UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
 
20549
 
 
 
FORM
10-Q
 
(Mark One)
☒
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended
June 30, 20222023
☐
 
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
(State or other jurisdiction of
incorporation or organization)
63-0885779
(I.R.S. Employer
Identification No.)
100 N. Gay Street
Auburn
,
Alabama
 
36830
 
(
334
)
821-9200
 
(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.
 
Yes
☒
 
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
 
Yes
☒
 
No
☐
Indicate by check
 
mark whether the
 
registrant is a
 
large accelerated filer,
 
an accelerated filer,
 
a non-accelerated filer,
 
a smaller reporting
company
 
or
 
an
 
emerging
 
growth
 
company.
 
See
 
the
 
definitions
 
of
 
“large
 
accelerated
 
filer,”
 
“accelerated
 
filer,”
 
“smaller
 
reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☐
If
 
an
 
emerging
 
growth
 
company,
 
indicate
 
by
 
check
 
mark
 
if
 
the
 
registrant
 
has
 
elected
 
not
 
to
 
use
 
the
 
extended
 
transition
 
period
 
for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
 
No
☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
AUBN
NASDAQ
 
Global Market
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 August 3, 20227, 2023
Common Stock, $0.01 par value per share
3,508,5823,497,430
 
shares
 
AUBURN NATIONAL BANCORPORATION, INC. AND
 
SUBSIDIARIES
INDEX
 
PAGE
Item 1
3
 
4
5
6
7
8
Item 2
 
2729
49
50
51
52
53
54
55
Item 3
56
Item 4
56
Item 1
56
Item 1A
56
Item 2
57
Item 3
57
Item 4
57
Item 5
57
Item 6
58
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
PART
 
1.
 
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
June 30,
December 31,
(Dollars in thousands, except share data)
20222023
20212022
Assets:
Cash and due from banks
$
19,70119,855
$
11,21011,608
Federal funds sold
62,3131,196
77,4209,300
Interest-bearing bank deposits
51,1008,485
67,6296,346
Cash and cash equivalents
133,11429,536
156,25927,254
Securities available-for-sale
 
429,220394,079
421,891405,304
Loans held for sale
989520,411
1,376
Loans, net of unearned income
440,872
458,364504,458
Allowance for loancredit losses
(4,716)(6,634)
(4,939)(5,765)
Loans, net
436,156513,777
453,425498,693
Premises and equipment, net
45,33045,896
41,72446,575
Bank-owned life insurance
19,83119,960
19,63519,952
Other assets
19,61122,882
10,84026,110
Total assets
$
1,084,2511,026,130
$
1,105,1501,023,888
Liabilities:
Deposits:
Noninterest-bearing
 
$
311,208298,479
$
316,132311,371
Interest-bearing
691,490652,263
678,111638,966
Total deposits
1,002,698950,742
994,243950,337
Federal funds purchased and securities sold under agreements to repurchase
4,1472,167
3,4482,551
Accrued expenses and other liabilities
1,2992,245
3,7332,959
Total liabilities
1,008,144955,154
1,001,424955,847
Stockholders' equity:
Preferred stock of $
.01
 
par value; authorized
200,000
 
shares;
no shares issued
0—
0—
Common stock of $
.01
 
par value; authorized
8,500,000
 
shares;
issued
3,957,135
 
shares
39
39
Additional paid-in capital
3,7963,800
3,7943,797
Retained earnings
111,994117,781
109,974116,600
Accumulated other comprehensive (loss) income,loss, net
(28,419)(39,072)
891(40,920)
Less treasury stock, at cost -
447,195457,723
 
shares and
436,650453,683
 
at June 30, 20222023
and December 31, 2021,2022, respectively
(11,303)(11,572)
(10,972)(11,475)
Total stockholders’ equity
76,10770,976
103,72668,041
Total liabilities and stockholders’
 
equity
$
1,084,2511,026,130
$
1,105,1501,023,888
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2022
20212023
2022
20212023
2022
Interest income:
Loans, including fees
$
6,019
$
4,691
$
5,11211,773
$
9,541
$
10,290
Securities:
Taxable
1,826
1,547
1,0093,691
2,883
1,958Tax-exempt
Tax-exempt404
415
444807
834
896
Federal funds sold and interest-bearing bank deposits
144
278
28357
341
56
Total interest income
8,393
6,931
6,59316,628
13,599
13,200
Interest expense:
Deposits
1,482
552
6142,600
1,137
1,280
Short-term borrowings
23
5
431
10
8
Total interest expense
1,505
557
6182,631
1,147
1,288
Net interest income
6,888
6,374
5,97513,997
12,452
11,912
Provision for loancredit losses
0(362)
(600)—
(296)
(250)
(600)
Net interest income after provision for loancredit
 
losses
7,250
6,374
6,57514,293
12,702
12,512
Noninterest income:
Service charges on deposit accounts
154
146
138308
288
270
Mortgage lending
142
187
424235
440
973
Bank-owned life insurance
68
97
99224
196
202Other
Other427
418
470816
832
868
Total noninterest income
791
848
1,1311,583
1,756
2,313
Noninterest expense:
Salaries and benefits
3,038
2,976
2,8975,965
5,926
5,748
Net occupancy and equipment
787
727
4391,586
1,161
877
Professional fees
299
239
326637
469
582Other
Other1,701
1,116
1,2543,241
2,403
2,399
Total noninterest expense
5,825
5,058
4,91611,429
9,959
9,606
Earnings before income taxes
2,216
2,164
2,7904,447
4,499
5,219
Income tax expense
288
363
504555
617
927
Net earnings
$
1,928
$
1,801
$
2,2863,892
$
3,882
$
4,292
Net earnings per share:
Basic and diluted
$
0.55
$
0.51
$
0.651.11
$
1.10
$
1.21
Weighted average shares
 
outstanding:
Basic and diluted
3,500,064
3,513,353
3,554,8713,501,098
3,515,991
3,560,554
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
5
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2022
20212023
2022
20212023
2022
Net earnings
$
1,928
$
1,801
$
2,2863,892
$
3,882
$
4,292
Other comprehensive (loss) income, net of tax:
Unrealized net (loss) gain on securities
(3,615)
(10,964)
1,7881,848
(29,310)
(3,344)
Other comprehensive (loss) income
(3,615)
(10,964)
1,7881,848
(29,310)
(3,344)
Comprehensive (loss) income
$
(1,687)
$
(9,163)
$
4,0745,740
$
(25,428)
$
948
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Unaudited)
 
Accumulated
Common
Additional
other
Shares
Common
paid-in
Retained
 
comprehensive
Treasury
(Dollars in thousands, except share data)
Outstanding
Stock
capital
earnings
(loss) income
stock
Total
Quarter ended June 30, 2023
Balance, March 31, 2023
3,500,879
$
39
$
3,798
$
116,798
$
(35,457)
$
(11,538)
$
73,640
Net earnings
—
—
—
1,928
—
—
1,928
Other comprehensive loss
—
—
—
—
(3,615)
—
(3,615)
Cash dividends paid ($
.27
per share)
—
—
—
(945)
—
—
(945)
Stock repurchases
(1,577)
—
—
—
—
(35)
(35)
Sale of treasury stock
110
—
2
—
—
1
3
Balance, June 30, 2023
3,499,412
$
39
$
3,800
$
117,781
$
(39,072)
$
(11,572)
$
70,976
Quarter ended June 30, 2022
Balance, March 31, 2022
3,516,971
$
39
$
3,795
$
111,123
$
(17,455)
$
(11,091)
$
86,411
Net earnings
—
0—
0—
1,801
0—
0—
1,801
Other comprehensive loss
—
0—
0—
0—
(10,964)
0—
(10,964)
Cash dividends paid ($
.265
 
per share)
—
0—
0—
(930)
0—
0—
(930)
Stock repurchases
(7,081)
0—
0—
0—
0—
(212)
(212)
Sale of treasury stock
50
0—
1
0—
0—
0—
1
Balance, June 30, 2022
3,509,940
$
39
$
3,796
$
111,994
$
(28,419)
$
(11,303)
$
76,107
QuarterSix months ended June 30, 202130,2023
Balance, MarchDecember 31, 20212022
3,566,3263,503,452
$
39
$
3,7913,797
$
106,696116,600
$
2,467(40,920)
$
(9,354)(11,475)
$
103,63968,041
Cumulative effect of change in accounting
standard
—
—
—
(821)
—
—
(821)
Net earnings
—
0—
0—
2,2863,892
0—
0—
2,2863,892
Other comprehensive income
—
0—
0—
0—
1,7881,848
0—
1,7881,848
Cash dividends paid ($
.26.54
 
per share)
—
0—
0—
(922)(1,890)
0—
0—
(922)(1,890)
Stock repurchases
(20,511)(4,225)
0—
0—
0—
0—
(750)(99)
(750)(99)
Sale of treasury stock
40185
0—
13
0—
0
1—
2
5
Balance, June 30, 20212023
3,545,8553,499,412
$
39
$
3,7923,800
$
108,060117,781
$
4,255(39,072)
$
(10,103)(11,572)
$
106,04370,976
Six months ended June 30, 202230,2022
Balance, December 31, 2021
3,520,485
$
39
$
3,794
$
109,974
$
891
$
(10,972)
$
103,726
Net earnings
—
0—
0—
3,882
0—
0—
3,882
Other comprehensive loss
—
0—
0—
0—
(29,310)
0—
(29,310)
Cash dividends paid ($
.53
 
per share)
—
0—
0—
(1,862)
0—
0—
(1,862)
Stock repurchases
(10,640)
0—
0—
0—
0—
(331)
(331)
Sale of treasury stock
95
0—
2
0—
0—
0—
2
Balance, June 30, 2022
3,509,940
$
39
$
3,796
$
111,994
$
(28,419)
$
(11,303)
$
76,107
Six months ended June 30, 2021
Balance, December 31, 2020
3,566,276
$
39
$
3,789
$
105,617
$
7,599
$
(9,354)
$
107,690
Net earnings
—
0
0
4,292
0
0
4,292
Other comprehensive loss
—
0
0
0
(3,344)
0
(3,344)
Cash dividends paid ($
.52
per share)
—
0
0
(1,849)
0
0
(1,849)
Stock repurchases
(20,511)
0
0
0
0
(750)
(750)
Sale of treasury stock
90
0
3
0
0
1
4
Balance, June 30, 2021
3,545,855
$
39
$
3,792
$
108,060
$
4,255
$
(10,103)
$
106,043
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended June 30,
(Dollars in thousands)
20222023
20212022
Cash flows from operating activities:
Net earnings
$
3,8823,892
$
4,2923,882
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loancredit losses
(250)(296)
(600)(250)
Depreciation and amortization
631858
629631
Premium amortization and discount accretion, net
1,7381,223
1,9401,738
Net gain on sale of loans held for sale
(349)(61)
(935)(349)
Net gain on other real estate owned
(162)—
0(162)
Loans originated for sale
(8,027)(1,219)
(32,608)(8,027)
Proceeds from sale of loans
8,6661,271
35,2798,666
Increase in cash surrender value of bank-owned life insurance
(172)
(196)
(202)Income recognized from death benefit on bank-owned life insurance
(52)
—
Net decrease (increase) decrease in other assets
(9,152)3,332
22(9,152)
Net (decrease) increase (decrease) in accrued expenses and other liabilities
7,397(1,401)
(2,404)7,397
Net cash provided by operating activities
4,1787,375
5,4134,178
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
29,57012,470
38,20429,570
Purchase of securities available-for-sale
—
(77,776)
(94,297)
Increase(Increase) decrease in loans, net
17,519(15,812)
4,80517,519
Net purchases of premises and equipment
(40)
(4,059)
(7,926)Proceeds from bank-owned life insurance death benefit
(Increase) decrease216
—
Decrease (increase) in FHLB stock
(74)41
267(74)
Proceeds from sale of other real estate owned
536—
0536
Net cash used in investing activities
(34,284)(3,125)
(58,947)(34,284)
Cash flows from financing activities:
Net (decrease) increasedecrease in noninterest-bearing deposits
(4,924)(12,892)
37,958(4,924)
Net increase in interest-bearing deposits
13,297
13,379
45,712
Net (decrease) increase in federal funds purchased and securities sold
 
under agreements to repurchase
699(384)
1,141699
Stock repurchases
(331)(99)
(750)(331)
Dividends paid
(1,862)(1,890)
(1,849)(1,862)
Net cash (used in) provided by financing activities
6,961(1,968)
82,2126,961
Net change in cash and cash equivalents
(23,145)2,282
28,678(23,145)
Cash and cash equivalents at beginning of period
156,25927,254
112,575156,259
Cash and cash equivalents at end of period
$
133,11429,536
$
141,253133,114
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
1,2062,191
$
1,3021,206
Income taxes
731800
1,335731
See accompanying notes to consolidated financial statements
8
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
 
POLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services
 
to individuals and
commercial customers in Lee County,
 
Alabama and surrounding countiesareas through its wholly owned subsidiary,
AuburnBank
AuburnBank (the(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, 2021.2022.
The unaudited consolidated financial statements include the accounts of the
 
Company and its wholly-owned subsidiaries.
 
Significant intercompany transactions and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires
 
management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures
 
of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the reporting period.
 
Actual results could
differ from those estimates.
 
Material estimates that are particularly susceptible to significant change in the near term
include other-than-temporary impairment onthe determination of allowance for credit losses investment securities, the
 
the determination of the allowance for loan credit
losses on loans, fair
value of financial instruments, and the valuation of deferred
tax assets and other real
estate owned
(“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update
 
(“ASU”
 
or “updates”) 2014-09,
 
Revenue
from Contracts with Customers
, codified at
 
Accounting Standards Codification
 
(“ASC”)
606. The Company adopted ASC
606 using the modified retrospective transition method.
 
The majority of the Company’s revenue stream
 
is generated from
interest income on loans and securities which are outside the scope of ASC 606.
 
The Company’s sources of income that
 
fall within the scope of ASC 606 include service charges on deposits, investmentinterchange
services, interchange fees and gains and losses on sales of other real estate, all of
which are presented as components of
noninterest income. The
following is a summary of the revenue streams that fall
within the scope of ASC 606:
 
●
Service charges on deposits, investment services, ATM
 
and interchange fees – Fees from these services are either
(i) transaction-based, for which the performance obligations are satisfied
 
when the individual transaction is processed,
processed, or (ii) set periodic service charges, for which the performance
obligations are
satisfied over the period
the service is
provided. Transaction-based
fees are recognized
at the time the transaction is processed, and periodic service
service charges are recognized over the service period.
 
●
Gains on sales of OREO
 
–
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer.
 
ASC 606 lists several criteria required to conclude that a contract for sale
exists, including a determination that the institution will collect substantially all of the consideration
 
to which it is
entitled.
 
In addition to the loan-to-value ratio, where the seller provides
the purchaser with financing, the analysis
is based on various other factors,
 
,
including the credit
quality of the borrower,purchaser, the structure
of the loan, and any
other
factors that we believe may affect collectability.
9
Subsequent Events
 
The Company has evaluated the effects of events and transactions through
 
through the date of this filing that have occurred
subsequent to June 30, 2022. 2023.
The Company does not believe there
were any material subsequent events during this
period
that would have required further recognition or disclosure in the unaudited
 
consolidated financial statements included in
this report.
 
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current
 
-period presentation. These
reclassifications had no material effect on the Company’s
 
previously reported net earnings or total stockholders’ equity.
Accounting DevelopmentsStandards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit
Losses (Topic 326):
Measurement
of Credit Losses on Financial Instruments (ASC 326). This standard replaced
the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit loss (“CECL”)
methodology. CECL requires
an
estimate of credit losses for the remaining estimated life of the financial asset using
historical experience, current
conditions, and reasonable and supportable forecasts and generally applies to
financial assets measured at amortized cost,
including loan receivables and held-to-maturity debt securities, and some off
-balance sheet credit exposures such as
unfunded commitments to extend credit. Financial assets measured at amortized
cost will be presented at the net amount
expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the first six monthsaccounting for available for sale debt
securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt
securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required
to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto
effective January 1, 2023 using the
modified retrospective approach for all financial assets measured at amortized
cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of CECL on January 1, 2023 included
an increase in the allowance for credit
losses on loans of $
1.0
million, which is presented as a reduction to net loans outstanding, and an increase in the allowance
for credit losses on unfunded loan commitments of $
0.1
million, which is recorded within other liabilities. The Company
recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023 for the cumulative
effect of adopting
CECL, which reflects the transition adjustments noted above, net of the applicable deferred
tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior
period amounts continue to be
reported in accordance with previously applicable accounting standards.
The Company adopted ASC 326 using the prospective transition approach for debt
securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023.
As of December 31, 2022, the Company did not adopt have
any other-than-temporarily impaired investment securities. Therefore,
upon adoption of ASC 326, the Company determined
that an allowance for credit losses on available for sale securities was not deemed
material.
The Company elected not to measure an allowance for credit losses for accrued interest receivable
and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status,
which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company
has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic
326): Troubled Debt
Restructurings and Vintage Disclosures”
on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements
for certain loan
refinancings and restructurings by creditors when a borrower is experiencing
financial difficulty.
Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity
must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new accounting guidance.loan or a continuation of an
existing loan. Additionally,
ASU
2022-02 requires an entity to disclose current-period gross write-offs
by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at
Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated
financial statements.
10
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums
and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded
in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a
level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and
is not well collateralized and in
the process of collection, or when management believes, after considering economic and
business conditions and collection
efforts, that the principal or interest will not be collectible in the normal course
of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has
not been received 30 days
after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual
status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual.
Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero.
Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there is a
sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized
cost basis to present the net
amount expected to be collected on the loans. Loans are charged
off against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate
of amounts previously
charged-off and expected to be charged-off.
Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s
estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management using relevant
available information, from
both internal and external sources, relating to past events, current conditions, and reasonable and
supportable forecasts.
The Company’s loan loss estimation process includes
procedures to appropriately consider the unique characteristics of
its
respective loan segments (commercial and industrial, construction and land development,
commercial real estate,
multifamily, residential real estate,
and consumer loans).
These segments are further disaggregated into loan classes, the
level at which credit quality is monitored.
See Note 5, Loans and Allowance for Credit Losses, for additional information
about our loan portfolio.
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model
for each loan segment,
except consumer
loans.
The weighted average remaining life method is used to estimate credit loss assumptions
for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering the
forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic
factors, and LGD, which is the estimate
of the amount of net loss in the event of default.
This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis.
The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial, construction
and land development,
commercial real estate,
multifamily, and residential real estate
loans.
In addition, forecasted changes in the Alabama home
price index is considered in the model for construction and land development and residential
real estate loans; forecasted
changes in the national commercial real estate (“CRE”) price index is considered in the
model for commercial real estate
and multifamily loans; and forecasted changes in the Alabama gross state product
is considered in the model for
multifamily loans.
Projections of these macroeconomic factors, obtained from an independent
third party, are utilized to
predict quarterly rates of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the loan, adjusted for
expected prepayments and principal
payments (“curtailments”) when appropriate. Management's determination
of the contract term excludes expected
extensions, renewals, and modifications unless the extension or
renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company.
To the extent the lives of the
loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be
made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion
period.
11
The weighted average remaining life method was deemed most appropriate
for the consumer loan segment because
consumer loans contain many different payment structures,
payment streams and collateral.
The weighted average
remaining life method uses an annual charge-off rate over several vintages
to estimate credit losses.
The average annual
charge-off rate is applied to the contractual term adjusted for
prepayments.
Additionally, the allowance
for credit losses calculation includes subjective adjustments for qualitative risk
factors that are
believed likely to cause estimated credit losses to differ from
historical experience. These qualitative adjustments may
increase or reduce reserve levels and include adjustments for lending management experience
and risk tolerance, loan
review and audit results, asset quality and portfolio trends, loan portfolio growth, industry
concentrations, trends in
underlying collateral, external factors and economic conditions not already captured.
Loans that do not share risk characteristics are evaluated on an individual basis. When
management determines that
foreclosure is probable and the borrower is experiencing financial difficulty,
the expected credit losses are based on the
estimated fair value of collateral held at the reporting date, adjusted for selling costs as
appropriate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s
exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off-balance sheet
loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are recorded
when they are funded.
The Company records an allowance for credit losses on off-balance
sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge to provision
for credit losses in the Company’s consolidated
statements of earnings.
The allowance for credit losses on off-balance sheet credit exposures
is estimated by loan segment
at each balance sheet date under the current expected credit loss model using the same
methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party
guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s
consolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77
thousand for the adoption of
ASC 326.
At June 30, 2023, the liability for credit losses on off-balance-sheet credit exposures included
in other liabilities
was $
0.3
million.
Provision for Credit Losses
The composition of the provision for (recoveries of) credit losses for the respective periods
is presented below.
 
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Provision for credit losses:
Loans
$
(331)
$
—
$
(291)
$
(250)
Reserve for unfunded commitments (1)
(31)
—
(5)
—
Total provision for credit
losses
$
(362)
$
—
$
(296)
$
(250)
(1)
Reserve requirements for unfunded commitments were reported as a component of other
noninterest expense prior
to the adoption of ASC 326.
12
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average
 
common shares outstanding for
the respective period.
 
Diluted net earnings per share reflect the potential dilution that could occur
 
upon exercise of
securities or other rights for, or convertible into, shares of the
 
Company’s common stock.
 
