains (losses), net

   —       12      3     (295)     11     (235)     14     (530)  

Other

   389     377      766     715      358     366      1,124     1,081   

 

 

Total noninterest income

    $1,167    $1,081       $2,488    $1,837       $1,056    $1,017       $3,544    $2,854   

 

 

Service charges on deposit accounts decreased primarily due to a decline in insufficient funds charges, reflecting changes in customer behavior and spending patterns.

The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are netted against the commission expense associated with these originations. The Company’s normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the associated mortgage servicing rights (“MSRs”) when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing fee income is reported net of any related amortization expense.

MSRs are also evaluated for impairment on a quarterly basis. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s mortgage lending income.

 

                Quarter ended June 30,                              Six Months Ended June 30,                        Quarter ended September 30,                 Nine Months Ended September 30,       
(Dollars in thousands)  2015   2014   2015   2014   

 

    2015

     2014       2015   2014 

 

 

Origination income

    $386    $254     $644    $494       $298    $386       $942    $880   

Servicing fees, net

   22     137      108     283      51     136      159     419   

Decrease (increase) in MSR valuation allowance

   49     (43)     39     (43)     13     12      52     (31)  

 

 

Total mortgage lending income

    $      457    $      348     $      791    $      734       $362    $534       $1,153    $1,268   

 

 

The increasedecrease in mortgage lending income was primarily due to an increase in origination income and changes in the MSR valuation allowance. These improvements were partially offset by a decrease in servicing fees, net of related amortization expense. Although servicing fees were largely unchanged, amortization expense increased due to faster prepayment speeds.

Income from bank-owned life insurance increased in the first sixnine months of 2015, compared to the first sixnine months of 2014 due to non-taxable death benefits received. Income from bank-owned life insurance decreased in the secondthird quarter of 2015, compared to the secondthird quarter of 2014 due to claims reducing the number of policies outstanding. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e. increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings on these policies are generally not taxable.

Net securities gains (losses) consist of realized gains and losses on the sale of securities and other-than-temporary impairment charges. Net gains realized on the sale of securities were $11,000 and $14,000, respectively, for the third quarter and first nine months of 2015, compared to net losses realized on the sale of securities of $235,000 and $197,000, respectively, for the third quarter and first nine months of 2014. The Company recorded an other-than-temporary impairment charge of $333,000 in the first quarter of 2014 related to securities that management intended to sell at March 31, 2014. Subsequent to March 31, 2014, the Company sold available-for-sale agency residential mortgage-backed securities (“RMBS”) with a fair value of $18.9 million and realized the expected loss of approximately $333,000. The Company incurred no other-than-temporary impairment charges in the first sixnine months of 2015.

Noninterest Expense

 

     ��          Quarter ended June 30,                              Six Months Ended June 30,                        Quarter ended September 30,             Nine Months Ended September 30,   
(Dollars in thousands)  2015   2014   2015   2014   

 

    2015

       2014       2015       2014 

 

 

Salaries and benefits

    $2,291    $2,221       $4,559      $4,502       $2,255    $2,199       $6,814    $6,701   

Net occupancy and equipment

   362     341      720     693      405     346      1,125     1,039   

Professional fees

   218     225      419     431      191     204      610     635   

FDIC and other regulatory assessments

   118     129      243     274      120     125      363     399   

Other real estate owned, net

   1     (62)     18     56      1     (237)     19     (181)  

Prepayment penalty on long-term debt

   —       —        362     —         —        —         362     —      

Other

   1,039     938      2,022     1,784      920     947      2,942     2,731   

 

 

Total noninterest expense

    $    4,029    $    3,792       $    8,343      $    7,740       $3,892    $3,584       $12,235    $11,324   

 

 

The increase in salaries and benefits expense reflected routine annual increases.

The increase in net occupancy and equipment expense reflects increases in various items, including repairs and maintenance and depreciation expense.

The decrease in FDIC and other regulatory assessments expense was primarily due to a decrease in the Bank’s quarterly assessment rate as several variables utilized by the FDIC in calculating our deposit insurance assessments improved.

The decrease in OREO expense, net during the first six months of 2015, compared to the first six months of 2014, was primarily due to a decrease in expenses as the carrying amount and number of properties have declined. The increase in OREO expense, net during the second quarter of 2015, compared to the second quarter of 2014, was primarily due to gains realized on the sale of certain OREO properties in the secondthird quarter and first nine months of 2014.

During the first sixnine months of 2015, the Company repaid $5.0 million of long-term debt with a weighted averagean interest rate of 3.59% and incurred prepayment penalties of $0.4 million.

The increase in otherOther noninterest expense wasincreased in the first nine months of 2015, compared to the first nine months of 2014 due to various items, including computer software and marketing and business development expenses.

Income Tax Expense

Income tax expense was $1.4$2.2 million for the first sixnine months of 2015, compared to $1.3$2.0 million for the first sixnine months of 2014. The Company’s income tax expense for the first sixnine months of 2015 reflects an effective income tax rate of 26.47%26.80%, compared to 26.69%26.96% for the first sixnine months of 2014. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $252.9$250.1 million at JuneSeptember 30, 2015, a decrease of $14.7$17.5 million, or 5%7%, compared to $267.6 million at December 31, 2014. This decline was primarily due to a decrease of $12.9$17.9 million in the amortized cost basis of securities available-for-sale as proceeds from sales, calls, and maturitiesprincipal repayments on mortgage-backed securities were not reinvested and a $1.8reinvested. This decrease was partially offset by $0.4 million change in unrealized gains (losses) on securities available-for-sale, reflecting a decreasean increase in prices as long-term interest rates increaseddeclined during the first sixnine months of 2015.

The average tax-equivalent yields earned on total securities were 3.06% in the first sixnine months of 2015 and 3.17%3.13% in the first sixnine months of 2014.

Loans

 

 

                           2015                          

                                           2014                                            2015   2014 
(In thousands) 

Second

Quarter

  

First

Quarter

   

Fourth

Quarter

 

Third

Quarter

 

Second

Quarter

    

 

Third

 

      Quarter      

 

Second

 

      Quarter      

 

First

 

      Quarter      

   

Fourth

 

      Quarter      

 

Third

 

      Quarter      

 

 

 

Commercial and industrial

 

$

 57,310   52,536    54,329    52,868    52,054     $ 47,925   57,310   52,536      54,329   52,868   

Construction and land development

  38,854   37,925    37,298    34,189    32,461      41,592   38,854   37,925      37,298   34,189   

Commercial real estate

  184,124   182,871    192,006    190,077    187,241      201,449   184,124   182,871      192,006   190,077   

Residential real estate

  115,039   111,265    107,641    106,555    102,921      117,863   115,039   111,265      107,641   106,555   

Consumer installment

  13,632   12,478    12,335    11,535    11,686      14,362   13,632   12,478      12,335   11,535   

 

 

