Auburn National Bancorporation, Inc: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Nov 1, 2024 and accepted by EDGAR at Nov 1, 2024, 12:10 ET.
Management's discussion and analysis
As filed, 80,531 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
OPERATIONS
General
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since 1984. As a bank holding
company, the Company may diversify into a broader range of financial services and other business activities than currently
are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the Bank.
The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including
Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April 1995. The
Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”). The Bank has been a member of the FHLB of Atlanta since 1991. Certain of the statements made in this
discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are
“forward-looking statements” as more fully described under “Special Cautionary Notice Regarding Forward-Looking
Statements” below.
The following discussion and analysis is intended to provide a better understanding of various factors related to the results
of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed consolidated financial statements and related
notes for the quarters and nine months ended September 30, 2024 and 2023, as well as the information contained in our
annual report on Form 10-K for the year ended December 31, 2023 and our interim reports on Form 10-Q for the quarters
ended March 31, 2024 and June 30, 2024.
Special Cautionary Notice Regarding Forward-Looking Statements
Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” “Description of
Property” and elsewhere, are “forward-looking statements” within the meaning and protections of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different from future results, performance,
achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “evaluation,” “estimate,” “continue,” “designed”,
“plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These
forward-looking statements may not be realized due to a variety of factors, including, without limitation:
the effects of future economic, business and market conditions and changes, foreign, domestic and locally,
including inflation, seasonality, natural disasters or climate change, such as rising sea and water levels, hurricanes
and tornados, COVID-19 or other health crises, epidemics or pandemics including supply chain disruptions,
inventory volatility, and changes in consumer behaviors;
the effects of war or other conflicts, acts of terrorism, trade restrictions (including tariffs), sanctions or other events
that may affect general economic conditions;
governmental monetary and fiscal policies, including the amount and costs of borrowing by the federal
government and its agencies, the continuing effects of COVID-19 fiscal and monetary stimuli, and changes in
monetary policies in response to inflation in light of the Federal Reserve’s target inflation rate of 2% over the
longer term and dual mandate goals of maximum employment and stable prices, including changes to increase the
Federal Reserve’s reinvestment of maturing Treasury securities beginning in June 2024 and mid-September 2024
reduction in the target federal funds rate by 50 basis points to a target range of 4.75 – 5.00%, among other things
described more full in “Effects of Inflation and Changing Price”;
legislative and regulatory changes, including changes in banking, securities and tax laws, regulations and rules and
their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost
of FDIC insurance;
changes in accounting pronouncements and interpretations, including the required use, beginning January 1, 2023,
of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (ASU) 2016-13, “Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as well as the
updates issued since June 2016 (collectively, FASB ASC Topic 326) on Current Expected Credit Losses
(“CECL”), and ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures, which eliminates troubled
debt restructurings (“TDRs”) and related guidance;
the failure of assumptions and estimates, including those used in the Company’s CECL models to establish our
allowance for credit losses and estimate asset impairments, as well as differences in, and changes to, economic,
market and credit conditions, including unemployment rates, changes in borrowers’ credit risks and payment
behaviors from those used in our CECL models and loan portfolio reviews;
the risks of changes in market interest rates and the shape of the yield curve on customer behaviors; the levels,
composition and costs of deposits, loan demand and mortgage loan originations; the values and liquidity of loan
collateral, our securities portfolio and interest-sensitive assets and liabilities; and the risks and uncertainty of the
amounts realizable on collateral;
the risks of increases in market interest rates or the continuation of restrictive monetary policies creating
unrealized losses on our securities available for sale, which adversely affect our stockholders’ equity for financial
reporting purposes and our tangible equity;
changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;
changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that
may be included as capital for regulatory purposes;
changes in the prices, values and sales volumes of residential and commercial real estate;
the effects of competition from a wide variety of local, regional, national and other providers of financial,
investment and insurance services, including the disruptive effects of financial technology and other competitors
who are not subject to the same regulation, including capital, and supervision and examination, as the Company
and the Bank and credit unions, which are not subject to federal income taxation;
the timing and amount of rental income from third parties following the June 2022 opening of our new
headquarters;
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
changes in technology or products that may be more difficult, costly, or less effective than anticipated;
cyber-attacks and data breaches that may compromise our systems, our vendors’ systems or customers’
information;
the risks that our deferred tax assets (“DTAs”) included in “other assets” on our consolidated balance sheets, if
any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less
than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss
carry-forwards that we may be able to utilize for income tax purposes;
the risks that our dividends, share repurchases and discretionary bonuses are limited by regulation to the
maintenance of a capital conservation buffer of 2.5% and our future earnings and “eligible retained earnings” over
rolling four calendar quarter periods;
other factors and risks described under “Risk Factors” herein, in our Annual Report on Form 10-K as of and for
the year ended December 31, 2023 filed with the United States Securities and Exchange Commission (the
“Commission” or “SEC”), and in any of our subsequent reports that we make with the SEC under the Exchange
Act.
All written or oral forward-looking statements that we make or are attributable to us are expressly qualified in their entirety
by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-
looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.
Summary of Results of Operations
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2024
2023
2024
2023
Net interest income (a)
6,811
6,380
20,216
20,591
Less: tax-equivalent adjustment
21
108
60
322
Net interest income (GAAP)
6,790
6,272
20,156
20,269
Noninterest income
846
865
2,629
2,448
Total revenue
7,636
7,137
22,785
22,717
Provision for credit losses
(127)
105
84
(191)
Noninterest expense
5,500
5,362
16,694
16,791
Income tax expense
531
182
1,170
737
Net earnings
1,732
1,488
4,837
5,380
Basic and diluted earnings per share
0.50
0.43
1.38
1.54
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $4.8 million for the first nine months of 2024, compared to $5.4 million for the first nine
months of 2023. Basic and diluted earnings per share were $1.38 per share for the first nine months of 2024, compared to
$1.54 per share for the first nine months of 2023.