At June 30, 20222023 and 2021,2022,
respectively, the Company
 
had no such securities or rights issued or outstanding, and therefore, no dilutive effect
 
to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods are
 
are presented below
 
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2022
20212023
2022
20212023
2022
Basic and diluted:
Net earnings
$
1,928
$
1,801
$
2,2863,892
$
3,882
$
4,292
Weighted average common
 
shares outstanding
3,500,064
3,513,353
3,554,8713,501,098
3,515,991
3,560,554
Net earnings per share
$
0.55
$
0.51
$
0.651.11
$
1.10
$
1.21
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 June 30, 2022,2023, the Company did not have any consolidated VIEs to disclose but did
 
have one nonconsolidated VIE,
discussed below.
New Markets Tax
Credit Investment
The New Markets Tax Credit
(“NMTC”) program provides federal tax incentives to investors to make investments in
distressed communities and promotes economic improvement through the development
of successful businesses in these
communities.
The NMTC is available to investors over seven years and is subject to recapture if certain events occur
during such period.
At June 30, 2023 and December 31, 2022, respectively,
the Company had one such investment in the
amounts of $1.9 million and $2.1 million, respectively,
which was included in other assets in the consolidated balance
sheets.
The Company’s equity investment in the
NMTC entity meets the definition of a VIE. While the Company’s
investment exceeds 50% of the outstanding equity interests, the Company does not consolidate
the VIE because it does not
meet the characteristics of a primary beneficiary since the Company lacks the power to direct
the activities of the VIE.
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
1,906
$
1,906
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
New Markets Tax
Credit Investment
The New Markets Tax Credit
(“NMTC”) program provides federal tax incentives to investors to make investments in
distressed communities and promotes economic improvement through the development
of successful businesses in these
communities.
The NMTC is available to investors over seven years and is subject to recapture if certain events occur
during such period.
At June 30, 2022 and December 31, 2021, respectively,
the Company had one such investment in the
amounts of $2.1 million and $2.2 million, respectively,
which was included in other assets in the consolidated balance
sheets.
The Company’s equity investment
meets the definition of a VIE. While the Company’s
investment exceeds 50% of
the outstanding equity interests, the Company does not consolidate the VIE because
it does not meet the characteristics of a
primary beneficiary since the Company lacks the power to direct the activities of
the VIE.
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
2,142
$
2,142
Other assets
13
NOTE 4: SECURITIES
At June 30, 20222023 and December 31, 2021,2022, respectively,
 
all securities within the scope of ASC 320,
Investments – Debt and
Equity Securities,
were classified as available-for-sale.
 
The fair value and amortized cost for securities available-for-sale
by contractual maturity at June 30, 20222023 and December 31, 2021,2022, respectively,
 
are presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
 
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
June 30, 20222023
Agency obligations (a)
$
05,306
48,47659,203
78,43560,643
0—
126,911125,152
29—
10,52815,422
$
137,410140,574
Agency MBS (a)
0—
4706,687
36,84931,155
197,266169,138
234,585206,980
75—
23,26031,769
257,770238,749
State and political subdivisions
170300
9541,014
15,82815,354
50,77245,279
67,72461,947
18214
4,4474,998
71,98966,931
Total available-for-sale
$
1705,606
49,90066,904
131,112107,152
248,038214,417
429,220394,079
28614
38,23552,189
$
467,169446,254
December 31, 20212022
Agency obligations (a)
$
5,0074,935
49,60450,746
69,80269,936
0—
124,413125,617
1,080—
2,07915,826
$
125,412141,443
Agency MBS (a)
0—
6807,130
35,85527,153
186,836183,877
223,371218,160
1,527—
2,68033,146
224,524251,306
State and political subdivisions
170300
647642
15,74315,130
57,54745,455
74,10761,527
3,61111
2705,681
70,76667,197
Total available-for-sale
$
5,1775,235
50,93158,518
121,400112,219
244,383229,332
421,891405,304
6,21811
5,02954,653
$
420,702459,946
(a) Includes securities issued by U.S. government agencies or government-sponsored
 
entities.
 
Securities with aggregate fair values of $
187.5215.9
 
million and $
172.3208.3
 
million at June 30, 20222023 and December 31, 2021,2022,
respectively, were pledged to
 
secure public deposits, securities sold under agreements to repurchase, Federal Home
 
Loan
Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required
 
or permitted by law.
 
Included in other assets on the accompanying consolidated balance sheets are non-marketable
 
equity investments.
 
The
carrying amounts of non-marketable equity investments were $
1.2
 
million at June 30, 20222023 and December 31, 2021,2022,
respectively.
 
Non-marketable equity investments include FHLB of Atlanta Stock, Federal
 
Reserve Bank of Atlanta
(“FRB”) stock, and stock in a privately held financial institution.
11
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at June 30, 20222023
 
and December 31, 2021,2022, respectively, segregated
by those securities that have been in an unrealized loss position for less than 12
 
months and 12 months or longer, are
presented below.
 
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
June 30, 2023:
Agency obligations
$
17,994
1,243
107,158
14,179
$
125,152
15,422
Agency MBS
22,246
1,332
184,734
30,437
206,980
31,769
State and political subdivisions
17,358
330
39,727
4,668
57,085
4,998
Total
$
57,598
2,905
331,619
49,284
$
389,217
52,189
December 31, 2022:
Agency obligations
 
$
82,20755,931
4,6184,161
40,55769,686
5,91011,665
$
122,764125,617
10,52815,826
Agency MBS
174,78370,293
15,7115,842
53,160147,867
7,54927,304
227,943218,160
23,26033,146
State and political subdivisions
47,57744,777
3,7732,176
3,33213,043
6743,505
50,90957,820
4,4475,681
Total
 
$
304,567171,001
24,10212,179
97,049230,596
14,13342,474
$
401,616401,597
38,23554,653
December 31, 2021:
Agency obligations
$
49,799
1,025
26,412
1,054
$
76,211
2,079
Agency MBS
130,110
1,555
38,611
1,125
168,721
2,680
State and political subdivisions
7,960
109
3,114
161
11,074
270
Total
$
187,869
2,689
68,137
2,340
$
256,006
5,029
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 securities 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.
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 security’s
fair value;
●
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
increases in market 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.
��
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1214
Agency mortgage-backedFor the securities (“MBS”)in the previous table, the Company assesses whether or not it intends to
sell or is more likely than not that
the Company will be required to sell the securities before recovery of the amortized
cost basis, which may be maturity.
Because the Company currently does not intend to sell those securities that have an
unrealized loss at June 30, 2023 and it
is not more-likely-than-not that the Company will be required
to sell the security before recovery of their amortized cost
bases, which may be maturity,
the Company has determined that no provision for credit loss is necessary.
In addition, the
Company evaluates whether any portion of the decline in fair value of available-for-sale
securities is the result of credit
deterioration, which would require the recognition of a provision to increase
the allowance for credit losses. Such
evaluations consider the extent to which the amortized cost of the security exceeds its
fair value, changes in credit ratings
and any other known adverse conditions related to the specific security.
The unrealized losses associated with agency MBS were primarilyavailable-for-
sale securities at June 30, 2023 are driven by increases
changes in market interest rates and not due
to the credit quality of the securities. These securities were issued by U.S. government agenciesare
 
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 increases
in market interest rates and were not due to the credit quality of the securities. Some of these
securities, and accordingly, no
allowance for credit losses is considered necessary related to available-for-sale
 
securities are guaranteed by aat
bond insurer, but management did not rely on
such guarantees in making its investment decision.
June 30, 2023. These securities will
continue to be monitored as a part
of the Company’sCompany's ongoing evaluation of credit
quality. Management evaluates
 
quarterly impairment analysis, but are expected to perform even if the
rating agencies reduce the credit ratingfinancial performance of the bond insurers. Asissuers on a result, the Company expectsquarterly basis to
recover the entire
amortized cost basis of these securities.
The carrying values of the Company’s investment
securities could decline in the future determine if market interest rates continue to
increase.
If the financial condition of an issuer (other than the U.S. government or
its agencies) deteriorates and the
Company determines it is probable
that it will not recover the entire amortized
cost basis for the security,
there is a risk that
other-than-temporary impairment charges
may occur in the future.
The Company will evaluate whether any loss is
temporary or not.
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 impairmentissuers can make all contractual principal and the credit
interest payments.
component of the loss is recognized in earnings. At June 30,
2022 and December 31, 2021, 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 quarters and six months ended June 30,
2022 and 2021, respectively.
Realized Gains and Losses
 
The Company had no realized gains and losses on sale of securities during the quarters andquarter
 
and six months ended June 30, 20222023
and 2021,2022, respectively.
NOTE 5: LOANS AND ALLOWANCE
 
FOR LOANCREDIT LOSSES
June 30,
December 31,
(Dollars in thousands)
20222023
20212022
Commercial and industrial
$
70,08761,880
$
83,97766,212
Construction and land development
38,65463,874
32,43266,479
Commercial real estate:
Owner occupied
58,22267,679
63,37561,125
Hotel/motel
34,36537,511
43,85633,378
Multi-family
29,72244,431
42,58741,084
Other
117,987126,180
108,553128,986
Total commercial real estate
240,296275,801
258,371264,573
Residential real estate:
Consumer mortgage
32,89553,674
29,78145,370
Investment property
52,32956,160
47,88052,278
Total residential real estate
85,224109,834
77,66197,648
Consumer installment
7,1229,022
6,6829,546
Total loans
441,383
459,123
Less: unearned income
(511)
(759)
Loans net of unearned income
$
440,872520,411
$
458,364504,458
13
Loans secured by real estate were approximately
82.5%86.4%
 
of the Company’s total loan portfolio
 
at June 30, 2022.2023.
 
At June 30,
2022,2023, the Company’s geographic loan
 
distribution was concentrated primarily in Lee County,
 
Alabama, and surrounding
areas.
In accordance with ASC 310, aThe loan portfolio segment is defined as the level at which an entity
develops and documents a systematic
systematic method for
determining its allowance for loancredit losses.
As part of the Company’s
quarterly assessment
of the
allowance, the loan
portfolio included the following portfolio segments: commercial and industrial,
 
industrial, construction and land development,
development, commercial real estate, residential real estate, and consumer installment. Where appropriate,
 
appropriate, the Company’s
loan portfolio
segments are further disaggregated into classes. A class is generally determined based
 
based on the initial
measurement attribute,
risk characteristics of the loan, and an entity’s
 
method for monitoring and determining credit risk.
The following describes
the risk characteristics relevant to each of the portfolio segments
 
and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or
 
other needs
for small and medium-sized commercial customers. Also included
 
in this category are loans to finance agricultural
production.
 
Generally,
 
the primary source of repayment is the cash flow from business operations and activities
 
of the
borrower.
 
As
1415
PPP loans with an aggregate outstanding principal balance of $
0.6
million included in this category, compared
to
138
PPP loans with an aggregate principal balance of $
8.1
million at
December 31, 2021.
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 fourin these classes: (1) owner occupied, (2)
hotel/motel,
(3) multifamily and (4) 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.
●
Hotel/motel
– includes loans for hotels and motels.
 
Generally, the primary source of repayment
 
is dependent upon
income generated from the real estate collateral.hotel/motel securing the loan.
 
The underwriting of these loans takes into consideration the
the occupancy and rental rates, as well as the financial health of the borrower.
●
Multi-family
 
– primarily includes loans to finance income-producing multi-family properties
 
.
 
Loans in this class
These include loans
for 5 or more unit residential propertyproperties and apartments leased to
residents. Generally
 
,
the primary
source of
repayment is dependent upon income generated from the real estate collateral.
 
The underwriting of these loans
loans takes into consideration the occupancy and rental rates,
as well as the financial
health of the borrower.respective borrowers.
 
●
Other
 
– primarily includes loans to finance income-producing commercial properties
 
other than hotels/motels and
multi-family properties, and which
 
are not owner occupied.
 
Loans in this class include loans for neighborhood
retail centers, medical and professional offices, single retail stores,
 
industrial buildings, and warehouses leased to
local and other businesses.
 
Generally,
 
the primary source of repayment is dependent upon income generated
from
the real
estate collateral. The underwriting of these loans takes into consideration
the occupancy and rental
 
rental rates,
as well as
the financial health of the borrower.
 
Residential real estate (“RRE”) —
includes loans disaggregated intoin these 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
 
in accordance
with the Bank’s general loan policies and procedures
 
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 values, as
well as the financial health of the borrowers.
Consumer installment —
includes loans to individuals,
which may be secured by personal property or are unsecured.
Loans
include personal lines of credit, automobile loans, and other retail loans.
These loans are underwritten in accordance with
the Bank’s general loan policies and procedures
which require, among other things, proper documentation of each
borrower’s financial condition, satisfactory credit history,
and, if applicable, property values.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
●
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.
16
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio
 
segment and class as of June
30, 20222023 and December 31, 2021.2022.
 
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
 
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
June 30, 2022:2023:
Commercial and industrial
$
70,05361,701
341
0—
70,08761,702
0178
$
70,08761,880
Construction and land development
38,65463,874
0—
0—
38,65463,874
0—
38,65463,874
Commercial real estate:
Owner occupied
58,22266,860
0—
0—
58,22266,860
0819
58,22267,679
Hotel/motel
34,36537,511
0—
0—
34,36537,511
0—
34,36537,511
Multi-family
29,72244,431
0—
0—
29,72244,431
0—
29,72244,431
Other
117,783126,180
28—
0—
117,811126,180
176—
117,987126,180
Total commercial real estate
240,092274,982
28—
0—
240,120274,982
176819
240,296275,801
Residential real estate:
Consumer mortgage
32,67153,432
41118
0—
32,71253,550
183124
32,89553,674
Investment property
52,24056,117
8915
0—
52,32956,132
028
52,32956,160
Total residential real estate
84,911109,549
130133
0—
85,041109,682
183152
85,224109,834
Consumer installment
7,1159,000
722
0—
7,1229,022
0—
7,1229,022
Total
$
440,825519,106
199156
0—
441,024519,262
3591,149
$
441,383520,411
December 31, 2021:2022:
Commercial and industrial
$
83,97465,764
35
0—
83,97765,769
0443
$
83,97766,212
Construction and land development
32,22866,479
204—
0—
32,43266,479
0—
32,43266,479
Commercial real estate:
Owner occupied
63,37561,125
0—
0—
63,37561,125
0—
63,37561,125
Hotel/motel
43,85633,378
0—
0—
43,85633,378
0—
43,85633,378
Multi-family
42,58741,084
0—
0—
42,58741,084
0—
42,58741,084
Other
108,366126,870
0—
0—
108,366126,870
1872,116
108,553128,986
Total commercial real estate
258,184262,457
0—
0—
258,184262,457
1872,116
258,371264,573
Residential real estate:
Consumer mortgage
29,07045,160
51638
0—
29,58645,198
195172
29,78145,370
Investment property
47,81852,278
0—
0—
47,81852,278
62—
47,88052,278
Total residential real estate
76,88897,438
51638
0—
77,40497,476
257172
77,66197,648
Consumer installment
6,6579,506
2540
0—
6,6829,546
0—
6,6829,546
Total
$
457,931501,644
74883
0—
458,679501,727
4442,731
$
459,123504,458
15
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 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 evaluates the loan portfolio’s
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 June 30, 2022 and December 31, 2021, 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 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.
16
The Company regularly re-evaluates its practices in determining the allowance
for loan losses. The Company’s look-back
period each quarter incorporates the effects of at least one economic
downturn in its loss history.
The Company believes
this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period,
the early
cycle periods in which the Company experienced significant losses would be excluded
from the determination of the
allowance for loan losses and its balance would decrease.
For the quarter ended June 30, 2022, the Company increased its
look-back period to 53 quarters to continue to include losses incurred by the Company beginning
with the first quarter of
2009.
The Company will likely continue to increase its look-back period to incorporate
the effects of at least one economic
downturn in its loss history.
During the second quarter of 2021, the Company adjusted certain qualitative and
economic
factors, previously downgraded as a result of the COVID-19 pandemic, to reflect improvements in
economic conditions in
our primary market area.
Further adjustments may be made from time to time in the future as a result of the COVID-19
pandemic and other changes in economic conditions.
The following table details the changes in the allowance for loan losses by portfolio segment
for the respective periods.
June 30, 2022
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
774
508
2,536
737
103
$
4,658
Charge-offs
(4)
0
0
0
(16)
(20)
Recoveries
2
0
22
7
47
78
Net (charge-offs) recoveries
(2)
0
22
7
31
58
Provision for loan losses
(11)
68
(35)
9
(31)
0
Ending balance
$
761
576
2,523
753
103
$
4,716
Six months ended:
Beginning balance
$
857
518
2,739
739
86
$
4,939
Charge-offs
(4)
0
0
0
(64)
(68)
Recoveries
4
0
22
14
55
95
Net recoveries (charge-offs)
0
0
22
14
(9)
27
Provision for loan losses
(96)
58
(238)
0
26
(250)
Ending balance
$
761
576
2,523
753
103
$
4,716
June 30, 2021
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
828
551
3,302
908
93
$
5,682
Charge-offs
0
0
0
(1)
0
(1)
Recoveries
2
0
0
13
11
26
Net recoveries
2
0
0
12
11
25
Provision for loan losses
(1)
88
(598)
(82)
(7)
(600)
Ending balance
$
829
639
2,704
838
97
$
5,107
Six months ended:
Beginning balance
$
807
594
3,169
944
104
$
5,618
Charge-offs
0
0
0
(1)
(5)
(6)
Recoveries
54
0
0
26
15
95
Net recoveries
54
0
0
25
10
89
Provision for loan losses
(32)
45
(465)
(131)
(17)
(600)
Ending balance
$
829
639
2,704
838
97
$
5,107
17
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 June 30, 2022 and 2021.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(Dollars in thousands)
losses
in loans
losses
in loans
losses
in loans
June 30, 2022:
Commercial and industrial (3)
$
761
70,087
0
0
761
70,087
Construction and land development
576
38,654
0
0
576
38,654
Commercial real estate
2,523
240,120
0
176
2,523
240,296
Residential real estate
753
85,224
0
0
753
85,224
Consumer installment
103
7,122
0
0
103
7,122
Total
$
4,716
441,207
0
176
4,716
441,383
June 30, 2021:
Commercial and industrial (4)
$
829
87,933
0
0
829
87,933
Construction and land development
639
37,477
0
0
639
37,477
Commercial real estate
2,704
242,646
0
199
2,704
242,845
Residential real estate
838
82,067
0
97
838
82,164
Consumer installment
97
7,762
0
0
97
7,762
Total
$
5,107
457,885
0
296
5,107
458,181
(1)
Represents loans collectively evaluated for impairment in accordance
with ASC 450-20,
Loss Contingencies
, and
pursuant to amendments by ASU 2010-20 regarding allowance
for non-impaired loans.
(2)
Represents loans individually evaluated for impairment in
accordance with ASC 310-30,
Receivables
, and
pursuant to amendments by ASU 2010-20 regarding allowance
for impaired loans.
(3)
Includes $0.6 million of PPP loans for which no
allowance for loan losses was allocated due to 100%
SBA guarantee.
(4)
Includes $22.1 million of PPP loans for which no allowance
for loan losses was allocated due to 100% SBA guarantee.
See “Impaired Loans” and “Troubled Debt Restructurings”
below for additional information about such 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.classes by year of origination as of June 30,
2023. These categories are
utilized to develop
the associated allowance for
loan credit losses using historical losses adjusted
for qualitative and
environmental factors
and are defined as follows:
 
●
Pass – loans which are well protected by the current net worth and paying capacity
of the
obligor (or guarantors, if
any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
●
Special Mention – loans with potential weakness that may,
 
if not reversed or corrected, weaken the credit or
inadequately protect the Company’s position
 
at some future date. These loans are not adversely classified and do
not expose an institution to sufficient risk to warrant an adverse classification.
●
Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes
 
debt repayment,
even though they are currently performing. These loans are characterized by the distinct possibility
 
that the
Company may incur a loss in the future if these weaknesses are not corrected
 
.
●
Nonaccrual – includes loans where management has determined that full payment
 
of principal and interest is not
expected.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
 
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loansLoans
June 30, 2022:2023:
 