Total loans

  408,959   397,075    403,609    395,224    386,363      423,191   408,959   397,075      403,609   395,224   

Less: unearned income

  (464)  (462)   (655)   (622)   (537)     (619 (464 (462)     (655 (622)  

 

 

Loans, net of unearned income

 $ 408,495   396,613    402,954    394,602    385,826     $     422,572   408,495   396,613      402,954   394,602   

 

 

Total loans, net of unearned income, were $408.5$422.6 million at JuneSeptember 30, 2015, compared to $403.0 million at December 31, 2014. Four loan categories represented the majority of the loan portfolio at JuneSeptember 30, 2015: commercial real estate (45%(48%), residential real estate (28%), construction and land development (9%(10%) and commercial and industrial (14%(11%). Approximately 23%24% of the Company’s commercial real estate loans were classified as owner-occupied at JuneSeptember 30, 2015.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $16.3$16.4 million, or 4% of total loans, at JuneSeptember 30, 2015, compared to $16.5 million, or 4% of total loans, at December 31, 2014. For

residential real estate mortgage loans with a consumer purpose, $1.9$1.0 million required interest-only payments at JuneSeptember 30, 2015, andcompared to $1.9 million at December 31, 2014. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.

Purchased loan participations included in the Company’s loan portfolio were approximately $1.5 million at JuneSeptember 30, 2015 and December 31, 2014. All purchased loan participations are underwritten by the Company independent of the selling bank. In addition, all loans, including purchased loan 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”.

The average yield earned on loans and loans held for sale was 5.10%5.01% in the first sixnine months of 2015 and 5.07%5.05% in the first sixnine months of 2014.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions on our borrowers’ cash flows, real estate market sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks by adhering to loan to value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital accounts; or 20% of capital accounts, if loans in excess of 10% are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $17.1$17.4 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $15.4$15.7 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At JuneSeptember 30, 2015, the Bank had no loan relationships exceeding these limits.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at JuneSeptember 30, 2015 (and related balances at December 31, 2014).

 

 September 30,   December 31,     
(In thousands)  

    June 30,

    2015

   

 December 31,

 2014

  

 

2015  

 

 

2014    

 

 

 

Lessors of 1 to 4 family residential properties

  $             45,591    $             41,152    $ 46,448   $ 41,152   

Multi-family residential properties

   36,298     35,961     44,787    35,961   

Shopping centers

   30,898     30,016     37,520    30,016   

 

 

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Company’s estimate of probable losses inherent in the loan portfolio. At JuneSeptember 30, 2015 and December 31, 2014, the allowance for loan losses was $4.9$5.1 million and $4.8 million, respectively, which management believed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the secondthird quarter of 2015 and the previous four quarters is presented below.

 

   2015  2014 
     

 

 

 
   2015     2014     Third            Second       First         Fourth       Third      
(Dollars in thousands)   

Second

Quarter

   

First

Quarter

     

Fourth

Quarter

  

Third

Quarter

  

Second

Quarter

   

 

  Quarter        

  

 

  Quarter    

 

 

  Quarter    

 

 

    Quarter    

 

 

  Quarter     

 

 

Balance at beginning of period

 $   4,722       4,836     4,754   4,728  4,711  $      4,886       4,722   4,836    4,754   4,728   

Charge-offs:

                      

Commercial and industrial

    —          (58)    —     —     (46)   —          —     (58   —      —     

Construction and land development

    —          —         —     —      —          —      —      1    —     

Residential real estate

    —          (60)    (79)  (287)  (41)   (26)      —     (60  (79 (287)  

Consumer installment

    (5)      (17)    (6)  (39)  (8)   (23)      (5 (17  (6 (39)  

 

Total charge-offs

    (5)      (135)    (84)  (326)  (95)   (49)      (5 (135  (84 (326)  

Recoveries

    169       21     16   52   112    90       169   21    16   52   

 

Net recoveries (charge-offs)

    164       (114)    (68)  (274)  17    41       164   (114  (68 (274)  

Provision for loan losses

    —          —       150   300   —      200       —      —      150   300   

 

Ending balance

 $           4,886                4,722             4,836           4,754           4,728  $  5,127       4,886   4,722    4,836   4,754   
                   

 

as a % of loans

    1.20 %    1.19     1.20   1.20   1.23    1.21 %   1.20   1.19    1.20   1.20   

as a % of nonperforming loans

    360 %    377     433   281   169    140 %   360   377    433   281   

Net (recoveries) charge-offs as % of average loans (a)

    (0.16)%    0.11     0.07   0.28   (0.02)   (0.04)%   (0.16 0.11    0.07   0.28   

 

(a) Net (recoveries) charge-offs are annualized.

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.20%1.21% at JuneSeptember 30, 2015, andcompared to 1.20% at December 31, 2014. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment in their entirety either improve or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgement about information available to them at the time of their examinations.

Net recoveries were $50,000,$91,000, or 0.02%0.03% of average loans in the first sixnine months of 2015, compared to net charge-offs of $140,000,$414,000, or 0.07%0.14% of average loans in the first sixnine months of 2014. In the first sixnine months of 2015, the Company recovered $140,000 related to the full repayment of a B note that was previously charged-off as part of a troubled debt restructuring.

At JuneSeptember 30, 2015, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 360%140%, compared to 433% at December 31, 2014. The decrease in this ratio was primarily due to one commercial real estate loan placed on nonaccrual during the first nine months of 2015 with a recorded investment of $2.1 million.

At JuneSeptember 30, 2015 and December 31, 2014, the Company’s recorded investment in loans considered impaired was $2.3$4.4 million and $3.3 million, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $0.5$1.0 million and $0.2 million at each respective date.

Nonperforming Assets

At JuneSeptember 30, 2015 and December 31, 2014, respectively, the Company had $1.9$3.9 million and $1.7 million in nonperforming assets. The increase was primarily due to one nonperforming commercial real estate loan with a recorded investment of $2.1 million at September 30, 2015.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the secondthird quarter of 2015 and the previous four quarters.

 

   2015       2014   2015   2014 
(Dollars in thousands)   

Second  

    Quarter      

  

First

      Quarter      

   Fourth
    Quarter    
   

Third

      Quarter      

  

    Second

      Quarter    

   

Third

 

Quarter

 

Second

 

Quarter

   

First

 

Quarter

   

Fourth

 

Quarter

   

Third

 

Quarter

 

 

Nonperforming assets:

                        

Nonaccrual loans

 $  1,359      1,251      1,117    1,690  2,804  $   3,650   1,359     1,251     1,117     1,690   

Other real estate owned

    499      499        534    1,215  1,584     278   499     499     534     1,215   

 

Total nonperforming assets

 $  1,858      1,750      1,651    2,905  4,388  $       3,928           1,858             1,750             1,651             2,905   

 

as a % of loans and other real estate owned

   0.45 %  0.44      0.41    0.73  1.13     0.93 %  0.45     0.44     0.41     0.73   

as a % of total assets

   0.23 %  0.22      0.21    0.37  0.57     0.48 %  0.23     0.22     0.21     0.37   

Nonperforming loans as a % of total loans

   0.33 %  0.32      0.28    0.43  0.73     0.86 %  0.33     0.32     0.28     0.43   

Accruing loans 90 days or more past due

 $  442             —       76  71  $   112   442     2     —        76   

 

The table below provides information concerning the composition of nonaccrual loans for the secondthird quarter of 2015 and the previous four quarters.