Net interest income (tax-equivalent) was $20.2 million for the first nine months of 2024, a 2% decrease compared to $20.6
million for the first nine months of 2023. This decrease was primarily due to a smaller balance sheet partially offset by an
increase in the Company’s net interest margin. The Company’s net interest margin (tax-equivalent) was 3.05% for the first
nine months of 2024 compared to 2.97% for the first nine months of 2023. This increase was primarily due to a more
favorable asset mix and higher yields on interest earning assets, which was partially offset by increased cost of interest-
bearing deposits. Average loans for the first nine months of 2024 were $568.9 million, a 11% increase from the first nine
months of 2023. Average total securities for the first nine months of 2024 were $259.2 million compared to $398.8 million
for the first nine months of 2023. The decrease was primarily the result of the Company’s balance sheet repositioning in
the fourth quarter of 2024. See “Results of Operations – Average Balance Sheet and Interest Rates” and “Net Interest
Income and Margin” below.
At September 30, 2024, the Company’s allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to
$6.9 million, or 1.23% of total loans, at December 31, 2023, and $6.8 million, or 1.24% of total loans, at September 30,
The Company recorded a provision for credit losses during the first nine months of 2024 of $0.1 million, compared to a
negative provision of $0.2 million during the first nine months of 2023. The provision for credit losses under CECL
reflects the Company’s evaluation of its credit risk profile and its future economic outlook and forecasts. Our CECL model
is largely influenced by economic factors including, most notably, the anticipated unemployment rate. The increase in the
provision for credit losses during the first nine months of 2024, as compared to the first nine months of 2023, was related to
changes in the composition of, and increases in, loans as well as changes in the economic forecasts used in our CECL
model.
Noninterest income was $2.6 million in the first nine months of 2024, compared to $2.4 million in the first nine months of
2023. The increase was primarily related to an increase in mortgage lending income and other noninterest income.
Noninterest expense was $16.7 million in the first nine months of 2024, compared to $16.8 million for the first nine months
of 2023. The decrease was primarily related to decreases in net occupancy and equipment expense and other noninterest
expense. These decreases were partially offset by an increase in salaries and benefits expense.
Income tax expense was $1.2 million for the first nine months of 2024 compared to $0.7 million for the first nine months of
2023. The Company's effective tax rate for the first nine months of 2024 was 19.48%, compared to 12.05% in the first nine
months of 2023. The Company’s effective income tax rate is affected principally by tax-exempt earnings from the
Company’s investments in municipal securities, bank-owned life insurance (“BOLI”), and New Markets Tax Credits
(“NMTCs”). The effective tax rate increased primarily due to a decrease in the Company’s investment in municipal
securities following the balance sheet restructuring in the fourth quarter of 2023, and the adoption of FASB ASU 2023-02
Investments – Equity Method and Joint Ventures (Topic 323) which allows the proportional amortization method for our
NMTC investments, on January 1, 2024. With the adoption of this ASU, amortization of NMTCs are now included in
income tax expense rather than noninterest expense.
The Company paid cash dividends of $0.81 per share in the first nine months of 2024 and 2023. At September 30, 2024,
the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current
regulatory standards with a total risk-based capital ratio of 15.76%, a tier 1 leverage ratio of 10.43% and a common equity
tier 1 (“CET1”) ratio of 14.75% at September 30, 2024.
For the third quarter of 2024, net earnings were $1.7 million, or $0.50 per share, compared to $1.5 million, or $0.43 per
share, for the third quarter of 2023. Net interest income (tax-equivalent) was $6.8 million for the third quarter of 2024
compared to $6.4 million for the third quarter of 2023. The increase was primarily due a more favorable asset mix and
higher yields on interest earning assets partially offset by increases in the cost of interest-bearing deposits. The Company’s
net interest margin (tax-equivalent) was 3.05% in the third quarter of 2024 compared to 2.73% in the third quarter of 2023.
The Company recorded a negative provision for credit losses during the third quarter of 2024 of $0.1 million, compared to a
provision of $0.1 million for the third quarter of 2023. Noninterest income was $0.8 million for the third quarter of 2024
compared to $0.9 million for the third quarter of 2023. This decrease was primarily due to a decrease in other noninterest
income. Noninterest expense was $5.5 million in the third quarter of 2024 compared to $5.4 million for the third quarter of
2023. The increase in noninterest expense was primarily due to an increase in salaries and benefits expense which was
partially offset by decreases in net occupancy and equipment expense and FDIC and other regulatory assessments expense.
Income tax expense was $0.5 million for the third quarter of 2024, compared to $0.2 million for the third quarter of 2023.
This increase was due to an increase in the level of earnings before taxes and the Company’s effective tax rate, which
increased to 23.46% in the third quarter of 2024 from 10.90% in the third quarter of 2023. This increase was related to a
decrease in the Company’s investment in municipal securities, and the adoption of ASU 2023-02, as described above.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these principles conform with U.S. GAAP and with
general practices within the banking industry. There have been no significant changes to our Critical Accounting Estimates
as described in our Form 10-K as of and for the year ended December 31, 2023.
RESULTS OF OPERATIONS
Average Balance Sheet and Interest Rates
Nine months ended September 30,
2024
2023
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
568,939
5.18%
514,706
4.71%
Securities - taxable
248,923
2.20%
344,136
2.13%
Securities - tax-exempt
10,235
3.71%
54,615
3.75%
Total securities
259,158
2.26%
398,751
2.35%
Federal funds sold
18,014
5.47%
4,372
4.86%
Interest bearing bank deposits
39,530
5.47%
8,118
4.66%
Total interest-earning assets
885,641
4.35%
925,947
3.70%
Deposits:
NOW
193,428
1.41%
189,586
0.75%
Savings and money market
250,146
0.79%
291,988
0.63%
Time deposits
196,584
3.45%
168,000
1.99%
Total interest-bearing deposits
640,158
1.80%
649,574
1.02%
Short-term borrowings
838
0.48%
3,748
2.43%
Total interest-bearing liabilities
640,996
1.80%
653,322
1.02%
Net interest income and margin (tax-equivalent)
20,216
3.05%
20,591
2.97%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $20.2 million for the first nine months of 2024, a 2% decrease compared to $20.6
million for the first nine months of 2023. This decrease was primarily due to a smaller balance sheet partially offset by a
increase in the Company’s net interest margin. The Company’s net interest margin (tax-equivalent) was 3.05% in the first
nine months of 2024 compared to 2.97% in the first nine months of 2023. This increase was primarily due a more
favorable asset mix and higher yields on interest-earning assets, which was partially offset by higher market interest rates,
which increased our cost of funds, generally, and changes in our deposit mix to higher cost interest bearing deposits. The
cost of interest-bearing liabilities increased to 180 basis points in the first nine months ended months of 2024, compared to
102 basis points in the first nine months ended months of 2023. Average interest-bearing deposits were $640.2 million
during the first nine months of 2024, a 1% decrease compared to $649.6 million during the first nine months of 2023. As of
September 30, 2024, average interest-bearing deposits were 71% of average total deposits compared to 69% on September
30, 2023. Since March 2022, the Federal Reserve increased the target federal funds rate by 525 basis points before
announcing a 50 basis points rate reduction on September 18, 2024, its first decrease in rates since its March 2020 COVID
rate reduction. At September 30, 2024, the target federal funds rate ranged from 4.75% - 5.00%.