Commercial and industrial
$
69,847
15
225
0Pass
$
70,0875,888
12,207
14,564
5,926
7,644
8,366
6,810
$
61,405
Special mention
—
—
—
—
—
—
203
203
Substandard
58
—
27
—
9
—
—
94
Nonaccrual
—
—
—
—
178
—
—
178
Total commercial and industrial
5,946
12,207
14,591
5,926
7,831
8,366
7,013
61,880
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
38,654Pass
018,973
039,757
02,957
38,6541,584
140
185
278
63,874
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
18,973
39,757
2,957
1,584
140
185
278
63,874
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
57,755Pass
3499,644
1187,779
018,781
58,22211,072
4,864
11,168
3,267
66,575
Special mention
—
—
232
—
—
—
—
232
Substandard
—
—
—
—
53
—
—
53
Nonaccrual
—
—
—
—
819
—
—
819
Total owner occupied
9,644
7,779
19,013
11,072
5,736
11,168
3,267
67,679
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
34,365Pass
06,533
010,087
03,264
34,3651,586
Multi-family4,022
29,72212,019
0—
037,511
0Special mention
29,722—
Other—
116,889—
894—
28—
176—
117,987—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial real estatehotel/motel
238,7316,533
1,24310,087
1463,264
1761,586
240,2964,022
Residential real estate:12,019
Consumer mortgage—
31,60637,511
446Current period gross charge-offs
660—
183—
32,895—
Investment property—
52,029—
45—
255—
0—
52,329
Total residential real estate
83,635
491
915
183
85,224
Consumer installment
7,084
14
24
0
7,122
Total
$
437,951
1,763
1,310
359
$
441,383
December 31, 2021:
Commercial and industrial
$
83,725
26
226
0
$
83,977
Construction and land development
32,212
2
218
0
32,432
Commercial real estate:
Owner occupied
61,573
1,675
127
0
63,375
Hotel/motel
36,162
7,694
0
0
43,856
Multi-family
39,093
3,494
0
0
42,587
Other
107,426
911
29
187
108,553
Total commercial real estate
244,254
13,774
156
187
258,371
Residential real estate:
Consumer mortgage
27,647
452
1,487
195
29,781
Investment property
47,459
98
261
62
47,880
Total residential real estate
75,106
550
1,748
257
77,661
Consumer installment
6,650
20
12
0
6,682
Total
$
441,947
14,372
2,360
444
$
459,123
Impaired loans
The following tables present details related to the Company’s
 
impaired loans. Loans that have been fully charged-off are
not included in the following tables. The related allowance generally represents the following
 
components that correspond
to impaired loans:
●
Individually evaluated impaired loans equal to or greater than $500 thousand secured
 
by real estate (nonaccrual
construction and land development, commercial real estate, and residential real estate
 
loans).
●
Individually evaluated impaired loans equal to or greater than $250 thousand not secured
 
by real estate
(nonaccrual commercial and industrial and consumer installment loans).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
June 30, 2023:
Multi-family
Pass
8,039
19,240
1,991
6,213
3,856
3,166
1,926
44,431
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
8,039
19,240
1,991
6,213
3,856
3,166
1,926
44,431
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
9,264
37,412
32,595
15,241
11,061
19,542
906
126,021
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
159
—
—
—
159
Nonaccrual
—
—
—
—
—
—
—
—
Total other
9,264
37,412
32,595
15,400
11,061
19,542
906
126,180
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
11,623
20,752
2,769
2,847
1,545
13,125
6
52,667
Special mention
—
—
—
—
—
379
—
379
Substandard
—
—
—
—
—
504
—
504
Nonaccrual
—
—
—
—
—
124
—
124
Total consumer mortgage
11,623
20,752
2,769
2,847
1,545
14,132
6
53,674
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
8,327
13,638
10,155
13,415
5,911
2,707
1,446
55,599
Special mention
43
250
—
—
—
—
—
293
Substandard
—
—
—
240
—
—
—
240
Nonaccrual
—
—
—
—
—
28
—
28
Total investment property
8,370
13,888
10,155
13,655
5,911
2,735
1,446
56,160
Current period gross charge-offs
—
—
—
—
—
��
—
—
Consumer installment
Pass
2,671
4,595
1,002
369
153
184
—
8,974
Special mention
—
—
1
4
—
—
—
5
Substandard
14
17
10
—
2
—
—
43
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
2,685
4,612
1,013
373
155
184
—
9,022
Current period gross charge-offs
29
24
13
1
—
—
—
67
Total loans
Pass
80,960
165,467
88,078
58,253
39,195
70,461
14,643
517,057
Special mention
43
250
233
4
—
379
203
1,112
Substandard
72
17
37
399
64
504
—
1,093
Nonaccrual
—
—
—
—
997
152
—
1,149
Total loans
$
81,075
165,734
88,348
58,656
40,256
71,496
14,846
$
520,411
Total current period gross charge-offs
$
29
24
13
1
—
—
—
67
20
(Dollars in thousands)
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
December 31, 2022:
Commercial and industrial
$
65,550
7
212
443
$
66,212
Construction and land development
66,479
—
—
—
66,479
Commercial real estate:
Owner occupied
60,726
238
161
—
61,125
Hotel/motel
33,378
—
—
—
33,378
Multi-family
41,084
—
—
—
41,084
Other
126,700
170
—
2,116
128,986
Total commercial real estate
261,888
408
161
2,116
264,573
Residential real estate:
Consumer mortgage
44,172
439
587
172
45,370
Investment property
51,987
43
248
—
52,278
Total residential real estate
96,159
482
835
172
97,648
Consumer installment
9,498
1
47
—
9,546
Total
$
499,574
898
1,255
2,731
$
504,458
The following table is a summary of the Company’s
nonaccrual loans by major categories as of June 30, 2023 and
December 31, 2022.
CECL
Incurred Loss
June 30, 2023
December 31, 2022
Nonaccrual
Nonaccrual
Total
Loans with
Loans with an
Nonaccrual
Nonaccrual
(Dollars in thousands)
No Allowance
Allowance
Loans
Loans
Commercial and industrial
$
178
—
178
$
443
Commercial real estate
819
—
819
2,116
Residential real estate
152
—
152
172
Total
$
1,149
—
1,149
$
2,731
The following table presents the amortized cost basis of collateral dependent loans, which
are individually evaluated to
determine expected credit losses:
(Dollars in thousands)
Real Estate
Business Assets
Total Loans
June 30, 2023:
Commercial and industrial
$
—
178
$
178
Commercial real estate
819
—
819
Total
$
819
178
$
997
Allowance for Credit Losses
The Company adopted ASC 326
on January 1, 2023, which introduced the CECL methodology for estimating all expected
losses over the life of a financial asset. Under the CECL methodology,
the allowance for credit losses is measured on a
collective basis for pools of loans with similar risk characteristics, and for loans that do
not share similar risk characteristics
with the collectively evaluated pools, evaluations are performed on an individual
basis.
21
The following table details the changes in the allowance for credit losses by portfolio segment for
the respective periods.
June 30, 2023
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
1,232
1,021
3,966
497
105
$
6,821
Charge-offs
—
—
—
—
(56)
(56)
Recoveries
194
—
—
5
1
200
Net recoveries (charge-offs)
194
—
—
5
(55)
144
Provision for credit losses
(228)
(16)
(178)
27
64
(331)
Ending balance
$
1,198
1,005
3,788
529
114
$
6,634
Six months ended:
Beginning balance
$
747
949
3,109
828
132
$
5,765
Impact of adopting ASC 326
532
(17)
873
(347)
(22)
1,019
Charge-offs
—
—
—
—
(67)
(67)
Recoveries
196
—
—
10
2
208
Net recoveries (charge-offs)
196
—
—
10
(65)
141
Provision for credit losses
(277)
73
(194)
38
69
(291)
Ending balance
$
1,198
1,005
3,788
529
114
$
6,634
June 30, 2022
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
774
508
2,536
737
103
$
4,658
Charge-offs
(4)
—
—
—
(16)
(20)
Recoveries
2
—
22
7
47
78
Net (charge-offs) recoveries
(2)
—
22
7
31
58
Provision for loan losses
(11)
68
(35)
9
(31)
—
Ending balance
$
761
576
2,523
753
103
$
4,716
Six months ended:
Beginning balance
$
857
518
2,739
739
86
$
4,939
Charge-offs
(4)
—
—
—
(64)
(68)
Recoveries
4
—
22
14
55
95
Net recoveries (charge-offs)
—
—
22
14
(9)
27
Provision for loan losses
(96)
58
(238)
—
26
(250)
Ending balance
$
761
576
2,523
753
103
$
4,716
22
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 June 30, 2022 as determined, prior
to the adoption of ASC 326.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(In thousands)
losses
in loans
losses
in loans
losses
in loans
June 30, 2022:
Commercial and industrial
$
761
70,087
—
—
761
70,087
Construction and land development
576
38,654
—
—
576
38,654
Commercial real estate
2,523
240,120
—
176
2,523
240,296
Residential real estate
753
85,224
—
—
753
85,224
Consumer installment
103
7,122
—
—
103
7,122
Total
$
4,716
441,207
—
176
4,716
441,383
(1)
Represents loans collectively evaluated for impairment,
prior to the adopton of ASC 326, in accordance with ASC
450-20,
Loss
Contingencies, and pursuant to amendments by ASU 2010-20
regarding allowance for non-impaired loans.
(2)
Represents loans individually evaluated for impairment, prior
to the adoption of ASC 326, in accordance with ASC
310-30,
Receivables, and pursuant to amendments by ASU 2010-20 regarding
allowance for impaired loans.
23
Impaired loans
The following tables present impaired loans at December 31, 2022 as determined under
ASC 310 prior to the adoption of
ASC 326.
Loans that have been fully charged-off are not included in the following
tables. The related allowance generally
represents the following components that correspond to impaired loans:
●
Individually evaluated impaired loans equal to or greater than $500 thousand secured
by real estate (nonaccrual
construction and land development, commercial real estate, and residential real estate
loans).
●
Individually evaluated impaired loans equal to or greater than $250 thousand not secured
by real estate
(nonaccrual commercial and industrial and consumer installment loans).
The following tables set forth certain information regarding the Company’s
 
impaired loans that were individually evaluated
for impairment at June 30, 2022 and December 31, 2021.2022.
June 30,December 31, 2022
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial and industrial
$
210
(1)
209
$
—
Commercial real estate:
OtherOwner occupied
$858
199(3)
(23)
176
$
0855
Total commercial real estate
199858
(23)(3)
176855
0—
Total
1,068
(4)
1,064
—
With allowance recorded:
Commercial and industrial
234
—
234
$
59
Commercial real estate:
Owner occupied
1,261
—
1,261
446
Total commercial real estate
1,261
—
1,261
446
Total
1,495
—
1,495
505
Total
 
impaired loans
$
1992,563
(23)(4)
1762,559
$
0
(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, 2021
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial real estate:
Other
$
205
(18)
187
$
0
Total commercial real estate
205
(18)
187
0
Residential real estate:
Investment property
68
(6)
62
0
Total residential real estate
68
(6)
62
0
Total
impaired loans
$
273
(24)
249
$
0505
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2024
Pursuant to the adoption of ASU 2022-02, effective January 1, 2023,
the Company prospectively discontinued the
recognition and measurement guidance previously required for
troubled debt restructurings (TDRs).
As of June 30, 2023,
the Company had no loans that would have previously required disclosure as TDRs.
The following table provides the average recorded investment in impaired loans, if
 
any, by portfolio
 
segment, and the
amount of interest income recognized on impaired loans after impairment by portfolio
 
segment and class during the quarter
respective periods.and six months ended June 30, 2023 as determined under ASC 310 prior to the adoption of ASC 326.
Quarter ended June 30, 2022
Six months ended June 30, 2022
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
180
0—
$
212
0—
Total commercial real estate
180
0—
212
0—
Residential real estate:
Investment property
0—
0—
9
0—
Total residential real estate
0—
0—
9
0—
Total
 
$
180
0
221
0
Quarter ended June 30, 2021
Six months ended June 30, 2021
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other—
$
202
0
205
0
Total commercial real estate
202
0
205
0
Residential real estate:
Investment property
100
0
102
0
Total residential real estate
100
0
102
0
Total
$
302
0
307
0
Troubled Debt
Restructurings
Impaired loans also include troubled debt restructurings (“TDRs”).
Section 4013 of the CARES Act, “Temporary
Relief
From Troubled Debt Restructurings,” provided
banks the option to temporarily suspend certain requirements under ASC
340-10 TDR classifications for a limited period of time to account for the effects
of COVID-19. In addition, the Interagency
Statement on COVID-19 Loan Modifications, encouraged
banks to work prudently with borrowers and describes the
agencies’ interpretation of how accounting rules under ASC 310-40,
“Troubled Debt Restructurings by Creditors,” apply to
certain COVID-19-related modifications. The Interagency Statement on
COVID-19 Loan Modifications was supplemented
on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and
Soundness Considering the Effect of the
COVID-19 Pandemic on Institutions.
If a loan modification was
eligible, a bank could elect to account for the loan under
section 4013 of the CARES Act. If a loan modification was
not eligible under section 4013, or if the bank elected not to
account for the loan modification under section 4013, the Revised Statement include
d
criteria when a bank may presume a
loan modification is not a TDR in accordance with ASC 310-40.
The Company evaluates loan extensions or modifications not qualified under
Section 4013 of the CARES Act or under the
Interagency Statement and related regulatory guidance on COVID-19 Loan Modifications
in accordance with FASB
ASC
340-10 with respect to the classification of the loan as a TDR.
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, when due, all
amounts owed, 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 risk characteristics
similar to 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.
21
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 evaluated individually,
including those that have payment defaults,
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 June 30, 2022
and December 31, 2021, respectively.
TDRs
Related
(Dollars in thousands)
Accruing
Nonaccrual
Total
Allowance
June 30, 2022
Commercial real estate:
Other
$
0
176
176
$
—
Total commercial real estate
0
176
176
—
Total
$
0
176
176
$221
—
TDRs
Related
(In thousands)
Accruing
Nonaccrual
Total
Allowance
December 31, 2021
Commercial real estate:
Other
$
0
187
187
$
—
Total commercial real estate
0
187
187
—
Investment property
0
62
62
—
Total residential real estate
0
62
62
—
Total
$
0
249
249
$
—
At June 30, 2022 there were no significant outstanding commitments to advance additional
funds to customers whose loans
had been restructured.
There were no loans modified in a TDR during the quarters and six months ended
June 30, 2022 and 2021,
respectively.
For the same periods, the Company had no loans modified in a TDR within the
previous 12 months 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
 
is determined using
assumptions that market participants would use in estimating future net servicing
 
servicing income, including estimates of
prepayment speeds, discount rates, default rates, costs to service, escrow account earnings,
 
contractual servicing fee
income, ancillary income, and late fees.
 
Subsequent to the date of transfer, the Company
 
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 soldgenerally sells, without recourse, to Fannie Mae.
The Company generally sells
conforming, fixed-rate, closed-end,
residential mortgages to Fannie Mae.Mae,
where the Company services the mortgages sold and records MSRs.
 
MSRs are included in other assets on the
accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis.
 
Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and loan type.
 
If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established.
 
The valuation allowance is adjusted
as the fair value changes.
 
Changes in the valuation allowance are recognized in earnings as a component
 
of mortgage
lending income.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2225
The following table details the changes in amortized MSRs and the related valuation allowance for
 
for the respective periods.
 
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2022
20212023
2022
20212023
2022
MSRs, net:
Beginning balance
$
1,096
$
1,285
$
1,3221,151
$
1,309
$
1,330
Additions, net
9
43
1729
97
315
Amortization expense
(55)
(69)
(134)(110)
(147)
(285)
Ending balance
$
1,050
$
1,259
$
1,3601,050
$
1,259
$
1,360
Valuation
 
allowance included in MSRs, net:
Beginning of period
$
0—
$
0—
$
0—
$
0—
End of period
0—
0—
0—
0—
Fair value of amortized MSRs:
Beginning of period
$
2,419
$
2,277
$
1,7742,369
$
1,908
$
1,489
End of period
2,547
1,8332,312
2,547
1,8332,312
2,547
NOTE 7: 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
 
market (or(or most advantageous
market in the absence of a principal market) for an asset or liability at the measurement date.
 
GAAP establishes a fair
value hierarchy for valuation inputs that gives the highest priority to quoted prices
 
in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs.
 
The fair value hierarchy is as follows:
Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical
 
assets or liabilities in active
markets.
 
Level 2—inputs to the valuation methodology include quoted prices for similar assets and
 
liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that
 
are observable for the
asset or liability, either directly or
 
indirectly.
 
Level 3—inputs to the valuation methodology are unobservable and reflect the
 
Company’s own assumptions about the
inputs market participants would use in pricing the asset or liability.
 
Level changes in fair value measurements
 
Transfers between levels of the fair value hierarchy are generally
 
recognized at the end of each reporting period.
 
The
Company monitors the valuation techniques utilized for each category of
 
financial assets and liabilities to ascertain when
transfers between levels have been affected.
 
The nature of the Company’s financial assets
 
and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For the six months
 
ended June 30, 2022,2023, there were no
transfers between levels and no changes in valuation techniques for the Company’s
 
financial
assets and liabilities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2326
Assets and liabilities measured at fair value on a recurring
 
basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using
 
Level 2 inputs.
 
For these securities, the Company
obtains pricing data from third party pricing services.
 
These third party pricing services consider observable data that
may
include broker/dealer quotes, market spreads, cash flows, benchmark
yields, reported
trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and
 
conditions.
 
On a quarterly basis,
management reviews the pricing data received from the third party pricing services
for reasonableness
given current market
conditions.
 
As part of its review, management
 
may obtain non-binding third party brokerbroker/dealer quotes to validate the fair value
value measurements.
 
In addition, management will periodically submit pricing information
provided by the
third party
pricing services to
another independent valuation firm on a sample basis.
 
This independent valuation firm will compare the price provided
prices
 
provided by
the third party pricing service with its own price prices
and will review the significant assumptions and
and valuation methodologies
used with management.
The following table presents the balances of the assets and liabilities measured at fair value
 
fair value on a recurring basis as of June
30, 20222023 and December 31, 2021,2022, respectively,
 
by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
 
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
June 30, 2023:
Securities available-for-sale:
Agency obligations
$
125,152
—
125,152
—
Agency MBS
206,980
—
206,980
—
State and political subdivisions
61,947
—
61,947
—
Total securities available-for-sale
394,079
—
394,079
—
Total
assets at fair value
$
394,079
—
394,079
—
December 31, 2022:
Securities available-for-sale:
Agency obligations
 
$
126,911125,617
0—
126,911125,617
0—
Agency RMBSMBS
234,585218,160
0—
234,585218,160
0—
State and political subdivisions
67,72461,527
0—
67,72461,527
0—
Total securities available-for-sale
429,220405,304
0—
429,220405,304
0—
Total
 
assets at fair value
$
429,220405,304
0—
429,220405,304
0
December 31, 2021:
Securities available-for-sale:
Agency obligations
$
124,413
0
124,413
0
Agency RMBS
223,371
0
223,371
0
State and political subdivisions
74,107
0
74,107
0
Total securities available-for-sale
421,891
0
421,891
0
Total
assets at fair value
$
421,891
0
421,891
0—
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.
ImpairedCollateral Dependent Loans
Loans considered impaired under ASC 310-10-35,
Receivables
,Collateral dependent loans 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, orat the fair value of
the collateral less selling costs ifsecuring the loan is collateral dependent.
 
less estimated selling costs. The
24
The fair value of impaired loans was primarily measuredreal estate collateral is determined based on the value of the collateralreal estate appraisals
 
securing these loans. Impairedwhich are generally based on recent sales of
comparable properties which are then adjusted for property specific factors.
Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determined
values based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral
dependent loans are classified within Level 3 of
the hierarchy due to the unobservable inputs used in determining their fair value hierarchy.such as collateral
 
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 salesvalues and the income approach. Appraisedborrower's
underlying financial condition.
 
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
customer’s business. Such discounts by management are subjective
and are typically significant unobservable inputs for27
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
MSRs, net, included in other assets on the accompanying consolidated balance sheets,
 
are carried at the lower of cost or
estimated fair value.
 
MSRs do not trade in an active market with readily observable prices.
 
To determine the fair
 
value of
MSRs, the Company engages an independent third party.
 
The independent third party’s
 
valuation model calculates the
present value of estimated future net servicing income using assumptions that
 
market participants would use in estimating
future net servicing income, including estimates of prepayment speeds, discount rates, default
 
rates, default rates, costcosts 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
June 30, 2023 and December 31, 2022, respectively,
by caption, on the accompanying consolidated balance sheets and by
FASB ASC 820 valuation
hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
June 30, 2023:
Loans, net
(1)
997
—
—
997
Other assets
(2)
1,050
—
—
1,050
Total assets at fair value
$
2,047
—
—
2,047
December 31, 2022:
Loans, net
(3)
2,054
—
—
2,054
Other assets
(2)
1,151
—
—
1,151
Total assets at fair value
$
3,205
—
—
3,205
(1)
Loans considered collateral dependent under ASC 326.
(2)
Represents MSRs, net, carried at lower of cost or
estimated fair value.
(3)
Loans considered impaired under ASC 310-10-35 Receivables,
prior to the adoption of ASC 326.
This amount reflects the recorded
investment in impaired loans, net of any related allowance
for loan losses.
Quantitative Disclosures for Level 3 Fair Value
 
Measurements
At June 30, 2023 and December 31, 2022, the Company had no Level 3 assets measured
 
at fair value on a recurring basis.
 
For Level 3 assets measured at fair value on a non-recurring basis at June 30, 2023
 
and and December 31, 2022, the
significant unobservable inputs used in the fair value measurements and
 
the range of such inputs with respect to such assets
are presented below.
Range of
Weighted
 
Carrying
 
Significant
 
Unobservable
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Inputs
of Input
June 30, 2023:
Collateral dependent loans
$
997
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,050
Discounted cash flow
Prepayment speed or CPR
6.1
-
19.7
7.5
 
Discount rate
9.5
-
11.5
9.5
December 31, 2022:
Impaired loans
$
2,054
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,151
Discounted cash flow
Prepayment speed or CPR
5.2
-
18.6
7.5
 
Discount rate
9.5
-
11.5
9.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25
The following table presents the balances of the assets and liabilities measured
at fair value on a nonrecurring basis as of
June 30, 2022 and December 31, 2021, respectively,
by caption, on the accompanying consolidated balance sheets and by
FASB ASC 820 valuation
hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
June 30, 2022:
Loans held for sale
$
989
0
989
0
Loans, net
(1)
176
0
0
176
Other assets
(2)
1,259
0
0
1,259
Total assets at fair value
$
2,424
0
989
1,435
December 31, 2021:
Loans held for sale
$
1,376
0
1,376
0
Loans, net
(1)
249
0
0
249
Other assets
(2)
1,683
0
0
1,683
Total assets at fair value
$
3,308
0
1,376
1,932
(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 other real estate owned and MSRs, net,
carried at lower of cost or estimated fair value.
Quantitative Disclosures for Level 3 Fair Value
Measurements
At June 30, 2022 and December 31, 2021, 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 June 30, 2022
and December 31, 2021, the significant
unobservable inputs used in the fair value measurements are presented
below.
Weighted
Carrying
Significant
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Range
of Input
June 30, 2022:
Impaired loans
$
176
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,259
Discounted cash flow
Prepayment speed or CPR
7.1
-
18.7
7.4
Discount rate
9.0
-
11.0
9.0
December 31, 2021:
Impaired loans
$
249
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Other real estate owned
374
Appraisal
Appraisal discounts
55.0
-
55.0
55.0
Mortgage servicing rights, net
1,309
Discounted cash flow
Prepayment speed or CPR
6.8
-
16.5
13.3
Discount rate
9.5
-
11.5
9.5
28
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
 
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 estimates
of the fair
fair value of financial instruments held by the Company.
 