 

   2015     2014   2015   2014 
(In thousands)   Second    
      Quarter          
  First
      Quarter      
  Fourth
      Quarter      
   Third
      Quarter      
  Second
      Quarter      
   

Third

 

Quarter

   

Second

 

Quarter

   

First

 

Quarter

   

Fourth

 

Quarter

   

Third

 

Quarter

 

 

Nonaccrual loans:

                        

Commercial and industrial

 $  46      51      55    56  52  $   81     46     51     55     56   

Construction and land development

   602      618      605    615  963     594     602     618     605     615   

Commercial real estate

   684      405      263    482  486     2,790     684     405     263     482   

Residential real estate

   27      177      194    533  1,303     185     27     177     194     533   

Consumer installment

    —        —         —      4  —        —       —       —       —         

 

Total nonaccrual loans

 $  1,359      1,251      1,117    1,690  2,804  $           3,650             1,359             1,251             1,117             1,690   
                   

 

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection. At JuneSeptember 30, 2015 and December 31, 2014, respectively, the Company had $1.4$3.7 million and $1.1 million in loans on nonaccrual.

At JuneSeptember 30, 2015, there were $0.4 million$112,000 in loans 90 days or more past due and still accruing interest compared to none at December 31, 2014.

The table below provides information concerning the composition of other real estate owned for the secondthird quarter of 2015 and the previous four quarters.

 

   2015     2014       2015   2014 
(In thousands)   Second    
      Quarter          
  

First

      Quarter      

  Fourth
      Quarter      
   Third
      Quarter      
  Second
      Quarter      
   

Third

 

Quarter

   

Second

 

Quarter

   

First

 

Quarter

   

Fourth

 

Quarter

   

Third

 

Quarter

 

 

Other real estate owned:

                        

Commercial:

                        

Developed lots

   252      252      252    882  1,260  $   252     252     252     252     882   

Residential

    247      247       282    333  324     26     247     247     282     333   

 

Total other real estate owned

 $      499          499      534    1,215  1,584  $                  278                499                499                534             1,215   
                   

 

At JuneSeptember 30, 2015 and December 31, 2014, respectively, the Company held $0.3 million and $0.5 million in OREO, which we acquired from borrowers.

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower have caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential problem loans, which are not included in nonperforming assets, amounted to $6.6$6.5 million, or 1.6%1.5% of total loans at JuneSeptember 30, 2015, compared to $7.8 million, or 2.0% of total loans at December 31, 2014.

The table below provides information concerning the composition of potential problem loans for the secondthird quarter of 2015 and the previous four quarters.

 

   2015     2014        2015   2014 
(In thousands)         Second      
      Quarter      
 

First  

      Quarter        

  Fourth  
      Quarter        
  Third  
      Quarter        
  Second    
      Quarter          
   

Third

 

Quarter

   

Second

 

Quarter

   

First

 

Quarter

   

Fourth

 

Quarter

   

Third

 

Quarter

 

 

Potential problem loans:

                       

Commercial and industrial

 $  383     385    376      429    397  $   329     383     385     376     429   

Construction and land development

   627     768    556      567    575     578     627     768     556     567   

Commercial real estate

   503     880    884      887    975     501     503     880     884     887   

Residential real estate

   4,898     5,682    5,917      5,898    4,754     4,964     4,898     5,682     5,917     5,898   

Consumer installment

    167     112     114      116    111     128     167     112     114     116   

 

Total potential problem loans

 $  6,578     7,827    7,847      7,897    6,812  $               6,500             6,578             7,827             7,847             7,897   
                

 

At JuneSeptember 30, 2015, approximately $0.3$0.2 million, or 4.7%3.8%, of total potential problem loans were past due at least 30 days, but less than 90 days. At JuneSeptember 30, 2015, the remaining balance of potential problem loans were current or past due less than 30 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than 90 days, for the secondthird quarter of 2015 and the previous four quarters.

 

   2015     2014        2015   2014 
(In thousands)         Second      
      Quarter      
        First        
      Quarter         
  Fourth    
      Quarter          
  Third  
      Quarter        
  Second    
      Quarter          
   

Third

 

Quarter

   

Second

 

Quarter

   

First

 

Quarter

   

Fourth

 

Quarter

   

Third

 

Quarter

 

 

Performing loans past due 30 to 89 days:

                        

Commercial and industrial

 $  6      82    168      245    277  $   37     6     82     168     245   

Construction and land development

   12      319    210      190    192     —       12     319     210     190   

Commercial real estate

   —        —      201      203    —        182     —       —       201     203   

Residential real estate

   415      1,417    2,231      221    832     335     415     1,417     2,231     221   

Consumer installment

    23      25     45      59    110     20     23     25     45     59   

 

Total

 $  456      1,843    2,855      918    1,411  $                  574                    456             1,843             2,855                918   
                   

 

Deposits

Total deposits were $716.0$724.3 million at JuneSeptember 30, 2015, compared to $693.4 million at December 31, 2014. Noninterest bearing deposits were $149.7$155.6 million, or 20.9%21.5% of total deposits, at JuneSeptember 30, 2015, compared to $130.2 million, or 18.8% of total deposits at December 31, 2014.

The average rate paid on total interest-bearing deposits was 0.76%0.75% in the first sixnine months of 2015 and 0.91%0.90% in the first sixnine months of 2014.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none outstanding at JuneSeptember 30, 2015, compared to $38.0 million and none outstanding at December 31, 2014. Securities sold under agreements to repurchase totaled $2.9$3.4 million and $4.7 million at JuneSeptember 30, 2015 and December 31, 2014, respectively.

The average rate paid on short-term borrowings was 0.48%0.50% in the first sixnine months of 2015 and 0.53%0.52% in the first sixnine months of 2014.

Long-term debt includes FHLB advances with an original maturity greater than one year and subordinated debentures related to trust preferred securities. The Bank had no long-term FHLB advances outstanding at JuneSeptember 30, 2015, compared to $5.0 million at December 31, 2014. In March 2015, the Bank repaid a $5.0 million FHLB advance and incurred prepayment penalties of $0.4 million. At both JuneSeptember 30, 2015 and December 31, 2014, the Bank had $7.2 million in junior subordinated debentures related to trust preferred securities outstanding. The debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.