The tax-equivalent yield on total interest-earning assets increased by 65 basis points to 4.35% in the first nine months of
2024 compared to 3.70% in the first nine months of 2023. This increase was primarily due to the Company’s balance sheet
repositioning strategy in the fourth quarter of 2023, which improved our asset mix, and loan growth combined with higher
market interest rates on interest earning assets. Average loans for the first nine months of 2024 were $568.9 million, an
11% increase from the first nine months of 2023.
The cost of total interest-bearing liabilities increased by 78 basis points to 1.80% in the first nine months of 2024 compared
to 1.02% in the first nine months of 2023. Our deposit costs may continue to increase as we compete for deposit funds
against other banks, money market mutual funds, Treasury securities and other interest-bearing alternative investments.
The Company continues to deploy various asset liability management strategies to manage its risks from interest rate
fluctuations. Deposit and loan pricing remain competitive in our markets. We believe this challenging rate environment
will continue throughout 2024. Our ability to compete and manage our deposit costs until our interest-earning assets
reprice and we generate new loans with current market interest rates will be important to our net interest margin during the
remainder of 2024.
Provision for Credit Losses
On January 1, 2023, we adopted ASC 326 and its CECL methodology, which requires us to estimate all expected credit
losses over the remaining life of our loans. Accordingly, the provision for credit losses represents a charge to earnings
necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for
all expected credit losses. The Company recorded a provision for credit losses during the first nine months of 2024 of $0.1
million, compared to a negative provision for credit losses of $0.2 million during the first nine months of 2023. 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.
Our allowance for credit losses reflects an amount we believe appropriate, based on our allowance assessment
methodology, to adequately cover all expected credit losses as of the date the allowance is determined. At September 30,
2024, the Company’s allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to $6.9 million, or
1.23% of total loans, at December 31, 2023, and $6.8 million, or 1.24% of total loans, at September 30, 2023.
Noninterest Income
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2024
2023
2024
2023
Service charges on deposit accounts
154
148
463
456
Mortgage lending income
133
110
463
345
Bank-owned life insurance
100
87
301
311
Other
459
520
1,402
1,336
Total noninterest income
846
865
2,629
2,448
The Company’s income from mortgage lending is primarily attributable to the (1) origination and sale of mortgage loans
and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage
loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are
netted against the commission expense associated with these originations. The Company’s normal practice is to originate
mortgage loans for sale in the secondary market and to either sell or retain the associated MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation
allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s mortgage lending income.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2024
2023
2024
2023
Origination income
52
20
194
81
Servicing fees, net
81
90
269
264
Total mortgage lending income
133
110
463
345
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. The increase in mortgage lending income was primarily related
to the Company increasing the number of mortgage loans held for sale during 2024 relative to the number of mortgage
loans held for investment during 2023.
Income from bank-owned life insurance was $301 thousand and $311 thousand for the first nine months of 2024, and 2023
respectively. Excluding a $52 thousand non-taxable death benefit received during the first quarter of 2023, income from
bank-owned life insurance would have been $259 thousand for the first nine months of 2023.
Other noninterest income was $1.4 million for the first nine months of 2024, compared to $1.3 million for the first nine
months of 2023. The increase in other noninterest income was primarily due to increased fee income on one-way sell
reciprocal deposits sold through the Intrafi network.
Noninterest Expense
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2024
2023
2024
2023
Salaries and benefits
3,148
2,844
9,359
8,809
Net occupancy and equipment
614
755
1,980
2,341
Professional fees
291
261
931
898
Other
1,447
1,502
4,424
4,743
Total noninterest expense
5,500
5,362
16,694
16,791
The increase in salaries and benefits was primarily due to routine annual increases in salaries and wages.
The decrease in net occupancy and equipment expense was primarily due to an increase in leasing income.
The decrease in other noninterest expense was primarily due to the Company’s adoption of ASU 2023-02 which allows the
proportional amortization method for our NMTC investments, on January 1, 2024. With the adoption of this ASU,
amortization of NMTCs are now included in income tax expense. During the first nine months of 2023, other noninterest
expense included $303 thousand related to our equity method investment in NMTCs.
Income Tax Expense
Income tax expense was $1.2 million during the first nine months of 2024 compared to $0.7 million during the first nine
months of 2023. The Company's effective tax rate for the first nine months of 2024 was 19.48%, compared to 12.05% in
the first nine months of 2023. The Company’s effective income tax rate is affected principally by tax-exempt earnings
from the Company’s investments in municipal securities, BOLI, and NMTCs. The effective tax rate increased primarily
due to a decrease in the Company’s investment in municipal securities following the balance sheet restructuring in the
fourth quarter of 2023, and the adoption of FASB ASU 2023-02 Investments – Equity Method and Joint Ventures (Topic
323) which allows the proportional amortization method for our NMTC investments, on January 1, 2024. With the
adoption of this ASU, amortization of NMTCs are now included in income tax expense rather than noninterest expense.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $258.3 million at September 30, 2024, compared to $270.9 million at December 31,
2023. This decrease reflects a $20.7 million decrease in the amortized cost basis of securities available-for-sale and an
increase in the fair value of securities available-for-sale of $8.1 million. The average annualized tax-equivalent yields
earned on total securities were 2.26% in the first nine months of 2024 and 2.35% in the first nine months of 2023.
Loans
2024
2023
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
61,510
77,627
78,920
73,374
66,014
Construction and land development
77,956
73,688
58,909
68,329
70,129
Commercial real estate
297,773
297,232
300,484
287,307
281,964
Residential real estate
118,582
119,427
118,240
117,457
117,150
Consumer installment
9,878
10,094
10,967
10,827
10,353
Total loans
565,699
578,068
567,520
557,294
545,610
Total loans were $565.7 million at September 30, 2024, a 2% increase compared to $557.3 million at December 31, 2023.