ASC 825 excludes certain financial instruments and all nonfinancial
nonfinancial instruments from its disclosure requirements.
26
The following methods and assumptions were used by the Company in estimating the fair
 
value of its financial instruments:
 
Loans, net
 
Fair values for loans were calculated using discounted cash flows. The discount rates reflected
 
current rates at which similar
loans would be made for the same remaining maturities. Expected
 
future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments.
 
The fair value of loans was measured using an exit price notion.
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.
 
The carrying value,
 
related estimated fair value, and placement in the fair value hierarchy of the Company’s
 
financial
instruments at June 30, 20222023 and December 31, 20212022 are presented below.
 
This table excludes financial instruments for
which the carrying amount approximates fair value.
 
Financial assets for which fair value approximates carrying
 
value
included cash and cash equivalents.
 
Financial liabilities for which fair value approximates carrying value
included
noninterest-bearing demand deposits,
 
interest-bearing demand deposits, and savings deposits.
 
Fair value approximates
carrying value in these financial liabilities due to these products having no stated
 
maturity.
 
Additionally, financial
liabilities for which fair value approximates carrying value included overnight
 
borrowings such as federal funds purchased
and securities sold under agreements to repurchase.
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
June 30, 2023:
Financial Assets:
Loans, net (1)
$
513,777
$
482,344
$
—
$
—
$
482,344
Financial Liabilities:
Time Deposits
$
174,529
$
170,342
$
—
$
170,342
$
—
December 31, 2022:
Financial Assets:
Loans, net (1)
$
436,156498,693
$
429,788484,007
$
0—
$
0—
$
429,788
Loans held for sale
989
1,003
0
1,003
0484,007
Financial Liabilities:
Time Deposits
$
154,738150,375
$
155,439150,146
$
0—
$
155,439150,146
$
0
December 31, 2021:
Financial Assets:
Loans, net (1)
$
453,425
$
449,105
$
0
$
0
$
449,105
Loans held for sale
1,376
1,410
0
1,410
0
Financial Liabilities:
Time Deposits
$
156,650
$
160,581
$
0
$
160,581
$
0—
(1) Represents loans, net of unearned income and the allowance
for loancredit losses.
 
The fair value of loans was measured using an
exit price
notion.
 
2729
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
 
understanding of various factors related to the results
of operations and financial condition of the Company and the Bank.
 
This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed consolidated
 
financial statements and related
notes for the quarters and six months ended June 30, 20222023 and 2021,2022, as well as the information
 
contained in our Annual
Report on Form 10-K for the year ended December 31, 20212022 and our Quarterly Reports on
 
Form 10-Q.
 
Special Cautionary Notice Regarding Forward-Looking Statements
Various
 
of the statements made herein under the captions “Management’s
 
Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about Market
 
Market Risk”, “Risk Factors” “Description of
Property” and elsewhere,
are “forward-looking statements” within the
meaning and protections of Section
27A of the
Securities Act of 1933 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
 
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
 
forward-looking statements.
 
You
 
can
identify these forward-looking statements through our use of words such as
“may,” “will,” “anticipate, “may,”
 
“assume,will,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”
 
“estimate,” “continue,” “designed”, “plan,” “point to,” “project,”
“could,project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target”,
“view”, and other similar words and expressions of
of the future.
 
These forward-looking statements may
not be realized due to a variety of
factors, including, without limitation:
●
the effects of future economic, business and market conditions and
 
changes, foreign, domestic and locally,local, including
including inflation, seasonality, natural
 
natural disasters or climate change, such as rising sea and water levels,
hurricanes and
and tornados, COVID-19 or other epidemics or pandemics including supply chain disruptions,
 
inventory volatility, and
and changes in consumer behaviors;
●
the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or
other events that
may affect
general economic conditions;
●
governmental monetary and fiscal policies, including the continuing effects
 
of COVID-19 fiscal and monetary stimuli in
stimulus, andresponse to the COVID-19 crisis, followed by changes in monetary policies beginning in
March 2022 in response
to inflationsinflation, including increases
in the Federal Reserve’s
target federal funds rate and reductions in the Federal
Reserve’s
holdings of securities;
●
legislative and regulatory changes, including changes in banking, securities and tax laws,
 
tax laws, regulations and rules and
their application by our regulators, including capital and liquidity requirements, and changes
 
and changes in the scope and cost
of FDIC insurance;insurance, including changes being considered in light of three regional bank
failures in California and
New York in
March and May 2023;
●
the failure of assumptions and estimates, as well as differences in, and changes to, economic,
 
economic, market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors
 
from those used in our loan
portfolio reviews;
●
the risks of inflation, changes in market interest rates and the shape of the yield curve on the levels, composition
and costs of deposits and borrowings, the values of our securities and loans, loan demand
 
demand and mortgage loan
loan originations, and the values and liquidity of loan collateral, securities, and interest-sensitive
 
assets and liabilities,
liabilities, and the risks and uncertainty of the amounts realizable on collateral;
30
●
the risks of further increases in market interest rates creating additional unrealized
losses on our securities
available for sale, which adversely affect our stockholders’ equity (including
tangible stockholders’ equity) for
financial reporting purposes;
●
changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;
●
changes in the availability and cost of credit and capital in the financial markets, and the types
 
of instruments that
may be included as capital for regulatory purposes;
28
●
changes in the prices, values and sales volumes of residential and commercial real estate;
●
the effects of competition from a wide variety of local, regional, national
 
and other providers of financial,
investment and insurance services, including the disruptiondisruptive effects of
 
financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank;Bank and credit unions,
which are not subject
to federal income taxation;
●
the failure of assumptions and estimates underlying the establishment of allowances
 
for possible loancredit losses, andincluding
other asset impairments, losses valuations of assets and liabilities and other estimates;
●
the costs of redeveloping our headquarters, the timing and amount of rental income
from third parties following
the June 2022
opening of this building, and the timing and amount of the sale of approximately
0.85 acres of landour new
next to the Company’s headquarters for
development by a third party as a hotel;headquarters;
●
the risks of mergers, acquisitions and divestitures, including,
 
without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions and
 
and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
●
changes in technology or products that may be more difficult, costly,
 
or less effective than anticipated;
●
cyber-attacks and data breaches that may compromise our systems,
 
our vendorvendors’ systems
or customers’
information;
●
the risks that our deferred tax assets (“DTAs”),
 
included in “other assets” on our consolidated balance sheets, if
any, could be reduced
if estimates of future
taxable income from
our operations and tax planning strategies are less
than currently estimated, and sales
of our capital stock could
trigger a reduction in the amount of
net operating loss
carry-forwards that we
may be able to utilize for income tax
purposes;
●
the timing and amount of any credit approved by the Internal Revenue Service (“IRS”)
resulting from our planned
filing, seeking an Employee Retention Credit, which we believe we are eligible
for under the CARES Act and the
2020 Consolidated Appropriations Act; and
●
other factors and informationrisks described under “Risk Factors” herein and in this report and other filingsany of our subsequent
reports that we make
with the SECSecurities and Exchange Commission (the “Commission” or “SEC”)
 
under the Exchange Act,
including our Annual Report on Form 10-K for the year ended December 31,
2021 and subsequent quarterly and
current reports. See Part II, Item 1A. “RISK FACTORS”.Act.
All written or oral forward-looking statements that are made by uswe make or are attributable
 
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.
ITEM 1.
BUSINESS
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered
with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding
Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and
in 1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state
member bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled the Bank
since 1984.
As a bank holding
company, the Company
may diversify into a broader range of financial services and other business activities than currently
are permitted to the Bank under applicable laws and regulations.
The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the Bank.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
The Bank has operated continuously since 1907 and currently conducts its business
primarily in East Alabama, including
Lee County and surrounding areas.
The Bank has been a member of the Federal Reserve System since April 1995.
The
Bank’s primary regulators are the Federal
Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”).
The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”)
since 1991.
Certain of the statements made in this discussion and analysis and elsewhere, including information
incorporated herein by
reference to other documents, are “forward-looking statements” within the
meaning of, and subject to, the protections of
Section 27A of the Securities
Act.
31
Summary of Results of Operations
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2022
20212023
2022
20212023
2022
Net interest income (a)
$
6,994
$
6,484
$
6,09314,211
$
12,674
$
12,150
Less: tax-equivalent adjustment
106
110
118214
222
238
Net interest income (GAAP)
6,888
6,374
5,97513,997
12,452
11,912
Noninterest income
 
791
848
1,1311,583
1,756
2,313
Total revenue
 
7,679
7,222
7,10615,580
14,208
14,225
Provision for loancredit losses
(362)
—
(600)(296)
(250)
(600)
Noninterest expense
5,825
5,058
4,91611,429
9,959
9,606
Income tax expense
288
363
504555
617
927
Net earnings
$
1,928
$
1,801
$
2,2863,892
$
3,882
$
4,292
Basic and diluted earnings per share
$
0.55
$
0.51
$
0.651.11
$
1.10
$
1.21
(a) Tax-equivalent.
 
See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $3.9
 
million for the first six months of 2023 and 2022, respectively.
Basic and diluted
earnings per share were $1.11 per share for the first six
months of 2023, compared to $4.3 million$1.10 per share for the first six
months of 2021.
Basic and diluted earnings per share were $1.10 per share for the first six months of 2022,
compared to
$1.21 per share for the first six months of 2021.2022.
 
Net interest income (tax-equivalent) was $12.7$14.2 million for the first six
 
months of 2022,2023, a 4%12% increase compared to $12.2$12.7
million for the first six months of 2021.2022.
 
This increase was primarily due to balance sheet growth, partially offset by a
decreaseimprovements in the Company’s net
 
net interest margin (tax-equivalent).
margin.
 
NetThe Company’s net interest
margin (tax-equivalent) declinedwas 3.10% in the first six months of 2023
compared to 2.51%
in the first six months of 2022.
 
inThis increase was primarily due to a more favorable asset mix and higher
yields on interest
earning assets.
These higher yields on interest earning assets were partially offset
by increased cost of funds.
The cost of
funds increased to 82 basis points, compared to 33 basis points in the first six months of 2022, compared to 2.63% for
also reflecting higher market
interest rates in the first six months of 2021both 2022 and 2023.
 
due to the continued lower interest rate
environment through most ofAverage loans for the first quarter followed by increases in the Federal Reserve’ssix
 
target federal funds rates
beginning March 16, 2022, and changes in our asset mix resulting from the continuing
elevated levels of customer deposits.
Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related costs for
the first six months of 2023 were $507.2
2022, compared to $0.4 million, fora 17% increase from the first six months of 2021.
2022.
At June 30, 2022,2023, the Company’s allowance
 
for loancredit losses was $6.6
million, or 1.27% of total loans, compared to $5.8
million, or 1.14% of total loans, at December 31, 2022, and $4.7
million, or 1.07% of total loans, comparedat June 30, 2022.
The
implementation of CECL required pursuant to $4.9Accounting Standards (“ASC”)
326, which was effective January 1, 2023,
increased our allowance for credit losses by $1.0 million, or 1.08%0.20% of total loans, at December 31, 2021, and $5.7as a day one
 
million, or 1.12% of total loans, at June 30, 2021.transition adjustment.
 
The Company recorded a negative provision for loancredit losses of $0.3
million and $0.6 million during the first six
months of 2023 of $0.3 million, compared
2022 and 2021, respectively.
Theto a negative provision for loancredit losses during 2022 was primarily related to
a decrease in total
loans, excluding PPP,
of $0.3 million during the first six months of 2022.
 
The negative provision for loancredit losses during 2021 was
primarily related to improvements in economic conditions in our primary marketunder CECL is reflective of the Company’s credit
 
area,risk profile and related improvements in ourthe future economic outlook and forecasts.
Our CECL
asset quality.model is largely influenced by economic factors including,
most notably, the anticipated
unemployment rate.
 
The negative
provision for loancredit losses is based upon various estimates and judgments,
including the absolute level of
loans, economic conditions, credit quality and the amount of net charge
-offs.
Noninterest income was $1.8 million forduring the first six months of 20222023 was primarily related to the resolution
of a collateral
dependent nonperforming loan, with a recorded investment of $1.3
million and a corresponding allowance of $0.5 million,
that was collected in full during the second quarter of 2023.
Noninterest income was $1.6 million in the first six months of 2023,
 
compared to $2.3$1.8 million forin the first six months of
2021.2022.
 
The decrease in noninterest income was primarily due to a decrease
in mortgage lending
income of $0.5$0.2
 
million as a
refinance activity slowed in our primary market area, asresult of higher mortgage market interest rates
on mortgage loans increased.
rates.
Noninterest expense was $11.4 million in the first six
months of 2023,
compared to $10.0 million for the first six months of 2022 compared
to $9.6 million for the first six months of
2021.2022.
 
The increase in noninterest expense was primarily due to increasesan increase in salaries and benefits expensenet occupancy
 
of $0.2 million and net
occupancy and equipment expense of $0.3
$0.4
million related to the Company’s
new headquarters,
 
partially offset
by a
decreasewhich opened in June 2022, professional fees expense of $0.1$0.2
million, and other noninterest expense of $0.8 million.
30
 
Income tax expense was $0.6 million for the first six months of 20222023
 
and 2022, respectively.
The Company's effective tax
rate for the first six months of 2023 was 12.48%, compared to $0.913.71% in the first six months of 2022.
The Company’s
effective income tax rate is principally affected by tax-exempt
earnings from the Company’s investment in
municipal
securities, bank-owned life insurance (“BOLI”), and New Markets Tax
Credits (“NMTCs”).
32
The Company paid cash dividends of $0.54 per share in the first six months of 2023,
an increase of 2% from the same
period of 2022.
The Company repurchased 4,225 shares for $0.1
 
million during the first six months of 2023.
At June 30,
2023, the Bank’s regulatory capital ratios
were well above the minimum amounts required to be “well capitalized” under
current regulatory standards with a total risk-based capital ratio of 2021.16.31%,
a tier 1 leverage ratio of 10.23% and a common
equity tier 1 (“CET1”) ratio of 15.33% at June 30, 2023.
At June 30,
2023, the Company’s equity to total assets ratio
was
6.92%, compared to 6.65% at December 31, 2022, and 7.02% at June 30, 2022
.
For the second quarter of 2023, net earnings were $1.9 million, or $0.55
per share, compared to $1.8 million, or $0.51 per
share, for the second quarter of 2022.
Net interest income (tax-equivalent) was $7.0 million for the second quarter of 2023,
an increase of 8% compared to $6.5
million for the second quarter of 2022.
This increase was primarily due to
improvements in the Company’s net interest
margin.
 
The Company’s effective taxnet interest margin
 
rate for(tax-equivalent) was 3.03% in the first six months
second quarter of 2022 was 13.71%,2023 compared to 17.76%2.60% in the first six
monthssecond quarter of 2021.2022.
 
The decreaseCompany recorded a negative provision for
credit losses during the second quarter of 2023 of $0.4 million, compared to no provision for
credit losses during the second
quarter 2022.
The provision for credit losses was primarily related to the resolution of a collateral
dependent
nonperforming loan, with a recorded investment of $1.3 million and a corresponding allowance
of $0.5 million, that was
collected in full during the second quarter of 2023.
Noninterest income was $0.8 million in the second quarter of 2023 and
2022, respectively.
Noninterest expense was $5.8 million in the second quarter of 2023,
compared to $5.1 million for the
second quarter of 2022.
The increase in noninterest expense was primarily due to an incomeincreases in other noninterest expense
of
$0.4 million.
Income tax benefit related to a New Markets Taxexpense was $0.3
 
Credit investment
funded inmillion for the fourthsecond quarter of 2021.2023, compared to $0.4 million for the second
quarter of 2022.
The Company's effective tax rate for the second quarter of 2023
was 13.00%, compared to 16.77% in the
second quarter of 2022.
 
The Company’s effective income
 
tax rate is principally impacted by tax-exempt
earnings from the
Company’s investment in municipal
 
investments in municipal securities, bank-owned life insurance, and New Markets
Tax
Credits.
The Company paid cash dividends of $0.53 per share in the first six months of 2022,
an increase of 2% from the same
period of 2021.
The Company’s share repurchases of $0.
3
million since December 31, 2021 resulted in 10,640 fewer
outstanding common shares at June 30, 2022.
At June 30, 2022, the Bank’s regulatory capital ratios
were well above the
minimum amounts required to be “well capitalized” under current regulatory
standards with a total risk-based capital ratio
of 17.38%, a tier 1 leverage ratio of 9.16 % and a common equity tier 1 (“CET1”)
ratio of 16.59 % at June 30, 2022.
For the second quarter of 2022, net earnings were $1.8 million, or $0.51
per share, compared to $2.3 million, or $0.65 per
share, for the second quarter of 2021.
Net interest income (tax-equivalent) was $6.5 million for the second quarter of 2022,
a 6% increase compared to $6.1
million for the second quarter of 2021.
This increase was primarily due to balance sheet
growth, and recent increases in market interest rates.
The Federal Reserve increased the target federal funds range by 25
basis points on March 27, 2022, 50 basis points on May 5 and 75 basis points on each of June
16 and July 27.
Further
increases in the target federal funds rate are possible if inflation remains elevated.
The Company’s net interest
margin (tax-
equivalent) was 2.60% in the second quarter of 2022 and 2021. Net interest income
(tax-equivalent) included $0.1
million
in PPP loan fees, net of related costs for the second quarter of 2022 and
$0.2 million in the second quarter of 2021.
The
Company had no provision for loan losses during the second quarter of 2022
compared to a negative provision for loan
losses of $0.6 million during the second quarter 2021.
Noninterest income was $0.8 million in the second quarter of 2022,
compared to $1.1 million in the second quarter of 2021.
The decrease in noninterest income was primarily due to a
decrease in mortgage lending income of $0.2
million as refinance activity slowed in our primary market area, as market
interest rates on mortgage loans increased.
Noninterest expense was $5.1 million in the second quarter of 2022,
compared
to $4.9 million for the second quarter of 2021.
The increase in noninterest expense was primarily due to an increase in net
occupancy and equipment expense of $0.3 million related to the Company’s
new headquarters, which opened in June 2022.
Income tax expense was $0.4
million for the second quarter of 2022 compared to $0.5 million for the second quarter
of
2021.
The Company's effective tax rate for the second quarter of 2022
was 16.77%, compared to 18.06% in the second
quarter of 2021.
This decrease was primarily due to an income tax benefit related to a New Markets Tax
 