The average rate paid on long-term debt was 3.53%3.45% in the first sixnine months of 2015 and 3.43% in the first sixnine months of 2014.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $77.1$79.6 million and $75.8 million as of JuneSeptember 30, 2015 and December 31, 2014, respectively. The change from December 31, 2014 was primarily driven by net earnings of $4.0 million, partially offset by cash dividends paid of $1.6$5.9 million and an other comprehensive lossincome due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $1.2$0.3 million, partially offset by cash dividends paid of $2.4 million.

The Company’s tier 1 leverage ratio was 10.39%10.37%, common equity tier 1 (“CET1”) risk-based capital ratio was 15.42%15.01%, tier 1 risk-based capital ratio was 16.76%16.29%, and total risk-based capital ratio was 17.78%17.33% at JuneSeptember 30, 2015. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” Based on current regulatory standards, the Company is classified as “well capitalized.”

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity (“EVE”) model.

Earnings simulation. Management believes that interest rate risk is best estimated by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

 

  +/- 20% for a gradual change of 400 basis points
  +/- 15% for a gradual change of 300 basis points
  +/- 10% for a gradual change of 200 basis points
  +/- 5% for a gradual change of 100 basis points

At JuneSeptember 30, 2015, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

Economic Value of Equity. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

 

  45% for an instantaneous change of +/- 400 basis points
  35% for an instantaneous change of +/- 300 basis points
  25% for an instantaneous change of +/- 200 basis points
  15% for an instantaneous change of +/- 100 basis points

At JuneSeptember 30, 2015, our EVE model indicated that we were in compliance with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Company’s established liquidity, loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. At JuneSeptember 30, 2015 and December 31, 2014, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

Liquidity Risk Management

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are separate legal entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements.

The primary source of funding and the primary source of liquidity for the Company include dividends received from the Bank, and secondarily proceeds from the possible issuance of common stock or other securities. Primary uses of funds by the Company include dividends paid to stockholders, stock repurchases, and interest payments on junior subordinated debentures issued by the Company in connection with trust preferred securities. The junior subordinated debentures are presented as long-term debt in the accompanying consolidated balance sheets and the related trust preferred securities are currently includible in Tier 1 Capital for regulatory capital purposes.

Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities, sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At JuneSeptember 30, 2015, the Bank had a remaining available line of credit with the FHLB of $232.3$237.1 million. At JuneSeptember 30, 2015, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments and Contingencies

At JuneSeptember 30, 2015, the Bank had outstanding standby letters of credit of $8.2 million and unfunded loan commitments outstanding of $49.4$58.7 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securities available-for-sale, or draw on its available credit facilities.

Mortgage lending activities

Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other matters.

As of JuneSeptember 30, 2015, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $357.1$359.5 million. Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

In the first sixnine months of 2015, as a result of the representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, the Company was required to repurchase one loantwo loans with aan aggregate principal balance of $169,000$287,000 that waswere current as to principal and interest at the time of repurchase and reimburse Fannie Mae approximately $37,000 related to a make whole request. At JuneSeptember 30, 2015, the Company had no pending repurchase or make whole requests.

Also, in the first quarter of 2015, the Company voluntarily repurchased ten investment property loans with an aggregate principal balance of $4.0 million that were made to the same borrower and were current as to principal and interest. At the date of repurchase, the aggregate fair value of these ten investment property loans was greater than the repurchase price required by Fannie Mae. As part of its quality control review procedures, one of these ten loans was self-reported to Fannie Mae in 2014 for possible breaches related to representation and warranty provisions. After further investigation, the Company identified certain underwriting deficiencies for nine additional investment property loans that were related to the same borrower. All ten loans were originated and sold to Fannie Mae. The Company submitted a voluntary repurchase request to Fannie Mae in January 2015 for all ten investment property loans, which was approved. In response to the quality control review findings related to this one borrower, the Company has put additional controls in place for investment property loans originated for sale, including additional quality control reviews and management approvals. Furthermore, management performed additional reviews of investment property loans originated for sale, including a review of the number of loans to one borrower, and does not believe there is any material exposure related to representation and warranty provisions for these loans.

We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of JuneSeptember 30, 2015, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

Effects of Inflation and Changing Prices

The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with U.S. generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

The following Accounting Standards Updates (“Updates” or “ASUs”) have been issued by the FASB but are not yet effective.

 

 ASU 2014-09,Revenue from Contracts with Customers (Topic 606);Customers;

 ASU 2015-02,Amendments to the Consolidation Analysis (Topic 810); andAnalysis;

ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs;

 ASU 2015-05,Customer’s Accounting for Fees Paid in a Cloud Computing ArrangementArrangement; and Disclosures

ASU 2015-14,Revenue from Contracts with Customers – Deferral of Disposals of Components of an Entity.the Effective Date.

Information about these pronouncements is described in more detail below.

ASU 2014-09,Revenue from Contracts with Customers (Topic 606), provides a comprehensive and converged standard on revenue recognition. The new guidance is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance also requires new qualitative and quantitative disclosures related to revenue from contracts with customers. TheseIn August 2015, FASB issued ASU 2015-14,Revenue from Contracts with Customers – Deferral of the Effective Date,which defers the effective date by one year. With the deferral, these changes are effective for the Company in the first quarter 2017of 2018 with retrospective application to each prior reporting period or with the cumulative effect of initially applying this Update at the date of initial application. Early adoption is not permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2015-02,Amendments to the Consolidation Analysis, (Topic 810), affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. These changes are effective for the Company in the first quarter of 2016. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU No. 2015-03,Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, rather than as an asset. These changes are effective for the Company in the first quarter of 2016 with retrospective application to each prior reporting period. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2015-05,Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. These changes are effective for the Company in the first quarter of 2016. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

Table 1 – Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation and calculation of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

 

 

2015

 

2014

   2015   2014 
(In thousands) Second
        Quarter        
  

First

        Quarter        

 Fourth
        Quarter        
 

Third

        Quarter        

  Second
        Quarter        
(in thousands)   

Third

 

Quarter

   

Second

 

Quarter

   

First

 

Quarter

   

Fourth

 

Quarter

   

Third

 

Quarter

 

    

 

 

 

Net interest income (GAAP)

 $ 5,788  5,523  5,482  5,448  5,253 $   5,670     5,788     5,523      5,482     5,448  

Tax-equivalent adjustment

  338  335  331  321  312    341     338     335      331     321  

    

 

 

 

Net interest income (Tax-equivalent)

 $       6,126            5,858            5,813            5,769            5,565 $               6,011                 6,126                 5,858      5,813     5,769  

    

 

 

 
    

      Six Months Ended June 30,      

                 Nine Months Ended September 30,   
(In thousands)    2015  2014               2015   2014 

 

Net interest income (GAAP)

       $ 11,311  10,523        $   16,981     15,971  

Tax-equivalent adjustment

        673  636           1,014     957  

 

Net interest income (Tax-equivalent)

       $         11,984          11,159        $   17,995     16,928  

 

Table 2 - Selected Quarterly Financial Data

 

  

2015

    