Four loan categories represented the majority of the loan portfolio at September 30, 2024: commercial real estate (53%),
residential real estate (21%), construction and land development (14%) and commercial and industrial (11%).
Approximately 21% of the Company’s commercial real estate loans were classified as owner-occupied at September 30,
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $10.1 million,
or 2% of total loans, and $8.7 million, or 2%, of total loans at September 30, 2024 and December 31, 2023, respectively.
For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only
payments at September 30, 2024 and December 31, 2023. The Company’s residential real estate mortgage portfolio does
not include any option or hybrid ARM loans, subprime loans, or any material amount of other consumer mortgage products
which are generally viewed as high risk.
The average yield earned on loans and loans held for sale was 5.18% in the first nine months of 2024 and 4.71% in the first
nine months of 2023.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of
current economic conditions, including inflation and the continuing increases in market interest rates, remaining COVID-19
pandemic effects including supply chain disruptions, reduced commercial office occupancy levels, housing supply
shortages and inflation on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in
making loans and evaluating collateral, reduced credit availability, (especially for commercial real estate) generally and
higher costs of financing properties, which reduce the transaction and dollar volumes of commercial real estate property
sales. Other risks we face include, among other things, real estate industry concentrations, competitive pressures from a
wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-
existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of
applicable laws and regulations. Various projects financed earlier that were based on lower interest rate assumptions than
currently in effect may not be as profitable or successful at the higher interest rates 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 $22.6 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $20.3 million. Our loan policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit. At September 30, 2024, the Bank had one
loan relationship exceeding our internal limit.
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. Loans to borrowers in each of the following
classes exceeded 25% of the Bank’s total risk-based capital at September 30, 2024 and December 31, 2023.
September 30,
December 31,
(Dollars in thousands)
2024
2023
Lessors of 1-4 family residential properties
59,317
56,912
Multi-family residential properties
43,789
45,841
Hotel/motel
37,913
39,131
Shopping centers/strip malls
33,506
27,128
Office Buildings
30,505
30,871
Allowance for Credit Losses
On January 1, 2023, we adopted ASC 326, which introduced the current expected loss (“CECL”) methodology, which
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. Our allowance for credit losses was approximately $6.9
million at both September 30, 2024 and December 31, 2023, which our management believed to be adequate at each of the
respective dates. Our allowance for credit losses as a percentage of total loans was 1.22% at September 30, 2024, compared
to 1.23% at December 31, 2023.
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 September 30, 2024, reasonable and supportable periods of four quarters were utilized followed by an eight quarter
straight line reversion period to long term averages.
A summary of the changes in the allowance for credit losses and certain asset quality ratios for the third quarter of 2024 and
the previous four quarters is presented below.
2024
2023
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
7,142
7,215
6,863
6,778
6,634
Charge-offs:
Commercial and industrial
(9)
(164)
Residential real estate
(54)
Consumer installment
(40)
(19)
(24)
(20)
(18)
Total charge -offs
(94)
(28)
(24)
(184)
(18)
Recoveries
34
19
91
11
4
Net recoveries (charge-offs)
(60)
(9)
67
(173)
(14)
Provision for (reversal of) credit losses
(206)
(64)
285
258
158
Ending balance
6,876
7,142
7,215
6,863
6,778
as a % of loans
1.22
1.24
1.27
1.23
1.24
as a % of nonperforming loans
887
900
822
753
559
Net (recoveries) charge-offs as % of average loans (a)
0.04
0.01
(0.05)
0.13
0.01
(a) Net (recoveries) charge-offs are annualized.
The allowance for credit losses by loan category for the third quarter of 2024 and the previous four quarters is presented
below.
2024
2023
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
(Dollars in thousands)
Amount
Amount
Amount
Amount
Amount
Commercial and industrial
1,160
10.9
1,366
13.4
1,415
13.9
1,288
13.2
1,215
12.1
Construction and land
development
985
13.8
942
12.7
840
10.4
960
12.3
1,073
12.9
Commercial real estate
3,989
52.6
4,091
51.5
4,202
53.0
3,921
51.5
3,803
51.6
Residential real estate
595
21.0
603
20.7
613
20.8
546
21.1
551
21.5
Consumer installment
147
1.7
140
1.7
145
1.9
148
1.9
136
1.9
Total allowance for credit losses
6,876
7,142
7,215
6,863
6,778
* Loan balance in each category expressed as a percentage of total loans.
Nonperforming Assets
At September 30, 2024 and December 31, 2023, the Company had $0.8 million and $0.9 million, respectively, in
nonperforming assets.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the third
quarter of 2024 and the previous four quarters.
2024
2023
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
775
794
878
911
1,213
Total nonperforming assets
775
794
878
911
1,213
as a % of loans and other real estate owned
0.14
0.14
0.15
0.16
0.22
as a % of total assets
0.08
0.08
0.09
0.09
0.12
Nonperforming loans as a % of total loans
0.14
0.14
0.15
0.16
0.22
The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2024 and the
previous four quarters.
2024
2023
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
162
Commercial real estate
735
753
765
783
801
Residential real estate
40
41
97
128
250
Consumer installment
16
Total nonaccrual loans
775
794
878
911
1,213
The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process of collection.
The Company had no loans 90 days or more past due and still accruing at September 30, 2024 and December 31, 2023,
respectively.
The Company had no OREO at September 30, 2024 or December 31, 2023.
Deposits
(In thousands)
2024
2023
Noninterest bearing demand
270,244
270,723
NOW
193,751
190,724
Money market
161,789
148,040
Savings
86,489
88,541
Certificates of deposit under $250,000
105,634
100,572
Certificates of deposit and other time deposits of $250,000 or more
83,817
97,643
Total deposits
901,724
896,243
Total deposits were $901.7 million at September 30, 2024, compared to $896.2 million at December 31, 2023. At
September 30, 2024 the Company had $37.8 million reciprocal deposits sold, compared to $59.0 million at December 31,
2023. The Company had no brokered deposits at September 30, 2024 compared to $46.6 million outstanding at September
30, 2023, and none at December 31, 2023. Noninterest-bearing deposits were $270.2 million, or 30% of total deposits, at
September 30, 2024, compared to $270.7 million, or 30% of total deposits at December 31, 2023.