Credit investment
funded in the fourth quarter of 2021.
The Company’s effective
income tax rate is principally impacted by tax-exempt
earnings from the Company’s
investment in municipal securities, bank-owned life insurance,
and New Markets Tax
Credits.
Other Events
We entered into a contract
on February 15, 2022 to sell approximately 0.85 acres of land to a third party,
where our former
headquarters building was located. The land, which is adjacent to our new
headquarters, has been cleared and site
improvements, which are a condition to the buyer’s obligation to
close its purchase, are being made.
The sale includes all
appurtenances, privileges, development and rights for an aggregate purchase
price of $4.26 million, net of estimated
prorations and closing costs. The principal owner of the purchaser and
his related interests are Bank customers and are
among the Bank’s largest borrowers.
All such loans and deposits are in the ordinary course of the Bank’s
business upon
market terms and conditions not more favorable than similarly situated customers. The
Bank entered into the agreement on
an arms-length basis in consultation with the Bank’s
real estate developer, and the agreement is on
market terms and
conditions.
The agreement contains various other terms, representations, warranties, covenants
and closing conditions that are
customary for transactions similar to the sale. The purchaser has a 180 day inspection period
ending on August 14, 2022
subject to up to 3 possible extensions, to complete all its due diligence, inspections and reviews,
and receive its necessary
approvals. The closing is subject to the completion of such matters satisfactory to the
purchaser, the satisfaction of the
agreement’s other terms, including customary
closing conditions, and the negotiation and execution of various use and
other ancillary agreements and may be extended. The purchaser’s obligations
to close are not contingent upon the purchaser
obtaining financing. The sale of the property is expected to close 30 days following the
later of (a) the expiration of the
inspection period and (b) the satisfaction of all the closing conditions. Upon closing, the
Company currently expects the
sale to be accretive to earnings by approximately $0.70 per share.
Currently, the Bank expects the transaction
to close later
this year.
31
We also intend to file a request
with the IRS for an employee retention credit of $1.6 million, or approximately $1.2
million
net of estimated income tax effects, or approximately $0.33 per
share, under the CARES Act and the 2022 Consolidated
Appropriations Act.
IRS action on this request, including its timing and the amount of any credit
approved by the IRS,
cannot be predicted. See “COVID-19 Impact Assessment.”
COVID-19 Impact Assessment
The COVID-19 pandemic has occurred in waves of different
variants since the first quarter of 2020. Vaccines
to protect
against and/or reduce the severity of COVID-19 were widely introduced at the
beginning of 2021.
At times, the pandemic
has severely restricted the level of economic activity in our markets. In response to the
COVID-19 pandemic, the State of
Alabama, and most other states, have taken preventative or protective actions to prevent
the spread of the virus, including
imposing restrictions on travel and business operations and a statewide mask mandate,
advising or requiring individuals to
limit or forego their time outside of their homes, limitations on gathering of people and
social distancing, and causing
temporary closures of businesses that have been deemed to be non-essential. Though certain
of these measures have been
relaxed or eliminated, especially as vaccination levels increased, such
measures could be reestablished in cases of new
waves, especially a wave of a COVID-19 variant that is more resistant
to existing vaccines and newly developed
treatments.
COVID-19 has significantly affected local state, national and
global health and economic activity and its future effects are
uncertain and will depend on various factors, including, among others, the duration
and scope of the pandemic, especially
new variants of the virus, effective vaccines and drug treatments, together
with governmental, regulatory and private sector
responses. COVID-19 has had continuing significant effects
on the economy, financial
markets and our employees,
customers and vendors. Our business, financial condition and results of oper
ations generally rely upon the ability of our
borrowers to make deposits and repay their loans, the value of collateral underlying
our secured loans, market value,
stability and liquidity and demand for loans and other products and services we offer,
all of which are affected by the
pandemic.
We have implemented
a number of procedures in response to the pandemic to support the safety and
well-being of our
employees, customers and shareholders.
●
We believe our business continuity
plan has worked to provide essential banking services to our
communities and
customers, while protecting our employees’ health. As part of our efforts
to exercise social distancing in
accordance with the guidelines of the Centers for Disease Control and the Governor
of the State of Alabama,
starting March 23, 2020, we limited branch lobby service to appointment only
while continuing to operate our
branch drive-thru facilities and ATMs.
As permitted by state public health guidelines, on June 1, 2020, we re-
opened some of our branch lobbies. In 2021, we opened our remaining branch lobbies.
We continue to
provide
services through our online and other electronic channels. In addition,
we maintain remote work access to help
employees stay at home while providing continuity of service during outbreaks of
COVID-19 variants.
●
We serviced the financial
needs of our commercial and consumer clients with extensions and
deferrals to loan
customers effected by COVID-19, provided such customers
were not more than 30 days past due at the time of the
request; and
●
We
were an active PPP lender. PPP loans were forgiva
ble, in whole or in part, if the proceeds are used for payroll
and other permitted purposes in accordance with the requirements of the PPP.
These loans carry a fixed rate of
1.00% and a term of two years (loans made before June 5, 2020)
or five years (loans made on or after June 5,
2020), if not forgiven, in whole or in part. Payments are deferred
until either the date on which the Small Business
Administration (“SBA”) remits the amount of forgiveness proceeds
to the lender or the date that is 10 months after
the last day of the covered period if the borrower does not apply for forgiveness
within that 10-month period. We
believe these loans and our participation in the program helped our customers and the communities
we serve.
32
COVID-19 has also had various economic effects, generally.
These include supply chain disruptions and manufacturing
delays, shortages of certain goods and services, reduced consumer expenditure on
hospitality and travel, and migration from
larger urban centers to less populated areas and remote work. The
demand for single family housing has exceeded existing
supplies. When coupled with construction delays attributable to supply chain disruptions
and worker shortages, these
factors have caused housing prices and apartment rents to increase, generally.
Stimulative monetary and fiscal policies,
along with shortages of certain goods and services, and rising petroleum and food
prices,
reflecting, among other things, the
war in the Ukraine, have led to the highest inflation in decades. Although fiscal stimulus remains
under consideration by
the President and Congress, the Federal Reserve has begun increasing its target
interest rates and is considering reducing its
holdings
of securities to counteract inflation.
A summary of PPP loans extended during 2020 follows:
(Dollars in thousands)
# of SBA
Approved
Mix
$ of SBA
Approved
Mix
SBA Tier:
$2 million to $10 million
—
—
%
$
—
—
%
$350,000 to less than $2 million
23
5
14,691
40
Up to $350,000
400
95
21,784
60
Total
423
100
%
$
36,475
100
%
We collected
approximately $1.5 million in fees from the SBA related to our PPP loans during 2020. Throug
h
December
31, 2021, we have recognized all of these fees, net of related costs.
As of December 31, 2021, we had received payments
and forgiveness on all PPP loans extended during 2020.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues
Act (the “Economic Aid
Act”) was signed into law. The
Economic Aid Act provides a second $900 billion stimulus package, including $325
billion
in additional PPP loans. The Economic Aid Act also permits the collection of
a higher amount of PPP loan fees by
participating banks.
A summary of PPP loans extended during 2021 under the Economic Aid
Act follows:
(Dollars in thousands)
# of SBA
Approved
Mix
$ of SBA
Approved
Mix
SBA Tier:
$2 million to $10 million
—
—
%
$
—
—
%
$350,000 to less than $2 million
12
5
6,494
32
Up to $350,000
242
95
13,757
68
Total
254
100
%
$
20,251
100
%
We collected
approximately $1.0 million in fees from the SBA related to PPP loans under the Economic Aid
Act. Through
June 30, 2022, we have recognized $0.9
million of these fees, net of related costs. As of June 30, 2022, we have received
payments and forgiveness on 240 PPP loans under the Economic
Aid Act, totaling $19.6 million. The outstanding balance
for the remaining 14 PPP loans under the Economic Aid Act was approximately $0.6
million at June 30, 2022.
We continue to closely
monitor this pandemic, and are working to continue our services and to address
developments as
those occur. Our results of operations for the
six months ended June 30, 2022, and our financial condition at that date
reflect only the ongoing effects of the pandemic, and may not
be indicative of future results or financial conditions,
including possible changes in monetary or fiscal stimulus, and the possible effects
of the expiration or extension of
temporary accounting and bank regulatory relief measures in response to the COVID
-19 pandemic.
As of June 30, 2022,
all of our capital ratios were in excess of all regulatory requirements to be well capitalized.
The
continuing effects of the COVID-19 pandemic could result in adverse
changes to credit quality and our regulatory capital
ratios, and inflation will affect our costs, interest rates and the values of our assets and
liabilities, customer behaviors and
economic activity.
Continuing supply chain and supply disruptions also adversely affect the
levels and costs of economic
activities.
We continue to closely
monitor this pandemic, and are working to continue our services during the pandemic
and to address developments as those occur.
33
The CARES Act and the 2020 Consolidated Appropriations Act provide eligible
employers an employee retention credit
related to COVID-19.
After consultation with our tax advisors, we believe we are eligible, subject
to the finalization and
filing of our request with the IRS, and approval of such request by the IRS, of an estimated
employee retention credit of
$1.6 million, or approximately $1.2 million, net of estimated income tax effects,
or approximately $0.33 per share.
IRS
action on this request, including its timing and the amount of any credit approved
by the IRS, cannot be predicted.
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 loancredit losses for loans, our
assessmentdetermination of other-than-temporary impairment, credit losses for investment securities,
recurring and
non-recurring fair value measurements, the valuation of
of other real estate owned, and the valuation of deferred tax assets, were critical to the determination
 
of our financial position
position and results of operations. Other policies also require subjective judgment and assumptions
 
assumptions and may accordingly
impact our
financial position and results of operations.
 
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASC 326 as described more fully in our
unaudited financial statements in Part I
of this Quarterly report,
especially Note 1, Accounting Standards Adopted in 2023 and Note 5, Loans and Allowance
for
Credit Losses.
This standard replaced the incurred loss methodology with an expected loss
methodology that is referred to
as the current expected credit loss (“CECL”) methodology.
CECL requires an estimate of credit losses for Loan Lossesthe remaining
estimated life of the financial asset using historical experience, current conditions,
and reasonable and supportable forecasts
and generally applies to financial assets measured at amortized cost, including loan
receivables and held-to-maturity debt
securities, and some off-balance sheet credit exposures such as unfunded
commitments to extend credit. Financial assets
measured at amortized cost will be presented at the net amount expected to be
collected by using an allowance for credit
losses.
In addition, CECL made changes to the accounting for available for sale debt
securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt
securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required
to sell.
The Company assessesadopted ASC 326 and all related subsequent amendments thereto
effective January 1, 2023 using the adequacy
modified retrospective approach for all financial assets measured at amortized
cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of itsCECL on January 1, 2023 included an increase
in the allowance for credit
losses on loans of $1.0 million, which is presented as a reduction to net loans outstanding, and
an increase in the allowance
for credit losses on unfunded loan lossescommitments of $0.1 million, which is recorded
within other liabilities. The Company
recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023 for the cumulative
effect of adopting
CECL, which reflects the transition adjustments noted above, net of the applicable deferred
tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior
 
period amounts continue to the end of each calendar quarter. The level ofbe
the allowance is based upon management’sreported
 
evaluationin accordance with previously applicable accounting standards.
33
The Company adopted ASC 326 using the loan portfolio, past loan loss experience, current asset quality
trends, known and inherent risks in the portfolio, adverse situations that may affectprospective transition approach for debt
 
a borrower’s abilitysecurities for which other-than-
temporary impairment had been recognized prior to repay (including
the timing of future payment), the estimated value of any underlying collateral,January 1, 2023.
 
compositionAs of December 31, 2022, the loan portfolio, economicCompany did not have
conditions, industry and peer bank loan loss rates and other pertinent factors, includingany other-than-temporarily impaired investment securities. Therefore,
 
regulatory recommendations. Thisupon adoption of ASC 326, the Company determined
evaluation is inherently subjective as it requires material estimates including the amountsthat an allowance for credit losses on available for sale securities was not deemed
material.
The Company elected not to measure an allowance for credit losses for accrued interest receivable
 
and timinginstead elected to
reverse interest income on loans or securities that are placed on nonaccrual status,
which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of future cash flows
expected to be received on impaired loans that may be susceptible to significant change.interest is doubtful. The Company
 
has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic
326): Troubled Debt
Restructurings and Vintage Disclosures”
on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements
for certain loan
refinancings and restructurings by creditors when a borrower is experiencing
financial difficulty.
Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity
must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new loan or a
continuation of an existing loan. Additionally,
ASU
2022-02 requires an entity to disclose current-period gross write-offs
by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at
Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated
financial statements.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are charged off, reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums
and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded
in wholeother assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a
level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and
is not well collateralized and in
the process of collection, or
in part, when management believes, after considering economic and
business conditions and collection
efforts, that the full collectability ofprincipal or interest will not be collectible in the loan is unlikely.normal course
 
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 loanbusiness. Past due status 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. A loan agreement.is considered to be past due when a scheduled payment has
 
Collection of all amounts duenot been received 30 days
according toafter the contractual terms meansdue date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual
status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual.
Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero.
Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there
is a sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that bothis deducted from the interest and principal payments of aloans' amortized
 
loan willcost basis to present the net
amount expected to 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, impairment
measurement is based on the fair valueloans. Loans are charged
off against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the collateral, less estimated disposal costs.aggregate
of amounts previously
charged-off and expected to be charged-off.
Accrued interest receivable is excluded from the estimate of credit losses.
The levelallowance for credit losses represents management’s
estimate of allowance maintained is believed by management, based on its processes and
estimates, to be adequate to
absorb probablelifetime credit losses inherent in loans as of the portfolio at the
balance sheet date. The allowance for credit losses is estimated by management using relevant
 
allowance is increased by provisions chargedavailable information, from
both internal and external sources, relating to expensepast events, current conditions, and decreased by charge-offs, net of recoveries of amountsreasonable and
 
previously charged-off and by releases from the
allowance when determined to be appropriate to the levels of loans and probablesupportable forecasts.
 
loan losses in such loans.
In assessing the adequacy of the allowance, the Company also considers the results of its
ongoing internal, independent
loan review process. The Company’s loan loss estimation process includes
 
review process assists in determining whether there are loans inprocedures to appropriately consider the portfolio
whose credit quality has weakened over time and evaluating the riskunique characteristics of the
 
entire its
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:
commercialsegments (commercial and industrial, construction and land development,
commercial real estate, multifamily,
residential
real estate, and consumer
installment loans. The Company analyzes each segment and estimates an allowance allocation loans).
 
These segments are further disaggregated into loan classes, the level at which
credit quality is monitored.
See Note 5, Loans and Allowance for each Credit Losses, for additional information about our
loan segment.
portfolio.
34
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model
for each loan segment, except consumer
loans.
The allocation weighted average remaining life method is used to estimate credit loss assumptions
for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering the
forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic
factors, and LGD, which is the estimate
of the amount of net loss in the event of default.
This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis.
The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial,
construction and land development,
commercial real estate, multifamily,
and residential real estate loans.
In addition, forecasted changes in the Alabama home
price index is considered in the model for construction and land development and residential
real estate loans; forecasted
changes in the national commercial real estate (“CRE”) price index is considered in the
model for commercial real estate
and multifamily loans; and forecasted changes in the Alabama gross state product
is considered in the model for
multifamily loans.
Projections of these macroeconomic factors, obtained from an independent
third party, are utilized to
predict quarterly rates of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the loan, adjusted for
expected prepayments and principal
payments (“curtailments”) when appropriate. Management's determination of the
contract term excludes expected
extensions, renewals, and modifications unless the extension or
renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company.
To the extent the lives of the
loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be
made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion
period.
The weighted average remaining life method was deemed most appropriate
for the consumer loan segment because
consumer loans contain many different payment structures,
payment streams and collateral.
The weighted average
remaining life method uses an annual charge-off rate over several vintages
to estimate credit losses.
The average annual
charge-off rate is applied to the contractual term adjusted for
prepayments.
Additionally, the allowance
for credit losses calculation includes subjective adjustments for qualitative risk
factors that are
believed likely to cause estimated credit losses to differ from historical experience.
These qualitative adjustments may
increase or reduce reserve levels and include adjustments for lending management experience
and risk tolerance, loan
review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,
trends in
underlying collateral, external factors and economic conditions not already captured.
Loans that do not share risk characteristics are evaluated on an individual basis. When
management determines that
foreclosure is probable and the borrower is experiencing financial difficulty,
the expected credit losses are based on the
estimated fair value of collateral held at the reporting date, adjusted for selling costs as appro
priate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s
exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off
-balance sheet loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are recorded
when they are funded.
The Company records an allowance for loancredit losses begins withon off-balance
sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a process of estimating thecharge to provision
 
probablefor credit losses inherent for these
types of loans. The estimates for these loans are established by category and based
onin the Company’s internal systemconsolidated
statements of earnings. The allowance for credit losses on off-balance sheet credit
exposures is estimated by loan segment
at each balance sheet date under the current expected credit risk ratings and historical loss data.model using the same
methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party
guarantees. The estimated loan loss allocation rateallowance for
unfunded commitments is included in other liabilities on the Company’s
 
internal systemconsolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77
thousand for the adoption of
credit risk grades is based on its experience with similarly graded loans.ASC 326. For
loan segments where the six months ended June 30, 2023, the Company believes it
does not have sufficient historical loss data, the Company mayrecorded
 
make adjustments based, in part, on loss ratesa negative provision for credit losses for
unfunded commitments of peer bank
groups.$5 thousand. At June 30, 2022 and December 31, 2021, and for the periods2023,
 
then ended, the Company adjusted its historical loss
ratesliability 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,on off-balance-sheet credit
exposures included in other liabilities was $0.3
million.
35
Assessment for Allowance for Credit Losses – Available
-for-Sale Securities
For any securities classified as ofavailable-for-sale that are in an unrealized
 
loss position at 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. The Company’s look-back
period each quarter incorporates the effects of at least one economic downturn
in its loss history.
The Company believes
this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period,
the early
cycle periods in which the Company experienced significant losses would be excluded
from the determination of the
allowance for loan losses and its balance would decrease. For the quarter ended
June 30, 2022, the Company increased its
look-back period to 53 quarters to continue to include losses incurred by the Company beginning
with the first quarter of
2009. The Company will likely continue to increase its look-back period to incorporate
the effects of at least one economic
downturn in its loss history.
During the quarter ended June 30, 2021, the Company adjusted certain qualitative
and
economic factors, previously downgraded as a result of the COVID-19
pandemic, to reflect improvements in economic
conditions in our primary market area.
Further adjustments may be made from time to time in the future as a result of the
COVID-19 pandemic and other economic changes.
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 debt securities with an unrealized loss, an other-than-temporary
impairment write-down is triggered when (1) the
Company has the intentassesses whether or not it intends to sell a debtthe security,
 
(2) it isor 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 of its amortized cost basis.
 
If either of these criteria are met, 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’ssecurity's amortized cost basis is written
down to fair value through net income.
 
andIf neither criterion is met, the Company evaluates whether any portion of the
decline in fair value is the result of credit deterioration.
Such evaluations consider the extent to which the amortized cost of
the security exceeds its fair value, changes in credit ratings and any other known adverse
conditions related to the specific
security.
If the evaluation indicates that a credit loss exists, an allowance for credit
losses is recorded for the amount by
which the amortized cost basis of the security exceeds 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 expected
to factors that arebe collected, limited by
the amount by which the amortized cost exceeds fair value.
Any impairment not recognized in the allowance for credit related and
losses is recognized in other comprehensive
income, net of applicable taxes. income.
The Company is required to own certain stock as a condition of membership, such as the
 
FHLB of Atlanta and Federal Home Loan
Reserve Bank (“FHLB”)
and Federal Reserve Bankof Atlanta (“FRB”).
 
These non-marketable equity securities are accounted for at cost
which equals par or
redemption value.
 
These securities do not have a readily determinable fair value as their ownership is restricted and
 
and there is
no market for these securities.
 
The Company records these non-marketable equity securities as a component
 
of other
assets, which are periodically evaluated for impairment. Management considers
 
these non-marketable equity securities to
be long-term investments. Accordingly,
 
when evaluating these securities for impairment, management considers
 
the
ultimate recoverability of the par value rather than by recognizing temporary declines in
 
value.
35
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
 
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 7, Fair Value,
 
of the unaudited 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
 
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”),or OREO, consists of properties obtained through foreclosure or otherwise
 
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
a charge-off through the allowance for loancredit losses. Additional
 
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 OREO.
36
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. At June 30, 20222023
 
we had total deferred tax assets of $10.3$13.4 million included
as “other assets”, including $9.5$13.1 million resulting from unrealized losses in our securities
 
portfolio.
 
Based upon the level of
of taxable income over the last three years and projections for future taxable income over the
 
the periods in which the deferred tax
tax assets are deductible, management believes it is more likely than not that we
 
we will realize the benefits of these deductible
differences at June 30, 2022.2023. The amount of the deferred tax assets considered
 
realizable, however, could be reduced if
estimates of future taxable income are reduced.
36
RESULTS
 
OF OPERATIONS
Average Balance
 
Sheet and Interest Rates
Six months ended June 30,
 
20222023
20212022
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
 
$
434,863507,176
4.42%4.68%
$
464,332434,863
4.47%4.42%
Securities - taxable
371,012348,066
2.14%
370,549
1.57%
299,011
1.32%
Securities - tax-exempt
 
60,22854,741
3.54%3.76%
62,84460,691
3.64%3.51%
Total securities
 
402,807
2.36%
431,240
1.84%
361,855
1.72%
Federal funds sold
5,619
4.77%
63,021
0.36%
34,700
0.13%
Interest bearing bank deposits
9,805
4.61%
88,008
0.52%
71,252
0.09%
Total interest-earning assets
925,407
3.67%
1,017,132
2.74%
932,139
2.91%
Deposits:
 
 
NOW
188,491
0.57%
204,912
0.12%
173,102
0.13%
Savings and money market
296,425
0.48%
338,283
0.20%
284,174Time deposits
0.23%160,102
Time Deposits1.71%
157,877
0.88%
159,406
1.07%
Total interest-bearing deposits
645,018
0.81%
701,072
0.33%
616,682
0.42%
Short-term borrowings
4,0753,443
0.50%1.82%
3,2664,075
0.50%
Total interest-bearing liabilities
648,461
0.82%
705,147
0.33%
619,948
0.42%
Net interest income and margin (tax-equivalent)
$
12,67414,211
2.51%3.10%
$
12,15012,674
2.63%2.51%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $12.7$14.2 million for the first six months of
 
months of 2022,
2023, a 4%12% increase compared to $12.2$12.7
million for the first six months of 2021.2022.
 
This increase was primarily due to balance sheet growth, partially offset
by a
decreaseimprovements in the Company’s net
 
net interest
margin (tax-equivalent).
 
NetThe Company’s net interest
margin (tax-equivalent) declined to 2.51%was 3.10% in
the first six months of 2022, 2023
compared to 2.63% for2.51% in the first six months of 20212022.
 
This increase was primarily due to the continued lower interest rate
environment and changes in oura more favorable asset mix resulting fromand
higher yields on interest earning assets.
Since March of 2022, the continuing elevated
levels of customer deposits.
The Federal
Reserve increased the target federal
funds range by
from 0 – 0.25% to 5.00 – 5.25%.
The target rate was increased another 25 basis points on March 27,July 26,
 
2022, 50 basis points on May 52023, and 75further
basis points on each of June 16 and July 27.
Further increases in the target federal funds rate are possibleappear likely if inflation
remains elevated.
Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related
costs for the
first six months of 2022, compared to $0.4 million for the first six months of 2021.
The tax-equivalent yield on total interest-earning assets decreasedincreased by 1793 basis points
 
to 3.67% in the first six months of
2023 compared to 2.74% in the first six months of
2022 compared to 2.91% in the first six months of 2021. 2022.
 