2014

  Second  First    Fourth  Third  Second   2015   2014 
(Dollars in thousands, except per share amounts)      Quarter          Quarter            Quarter          Quarter          Quarter       Third
Quarter
 Second
Quarter
   First
Quarter
   Fourth
Quarter
   Third
Quarter
 

    

 

 

Results of Operations

                      

Net interest income (a)

  $         6,126     5,858    5,813  5,769  5,565 $   6,011   6,126     5,858     5,813     5,769  

Less: tax-equivalent adjustment

  338     335    331  321  312    341   338     335     331     321  

 

Net interest income (GAAP)

  5,788     5,523    5,482  5,448  5,253    5,670   5,788     5,523     5,482     5,448  

Noninterest income

  1,167     1,321    1,079  1,017  1,081    1,056   1,167     1,321     1,079     1,017  

 

Total revenue

  6,955     6,844    6,561  6,465  6,334    6,726   6,955     6,844     6,561     6,465  

Provision for loan losses

  —         —        150  300  —        200    —         —         150     300  

Noninterest expense

  4,029     4,314    3,780  3,584  3,792    3,892   4,029     4,314     3,780     3,584  

Income tax expense

  776     668    735  709  683    724   776     668     735     709  

 

Net earnings

  $         2,150     1,862    1,896  1,872  1,859 $   1,910   2,150     1,862     1,896     1,872  

 

Per share data:

                      

Basic and diluted net earnings

  $           0.59     0.51    0.52  0.51  0.51 $   0.52   0.59     0.51     0.52     0.51  

Cash dividends declared

  0.22     0.22    0.215  0.215  0.215    0.22   0.22     0.22     0.215     0.215  

Weighted average shares outstanding:

                      

Basic and diluted

  3,643,413     3,643,365    3,643,328  3,643,328  3,643,295        3,643,455         3,643,413           3,643,365           3,643,328           3,643,328  

Shares outstanding

    3,643,428     3,643,378    3,643,328  3,643,328  3,643,328

Shares outstanding, at period end

    3,643,478   3,643,428     3,643,378     3,643,328     3,643,328  

Book value

  $         21.15     21.28    20.80  20.09  19.84 $   21.85   21.15     21.28     20.80     20.09  

Common stock price

                      

High

  $         25.75     25.25    24.64  24.92  25.00 $   27.80   25.75     25.25     24.64     24.92  

Low

  24.51     23.15    22.10  23.17  22.90    25.78   24.51     23.15     22.10     23.17  

Period end

  25.73     24.85    23.64  24.64  24.02

Period end:

    26.47   25.73     24.85     23.64     24.64  

To earnings ratio

  12.08x   12.12    11.59  12.38  12.19    12.37 12.08     12.12     11.59     12.38  

To book value

  122%  117    114  123  121    121 122     117     114     123  

Performance ratios:

                      

Return on average equity

  10.91%  9.68    10.21  10.19  10.72    9.75 10.91     9.68     10.21     10.19  

Return on average assets

  1.09%  0.93    0.98  0.97  0.96    0.95 1.09     0.93     0.98     0.97  

Dividend payout ratio

  37.29%  43.14    41.35  42.16  42.16    42.31 37.29     43.14     41.35     42.16  

Asset Quality:

                      

Allowance for loan losses as a % of:

                      

Loans

  1.20%  1.19    1.20  1.20  1.23    1.21 1.20     1.19     1.20     1.20  

Nonperforming loans

  360%  377    433  281  169    140 360     377     433     281  

Nonperforming assets as a % of:

                      

Loans and other real estate owned

  0.45%  0.44    0.41  0.73  1.13

Loans and foreclosed properties

    0.93 0.45     0.44     0.41     0.73  

Total assets

  0.23%  0.22    0.21  0.37  0.57    0.48 0.23     0.22     0.21     0.37  

Nonperforming loans as a % of total loans

  0.33%  0.32    0.28  0.43  0.73    0.86 0.33     0.32     0.28     0.43  

Net (recoveries) charge-offs as a % of average loans (c)

  (0.16)%  0.11    0.07  0.28  (0.02)

Annualized net (recoveries) charge-offs as a % of average loans

    (0.04) (0.16)     0.11     0.07     0.28  

Capital Adequacy:

                      

CET 1 risk-based capital ratio

  15.42%  15.38    n/a  n/a  n/a    15.01 15.42     15.38     n/a     n/a  

Tier 1 risk-based capital ratio

  16.76%  16.83    17.45  17.43  17.45    16.29 16.76     16.83     17.45     17.43  

Total risk-based capital ratio

  17.78%  17.84    18.54  18.50  18.53    17.33 17.78     17.84     18.54     18.50  

Tier 1 Leverage Ratio

  10.39%  10.13    10.32  10.26  10.07    10.37 10.39     10.13     10.32     10.26  

Other financial data:

                      

Net interest margin (a)

  3.29%  3.15    3.14  3.16  3.09    3.13 3.29     3.15     3.14     3.16  

Effective income tax rate

  26.52%  26.40    27.94  27.47  26.87    27.49 26.52     26.40     27.94     27.47  

Efficiency ratio (b)

  55.24%  60.09    54.85  52.81  57.06    55.07 55.24     60.09     54.85     52.81  

Selected average balances:

                      

Securities

  $    259,376     264,268    265,616  274,155  274,305 $   251,393   259,376     264,268     265,616     274,155  

Loans, net of unearned income

  402,482     400,161    397,875  389,392  378,994    416,210   402,482     400,161     397,875     389,392  

Total assets

  791,889     802,062    777,548  771,685  772,326    806,764   791,889     802,062     777,548     771,685  

Total deposits

  699,453     705,746    682,812  678,738  684,613    714,960   699,453     705,746     682,812     678,738  

Long-term debt

  7,217     11,550    12,217  12,217  12,217    7,217   7,217     11,550     12,217     12,217  

Total stockholders’ equity

  78,791     76,915    74,307  73,499  69,367    78,387   78,791     76,915     74,307     73,499  

Selected period end balances:

                      

Securities

  $    252,906     262,141    267,603  264,827  276,953 $   250,142   252,906     262,141     267,603     264,827  

Loans, net of unearned income

  408,495     396,613    402,954  394,602  385,826    422,572   408,495     396,613     402,954     394,602  

Allowance for loan losses

  4,886     4,722    4,836  4,754  4,728    5,127   4,886     4,722     4,836     4,754  

Total assets

  806,233     790,224    789,231  781,136  775,128    817,994   806,233     790,224     789,231     781,136  

Total deposits

  715,994     698,336    693,390  680,763  684,181    724,311   715,994     698,336     693,390     680,763  

Long-term debt

  7,217     7,217    12,217  12,217  12,217    7,217   7,217     7,217     12,217     12,217  

Total stockholders’ equity

  77,053     77,544    75,799  73,193  72,291    79,599   77,053     77,544     75,799     73,193  

 

(a) Tax-equivalent. See “Table 1 - Explanation of Non-GAAP Financial Measures.”