The average rate paid on total interest-bearing deposits was 1.80% in the first nine months of 2024, compared to 1.02% in
first nine months of 2023.
At September 30, 2024, estimated uninsured deposits totaled $355.1 million, or 39% of total deposits, compared to $356.3
million, or 40% of total deposits at December 31, 2023. During 2023, the Bank began participating in the Certificates of
Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for
reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of improving the FDIC insurance
coverage for our depositors. The total of reciprocal deposits at September 30, 2024 was $16.3 million, compared to none at
December 31, 2023. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC
insurance limits. The Bank’s uninsured deposits at September 30, 2024 and December 31, 2023 include approximately
$214.9 million and $206.2 million, respectively, of deposits of state, county and local governments that are collateralized
by securities having an equal fair value to such deposits.
The estimated uninsured time deposits by maturity as of September 30, 2024 is presented below.
(Dollars in thousands)
September 30, 2024
Maturity of:
3 months or less
36,447
Over 3 months through 6 months
8,261
Over 6 months through 12 months
9,012
Over 12 months
2,347
Total estimated uninsured time deposits
56,067
The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large banks with more than $5
billion of uninsured deposits to pay for the federal government’s systemic risk determination to insure all depositors in
connection with the March 2023 failures of Silicon Valley Bank and Signature Bank. These special assessments do not
apply to the Bank.
Other Borrowings and Available Credit
The Company had no long-term debt at September 30, 2024 and December 31, 2023. The Bank utilizes short and long-
term non-deposit borrowings from time to time. Short-term borrowings generally consist of federal funds purchased and
securities sold under agreements to repurchase with an original maturity of one year or less. The Bank had available federal
funds lines totaling $65.2 million with no federal funds borrowings outstanding at September 30, 2024, and December 31,
2023, respectively. The Company had no securities sold under agreements to repurchase, which were entered into on behalf
of certain customers at September 30, 2024 compared to $1.5 million at December 31, 2023. The Bank is eligible to
borrow from the FRB’s discount window, but had no such borrowings at September 30, 2024 and December 31, 2023. The
bank never borrowed from the Federal Reserve’s Bank Term Facility Program (“BTFP”), which ceased making new loans
on March 11, 2024.
The Bank is a member of the FHLB of Atlanta and has borrowed, and may in the future borrow from time to time under the
FHLB of Atlanta’s advance program to obtain funding for its growth. FHLB advances include both fixed and variable rates
and are taken out with varying maturities, and are generally secured by eligible assets. The Bank had no borrowings under
FHLB of Atlanta’s advance program at September 30, 2024 and December 31, 2023, respectively. At those dates, the Bank
had $307.7 million and $309.1 million, respectively, of available lines of credit at the FHLB of Atlanta. Advances include
both fixed and variable interest rates and varying maturities may be used. The Bank also has access to the FRB discount
window.
The average rate paid on the Bank’s short-term borrowings was 0.48% in the first nine months of 2024 compared to 2.43%
in the first nine months of 2023. The Bank had average short term borrowings of $0.8 million in the first nine months of
2024, a 78% decrease compared to $3.7 million during the first nine months of 2023.
CAPITAL ADEQUACY
The Company’s consolidated stockholders’ equity was $84.3 million and $76.5 million as of September 30, 2024 and
December 31, 2023, respectively. The increase from December 31, 2023 was primarily driven by net earnings of $4.8
million and other comprehensive income due to the change in unrealized gains/losses on securities available-for-sale, net of
tax of $6.1 million, partially offset by cash dividends of $2.8 million, and the cumulative effect of adopting the new NMTC
accounting standard of $0.3 million. Total unrealized losses, net of tax, on available-for-sale securities decreased from
$29.0 million on December 31, 2023 to $22.9 million September 30, 2024. These unrealized losses do not affect the
Bank’s capital for regulatory capital purposes.
The Company paid cash dividends of $0.81 per share for both the first nine months of 2024 and first nine months of 2023.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and
related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital
conservation buffer was subject to a three-year phase-in period that began on January 1, 2016 and was fully phased-in on
January 1, 2019 at 2.5%. A banking organization with a capital 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.
On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted a final rule that amended the
capital conservation buffer. The new rule revises the definition of “eligible retained income” for purposes of the maximum
payout ratio to allow banking organizations to more freely use their capital buffers to promote lending and other financial
intermediation activities, by making the limitations on capital distributions more gradual. The eligible retained income is
now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected
in net income; and (ii) the average of all net income over the preceding four quarters. This rule only affects the capital
buffers, and banking organizations were encouraged to make prudent capital distribution decisions.
The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s Small Bank Holding
Company Policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its
consolidated subsidiaries. The Bank’s tier 1 leverage ratio was 10. 43%, CET1 risk-based capital ratio was 14.75%, tier 1
risk-based capital ratio was 14.75%, and total risk-based capital ratio was 15.76% at September 30, 2024. These ratios
exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital
ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.”
The Bank’s capital conservation buffer was 7.76% at September 30, 2024 exceeded the fully phased -in capital conservation
buffer, and such buffer did not limit capital distributions, share repurchases or discretionary bonuses to the extent of
available earnings.
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;
Market risk, which results from changes in the value of trading positions;
Operational risk, which is the risk of losses resulting from inadequate or failed internal process, people, and
systems, or from external events; and
Credit valuation adjustment risk, which results from the risk of losses on certain derivative contracts.
The Basel III endgame regulatory proposals are not applicable to the Company or the Bank. The Federal Reserve has
indicated that it is revising and expects to re-propose these rules applicable to larger organizations than the 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 model and an economic
value of equity (“EVE”) model.
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation modeling.
Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings
simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the
variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s
flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:
+/- 20% for a gradual change of 400 basis points
+/- 15% for a gradual change of 300 basis points
+/- 10% for a gradual change of 200 basis points
+/- 5% for a gradual change of 100 basis points
While a gradual change in interest rates was used in the above analysis to provide an estimate of exposure under these
scenarios, our modeling under both a gradual and instantaneous change in interest rates indicates our balance sheet is
liability sensitive over the forecast period of 12 months.