This decreaseincrease was primarily due to changes in our asset mix and
resulting from the significant increase in customer deposits.higher market interest rates on interest earning assets.
The cost of total interest-bearing liabilities decreasedincreased by 949 basis points to 0.33%
 
0.82% in the first six months of 20222023 compared to
0.42%to 0.33% in the first six months of 2021, even as interest bearing deposits increased.
The net decrease in our funding costs
was primarily due to lower prevailing market interest rates through most of the
first quarter of 2022.
Our funding costs
declined less than the rates earned on our interest earning assets.
 
Our deposit costs may continue to increase as the Federal Reserve
increases its
target federal funds rate, and market interest rates increase.
The Company continues to deploy various asset liability management strategiesincrease, and
 
to manage its risk toas customer behaviors change as a result of inflation and higher
market interest rate
fluctuations. Pricing remains competitive in our markets.
We believe this challenging
competitive environment will
continue throughout the remainder of 2022.
Our ability to hold our deposit rates low until our interest-earning assets
reprice will be important in our ability to maintain or potentially increase our net interest
margin during the beginning of
the monetary tightening cycle that we believe we will continue to experience in
2022.on deposits and other alternative investments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
37
The Company continues to deploy various asset liability management strategies
to manage its risks from interest rate
fluctuations. Deposit and loan pricing remain competitive in our
markets.
We believe this challenging
rate environment
will continue throughout 2023.
Our ability to compete and manage our deposit costs until our interest-earning assets
reprice will be important to maintaining or potentially increasing our net interest
margin during the monetary tightening
cycle that we believe will continue throughout 2023.
Provision for LoanCredit Losses
TheOn January 1, 2023, we adopted ASC 326, which introduces the current expected
credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loans.
Accordingly, the provision for loan credit
losses represents a charge to earnings necessary to provideestablish an allowance
 
an allowance for loancredit losses that, in management's evaluation,
management believes, based on its processes and estimates, should beis adequate
to provide coverage for the probable losses on
outstanding loans.
all expected credit losses. The Company recorded
a negative provision for loancredit losses of $0.3
million for the first six months of
2022, compared to a negative provision for loan losses of $0.6 million for the first six
months of 2021.
The negative
provision for loan losses for the first six months of 2022 was primarily related
to a decrease in total loans, excluding PPP,
during the first six months of 2023 of $0.3
million, compared to a negative provision for credit losses of $0.3 million during
the first six months of 2022.
Provision expense is affected by organic loan growth in our
loan portfolio, our internal
assessment of the credit quality of the loan portfolio, our expectations about future economic
conditions and net charge-
offs.
Our CECL model is largely influenced by economic factors
including, most notably,
the anticipated
unemployment
rate, which may be affected by monetary policy.
 
The negative provision for loancredit losses forduring the first six months
of 2021
2023 was primarily
related to improvementsthe resolution of a collateral dependent nonperforming loan,
with a recorded investment of
$1.3 million and a corresponding allowance of $0.5 million, that was collected in economic conditions infull during
the second quarter of 2023.
Our allowance for credit losses reflects an amount we believe appropriate,
based on our primary market area.allowance assessment
methodology, to adequately cover
 
The provision for loanall expected future losses is based upon
various factors, including the absolute level of loans, economic conditions, credit
quality, and the amount of net charge-
offs.
Based upon its assessmentas of the loan portfolio, management adjustsdate the allowance is determined. At June 30, 2023,
the Company’s allowance for loancredit
 
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 percentagewas $6.6 million, or 1.27% of total loans, wascompared to $5.8 million, or 1.14% of
total loans, at December 31, 2022, and $4.7 million, or 1.07% of total loans, at June 30, 2022, compared to2022.
 
1.08% at December 31, 2021.
WhileThe implementation of
the policies and procedures used to estimate the allowance for loan losses,CECL, 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 industries) may have a material adverse
effect on
our asset quality and the adequacy of January 1, 2023, increased our allowance for loancredit losses resulting in significantby $1.0
 
increases in the provision formillion, or 0.20% of total loans, as a day
loan losses.one transition adjustment to ASC 326.
Noninterest Income
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2022
20212023
2022
20212023
2022
Service charges on deposit accounts
$
154
$
146
$
138308
$
288
$
270
Mortgage lending income
142
187
424235
440
973
Bank-owned life insurance
68
97
99224
196
202Other
Other427
418
470816
832
868
Total noninterest income
$
791
$
848
$
1,1311,583
$
1,756
$
2,313
The Company’s income from mortgage lending
 
was primarily attributable to the (1) origination and sale of mortgage loans
and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses
 
from the sale of the mortgage
loans originated, origination fees, underwriting fees, and other fees associated
 
with the origination of loans, which are
netted against the commission expense associated with these originations. The
 
Company’s normal practice is to originate
mortgage loans for sale in the secondary market and to either sell or retain the associated
 
MSRs when the loan is sold.
 
MSRs are recognized based on the fair value of the servicing right on the date the corresponding
 
mortgage loan is sold.
 
Subsequent to the date of transfer, the Company
 
has elected to measure its MSRs under the amortization method.
 
Servicing
fee income is reported net of any related amortization expense.
 
The Company evaluates MSRs for impairment on a quarterly basis.
 
Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type.
 
If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair
 
value, a valuation allowance for that group is established.
 
The valuation
allowance is adjusted as the fair value changes.
 
An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease
 
in the fair value of MSRs.
 
The following table presents a breakdown of the Company’s
mortgage lending income.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2022
2021
2022
2021
Origination income
$
120
$
398
$
349
$
935
Servicing fees, net
67
26
91
38
Total mortgage lending income
$
187
$
424
$
440
$
973
 
 
 
 
 
 
 
 
 
 
38
The Company’s income from mortgage lending
typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of mortgage loans. Origination income decreased
due to a decrease in refinance
activity in our primary market area, as market interest rates on mortgage loans increased.
The decrease in origination
income was partially offset by an increase in servicing fees, net of related
amortization expense as prepayment speeds
slowed, resulting in decreased amortization expense.
Noninterest Expense
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2022
2021
2022
2021
Salaries and benefits
$
2,976
$
2,897
$
5,926
$
5,748
Net occupancy and equipment
727
439
1,161
877
Professional fees
239
326
469
582
Other
1,116
1,254
2,403
2,399
Total noninterest expense
$
5,058
$
4,916
$
9,959
$
9,606
The increase in salaries and benefits was primarily due to a decrease in deferred costs related
to the PPP loan program, and
routine annual wage and benefit increases.
The increase in net occupancy and equipment expense was primarily due to increased
expenses related to the
redevelopment of the Company’s headquarters
in downtown Auburn.
This amount includes depreciation expense and one-
time costs associated with the opening of the Company’s
new headquarters.
The Company relocated its main office branch
and bank operations into its newly constructed headquarters during June of 2022.
The decrease in professional fees expense was primarily due to a decrease
in legal fees.
Income Tax
Expense
Income tax expense was $0.6
million for the first six months of 2022 compared to $0.9 million for the first six months of
2021.
The Company’s effective income
tax rate for the first six months of 2022 was 13.71%, compared to 17.76%
in the
first six months of 2021.
The decrease was primarily due to an income tax benefit related to a New Markets Tax
Credit
investment funded in the fourth quarter of 2021.
The Company’s effective
income tax rate is principally impacted by tax-
exempt earnings from the Company’s investments
in municipal securities, bank-owned life insurance, and New Markets
Tax Credits.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $429.2
million at June 30, 2022 compared to $421.9 million at December 31, 2021.
This
increase reflects an increase in the amortized cost basis of securities available-for-sale
of $46.5 million, and a decrease of
$39.2 million in the fair value of securities available-for-sale.
The increase in the amortized cost basis of securities
available-for-sale was primarily attributable to management
allocating more funding to the investment portfolio following
the significant increase in customer deposits.
The decrease in the fair value of securities was primarily due to an increase
in
long-term market interest rates,
which resulted in $9.5 million of deferred tax assets included in our other assets.
The
average annualized tax-equivalent yields earned on total securities were 1.84
%
in the first six months of 2022 and 1.72% in
the first six months of 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
38
The following table presents a breakdown of the Company’s
mortgage lending income.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Origination income
$
57
$
120
$
61
$
349
Servicing fees, net
85
67
174
91
Total mortgage lending income
$
142
$
187
$
235
$
440
The Company’s income from mortgage lending
typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of mortgage loans. Origination income decreased
as market interest rates on
mortgage loans increased.
The decrease in origination income was partially offset by an increase
in servicing fees, net of
related amortization expense as prepayment speeds slowed, resulting in decreased
amortization expense.
Noninterest Expense
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Salaries and benefits
$
3,038
$
2,976
$
5,965
$
5,926
Net occupancy and equipment
787
727
1,586
1,161
Professional fees
299
239
637
469
Other
1,701
1,116
3,241
2,403
Total noninterest expense
$
5,825
$
5,058
$
11,429
$
9,959
The increase in net occupancy and equipment expenses was primarily due to increased
expenses related to the Company’s
new headquarters in downtown Auburn.
This amount includes depreciation expense and other costs associated
with
operating the new headquarters.
The Company relocated its main office branch and bank operations
into its newly
constructed headquarters during June 2022.
The increase in other noninterest expense was due to various items including
FDIC assessments, software costs, ATM
and
checkcard expenses, impairment related to a new market tax credit investment, due to the
remaining tax credit being less
than the Company’s investment, and a gain on sale of other
real estate owned that was realized in the 2022.
Income Tax
Expense
Income tax expense was $0.6 million for the first six months of 2023
and 2022, respectively.
The Company’s effective
income tax rate for the first six months of 2023 was 12.48%, compared to 13.71%
in the first six months of 2022.
The
Company’s effective income
tax rate is principally impacted by tax-exempt earnings from the Company’s
investments in
municipal securities, bank-owned life insurance, and New Markets Tax
Credits.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $394.1
million at June 30, 2023,
3% less than the $405.3 million at December 31, 2022.
This decrease reflects a $13.7 million decrease in the amortized cost basis of securities available
-for-sale, offset by an
increase in the fair value of securities available-for-sale of $2.5
million.
The average annualized tax-equivalent yields
earned on total securities were 2.36%
in the first six months of 2023 and 1.84% in the first six months of 2022.
39
Loans
20222023
20212022
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
70,08761,880
73,29759,602
83,97766,212
79,20270,715
87,93370,117
Construction and land development
38,65463,874
33,05866,500
32,43266,479
34,89054,773
37,47738,654
Commercial real estate
240,296275,801
235,062267,962
258,371264,576
252,798249,527
242,845239,873
Residential real estate
85,224109,834
79,102101,975
77,66197,648
80,20591,469
82,16485,106
Consumer installment
7,1229,022
8,4129,002
6,6829,546
7,0607,551
7,7627,122
Total loans
441,383$
428,931520,411
459,123505,041
454,155504,461
458,181
Less:
unearned income
(511)
(514)
(759)
(923)
(1,197)
Loans, net of unearned income
$474,035
440,872
428,417
458,364
453,232
456,984
Total loans net of unearned income,
 
were $440.9$520.4 million at June 30, 2022, and $458.42023, up 3% compared to $504.5 million at December 31,
 
2021.
Excluding PPP loans, total loans, net of unearned income, were $440.2
million, a decrease of $10.0 million, or 2% from
December 31, 2021.2022.
 
Four loan
categories represented the majority of the loan portfolio at June 30, 2022:2023: commercial real
 
commercialestate (53%), residential real
estate (55%), residential real estate (19%(21%), commercial and industrial (16%(12%) and
construction and land development (9%
(12%).
 
Approximately 24%25% of the
Company’s commercial
real estate loans
were classified as owner-occupied at June 30, 2022.2023.
Within the residential real estate portfolio
segment, the Company
had junior lien mortgages of approximately $6.9
$8.1 million,
or 2%, and $7.2$7.4 million, or 2%1%, of total loans net of unearned income at June 30, 2022
2023 and December 31, 2021,
2022, respectively.
 
For residential real
estate mortgage loans with a consumer purpose, the Company
had no loans that required
interest only payments at June 30, 2022
2023 and December 31, 2021.2022. The Company’s
 
residential real estate mortgage portfolio
does not include any option or
hybrid ARM loans, subprime loans,
or any material amount of other high-risk consumer
mortgage products which are generally
products.viewed as high risk.
 
The average yield earned on loans and loans held for sale was 4.42%4.68% in the first six months
 
of 20222023 and 4.47%4.42% in the first
six months of 2021.2022.
 
The specific economic and credit risks associated with our loan portfolio include, but are
 
but are not limited to, the effects of
current economic conditions, including inflation and the continuing effects from theincreases in
 
market interest rates, remaining COVID-19
pandemic as well as high inflation rates
and the Federal Reserve’s shift from stimulativeeffects including supply chain disruptions, reduced
 
monetary policy to increases in the target Federal Funds ratecommercial office occupancy levels, housing supply
shortages and
reductions in its securities holdings,
inflation, on our borrowers’ cash flows, real estate market sales volumes
and liquidity, valuations
 
availabilityused in
making loans and costevaluating collateral, reduced credit availability
,
(especially for commercial real estate) generally and
higher costs of financing properties, which reduce the transaction and dollar
volumes of commercial real estate property
sales, real estate industry concentrations, competitive pressures from a
 
from a wide range of other
lenders, deterioration in certain
credits, interest rate fluctuations, and increases,
reduced collateral values or non-existent collateral,
collateral, title defects, inaccurate appraisals,
financial deterioration of borrowers,
fraud, and any violation of applicable
laws and regulations.
Various
projects financed
earlier that were based on lower interest rate assumptions than currently in effect
may not be as profitable or successful at
higher interest rate currently in effect and currently expected in the future.
The Company attempts to reduce these economic and credit risks through its loan-to-value
 
guidelines for collateralized
loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial
 
position. Also, we have
established and periodically review,
 
lending policies and procedures. Banking regulations limit a bank’s
 
credit exposure by
prohibiting unsecured loan relationships that exceed 10% of its capital; or 20%
 
of capital, if loans in excess of 10% of
capital are fully secured. Under these regulations, we are prohibited from having secured
 
loan relationships in excess of
approximately $21.4
$23.0 million.
 
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding
 
plus
unfunded commitments) to a single borrower of $19.3
$20.7 million. Our loan policy requires
that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit.
 
At June 30, 2022,2023, the Bank had no
relationships exceeding these limits.
 
 
 
 
 
 
 
 
40
We periodically analyze
 
our commercial and industrial and commercial real estate loan portfolios to determine if
 
a
concentration of credit risk exists in any one or more industries. We
 
use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers.
 
Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk
 
risk-based-based capital at June 30, 20222023 and December 31, 2021.2022.
 
June 30,
December 31,
(Dollars in thousands)
20222023
20212022
Lessors of 1-4 family residential properties
$
52,32956,160
$
47,880
Hotel/motel
34,365
43,85652,278
Multi-family residential properties
29,72244,431
42,58741,084
Shopping centersHotel/motel
27,30937,511
29,574
In light of disruptions in economic conditions caused by COVID-19, the financial regulators
have issued guidance
encouraging banks to work constructively with borrowers affected
by the virus in our community.
This guidance, including
the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner
Guidance for Assessing Safety
and Soundness Considering the Effect of the COVID-19
Pandemic on Institutions, provides that the agencies will not
criticize financial institutions that mitigate credit risk through prudent actions
consistent with safe and sound practices.
Specifically, examiners
will not criticize institutions for working with borrowers as part of a risk
mitigation strategy
intended to improve existing loans, even if the restructured loans have or develop
weaknesses that ultimately result in
adverse credit classification.
Upon demonstrating the need for payment relief, the bank will work with qualified borrowers
that were otherwise current before the pandemic to determine the most appropriate
deferral option.
For residential
mortgage and consumer loans the borrower may elect to defer payments for up to three
months.
Interest continues to
accrue and the amount due at maturity increases.
Commercial real estate, commercial, and small business borrowers may
elect to defer payments for up to three months or pay scheduled interest payments for a
six-month period.
The bank
recognizes that a combination of the payment relief options may be prudent dependent
on a borrower’s business type.
As
of June 30, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19
loan deferral totaling $0.1 million at
December 31, 2021.
Section 4013 of the CARES Act provides
that a qualified loan modification is exempt by law from classification as a TDR
pursuant to GAAP.
In addition, the Interagency Statement on COVID-19 Loan Modifications provides
circumstances in
which a loan modification is not subject to classification as a TDR if such loan is not eligible
for modification under
Section 4013.
33,378
Allowance for LoanCredit Losses
 
The Company maintains the allowance for loancredit losses at a level that management believes
 
appropriate to adequately cover
the Company’s estimate of probableexpected
 
losses inherent in the loan portfolio. The allowance for loancredit losses was $4.7$6.6 million at June
June 30, 20222023 compared to $4.9$5.8 million at December 31, 2021, which2022,
 
which management believed to be adequate at each of the
respective dates. The judgments and estimates associated with the determination of the
 
of the allowance for loancredit losses are
described under “Critical Accounting Policies.”
On January 1, 2023, we adopted ASC 326,
which introduces the current expected credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loan portfolio.
Accordingly, beginning in
2023, the allowance for credit losses represents an amount that, in management's evaluation,
is adequate to provide
coverage for all expected future credit losses on outstanding loans. As of June 30,
2023 and December 31, 2022, our
allowance for credit losses was approximately $6.6 million and $5.8
million, respectively, which our
management believes
to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total
loans was 1.27% at
June 30, 2023, up from 1.14%
at December 31, 2022.
The increase in the allowance for credit losses is largely the result of the implementation
of ASC
326 on January 1, 2023,
which resulted in an adjustment to the opening balance of the allowance for credit losses of
$1.0 million. Our CECL models
rely largely on projections of macroeconomic conditions to estimate
future credit losses. Macroeconomic factors used in the
model include the Alabama unemployment rate, the Alabama home price index, the
national commercial real estate price
index and the Alabama gross state product.
Projections of these macroeconomic factors, obtained from an independent third
party, are utilized to predict
quarterly rates of default.
Under the CECL methodology the allowance for credit losses is measured
on a collective basis for pools of loans with
similar risk characteristics, and for loans that do not share similar risk characteristics
with the collectively evaluated pools,
evaluations are performed on an individual basis. Losses are predicted over
a period of time determined to be reasonable
and supportable, and at the end of the reasonable and supportable period
losses are reverted to long term historical averages.
At June 30, 2023, reasonable and supportable periods of 4 quarters were utilized
followed by an 8 quarter straight line
reversion period to long term averages.
 
 
 
 
 
 
 
 
 
 
 
41
A summary of the changes in the allowance for loan losses and certain asset quality ratios
for the second quarter of 2022
and the previous four quarters is presented below.
2022
2021
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
4,658
4,939
5,119
5,107
5,682
Charge-offs:
Commercial and industrial
(4)
—
—
—
—
Commercial real estate
—
—
(254)
—
—
Residential real estate
—
—
(2)
—
(1)
Consumer installment
(16)
(48)
(32)
—
—
Total charge
-offs
(20)
(48)
(288)
—
(1)
Recoveries
78
17
108
12
26
Net recoveries (charge-offs)
58
(31)
(180)
12
25
Provision for loan losses
—
(250)
—
—
(600)
Ending balance
$
4,716
4,658
4,939
5,119
5,107
as a % of loans
1.07
%
1.09
1.08
1.13
1.12
as a % of nonperforming loans
1,314
%
1,256
1,112
1,053
813
Net (recoveries) charge-offs as % of average loans (a)
(0.05)
%
0.03
0.16
(0.01)
(0.02)
(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 1.07%
at June 30, 2022, compared to 1.08% at December 31, 2021.
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, including the duration and magnitude of
COVID-19 effects and increasing market
interest rates as the Federal Reserve shifts from stimulus to fighting inflation,
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
judgment about information available to them at the time of their examinations.
Nonperforming Assets
At June 30, 2022 the Company had $0.4 million in nonperforming assets compared to $0.8
million at December 31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4241
A summary of the changes in the allowance for credit losses and certain asset
quality ratios for the second quarter of 2023
and the previous four quarters is presented below.
2023
2022
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,821
5,765
4,966
4,716
4,658
Impact of adopting ASC 326
—
1,019
—
—
—
Charge-offs:
Commercial and industrial
—
—
(205)
(13)
(4)
Consumer installment
(56)
(11)
(3)
(3)
(16)
Total charge
-offs
(56)
(11)
(208)
(16)
(20)
Recoveries
200
8
7
16
78
Net recoveries (charge-offs)
144
(3)
(201)
—
58
Provision for credit losses
(331)
40
1,000
250
—
Ending balance
$
6,634
6,821
5,765
4,966
4,716
as a % of loans
1.27
%
1.35
1.14
1.05
1.07
as a % of nonperforming loans
577
%
255
211
1,431
1,314
Net (recoveries) charge-offs as % of average loans (a)
(0.06)
%
—
0.04
—
(0.05)
(a) Net (recoveries) charge-offs are annualized.
Nonperforming Assets
At June 30, 2023 the Company had $1.1 million in nonperforming assets compared to $2.7
million at December 31, 2022.
The decrease in nonperforming assets was primarily related to the resolution of a collateral
dependent nonperforming loan,
with a recorded investment of $1.3 million, that was collected in full during the second quarter
of 2023.
The table below provides information concerning total nonperforming assets
 
and certain asset quality ratios for the second
quarter of 20222023 and the previous four quarters.
 