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

(c) Net (recoveries) charge-offs are annualized.NM - not meaningful

Table 3 - Selected Financial Data

 

         Six Months Ended June 30,           Nine Months Ended September 30,   
(Dollars in thousands, except per share amounts)   2015            2014          2015 2014 

 

Results of Operations

         

Net interest income (a)

 $  11,984     11,159 $   17,995   16,928  

Less: tax-equivalent adjustment

    673     636    1,014   957  

 

Net interest income (GAAP)

   11,311     10,523    16,981   15,971  

Noninterest income

    2,488     1,837    3,544   2,854  

 

Total revenue

   13,799     12,360    20,525   18,825  

Provision for loan losses

   —         (400)    200   (100)  

Noninterest expense

   8,343     7,740    12,235   11,324  

Income tax expense

    1,444     1,340    2,168   2,049  

 

Net earnings

 $  4,012     3,680 $   5,922   5,552  
       

 

Per share data:

         

Basic and diluted net earnings

 $  1.10     1.01 $   1.63   1.52  

Cash dividends declared

   0.44     0.43    0.66   0.645  

Weighted average shares outstanding:

         

Basic and diluted

   3,643,389     3,643,228          3,643,411             3,643,262  

Shares outstanding, at period end

   3,643,428     3,643,328    3,643,478   3,643,328  

Book value

 $  21.15     19.84 $   21.85   20.09  

Common stock price

         

High

 $  25.75     25.80 $   27.80   25.80  

Low

   23.15     22.90    23.15   22.90  

Period end

   25.73     24.02    26.47   24.64  

To earnings ratio

   12.08x   12.19    12.37 12.38  

To book value

   122%  121    121 123  

Performance ratios:

         

Return on average equity

   10.31%  10.91    10.12 10.65  

Return on average assets

   1.01%  0.96    0.99 0.96  

Dividend payout ratio

   40.00%  42.57    40.49 42.43  

Asset Quality:

         

Allowance for loan losses as a % of:

         

Loans

   1.20%  1.23    1.21 1.20  

Nonperforming loans

   360%  169    140 281  

Nonperforming assets as a % of:

         

Loans and other real estate owned

   0.45%  1.13    0.93 0.73  

Total assets

   0.23%  0.57    0.48 0.37  

Nonperforming loans as a % of total loans

   0.33%  0.73    0.86 0.43  

Annualized net (recoveries) charge-offs as a % of average loans

   (0.02)%  0.07    (0.03) 0.14  

Capital Adequacy:

         

CET 1 risk-based capital ratio

   15.42%  n/a    15.01 n/a  

Tier 1 risk-based capital ratio

   16.76%  17.45    16.29 17.43  

Total risk-based capital ratio

   17.78%  18.53    17.33 18.50  

Tier 1 Leverage Ratio

   10.39%  10.07    10.37 10.26  

Other financial data:

         

Net interest margin (a)

   3.22%  3.14    3.19 3.15  

Effective income tax rate

   26.47%  26.69    26.80 26.96  

Efficiency ratio (b)

   57.65%  59.56    56.80 57.24  

Selected average balances:

         

Securities

 $  261,809     271,177 $   258,299   272,180  

Loans, net of unearned income

   401,327     378,163    406,343   381,947  

Total assets

   796,947     767,268    800,255   768,756  

Total deposits

   702,582     681,487    706,754   680,560  

Long-term debt

   9,372     12,217    8,645   12,217  

Total stockholders’ equity

   77,858     67,472    78,037   69,503  

Selected period end balances:

         

Securities

 $  252,906     276,953 $   250,142   264,827  

Loans, net of unearned income

   408,495     385,826    422,572   394,602  

Allowance for loan losses

   4,886     4,728    5,127   4,754  

Total assets

   806,233     775,128    817,994   781,136  

Total deposits

   715,994     684,181    724,311   680,763  

Long-term debt

   7,217     12,217    7,217   12,217  

Total stockholders’ equity

    77,053     72,291    79,599   73,193  

 

(a) Tax-equivalent. See “Table 1 - Explanation of Non-GAAP Financial Measures.”

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

Table 4 - Average Balances and Net Interest Income Analysis

 

 Quarter ended June 30,    Quarter ended September 30, 
      2015      2014                2015             2014 
(Dollars in thousands)     Average    
Balance
     Interest
    Income/
    Expense
   Yield/
  Rate
 Average
Balance
     Interest
    Income/
    Expense
   Yield/
  Rate
    

Average

Balance

   

    Interest

    Income/

    Expense

   

Yield/

Rate

   

Average

Balance

   

    Interest

    Income/

    Expense

   

Yield/

Rate

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Interest-earning assets:

                        

Loans and loans held for sale (1)

  $ 405,093      $5,217   5.17%    $ 382,100      $4,766   5.00%   $   418,491      $5,090     4.83%   $   392,084      $4,953     5.01%  

Securities - taxable

   191,181    949   1.99%     213,777    1,214   2.28%      181,991     939     2.05%      211,580     1,171     2.20%  

Securities - tax-exempt (2)

   68,195    992   5.83%     60,528    919   6.09%      69,402     1,005     5.75%      62,575     943     5.98%  

   

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   259,376    1,941   3.00%     274,305    2,133   3.12%      251,393     1,944     3.07%      274,155     2,114     3.06%  

Federal funds sold

   47,215    28   0.24%     63,604    30   0.19%      57,375     37     0.26%      45,975     25     0.22%  

Interest bearing bank deposits

   35,370    23   0.26%     2,670     —      —          33,766     20     0.23%      11,637     8     0.27%  

   

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-earning assets

   747,054      $7,209   3.87%     722,679      $6,929   3.85%      761,025      $7,091     3.70%      723,851      $7,100     3.89%  

Cash and due from banks

   13,083        12,690         12,971          12,808      

Other assets

   31,752        36,957         32,768          35,026      

   

 

      

 

      

 

        

 

     

Total assets

  $   791,889       $ 772,326        $   806,764       $   771,685      

   

 

      

 

      

 

        

 

     

Interest-bearing liabilities:

                        

Deposits:

                        

NOW

  $ 114,803      $88   0.31%    $ 107,287      $86   0.32%   $   115,433      $88     0.30%   $   103,614      $82     0.31%  

Savings and money market

   202,309    183   0.36%     190,057    243   0.51%      222,675     211     0.38%      190,995     247     0.51%  

Certificates of deposits less than $100,000

   92,423    238   1.03%     103,518    305   1.18%      89,711     227     1.00%      100,150     282     1.12%  

Certificates of deposits and other time deposits of $100,000 or more

   142,526    511   1.44%     157,585    621   1.58%      137,557     491     1.42%      155,504     610     1.56%  

   

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

   552,061    1,020   0.74%     558,447    1,255   0.90%      565,376     1,017     0.71%      550,263     1,221     0.88%  