At September 30, 2024, our earnings simulation model indicated that we were in compliance with the policy guidelines
noted above.
Economic Value of Equity
. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12-month timeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in
interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than
the following:
35% for an instantaneous change of +/- 400 basis points
30% for an instantaneous change of +/- 300 basis points
25% for an instantaneous change of +/- 200 basis points
15% for an instantaneous change of +/- 100 basis points
At September 30, 2024, our EVE model indicated that we were in compliance with our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayments and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may
differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the
Company’s established liquidity, loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit
needs of our customers. From time to time, the Company also may enter into back-to-back interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not
designated as hedging instruments. At September 30, 2024 and December 31, 2023, the Company had no derivative
contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
Liquidity Risk Management
Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations. The Company seeks to manage its liquidity to
manage or reduce its costs of funds by maintaining liquidity believed adequate to meet its anticipated funding needs, while
balancing against excessive liquidity that likely would reduce earnings due to the cost of foregoing alternative higher-
yielding assets.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and
dividends, and Federal Reserve Regulation W restricts Company borrowings from, and other transactions with, the Bank.
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 payment of Company expenses, dividends paid to stockholders and Company stock repurchases.
Primary sources of funding for the Bank include customer deposits, other borrowings, interest payments on earning assets,
repayment and maturity of securities and loans, sales of securities, and the sale of loans, particularly residential mortgage
loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount
window. In addition to these sources, the Bank is eligible to participate in the FHLB of Atlanta’s advance program to obtain
funding for growth and liquidity. Advances include both fixed and variable terms and may be taken out with varying
maturities. At September 30, 2024, the Bank had no FHLB of Atlanta advances outstanding and available credit from the
FHLB of $307.7 million. At September 30, 2024, the Bank also had $65.2 million of available federal funds lines with no
borrowings outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.
The Company also has access to the FRB discount window.
Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known
contractual obligations and unfunded commitments, including loan commitments and reasonably expected borrower,
depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations
At September 30, 2024, the Bank had outstanding standby letters of credit of $0.6 million and unfunded loan commitments
outstanding of $77.6 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 use its cash and cash equivalents, deposits with other banks, liquidate
federal funds sold or a portion of our securities available-for-sale, or draw on its available credit facilities or raise deposits.
Mortgage lending activities
We generally sell residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these
loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various
customary representations and warranties regarding the origination and characteristics of the residential mortgage loans.
Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of
the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with
loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other
matters.
As of September 30, 2024, the aggregate unpaid principal balance of residential mortgage loans, which we have originated
and sold, but retained the servicing rights, was $207.5 million. Although these loans are generally sold on a non-recourse
basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole
requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase
or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole
requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to
determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks
of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and
quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
The Company was not required to repurchase any loans during the first nine months of 2024 as a result of representation
and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at September 30, 2024.
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to:
(1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any
required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements
governing our rights and duties as servicer.
The agreements under which we act as servicer generally specifies standards of responsibility for actions taken by us in
such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the
respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be
subject to termination if the breach is not cured within a specified period following notice. The standards governing
servicing and the possible remedies for violations of such standards are determined by our agreements with Fannie Mae and
Fannie Mae’s mortgage servicing guides. Remedies could include repurchase of an affected loan.
Although repurchase and make whole requests related to representation and warranty provisions and servicing activities
have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred
(make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on
their purchased loans. As of September 30, 2024, we do not believe that this exposure is material due to the historical level
of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie
Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate
this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor
portfolios.
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not
obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is
entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented herein have been prepared in
accordance with GAAP and practices within the banking industry which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance
than the effects of general levels of inflation.
Inflation can increase our noninterest expenses. It also can affect our customers’ behaviors, the mix of deposits between
interest and noninterest bearing, and the levels of interest rates we have to pay on our deposits and other borrowings, and
the interest rates we earn on our earning assets. The difference between our interest expense and interest income is also
affected by the shape of the yield curve and the speeds at which our assets and liabilities, respectively, reprice in response
to interest rate changes. Although inflation decreased in the most recent quarter, the yield curve continued to be inverted
through September 30, 2024, which means shorter term interest rates are higher than longer term interest rates. This results
in a lower spread between our costs of funds and our interest income. In addition, net interest income could be affected by
asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the
same index. Higher market interest rates and reductions in the securities held by the Federal Reserve to reduce inflation
generally reduce economic activity and may reduce loan demand and growth, and may adversely affect unemployment
rates. Inflation and related changes in market interest rates, as the Federal Reserve maintains interest rates to meet its
longer term inflation goal of 2%, also can adversely affect the values and liquidity of our loans and securities, the value of
collateral securing loans to our borrowers, and the success of our borrowers and such borrowers’ available cash to pay
interest on and principal of our loans to them.
Beginning in March 2022, the Federal Reserve, the Federal Reserve increased its target federal funds range from 0 – 0.25%
to 4.25 – 4.50% to fight inflation. 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%. The Federal Reserve has indicated it will maintain higher target
rates and restrictive monetary policy to meet its goals of (i) 2% target inflation rate over the longer term and (ii) maximum
employment goals. The Federal Reserve’s Open Market Committee (“FOMC”) reaffirmed its commitment in May 2024 to
the 2% inflation objective and announced that it “does not expect it will be appropriate to reduce the target range until it has
gained greater confidence that inflation is moving substantially toward 2%.” Further, beginning in June 2024, the FOMC
relaxed its monetary policy by slowing its monthly reduction of Treasury securities from $60 billion to $25 billion, while
maintaining the $35 monthly reduction of agency debt and agency mortgage -backed securities at $35 billion.
On September 18, 2024, in light of inflation moderating, the FOMC reduced its target federal funds rate range by 50 basis
points to 4.75% to 5.00%. While the FOMC reaffirmed its target inflation rate of 2% over the longer run, it indicated it was
“recalibrating” its policy based on decreasing inflation rates and the risks of increasing unemployment, but would act on
incoming data, the evolving outlook and the balance of the risks of inflation and unemployment levels. In the future, the
Federal Reserve could further decrease target interest rates, or could increase such target rates, depending on the data and
its outlook.