20222023
20212022
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
3591,149
3712,680
4442,731
486347
628
Other real estate owned
—
374
374
—
—359
Total nonperforming assets
$
3591,149
7452,680
8182,731
486347
628359
as a % of loans and other real estate owned
0.080.22
%
0.170.53
0.180.54
0.110.07
0.140.08
as a % of total assets
0.030.11
%
0.070.26
0.070.27
0.050.03
0.060.03
Nonperforming loans as a % of total loans
0.080.22
%
0.090.53
0.100.54
0.110.07
0.140.08
Accruing loans 90 days or more past due
$
—
—
—
69
—
42
The table below provides information concerning the composition of nonaccrual
 
loans for the second quarter of 20222023 and
the previous four quarters.
 
20222023
20212022
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
$
178
432
443
—
—
Commercial real estate
$819
2,103
2,116
170
176
182
187
193
199
Residential real estate
152
135
172
177
183
189Consumer installment
257—
29310
429—
—
—
Total nonaccrual loans
$
3591,149
3712,680
4442,731
486347
628359
The Company discontinues the accrual of interest income when (1) there is a significant
 
deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or
 
(2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process of collection
 
.
 
The Company had $0.4
million in loans on nonaccrual status at June 30, 2022 and December 31,
2021, respectively.
The Company had no loans 90 days or more past due and still accruing at June 30, 20222023
 
and December 31, 2021,2022,
respectively.
The table below provides information concerning the composition ofCompany had no OREO
for the second quarter of 2022 and the
previous four quarters. at June 30, 2023 or December 31, 2022.
 
2022Deposits
2021June 30,
Second
First
Fourth
Third
SecondDecember 31,
(In thousands)
Quarter2023
Quarter2022
Quarter
Quarter
Quarter
Other real estate owned:
Commercial real estateNoninterest bearing demand
$
—298,479
374311,371
374NOW
—192,083
—178,641
Money market
194,435
214,298
Savings
91,216
95,652
Certificates of deposit under $250,000
100,972
93,017
Certificates of deposit and other time deposits of $250,000 or more
73,557
57,358
Total other real estate owneddeposits
$
—950,742
374
374
—
—
Potential Problem Loans
Potential problem loans represent those loans with a well-defined weakness and
where information about possible credit
problems of a borrower has 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 $1.3
million, or 0.3% of total loans at June 30,
2022, and $2.4 million, or 0.5% of total loans at December 31, 2021.
43
The table below provides information concerning the composition of potential problem
loans for the second quarter of 2022
and the previous four quarters.
2022
2021
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Potential problem loans:
Commercial and industrial
$
225
215
226
274
291
Construction and land development
—
13
218
231
239
Commercial real estate
146
150
156
172
178
Residential real estate
915
1,592
1,748
1,848
2,096
Consumer installment
24
8
12
19
7
Total potential problem loans
$
1,310
1,978
2,360
2,544
2,811
At June 30, 2022, approximately $0.1 million or 11
%
of total potential problem loans were past due at least 30 days, but
less than 90 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 second quarter of 2022 and the previous four quarters.
2022
2021
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial
$
34
7
3
68
1
Construction and land development
—
1
204
—
204
Commercial real estate
28
—
—
—
205
Residential real estate
130
496
516
409
68
Consumer installment
7
15
25
25
7
Total
$
199
519
748
502
485
Deposits950,337
Total deposits
 
were $1.0 billion$950.7 million at June 30, 20222023 and $950.3 million at December 31, 2021.2022.
 
Noninterest-bearingThe Company utilizes
brokered deposits as an additional funding source.
At June 30, 2023, the Company had $16.0 million in brokered deposits,
compared to none at December 31, 2022.
Excluding brokered deposits, customer deposits decreased $15.6 million, or 2%,
during the first six months of 2022.
This decrease reflects net outflows to higher yield investment alternatives in a
rising
interest rate environment and a decline in balances in existing accounts due to increased
customer spending.
Noninterest-
bearing deposits were $311.2
$298.5 million, or 31% of total deposits, at June 30, 2022,
2023, compared to $316.1
$311.4 million, or 32%33% of
total deposits at December 31,
2021. 2022.
 
Estimated uninsured deposits totaled $411.3
$374.8 million and $420.8$381.7 million at June 30, 2022
2023 and December 31, 2021,2022,
respectively.
 
Uninsured amounts are estimated based on the portion of account balances in excess of
 
FDIC insurance
limits.
The Bank’s uninsured deposits at June 30,
2023 and December 31, 2022 include approximately $166.0 million and
$155.0 million, respectively, of deposits
of state, county and local governments that are collateralized by securities having
an equal fair value to such deposits.
The FDIC has proposed a special assessment on uninsured deposits of banks with over $5
billion in uninsured deposits to
the FDIC Deposit Insurance Fund’s costs
of the systemic risk determination made in connection with two recent bank
failures.
The special assessment will not apply to AuburnBank.
The average rate paid on total interest-bearing deposits was 0.33%0.81% in the first six
 
months of 20222023 compared to 0.42%0.33% in the
first six months of 2021.2022.
 
43
Other Borrowings and Available
Credit
Other borrowings consist ofThe Company has no outstanding indebtedness.
The Bank borrows other short-term borrowings and long-term debt.debt from
time to time. Short-term
borrowings generally consist of federal
funds purchased
and securities sold under agreements to
repurchase
with an original maturity of one year or less.
 
The Bank
had available federal funds lines totaling $61.0 million and $41.0
million with noneno federal funds borrowings outstanding at June 30, 2022,2023, and
December 31, 2021, respectively.
 
2022, respectively. Securities sold
under
agreements to repurchase,
which were entered into on behalf of certain customers totaled $4.1
$2.1 million and $3.4 $2.6
million at
June 30, 20222023 and December 31, 2021,2022, respectively.
 
At June 30, 2023 and December 31, 2022, the Bank had no
borrowings from the Federal Reserve discount window and no borrowings under
the Federal Reserve’s new Bank Term
Facility Program (“BTFP”), which opened March 12, 2023.
The Bank is a member of the FHLB of Atlanta and may borrow from time to time
under the FHLB of Atlanta’s advance
program to obtain funding for its growth.
FHLB advances include both fixed and variable terms and are taken out with
varying maturities, and are generally secured by eligible assets.
The Bank had no borrowings under FHLB of Atlanta’s
advance program at June 30, 2023 and December 31, 2022, respectively.
At those dates, the Bank had $305.2 million and
$312.6 million, respectively, of available
lines of credit at the FHLB of Atlanta.
The average rate paid on the Bank’s
short-term borrowings was 0.50%1.82% in the first six months of 20222023
 
and 2021,compared to 0.50%
respectively.in the first six months of 2022.
The Company had no long-term debt at June 30, 20222023 and December 31, 2021.
442022.
CAPITAL ADEQUACY
 
The Company’s consolidated
 
stockholders’ equity was $76.1$71.0 million and $103.7$68.0 million as of June 30, 20222023
 
and December
31, 2021,2022, respectively. The decreaseincrease
 
from December 31, 20212022 was primarily driven by an net earnings of $3.9 million and
other comprehensive lossincome due
to
the change in unrealized gains/losses on securities available-for-sale,
 
available-for-sale, net of tax of $29.3$1.8
million, partially offset by cash dividends of $1.9 million, the cumulative effect
of adopting CECL accounting standard of
$0.8 million and repurchases of the Company’s
stock of $0.1 million.
 
The increase in theTotal unrealized losses
on available-for-sale
unrealized losssecurities declined 5% from $54.7 million on securities was primarily due December 31, 2022
to increases in market interest rates.$52.2 million June 30, 2023.
 
These unrealized losses
do not affect
the Bank’s capital
for regulatory capital purposes.
 
The Company paid cash dividends of $0.53$0.54 per share in the first six months of 2022,2023,
 
an increase of 2% from the same
period in 2021.2022. The Company’s share repurchases
 
of $0.3$0.1
 
million since December 31, 20212022 resulted in 10,6404,225 fewer
outstanding common shares at June 30, 2022.2023.
These shares were repurchased at an average cost per share of $23.28.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory
 
capital framework and
related Dodd-Frank Wall
 
Street Reform and Consumer Protection Act changes.
 
The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements
 
for capital adequacy purposes.
 
The capital
conservation buffer was subject to a three yearthree-year phase-in period
that began on January 1,
2016 and was fully phased-in on
January 1, 2019 at 2.5%.
 
A banking organization with a conservation buffer of less than the
 
required amount will be
subject to limitations on capital distributions, including dividend payments and certain discretionary
 
bonus payments to
executive officers.
 
At June 30, 2022,2023, the Bank’s ratio
 
was sufficient to meet the fully phased-in conservation buffer.
Effective March 20, 2020, the Federal Reserve and the other
 
federal banking regulators adopted an interim final rule that
amended the capital conservation buffer.
 
The interim final rule was adopted as a final rule on August 26, 2020.
 
The new
rule revises the definition of “eligible retained income” for purposes of the maximum payout
 
maximum payout ratio to allow banking
organizations to more freely use their capital buffers to
 
promote lending and other financial intermediation activities, by
making the limitations on capital distributions more gradual.
 
The eligible retained income is now the greater of (i) net
income for the four preceding quarters, net of distributions and associated
 
tax effects not reflected in net income; and (ii)
the average of all net income over the preceding four quarters.
 
The interim finalThis rule only affects the capital buffers, and banking
banking organizations were encouraged to
make prudent capital distribution decisions.
44
The Federal Reserve has treated us as a “small bank holding company’ under the Federal
 
Reserve’s policy.Small Bank Holding
Company Policy.
 
Accordingly,
our capital adequacy is evaluated
at the Bank level, and not for the Company and its
consolidated
subsidiaries.
 
The Bank’s
tier 1 leverage ratio
was 9.16%10.23%, CET1 risk-based capital ratio was 16.59%15.33%, tier 1
risk-based capital ratio was 16.59%15.33%, and
total risk-based capital ratio was 17.38%16.31% at
June 30, 2022.2023. These ratios exceed the
the minimum regulatory capital percentages
of 5.0% for tier 1 leverage ratio, 6.5%
for CET1 risk-based capital ratio, 8.0% for
for tier 1 risk-based capital ratio, and 10.0%
for total risk-based capital ratio to
be considered “well capitalized.”
 
The Bank’s
capital conservation buffe
r
buffer was 9.38%8.31% at
June 30, 2022.2023.
 
Our unrealized
On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued
a joint notice of proposed
rulemaking to implement the Basel III endgame components.
The proposal which is subject to public comment and change
only applies to banks and holding companies with $100 billion or more of assets.
The proposal includes provisions dealing
with:
●
Credit risk, which arises from the risk that an obligor fails to perform on an obligation;
●
Credit risk, which arises from the risk than an obligor fails to perform on an obligation;
●
Market risk, which results from changes in the value of trading positions;
●
Operations risk, which is the risk of losses resulting from inadequate or
failed internal process, people, and
systems, or from external events; and
●
Credit valuation adjustment risk, which results from the risk of losses on securities duecertain derivative
contracts.
The proposal would also change the capital requirements for banking organizations
with more than $100 billion of assets.
These regulatory proposals are not applicable to increases in market interest rates do
not directly affect our capital
for regulatory purposes, and the resulting deferred tax assets, including $9.5
million resulting from such unrealized
securities losses, was below the 25% threshold requiring deduction of such assets
from CET1 capital.Company.
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
 
simulation model and an economic
value of equity (“EVE”) model.
45
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation
 
modeling.
Forecasted levels of earning assets, interest-bearing liabilities, and off
 
-balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next 12 months and other
 
factors in order to produce various earnings
simulations and estimates. To
 
help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the
variance of net interest income from gradual changes in interest rates.
 
For changes up or down in rates from management’s
flat interest rate forecast over the next 12 months, policy limits for net interest income variances
 
are as follows:
●
+/- 20% for a gradual change of 400 basis points
●
+/- 15% for a gradual change of 300 basis points
●
+/- 10% for a gradual change of 200 basis points
●
+/- 5% for a gradual change of 100 basis points
While a gradual change in interest rates was used in the above analysis to provide an estimate
of exposure under these
scenarios, our modeling under both a gradual and instantaneous change in interest rates
indicates our balance sheet is asset
sensitive.
At June 30, 2022,2023, our earnings simulation model indicated that we were in compliance
 
with the policy guidelines noted
above.
 
45
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 June 30, 2022,2023, our EVE model indicated that we were in compliance with
 
our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income
 
income will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated
 
with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition,
 
the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain
 
assets and liabilities may have
similar maturities or periods of repricing, they may react in different
 
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions.
 
Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets
 
and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate
 
mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
 
Prepayments
 
and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of certain instruments.
 
The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates or economic
 
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
 
between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity
 
while continuing to meet the credit and deposit
needs of our customers. From time to time, the Company also may enter into back-to-back
 
interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify
 
as derivatives, but are not
designated as hedging instruments. At June 30, 20222023 and December 31, 2022,
 
2021, the Company had no derivative contracts
designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
 
46
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 ofThe Company seeks to manage its liquidity
the to
Company could experience highermanage or reduce its costs of obtaining funds due to insufficientby maintaining liquidity believed adequate
 
to meet its anticipated funding needs, while
balancing against excessive liquidity could leadthat likely would
to lowerreduce earnings due to the cost of foregoing alternative higher-yieldhigher-
market investment opportunities.yielding assets.
 
Liquidity is managed at two levels. The first is the liquidity of the Company.
 
The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are
 
separate and distinct legal
entities with different funding needs and sources, and each are subject
 
to regulatory guidelines and requirements.
 
The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses,
 
expenses, debt obligations and
dividends.
 
The Bank’s payment of dividends depends
 
on its earnings, liquidity, capital
 
and the absence of regulatory
restrictions on such dividends.
 
The primary source of funding and liquidity for the Company has been dividends received
 
from the Bank.
 
If needed, the
Company could also borrow money,
 
or issue common stock or other securities.
 
Primary uses of funds by the Company
include dividends paid to stockholders, Company stock repurchases, and payment of
 
Company expenses.
 
46
Primary sources of funding for the Bank include customer deposits, other borrowings,
 
interest payments on earning assets,
repayment and maturity of securities
and loans, sales of securities, and the
sale and repayment of loans, particularly residential mortgage
loans. The Bank has access to federal
funds lines from various banks and borrowings
borrowings from the Federal Reserve discount window.
window and the Federal Reserve’s recent
BTFP borrowing facility.
 
In addition to these sources, the Bank is a member of
the FHLB of Atlanta and may participate in the FHLB of Atlanta’s
FHLB’s advance program to obtain funding for its growth.
 
its growth.
Advances include both fixed and variable terms and may be
taken out with varying
maturities. At June 30, 2022,2023, the Bank
had a remaining available
line of credit with the FHLB of $305.2
$332.7 million. At June 30, 2022,2023, the Bank also had $51.0 $61.0
million of available federal
funds lines with no borrowings
outstanding. Primary
uses of funds include repayment of
maturing obligations and
growing the loan portfolio.
 
Management believes that the Company and the Bank have adequate sources of liquidity to
 
meet all their respective known
contractual obligations and unfunded commitments, including loan commitments
 
and reasonablereasonably expected borrower, depositor,
and
depositor, and creditor requirements over the next twelve
months.
 
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual
 
Obligations
At June 30, 2022,2023, the Bank had outstanding standby letters of credit of $1.2$0.8 million and
 
million and unfunded loan commitments
outstanding of $60.4$78.7 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 our securities available-
for-sale, or draw on its available credit facilities.facilities or raise deposits.
 
Mortgage lending activities
We primarilygenerally sell residential
 
mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these
loans. The sale agreements for these residential mortgage loans with Fannie Mae and other
 
investors include various
representations and warranties regarding the origination and characteristics of the
 
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 June 30, 2022,2023,
 
the aggregate unpaid principal balance of residential mortgage loans, which we have originated and
 
and
sold, but
retained the servicing rights, was $247.1$221.6 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
 
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
 
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
quality assurance practices and by servicing mortgage loans to meet investor and secondary
 
market standards.
47
The Company was not required to repurchase any loans during the first six months of
 
20222023 as a result of representation and
warranty provisions contained in the Company’s
 
sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at June 30, 2022.2023.
We service all residential
 
mortgage loans originated and sold by us to Fannie Mae.
 
As servicer, our primary duties are to:
(1) collect payments due from borrowers;
 
(2) advance certain delinquent payments of principal and interest;
 
(3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating to the
 
mortgage loans;
 
(4) maintain any
required escrow accounts for payment of taxes and insurance and administer
escrow payments;
 
and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to investors
 
consistent with the agreements
governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies standard
 
standardss
 
of responsibility for actions taken by us in such
capacity and provides protection against expenses and liabilities incurred by us when acting
 
in compliance with the
respective servicing agreements.
 
However, if we commit a material breach of our obligations
 
as servicer, we may be
subject to termination if the breach is not cured within a specified period following notice.
 
The standards governing
servicing and the possible remedies for violations of such standards are determined by
our agreement with Fannie Mae and
Fannie Mae’s mortgage servicing
 
guides issued by Fannie
Mae as well as the contract provisions established between Fannie Mae and the Bank.guides.
 
Remedies could include repurchase
of an affected loan.
47
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 June 30, 2022,2023, we do not believe that this exposure is material due to the historical level of
repurchase requests and loss trends, in addition to the fact that
99% of our residential
mortgage loans serviced for Fannie
Mae were current as of such date.
 
We maintain ongoing communications
 
with our investors and will continue to evaluate
this exposure by monitoring the level and number of repurchase requests as well as the delinquency
 
rates in our investor
portfolios.
Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential
mortgage loans sold to Fannie Mae to
request forbearance to the servicer after affirming that such borrower is experiencing
financial hardships during the
COVID-19 emergency.
Except for vacant or abandoned properties, Fannie Mae servicers may not initiate
foreclosures on
similar procedures or related evictions or sales until December 31, 2020. The
forbearance period was extended, generally,
to March 31, 2021. The Bank sells mortgage loans to Fannie Mae and services these on
an actual/actual basis.
As a result,
the Bank is not
obligated to make any advances to Fannie Mae on principal and interest on such mortgage
 
such mortgage loans where the
borrower is
entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented
 
presented herein have been prepared in
accordance with GAAP and practices within the banking industry which require the
 
the measurement of financial position and
operating results in terms of historical dollars without considering the changes in
 
the relative purchasing power of money
over time due to inflation. Unlike
most industrial companies, virtually all the assets and liabilities
of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact on a
 
financial institution’s performance
than the effects of general levels of inflation.
Inflation can affect our noninterest expenses. It also can affect
 
Inflation, however,the interest rates we have to pay on our deposits and other
borrowings, and the interest rates we earn on our earning assets.
The difference between our interest expense and interest
income is also affected by the shape of the yield curve and the speed
at which our assets and liabilities reprice in response
to interest rate changes.
The yield curve was inverted on June 30, 2023, which means shorter
term interest rates are higher
than longer interest rates.
This results in a lower spread between our costs of funds and our interest income.
In addition,
net interest income could increase our noninterestbe affected by asymmetrical changes in the different
 
expenses, and Federalinterest rate indexes, given that not all of our
Reserve monetary policy in response to inflation has increasedassets or liabilities are priced with the same index. Higher market interest rates and sales
 
affectedof securities held by the Federal
Reserve to reduce inflation generally reduce economic activity and may reduce loan
demand and growth.
Inflation and
related changes in market interest rates, as the Federal Reserve acts to
meet its long term inflation goal of 2%, also can
adversely affect the values of certainand liquidity of our loans and securities.
assetsInflation is running at levels unseen in decades and liabilities, includingwell above the Federal Reserve’s
long term inflation goal of 2.0%
annually.
Beginning in March 2022, the Federal Reserve has been raising target
federal funds interest rates and reducing its
securities holdings in an effort to reduce inflation During 2022,
the Federal Reserve increased the target federal funds range
from 0 – 0.25% to 4.25 – 4.50%.
The target federal funds rate was increased another 25 basis points on each of January 31,
March 7, May 3 and July 26, 2023 to 5.25-5.50%, and further increases in the target
federal funds rate appear likely if
inflation remains elevated.
Our deposit costs may increase as the Federal Reserve increases its target federal
funds rate,
market interest rates increase, and as customer savings behaviors change as a result of inflation
and customers seek higher
market interest rates on deposits and other alternative investments.
Monetary efforts to control inflation may also affect
unemployment which is an important component in our securities portfolio and mortgage servicing assets.CECL model used to
estimate our allowance for credit losses.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASUs haveASU has been issued by the FASB
 
but areis not yet effective.
 