Short-term borrowings

   3,678    4   0.44%     3,404    5   0.59%      2,955     4     0.54%      3,929     5     0.50%  

Long-term debt

   7,217    59   3.28%     12,217    104   3.41%      7,217     59     3.24%      12,217     105     3.41%  

   

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

   562,956      $1,083   0.77%     574,068      $1,364   0.95%      575,548      $1,080     0.74%      566,409      $1,331     0.93%  

Noninterest-bearing deposits

   147,392        126,166         149,584          128,475      

Other liabilities

   2,750        2,725         3,245          3,302      

Stockholders’ equity

   78,791        69,367         78,387          73,499      

   

 

      

 

      

 

        

 

     

Total liabilities and stockholders’ equity

  $ 791,889       $   772,326      $       806,764       $       771,685      

   

 

      

 

      

 

        

 

     

Net interest income and margin (tax-equivalent)

      $        6,126       3.29%        $        5,565       3.09%         $      6,011     3.13%         $      5,769       3.16%  

    

 

 

     

 

 

      

 

 

      

 

 

 

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.

Table 5 - Average Balances and Net Interest Income Analysis

 

 Six Months Ended June 30,  Nine Months Ended September 30, 
      2015      2014          2015           2014 
(Dollars in thousands)     Average    
Balance
     Interest
    Income/
    Expense
   Yield/
  Rate
 Average
Balance
 

    Interest

    Income/
    Expense

   Yield/
  Rate
  

Average

Balance

 

    Interest

    Income/

    Expense

 

Yield/

Rate

 

Average

Balance

 

    Interest

    Income/

    Expense

 

Yield/

Rate

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Interest-earning assets:

                  

Loans and loans held for sale (1)

  $ 404,106      $10,223   5.10%    $ 380,449      $9,556   5.07%   $ 408,954     $15,313   5.01%   $ 384,370     $14,509   5.05%  

Securities - taxable

   193,694    1,989   2.07%     210,223    2,390   2.29%    189,750   2,928   2.06%    210,680   3,561   2.26%  

Securities - tax-exempt (2)

   68,115    1,978   5.86%     60,954    1,870   6.19%    68,549   2,983   5.82%    61,500   2,813   6.12%  

   

 

 

    

 

 

   

 

 

   

 

 

 

Total securities

   261,809    3,967   3.06%     271,177    4,260   3.17%    258,299   5,911   3.06%    272,180   6,374   3.13%  

Federal funds sold

   60,789    62   0.21%     59,385    55   0.19%    59,639   99   0.22%    54,866   80   0.19%  

Interest bearing bank deposits

   24,449    28   0.23%     5,171    17   0.66%    27,589   48   0.23%    7,350   25   0.45%  

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   751,153      $14,280   3.83%     716,182      $13,888   3.91%    754,481     $21,371   3.79%    718,766   $20,988   3.90%  

Cash and due from banks

   13,439        12,762       13,281      12,777    

Other assets

   32,355        38,324       32,493      37,213    

   

 

      

 

     

 

     

 

   

Total assets

  $   796,947       $   767,268        $ 800,255       $ 768,756    

   

 

      

 

     

 

     

 

   

Interest-bearing liabilities:

                  

Deposits:

                  

NOW

  $ 114,739      $174   0.31%    $ 106,812      $170   0.32%   $ 114,973     $262   0.30%   $ 105,734     $252   0.32%  

Savings and money market

   207,027    409   0.40%     189,830    480   0.51%    212,300   620   0.39%    190,223   728   0.51%  

Certificates of deposits less than $100,000

   93,933    492   1.06%     104,079    617   1.20%    92,510   719   1.04%    102,755   899   1.17%  

Certificates of deposits and other time deposits of $100,000 or more

   145,124    1,047   1.45%     157,509    1,245   1.59%    142,575   1,538   1.44%    156,833   1,854   1.58%  

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

   560,823    2,122   0.76%     558,230    2,512   0.91%    562,358   3,139   0.75%    555,545   3,733   0.90%  

Short-term borrowings

   4,167    10   0.48%     3,440    9   0.53%    3,758   14   0.50%    3,605   14   0.52%  

Long-term debt

   9,372    164   3.53%     12,217    208   3.43%    8,645   223   3.45%    12,217   313   3.43%  

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   574,362      $2,296   0.81%     573,887      $2,729   0.96%    574,761     $3,376   0.79%    571,367   $4,060   0.95%  

Noninterest-bearing deposits

   141,759        123,257       144,396      125,015    

Other liabilities

   2,968        2,652       3,061      2,871    

Stockholders’ equity

   77,858        67,472       78,037      69,503    

   

 

      

 

     

 

     

 

   

Total liabilities and stockholders’ equity

  $ 796,947       $ 767,268      $     800,255     $     768,756    

   

 

      

 

     

 

     

 

   

Net interest income and margin (tax-equivalent)

      $      11,984       3.22%        $      11,159       3.14%       $      17,995       3.19%       $      16,928     3.15%  

    

 

 

     

 

 

    

 

 

    

 

 

 

 

(1)Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
(2)Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.

Table 6 - Loan Portfolio Composition

 

     2015    2014 
  

 

 

 
 2015   2014      

 

Third  

 

 

    Second   

 

 

    First   

   

 

    Fourth   

 

 

    Third    

 
(In thousands) Second
Quarter
   

First

Quarter

   Fourth
Quarter
   Third
Quarter
   Second
Quarter
      

 

Quarter  

 

 

    Quarter   

 

 

    Quarter   

   

 

    Quarter   

 

 

    Quarter    

 

 

 

Commercial and industrial

 $ 57,310      52,536      54,329      52,868      52,054     $     47,925   57,310   52,536      54,329   52,868   

Construction and land development

  38,854      37,925      37,298      34,189      32,461        41,592   38,854   37,925      37,298   34,189   

Commercial real estate

  184,124      182,871      192,006      190,077      187,241        201,449   184,124   182,871      192,006   190,077   

Residential real estate

  115,039      111,265      107,641      106,555      102,921        117,863   115,039   111,265      107,641   106,555   

Consumer installment

  13,632      12,478      12,335      11,535      11,686        14,362   13,632   12,478      12,335   11,535   

 

 

Total loans

  408,959      397,075      403,609      395,224      386,363        423,191   408,959   397,075      403,609   395,224   

Less: unearned income

  (464)     (462)     (655)     (622)     (537)       (619 (464 (462    (655 (622)  

 

 

Loans, net of unearned income

  408,495      396,613      402,954      394,602      385,826        422,572   408,495   396,613      402,954   394,602   

Less: allowance for loan losses

  (4,886)     (4,722)     (4,836)     (4,754)     (4,728)       (5,127 (4,886 (4,722    (4,836 (4,754)  

 

 

Loans, net

 $       403,609          391,891          398,118          389,848          381,098     $       417,445   403,609   391,891      398,118   389,848   

 

 