Our deposit costs increased as the Federal Reserve increased its target federal funds rate to fight inflation, market interest
rates increased, and as customers moved to interest bearing deposits to earn interest on their funds, and at higher interest
rates. Monetary policy efforts to control inflation may also affect unemployment which is an important component in our
CECL model used to estimate our allowance for credit losses. As inflation and market interest rates and expectations
regarding these declined in the three months ended September 30, 2024, the values of our securities investments held for
sale increased, which increased our stockholders’ equity.
See “Item 1A. Risk Factors” in this Report for additional information about inflation, interest rates and related risks.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB but is not yet effective.
ASU 2023-09,
Income Taxes (Topic 740): Improvements to Income Tax disclosures
ASU 2023-09 seeks to enhance the transparency and decision usefulness of income tax disclosures. For public business
entities, the new standard is effective for annual periods beginning after December 15, 2024. The Company does not
expect the new standard to have a material impact on the Company’s consolidated financial statements.
Table 1 – Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly
report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-
GAAP financial measures to their most directly comparable GAAP financial measures are presented below.
2024
2023
Third
Second
First
Fourth
Third
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
6,790
6,709
6,657
6,059
6,272
Tax-equivalent adjustment
21
19
20
95
108
Net interest income (Tax -equivalent)
6,811
6,728
6,677
6,154
6,380
Nine months ended September 30,
(In thousands)
2024
2023
Net interest income (GAAP)
20,156
20,269
Tax-equivalent adjustment
60
322
Net interest income (Tax -equivalent)
20,216
20,591
Table 2 - Selected Quarterly Financial Data
2024
2023
Third
Second
First
Fourth
Third
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
6,811
6,728
6,677
6,154
6,380
Less: tax-equivalent adjustment
21
19
20
95
108
Net interest income (GAAP)
6,790
6,709
6,657
6,059
6,272
Noninterest income
846
896
887
(5,429)
865
Total revenue
7,636
7,605
7,544
630
7,137
Provision for credit losses
(127)
(123)
334
326
105
Noninterest expense
5,500
5,519
5,675
5,803
5,362
Income tax expense
531
475
164
(1,514)
182
Net earnings
1,732
1,734
1,371
(3,985)
1,488
Per share data:
Basic and diluted net earnings
0.50
0.50
0.39
(1.14)
0.43
Cash dividends declared
0.27
0.27
0.27
0.27
0.27
Weighted average shares outstanding:
Basic and diluted
3,493,699
3,493,699
3,493,663
3,493,614
3,496,411
Shares outstanding, at period end
3,493,699
3,493,699
3,493,699
3,493,614
3,493,614
Book value
24.14
21.53
21.32
21.90
17.59
Common stock price:
High
24.35
19.25
21.55
21.99
22.80
Low
17.50
16.63
18.82
19.72
20.85
Period end:
22.90
18.29
19.27
21.28
21.50
To earnings ratio (b)
91.60
x
101.61
83.78
53.20
7.65
To book value
95
85
90
97
122
Performance ratios:
Annualized return on average equity
9.10
9.63
7.13
(26.40)
8.59
Annualized return on average assets
0.71
0.71
0.56
(1.56)
0.58
Dividend payout ratio
54.00
54.00
69.23
(23.68)
62.79
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.22
1.24
1.27
1.23
1.24
Nonperforming loans
887
900
822
753
559
Nonperforming assets as a % of:
Loans and other real estate owned
0.14
0.14
0.15
0.16
0.22
Total assets
0.08
0.08
0.09
0.09
0.12
Nonperforming loans as a % of total loans
0.14
0.14
0.15
0.16
0.22
Annualized net charge-offs (recoveries) as % of average loans
0.04
0.01
(0.05)
0.13
0.01
Capital Adequacy: (c)
CET 1 risk-based capital ratio
14.75
14.47
14.62
14.52
15.01
Tier 1 risk-based capital ratio
14.75
14.47
14.62
14.52
15.01
Total risk-based capital ratio
15.76
15.49
15.69
15.52
15.98
Tier 1 leverage ratio
10.43
10.39
10.34
9.72
10.26
Other financial data:
Net interest margin (a)
3.05
3.06
3.04
2.65
2.73
Effective income tax rate
23.46
21.50
10.68
(27.53)
10.90
Efficiency ratio (d)
71.83
72.39
75.03
800.41
74.01
Selected average balances:
Securities
251,723
258,228
267,606
354,065
390,772
Loans, net of unearned income
571,651
573,443
560,757
550,938
529,382
Total assets
982,656
978,107
976,930
1,020,476
1,020,980
Total deposits
904,860
900,673
897,051
953,674
942,533
Total stockholders’ equity
76,113
72,059
76,948
60,372
69,269
Selected period end balances:
Securities
258,285
254,359
260,770
270,910
373,286
Loans, net of unearned income
565,699
578,068
567,520
557,294
545,610
Allowance for credit losses
6,876
7,142
7,215
6,863
6,778
Total assets
990,143
1,025,054
979,039
975,255
1,030,724
Total deposits
901,724
946,405
899,673
896,243
964,602
Total stockholders’ equity
84,336
75,209
74,489
76,507
61,451
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Calculated by dividing period end share price by earnings per share for the previous four quarters.
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
(d) 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 Measures.
Table 3 - Selected Financial Data
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2024
2023
Results of Operations
Net interest income (a)
20,216
20,591
Less: tax-equivalent adjustment
60
322
Net interest income (GAAP)
20,156
20,269
Noninterest income
2,629
2,448
Total revenue
22,785
22,717
Provision for (reversal of) credit losses
84
(191)
Noninterest expense
16,694
16,791
Income tax expense
1,170
737
Net earnings
4,837
5,380
Per share data:
Basic and diluted net earnings
1.38
1.54
Cash dividends declared
0.81
0.81
Weighted average shares outstanding:
Basic and diluted
3,493,687
3,499,518
Shares outstanding, at period end
3,493,699
3,493,614
Book value
24.14
17.59
Common stock price:
High
24.35
24.50
Low
16.63
18.80
Period end
22.90
21.50
To earnings ratio (b)
91.60
x
7.65
To book value
95
122
Performance ratios:
Annualized return on average equity
8.59
10.15
Annualized return on average assets
0.66
0.70
Dividend payout ratio
58.70
52.60
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.22
1.24
Nonperforming loans
887
559
Nonperforming assets as a % of:
Loans and other real estate owned
0.14
0.22
Total assets
0.08
0.12
Nonperforming loans as a % of total loans
0.14
0.22
Annualized net recoveries as a % of average loans
(0.03)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
14.75
15.01
Tier 1 risk-based capital ratio
14.75
15.01
Total risk-based capital ratio
15.76
15.98
Tier 1 leverage ratio
10.43
10.26
Other financial data:
Net interest margin (a)
3.05
2.97
Effective income tax rate
19.48
12.05
Efficiency ratio (d)
73.08
72.88
Selected average balances:
Securities
259,158
398,751
Loans, net of unearned income
568,628
514,635
Total assets
979,243
1,022,257
Total deposits
900,876
944,471
Total stockholders’ equity
75,044
70,659
Selected period end balances:
Securities
258,285
373,286
Loans, net of unearned income
565,699
545,610
Allowance for credit losses
6,876
6,778
Total assets
990,143
1,030,724
Total deposits
901,724
964,602
Total stockholders’ equity
84,336
61,451
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Calculated by dividing period end share price by earnings per share for the previous four quarters.