●
ASU 2016-13,2023-02,
Financial InstrumentsInvestments – Credit Losses (TopicEquity Method and Joint Ventures
 
326)(Topic 323):
 
Measurement of Accounting for Investments in Tax
Credit Losses on FinancialStructures Using
Instruments;the Proportional Amortization Method
48
Information about these pronouncementsthis pronouncement is described in more detail below.
ASU 2016-13,2023-02,
Financial Instruments - Credit Losses (TopicInvestments – Equity Method and Joint Ventures
 
326)(Topic 323): - Measurement of Credit
 
Losses on FinancialAccounting for Investments in Tax
Credit
InstrumentsStructures Using the Proportional
Amortization Method
, amends guidance onThe amendments in this Update permit reporting entities to elect
to account for their tax equity investments, regardless of the tax credit losses for assets held at amortized cost basis andprogram from
 
availablewhich the income tax credits are
received, using the proportional amortization method if certain conditions are
met. The new standard is effective for sale debtfiscal
securities.years, and interim periods within those fiscal years, beginning after December 15,
 
For assets held at amortized cost basis,2023.
The Company is currently
evaluating the impact of the new standard eliminates the probable initial recognition
threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of all expected
credit losses using a broader
range of information regarding past events, current conditions and forecasts assessing the
collectability of cash flows. The
allowance for credit losses is a valuation account that is deducted from the amortized
cost basis of the financial assets to
present the net amount expected to be collected.
For available for sale debt securities, credit losses should be measured in a
manner similar to current GAAP,
however the new standard will require that credit losses be presented as an allowance
rather than as a write-down.
The new guidance affects entities holding financial assets and
net investment in leases that are
not accounted for at fair value through net income. The amendments affect
loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables,
and any other financial assets not
excluded from the scope that have the contractual right to receive cash.
For public business entities, the new guidance was
originally effective for annual and interim periods in fiscal years
beginning after December 15, 2019.
The Company has
developed an implementation team that is following a general timeline.
The team has been working with an advisory
consultant, with whom a third-party software license has been purchased.
The Company’s preliminary evaluation indicates
the provisions of ASU No. 2016-13 are expected to impacton the Company’s
 
consolidated financial statements, in particular
the level of the reserve for credit losses.statements.
 
The Company is continuing to evaluate the extent of the potential impact and
expects that portfolio composition and economic conditions at the time of adoption
will be a factor.
On October 16, 2019,
the FASB approved
a previously issued proposal granting smaller reporting companies a postponement of the required
implementation date for ASU 2016-13.
The Company is required to implement the new standard in January 2023, with early adoption
permitted in any period prior
to that date.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
49
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
 
to GAAP.
 
The reconciliations
 
of these non-
GAAP financial measures to their most directly comparable GAAP financial
 
measures are presented below.
 
20222023
20212022
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,3746,888
6,0787,109
6,0377,471
6,0417,243
5,9756,374
Tax-equivalent adjustment
110106
112
115108
117
118117
110
Net interest income (Tax
 
-equivalent)
$
6,4846,994
6,1907,217
6,1527,588
6,1587,360
6,0936,484
Six months ended June 30,
(In thousands)
20222023
20212022
Net interest income (GAAP)
$
12,45213,997
11,91212,452
Tax-equivalent adjustment
222214
238222
Net interest income (Tax
 
-equivalent)
$
12,67414,211
12,15012,674
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50
Table 2
 
- Selected Quarterly Financial Data
 
20222023
20212022
Second
First
Fourth
Third
Second
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,4846,994
6,1907,217
6,1527,588
6,1587,360
6,0936,484
Less: tax-equivalent adjustment
110106
112
115108
117
118117
110
Net interest income (GAAP)
6,3746,888
6,0787,109
6,0377,471
6,0417,243
5,9756,374
Noninterest income
848791
908792
1,0193,898
956852
1,131848
Total revenue
7,2227,679
6,9867,901
7,05611,369
6,9978,095
7,1067,222
Provision for loancredit losses
—(362)
 
(250)66
—1,000
250
 
—
 
(600)
Noninterest expense
5,0585,825
4,9015,604
5,0924,449
4,7365,415
4,9165,058
Income tax expense
 
363288
254267
931,454
386432
504363
Net earnings
$
1,8011,928
2,0811,964
1,8714,466
1,8751,998
2,2861,801
Per share data:
Basic and diluted net earnings
 
$
0.510.55
0.590.56
0.531.27
0.530.57
0.650.51
Cash dividends declared
0.27
0.27
0.265
0.265
0.26
0.26
0.260.265
Weighted average shares outstanding:
Basic and diluted
3,513,3533,500,064
3,518,6573,502,143
3,524,3113,504,344
3,536,3203,507,318
3,554,8713,513,353
Shares outstanding
3,509,9403,499,412
3,516,9713,500,879
3,520,4853,503,452
3,529,3383,505,355
3,545,8553,509,940
Book value
$
21.6820.28
24.5721.03
29.4619.42
29.7317.06
29.9121.68
Common stock price
High
$
33.5724.32
34.4924.50
34.7924.71
35.3629.02
38.9033.57
Low
 
27.0418.80
31.7522.55
31.3222.07
33.2523.02
34.5027.04
Period end
27.0421.26
33.2122.66
32.3023.00
33.8023.02
35.4627.04
To earnings ratio
12.527.21
x
14.447.79
14.237.82
14.5710.46
15.2212.52
To book value
125105
%
108
118
135
110
114
119125
Performance ratios:
Return on average equity
 
8.2610.37
%
7.9711.44
7.0728.23
7.0110.35
8.748.26
Return on average assets
 
0.660.75
%
0.77
1.75
0.75
0.70
0.72
0.910.66
Dividend payout ratio
51.9649.09
%
44.9248.21
49.0620.87
49.0646.49
40.0051.96
Asset Quality:
Allowance for loancredit losses as a % of:
Loans
1.071.27
%
1.091.35
1.081.14
1.131.05
1.121.07
Nonperforming loans
1,314577
%
1,256255
1,112211
1,0531,431
8131,314
Nonperforming assets as a % of:
Loans and other real estate owned
0.080.22
%
0.170.53
0.180.54
0.110.07
0.140.08
Total assets
 
0.030.11
%
0.070.26
0.070.27
0.050.03
0.060.03
Nonperforming loans as a % of total loans
0.080.22
%
0.090.53
0.100.54
0.110.07
0.140.08
Annualized net (recoveries) charge-offs as a % of average loans
(0.05)(0.11)
%
0.03—
0.16
(0.01)—
(0.02)(0.05)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
16.5915.33
%
17.2615.45
16.2315.39
16.8215.39
17.0316.59
Tier 1 risk-based capital ratio
16.5915.33
%
17.2615.45
16.2315.39
16.8215.39
17.0316.59
Total risk-based capital ratio
17.3816.31
%
18.0816.48
17.0616.25
17.7216.16
17.9417.38
Tier 1 leverage ratio
9.1610.23
%
9.0910.07
9.3510.01
9.579.29
9.819.16
Other financial data:
Net interest margin (a)
2.603.03
%
2.433.17
2.453.27
2.513.00
2.60
Effective income tax rate
16.7713.00
%
10.8811.97
4.7424.56
17.0717.78
18.0616.77
Efficiency ratio (b)
68.9974.82
%
69.0569.97
71.0138.73
66.5765.94
68.0568.99
Selected average balances:
Securities
$
427,426402,929
435,097402,684
414,061407,792
395,529432,393
370,582427,426
Loans, net of unearned income
428,612512,066
439,713502,158
455,726490,163
452,668457,722
460,672428,612
Total assets
1,092,7591,022,874
1,114,4071,022,938
1,073,5641,022,863
1,040,9851,069,973
1,005,0411,092,759
Total deposits
999,867942,552
1,003,394948,393
961,544951,122
927,368987,614
894,757999,867
Total stockholders’ equity
87,24774,404
104,49368,655
105,92563,283
106,93677,191
104,59187,247
Selected period end balances:
 
Securities
$
429,220394,079
417,459405,692
421,891405,304
407,474411,538
384,865429,220
Loans, net of unearned income
440,872520,411
428,417505,041
458,364504,458
453,232474,035
456,984440,872
Allowance for loancredit losses
4,7166,634
4,6586,821
4,9395,765
5,1194,966
5,1074,716
Total assets
1,084,2511,026,130
1,109,6641,017,746
1,105,1501,023,888
1,065,8711,042,559
1,036,2321,084,251
Total deposits
1,002,698950,742
1,017,742939,190
994,243950,337
954,971977,938
923,4621,002,698
Total stockholders’ equity
76,10770,976
86,41173,640
103,72668,041
104,92959,793
106,04376,107
(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) Regulatory capital ratios presented are for the Company's
 
wholly-owned subsidiary, AuburnBank.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
51
Table 3
 
- Selected Financial Data
Six months ended June 30,
(Dollars in thousands, except per share amounts)
20222023
20212022
Results of Operations
Net interest income (a)
$
12,67414,211
12,15012,674
Less: tax-equivalent adjustment
222214
238222
Net interest income (GAAP)
12,45213,997
11,91212,452
Noninterest income
1,7561,583
2,3131,756
Total revenue
14,20815,580
14,22514,208
Provision for loancredit losses
(250)(296)
(600)(250)
Noninterest expense
9,95911,429
9,6069,959
Income tax expense
617555
927617
Net earnings
$
3,8823,892
4,2923,882
Per share data:
Basic and diluted net earnings
 
$
1.101.11
1.211.10
Cash dividends declared
0.530.54
0.520.53
Weighted average shares outstanding:
Basic and diluted
3,515,9913,501,098
3,560,5543,515,991
Shares outstanding, at period end
3,509,9403,499,412
3,545,8553,509,940
Book value
$
21.6820.28
29.9121.68
Common stock price:
High
$
34.4924.50
48.0034.49
Low
 
27.0418.80
34.5027.04
Period end
27.0421.26
35.4627.04
To earnings ratio
12.527.21
x
15.2212.52
To book value
125105
%
119125
Performance ratios:
Return on average equity
 
8.1010.91
%
8.048.10
Return on average assets
 
0.700.76
%
0.860.70
Dividend payout ratio
48.1848.65
%
42.9848.18
Asset Quality:
Allowance for loancredit losses as a % of:
Loans
1.071.27
%
1.121.07
Nonperforming loans
1,314577
%
8131,314
Nonperforming assets as a % of:
Loans and other real estate owned
0.080.22
%
0.140.08
Total assets
 
0.030.11
%
0.060.03
Nonperforming loans as a % of total loans
0.080.22
%
0.140.08
Annualized net recoveries as a % of average loans
(0.01)(0.06)
%
(0.04)(0.01)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
16.5915.33
%
17.0316.59
Tier 1 risk-based capital ratio
16.5915.33
%
17.0316.59
Total risk-based capital ratio
17.3816.31
%
17.9417.38
Tier 1 leverage ratio
9.1610.23
%
9.819.16
Other financial data:
Net interest margin (a)
2.513.10
%
2.632.51
Effective income tax rate
13.7112.48
%
17.7613.71
Efficiency ratio (b)
69.0272.36
%
66.4269.02
Selected average balances:
Securities
$
431,240402,807
361,855431,240
Loans, net of unearned income
434,131507,139
462,040434,131
Total assets
1,103,5231,022,906
992,9401,103,523
Total deposits
1,001,620945,456
879,0631,001,620
Total stockholders’ equity
95,82271,365
106,72995,822
Selected period end balances:
 
Securities
$
429,220394,079
384,865429,220
Loans, net of unearned income
440,872520,411
456,984440,872
Allowance for loancredit losses
4,7166,634
5,1074,716
Total assets
1,084,2511,026,130
1,036,2321,084,251
Total deposits
1,002,698950,742
923,4621,002,698
Total stockholders’ equity
76,10770,976
106,04376,107
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Efficiency ratio is the result of noninterest expense divided
 
by the sum of noninterest income and tax-equivalent net interest
 
income.
 
See
 
"Table 1 - Explanation of Non-GAAP Financial Measures."
(c) Regulatory capital ratios presented are for the Company's
 
wholly-owned subsidiary, AuburnBank.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
52
Table 4
 
- Average Balances
 
and Net Interest Income Analysis
Quarter ended June 30,
20222023
20212022
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
 
 
Loans and loans held for sale (1)
$
512,139
$
6,019
4.71%
$
429,182
$
4,691
4.38%
$
462,319
$
5,112
4.44%
Securities - taxable (2)
367,241347,714
1,826
2.11%
368,618
1,547
1.69%
307,941
1,009
1.31%1.68%
Securities - tax-exempt (2)(3)
60,18555,215
510
3.70%
58,807
525
3.50%
62,641
562
3.60%3.58%
Total securities
 
427,426402,929
2,336
2.33%
427,425
2,072
1.94%
370,582
1,571
1.70%
Federal funds sold
3,943
48
4.88%
52,582
82
0.63%
36,570
11
0.12%
Interest bearing bank deposits
8,023
96
4.80%
92,802
196
0.85%
72,144
17
0.09%
Total interest-earning assets
1,001,992927,034
$
8,499
3.68%
1,001,991
$
7,041
2.82%
941,615
$
6,711
2.86%
Cash and due from banks
15,48515,621
14,82415,485
Other assets
75,28280,219
48,60275,283
Total assets
$
1,092,7591,022,874
$
1,005,0411,092,759
Interest-bearing liabilities:
Deposits:
 
 
NOW
$
189,406
$
287
0.61%
$
208,873
$
62
0.12%
$
174,138
$
45
0.10%
Savings and money market
292,238
414
0.57%
331,097
159
0.19%
286,477
150
0.21%
Time deposits
164,479
781
1.90%
155,990
331
0.85%
159,347
419
1.05%
Total interest-bearing deposits
646,123
1,482
0.92%
695,960
552
0.32%
619,962
614
0.40%
Short-term borrowings
3,835
23
2.41%
4,205
5
0.50%
3,370
4
0.50%
Total interest-bearing liabilities
649,958
$
1,505
0.93%
700,165
$
557
0.32%
623,332
$
618
0.40%
Noninterest-bearing deposits
303,907296,428
 
274,795303,907
 
Other liabilities
1,4402,084
2,3231,440
Stockholders' equity
87,24774,404
 
104,59187,247
 
Total liabilities and stockholders'
 
equity
$
1,092,7591,022,874
$
1,005,0411,092,759
Net interest income and margin (tax-equivalent)
$
6,994
3.03%
$
6,484
2.60%
$
6,093
2.60%
 
(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) Includes average net unrealized gains (losses) on investment securities available
for sale
(3) Yields on tax-exempt securities have been
 
computed on a tax-equivalent basis using a federal income
tax rate of 21%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
53
Table 5
 
- Average Balances
 
and Net Interest Income Analysis
Six months ended June 30,
 
20222023
20212022
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
 
 
Loans and loans held for sale (1)
$
507,176
$
11,773
4.68%
$
434,863
$
9,541
4.42%
$
464,332
$
10,290
4.47%
Securities - taxable
371,012348,066
3,691
2.14%
370,549
2,883
1.57%
299,011
1,958
1.32%
Securities - tax-exempt (2)
60,22854,741
1,021
3.76%
60,691
1,056
3.54%
62,844
1,134
3.64%3.51%
Total securities
 
402,807
4,712
2.36%
431,240
3,939
1.84%
361,855
3,092
1.72%
Federal funds sold
5,619
133
4.77%
63,021
113
0.36%
34,700
23
0.13%
Interest bearing bank deposits
9,805
224
4.61%
88,008
228
0.52%
71,252
33
0.09%
Total interest-earning assets
925,407
$
16,842
3.67%
1,017,132
$
13,821
2.74%
932,139
$
13,438
2.91%
Cash and due from banks
15,29615,574
14,35515,296
Other assets
71,09581,925
46,44671,095
Total assets
$
1,103,5231,022,906
$
992,9401,103,523
Interest-bearing liabilities:
Deposits:
 
 
NOW
$
188,491
$
536
0.57%
$
204,912
$
119
0.12%
$
173,102
$
111
0.13%
Savings and money market
296,425
703
0.48%
338,283
331
0.20%
284,174
321
0.23%
Time deposits
160,102
1,361
1.71%
157,877
687
0.88%
159,406
848
1.07%
Total interest-bearing deposits
645,018
2,600
0.81%
701,072
1,137
0.33%
616,682
1,280
0.42%
Short-term borrowings
3,443
31
1.82%
4,075
10
0.50%
3,266
8
0.50%
Total interest-bearing liabilities
648,461
$
2,631
0.82%
705,147
$
1,147
0.33%
619,948
$
1,288
0.42%
Noninterest-bearing deposits
300,548300,439
 
262,381300,548
 
Other liabilities
2,0062,642
3,8822,006
Stockholders' equity
95,82271,364
 
106,72995,822
 
Total liabilities and stockholders'
 
equity
$
1,103,5231,022,906
$
992,9401,103,523
Net interest income and margin (tax-equivalent)
$
12,67414,211
2.51%3.10%
$
12,15012,674
2.63%2.51%
 
 
 
(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) Includes average net unrealized gains (losses) on
investment securities available for sale
(3) Yields on tax-exempt securities have been
 
computed on a tax-equivalent basis using a federal income
tax rate of 21%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
54
Table 6
 
- Allocation of Allowance for LoanCredit Losses
20222023
20212022
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
7611,198
15.911.9
$
8571,232
18.311.8
$
816747
17.413.1
$
829732
19.214.9
$
828761
19.115.9
Construction and land
 
development
1,005
12.3
1,021
13.2
949
13.2
789
11.6
576
8.8
518
7.1
590
7.7
639
8.2
551
6.5
Commercial real estate
2,523
54.4
2,739
56.2
2,823
55.6
2,7043,788
53.0
3,2593,966
55.153.0
3,109
52.4
2,561
52.6
2,523
54.4
Residential real estate
529
21.1
497
20.2
828
19.4
783
19.3
753
19.3
739
16.9
799
17.7
838
17.9
951
17.9
Consumer installment
114
1.7
105
1.8
132
1.9
101
1.6
103
1.6
86
1.5
91
1.6
97
1.7
93
1.4
Total allowance for loan credit
losses
$
4,7166,634
$
4,9396,821
$
5,1195,765
$
5,1074,966
$
5,6824,716
* Loan balance in each category expressed as a percentage of total loans.
 
 
 
 
 
 
 
 
 
 
55
Table 7
 
– Estimated Uninsured Time Deposits by Maturity
(Dollars in thousands)
June 30, 20222023
Maturity of:
3 months or less
$
17,77811,478
Over 3 months through 6 months
11,79219,713
Over 6 months through 12 months
4,4965,640
Over 12 months
5,45814,226
Total estimated uninsured
 
time deposits
$
39,52451,057
56
ITEM 3.
 
QUANTITATIVE
 
AND QUALITATIVE
 
DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is set forth in ITEM 2 under the caption
 
“MARKET AND LIQUIDITY RISK
MANAGEMENT” and is incorporated herein by reference.
 
ITEM 4. CONTROLS AND PROCEDURES
The Company, with the participation
 
of its management, including its Chief Executive Officer and
 
Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation
 
of its disclosure controls and procedures (as
defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the
period covered by this report. Based upon that evaluation and as of the end of the period covered by this report,
 
the
Company’s Chief Executive Officer
 
and Chief Financial Officer concluded that the Company’s
 
disclosure controls and
procedures were effective to allow timely decisions regarding disclosure
 
in its reports that the Company files or submits to
the Securities and Exchange Commission under the Securities Exchange Act of 1934,
 
as amended. There have been no
changes in the Company’s internal control
 
over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially
 
affect, the Company’s
 
internal control over financial
reporting.
PART
 
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank are, from time to time, involved
 
in legal proceedings. The
Company’s and Bank’s
 
management believe there are no pending or threatened legal, governmental, or
regulatory
proceedings that, upon resolution, are expected to have a material adverse effect
 
upon the Company’s or the Bank’s
financial condition or results of operations. See also, Part I, Item 3 of the Company’s
 
Annual Report on Form 10-K for the
year ended December 31, 2021.2022.
 
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the
 
factors discussed in Part I,
Item 1A. “RISK FACTORS”
 
in the Company’s Annual Report
 
on Form 10-K for the year ended December 31, 2021,2022,
which could materially affect our business, financial condition
 
or future results. The risks described in our annual report on
Form 10-K are not the only the risks facing our Company.
 
Increases in inflation and the resulting tightening of Federal
Reserve monetary policy by increased target interest rates has and
reductions in the Federal Reserve’s securities portfolio,
have
and is expected
to continue to affect mortgage originations
and income and
the market values of our securities portfolio.portfolio and
loans.
 
These could also affect our deposit, costs and mixes, and
 
mixes, and
change consumer savings and payment behaviors.
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
57
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock
 
during the second quarter of 20222023 were as follows:
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value
 
of Shares that
May Yet Be
Purchased Under the
Plans or Programs
(1)
April 1 - April 30, 20222023
—303
$22.54
—303
—
$
5,000,0004,544,286
May 1 - May 31, 20222023
7,0811,274
29.9721.73
7,0811,274
4,787,7784,516,607
June 1 - June 30, 20222023
—
—
—
4,787,7784,516,607
Total
7,0811,577
29.9721.88
7,0811,577
4,787,7784,516,607
(1)
On April 12, 2022, the Company adoptedBoard of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of Directors
had approved a new $5 million stock repurchase program to replace the repurchase program that became effectiveexpired on March 31, 2022. The new program
authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the
earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan
and
(iii) April 12, 2022.15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases,
and otherwise.
ITEM 3.
 
DEFAULTS
 
UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
 
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
 
OTHER INFORMATION
Not applicable.
 
 
 
58
ITEM 6.
 
EXHIBITS
Exhibit
 
Number
 
Description
 
3.1
 
3.2
 
31.1
 
31.2
 
32.1
32.2
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension
 
Schema Document
101.CAL
 
XBRL Taxonomy Extension
 
Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension
 
Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension
 
Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension
 
Definition Linkbase Document
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
 
 
Incorporated by reference from Registrant’s
 
Form 10-Q dated June 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.
 
 
 
 
 
59
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)
Date:
 
August 4, 2022
By:
/s/ Robert W.
Dumas
Robert W.
Dumas
Chairman, President and CEO
Date:
August 4, 20228, 2023
 
By:
 
/s/ David A. Hedges
 
David A. Hedges
ExecutivePresident and CEO
Date:
August 8, 2023
By:
/s/
W.
James Walker,
IV
W.
James Walker,
IV
Senior Vice President and Chief Financial
 
Officer