Table 7 - Allowance for Loan Losses and Nonperforming Assets

 

          2015         2014 
 2015 2014        

 

 

 
(Dollars in thousands) Second
Quarter
 First
Quarter
 Fourth
Quarter
   

Third

Quarter

     Second
  Quarter
  

 

Third          

 

Quarter          

 

  Second    

 

  Quarter    

 

    First  

 

    Quarter  

   

    Fourth    

 

    Quarter    

 

    Third   

 

    Quarter   

 

 

 

Allowance for loan losses:

                 

Balance at beginning of period

 $ 4,722    4,836     4,754      4,728      4,711    $ 4,886        4,722   4,836      4,754   4,728   

Charge-offs:

                 

Commercial and industrial

   —       (58)     —         —         (46)     —           —     (58    —      —     

Construction and land development

   —        —             —         —         —           —      —        1    —     

Residential real estate

   —       (60)    (79)     (287)     (41)    (26)        —     (60    (79 (287)  

Consumer installment

  (5)   (17)    (6)     (39)     (8)    (23)       (5 (17    (6 (39)  

 

 

Total charge-offs

  (5)   (135)    (84)     (326)     (95)    (49)       (5 (135    (84 (326)  

Recoveries

  169    21     16      52      112     90        169   21      16   52   

 

 

Net recoveries (charge-offs)

  164    (114)    (68)     (274)     17     41        164   (114    (68 (274)  

Provision for loan losses

   —        —        150      300      —        200         —      —        150   300   

 

 

Ending balance

 $ 4,886    4,722     4,836      4,754      4,728    $ 5,127        4,886   4,722      4,836   4,754   

 

 

as a % of loans

  1.20  1.19     1.20      1.20      1.23     1.21  %   1.20   1.19      1.20   1.20   

as a % of nonperforming loans

  360  377     433      281      169     140  %   360   377      433   281   

Net (recoveries) charge-offs as % of avg. loans (a)

  (0.16) 0.11     0.07      0.28      (0.02)  

Net (recoveries) charge-offs as % of average loans (a)

  (0.04)%   (0.16 0.11      0.07   0.28   

 

 

Nonperforming assets:

                 

Nonaccrual loans

 $ 1,359    1,251     1,117      1,690      2,804    $ 3,650        1,359   1,251      1,117   1,690   

Other real estate owned

  499    499     534      1,215      1,584     278        499   499      534   1,215   

 

 

Total nonperforming assets

 $         1,858          1,750             1,651              2,905              4,388    $ 3,928        1,858   1,750      1,651   2,905   

 

 

as a % of loans and other real estate owned

  0.45  0.44     0.41      0.73      1.13   

as a % of loans and foreclosed properties

  0.93 %   0.45   0.44      0.41   0.73   

as a % of total assets

  0.23  0.22     0.21      0.37      0.57     0.48 %   0.23   0.22      0.21   0.37   

Nonperforming loans as a % of total loans

  0.33  0.32     0.28      0.43      0.73     0.86 %   0.33   0.32      0.28   0.43   

Accruing loans 90 days or more past due

 $ 442         —         76      71    $ 112       442   2      —     76   

 

 

(a) Net charge-offs (recoveries) charge-offs are annualized.

Table 8 - Allocation of Allowance for Loan Losses

 

 2015 2014  2015     2014 
 Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter  Third Quarter    Second Quarter     First Quarter     Fourth Quarter     Third Quarter 
(Dollars in thousands)  Amount   %*  Amount   %*  Amount   %*  Amount   %* Amount   %*  Amount   %*    Amount   %*     Amount   %*     Amount   %*     Amount   %* 

 

 

Commercial and industrial

 $ 681     14.0    $ 644     13.2    $ 639     13.5    $ 669     13.4    $ 639     13.5    

$

 504     11.3      $ 681     14.0      $    644     13.2      $    639     13.5      $    669     13.4    

Construction and land development

  640     9.4     830     9.6     974     9.2     895     8.7     907     8.4     627     9.8       640     9.6       830     9.6       974     9.1       895     8.6    

Commercial real estate

  2,146     45.0     1,888     46.1     1,928     47.6     1,935     48.1     1,913     48.5     2,679     47.6       2,146     45.0       1,888     46.1       1,928     47.6       1,935     48.1    

Residential real estate

  1,180     28.1     1,153     28.0     1,119     26.7     1,083     27.0     1,095     26.6     1,103     27.9       1,180     28.1       1,153     28.0   ��   1,119     26.7       1,083     27.0    

Consumer installment

  239     3.3     207     3.1     176     3.1     172     2.9     174     3.0     214     3.4       239     3.3       207     3.1       176     3.1       172     2.9    

 

 

Total allowance for loan losses

 $     4,886     $     4,722     $     4,836     $     4,754     $     4,728     $ 5,127      $ 4,886      $    4,722      $    4,836      $    4,754    

 

 

* Loan balance in each category expressed as a percentage of total loans.

Table 9 - CDs and Other Time Deposits of $100,000 or More

 

(Dollars in thousands)  JuneSeptember 30, 2015 

 

 

Maturity of:

  

3 months or less

  $22,15019,369   

Over 3 months through 6 months

   19,5769,763   

Over 6 months through 12 months

   19,30422,571   

Over 12 months

   79,42585,211   

 

 

Total CDs and other time deposits of $100,000 or more

  $          140,455136,914   

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK MANAGEMENT” and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation of its management, including its Chief Executive Officer and Principal Financial and Accounting Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the Company’s Chief Executive Officer and Principal Financial and Accounting Officer concluded that the Company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the Company files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form 10-K for the year ended December  31, 2014.

ITEM 1A.   RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

Not applicable.

ITEM 6.  EXHIBITS

 

Exhibit

Number

  

Description

3.1  Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*
3.2  Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **
31.1  Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of theSarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.
31.2  Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of theSarbanes-Oxley Act of 2002, by David A. Hedges, Senior Vice President, Controller and Chief Financial Officer (Principal Financial and Accounting Officer).
32.1  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of theSarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.***
32.2  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of theSarbanes-Oxley Act of 2002, by David A. Hedges, Senior Vice President, Controller and Chief Financial Officer (Principal Financial and Accounting Officer).***
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document

 

 

*Incorporated by reference from Registrant’s Form 10-Q dated September 30, 2002.

 

** **Incorporated by reference from Registrant’s Form 10-K dated March 31, 2008.

 

** ***The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q are “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 AUBURN NATIONAL BANCORPORATION, INC.
 

(Registrant)

                      (Registrant)
Date:            July 31,October 30, 2015                                              By:          /s/ E. L. Spencer, Jr.                            
 
 E. L. Spencer, Jr.
 
 President, Chief Executive Officer and
 
 Chairman of the Board
Date:            July 31,October 30, 2015                                              By:          /s/ David A. Hedges                            
 
 David A. Hedges
 
 SVP, Controller and Chief Financial Officer
 
 (Principal Financial and Accounting Officer)