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
(d) 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 Measures.
Table 4 - Average Balances and Net Interest Income Analysis
Quarter ended September 30,
2024
2023
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)
571,917
7,642
5.32%
529,521
6,373
4.77%
Securities - taxable (2)
241,604
1,327
2.19%
336,406
1,783
2.10%
Securities - tax-exempt (2)(3)
10,119
97
3.81%
54,366
510
3.72%
Total securities
251,723
1,424
2.25%
390,772
2,293
2.33%
Federal funds sold
18,696
255
5.43%
1,918
26
5.38%
Interest bearing bank deposits
46,174
659
5.68%
4,799
59
4.88%
Total interest-earning assets
888,510
9,980
4.47%
927,010
8,751
3.75%
Cash and due from banks
17,909
14,345
Other assets
76,237
79,625
Total assets
982,656
1,020,980
Interest-bearing liabilities:
Deposits:
NOW
192,781
729
1.50%
191,849
534
1.10%
Savings and money market
253,943
614
0.96%
283,152
661
0.93%
Time deposits
198,009
1,826
3.67%
183,539
1,139
2.46%
Total interest-bearing deposits
644,733
3,169
1.96%
658,540
2,334
1.41%
Short-term borrowings
2
0.00%
4,347
37
3.38%
Total interest-bearing liabilities
644,735
3,169
1.96%
662,887
2,371
1.42%
Noninterest-bearing deposits
260,127
283,993
Other liabilities
1,681
4,831
Stockholders' equity
76,113
69,269
Total liabilities and stockholders' equity
982,656
1,020,980
Net interest income and margin (tax-equivalent)
6,811
3.05%
6,380
2.73%
(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%.
Table 5 - Average Balances and Net Interest Income Analysis
Nine months ended September 30,
2024
2023
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)
568,939
22,082
5.18%
514,706
18,146
4.71%
Securities - taxable (2)
248,923
4,109
2.20%
344,136
5,474
2.13%
Securities - tax-exempt (2)(3)
10,235
284
3.71%
54,615
1,531
3.75%
Total securities
259,158
4,393
2.26%
398,751
7,005
2.35%
Federal funds sold
18,014
738
5.47%
4,372
159
4.86%
Interest bearing bank deposits
39,530
1,619
5.47%
8,118
283
4.66%
Total interest-earning assets
885,641
28,832
4.35%
925,947
25,593
3.70%
Cash and due from banks
17,917
15,160
Other assets
75,685
81,150
Total assets
979,243
1,022,257
Interest-bearing liabilities:
Deposits:
NOW
193,428
2,045
1.41%
189,586
1,067
0.75%
Savings and money market
250,146
1,486
0.79%
291,988
1,368
0.63%
Time deposits
196,584
5,082
3.45%
168,000
2,499
1.99%
Total interest-bearing deposits
640,158
8,613
1.80%
649,574
4,934
1.02%
Short-term borrowings
838
3
0.48%
3,748
68
2.43%
Total interest-bearing liabilities
640,996
8,616
1.80%
653,322
5,002
1.02%
Noninterest-bearing deposits
260,718
294,897
Other liabilities
2,485
3,379
Stockholders' equity
75,044
70,659
Total liabilities and stockholders' equity
979,243
1,022,257
Net interest income and margin (tax-equivalent)
20,216
3.05%
20,591
2.97%
(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%.
Market risk
As filed, 158 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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.
Controls and procedures
As filed, 1,096 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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.
Risk factors
As filed, 1,179 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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. The persistence of inflation above the Federal Reserve’s long
term targets, and the maintenance of or further increases in, tightened Federal Reserve monetary policy by increased target
interest rates and reductions in the Federal Reserve’s securities portfolio, have and are expected to continue to affect the
levels of interest rates, mortgage originations and income, the market values of our securities portfolio and loans and have
resulted in unrealized losses that have adversely affected our stockholders’ equity. These have affected and are expected to
continue to affect our deposit costs and mixes, and consumer savings and payment behaviors. These may also affect our
borrower’s operating costs, expected returns and cash flows available to service our loans. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition, and/or operating results in the future.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-07-01 to 2024-09-30 | $154.0k | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months2024-01-01 to 2024-09-30 | $463.0k | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Interest expense | 3 months2024-07-01 to 2024-09-30 | $3.2m | us-gaap:InterestExpense |
| Interest expense | 9 months2024-01-01 to 2024-09-30 | $8.6m | us-gaap:InterestExpense |
| Income tax | 3 months2024-07-01 to 2024-09-30 | $531.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2024-01-01 to 2024-09-30 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | $1.7m | us-gaap:ProfitLoss |
| Net income | 9 months2024-01-01 to 2024-09-30 | $4.8m | us-gaap:ProfitLoss |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | $0.50 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2024-01-01 to 2024-09-30 | $1.38 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months2024-01-01 to 2024-09-30 | $8.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 9 months2024-01-01 to 2024-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | At period end2024-09-30 | $990.1m | us-gaap:Assets |
| Total liabilities | At period end2024-09-30 | $905.8m | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-09-30 | $84.3m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |
Source: SEC EDGAR, the filing index for accession 0001193125-24-249547. Last ingested by Listed: Nov 11, 2026, 01:56 ET. Listed shows no prices and gives no investment advice.