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, 2021
March 31, 2022
☐
 
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
 
Indicate by
 
check
mark
 
whether
the
 
registrant (1)
 
(1) has
filed
 
all
reports
 
required
to
 
be
filed
 
by Section
 
Section 13
or
 
15(d)
of
 
the
Securities
Exchange Act of
 
of 1934
during the
 
preceding 12 months (or
 
(or for
such shorter
 
period that the
 
the registrant
was required
 
to file such
 
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
 
the registrant is a
 
large accelerated filer,
 
an accelerated filer, a
 
a non-accelerated filer,
a smaller
reporting
company
or
 
an
emerging
 
growth
company.
 
See
the
 
definitions
of
 
“large
accelerated
 
filer,” “accelerated
“accelerated
 
filer,” “smaller
“smaller
 
reporting
company” and “emerging growth company” in Rule 12b-2
of the Exchange Act. (Check one):
 
Large Accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☐
If
 
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 July 29, 2021May 4, 2022
Common Stock, $0.01 par value per share
3,542,5053,515,787
 
shares
 
AUBURN NATIONAL BANCORPORATION, INC. AND
 
SUBSIDIARIES
INDEX
 
PAGE
Item 1
3
 
4
5
6
7
8
Item 2
 
28
4948
5049
50
52
53
54
55
5651
5752
Item 3
5853
Item 4
5853
Item 1
5853
Item
1A
5853
Item 2
5954
Item 3
5954
Item 4
5954
Item 5
5954
Item 6
6055
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
PART
 
1.
 
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
June 30,March 31,
December 31,
(Dollars in thousands, except share data)
20212022
20202021
Assets:
Cash and due from banks
$
18,92522,085
$
14,86811,210
Federal funds sold
49,46671,249
28,55777,420
Interest-bearing bank deposits
72,86296,243
69,15067,629
Cash and cash equivalents
141,253189,577
112,575156,259
Securities available-for-sale
 
384,865417,459
335,177421,891
Loans held for sale
1,367977
3,4181,376
Loans, net of unearned income
456,984428,417
461,700458,364
Allowance for loan losses
(5,107)(4,658)
(5,618)(4,939)
Loans, net
451,877423,759
456,082453,425
Premises and equipment, net
29,82642,123
22,19341,724
Bank-owned life insurance
19,43419,734
19,23219,635
Other assets
7,61016,035
7,92010,840
Total assets
$
1,036,2321,109,664
$
956,5971,105,150
Liabilities:
Deposits:
Noninterest-bearing
 
$
283,356308,338
$
245,398316,132
Interest-bearing
640,106709,404
594,394678,111
Total deposits
923,4621,017,742
839,792994,243
Federal funds purchased and securities sold under agreements
to repurchase
3,5333,994
2,3923,448
Accrued expenses and other liabilities
3,1941,517
6,7233,733
Total liabilities
930,1891,023,253
848,9071,001,424
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
3,7923,795
3,7893,794
Retained earnings
108,060111,123
105,617109,974
Accumulated other comprehensive (loss) income, net
4,255(17,455)
7,599891
Less treasury stock, at cost -
411,280440,164
 
shares and
390,859436,650
 
at June 30, 2021March 31, 2022
and December 31, 2020,2021, respectively
(10,103)(11,091)
(9,354)(10,972)
Total stockholders’ equity
106,04386,411
107,690103,726
Total liabilities and stockholders’
 
stockholders’ equity
$
1,036,2321,109,664
$
956,5971,105,150
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,
March 31,
(Dollars in thousands, except share and per share data)
2021
20202022
2021
2020
Interest income:
Loans, including fees
$
5,1124,850
$
5,4945,178
$
10,290
$
10,906
Securities:Securities
Taxable
1,0091,336
1,056
1,958
2,167949
Tax-exempt
444419
476
896
929452
Federal funds sold and interest-bearinginterest bearing bank deposits
2863
27
56
30628
Total interest income
6,5936,668
7,053
13,200
14,3086,607
Interest expense:
Deposits
614585
981
1,280
2,022666
Short-term borrowings
4
2
85
4
Total interest expense
618590
983
1,288
2,026670
Net interest income
5,9756,078
6,070
11,912
12,2825,937
Provision for loan losses
(600)(250)
450
(600)
8500
Net interest income after provision for loan
 
loan losses
6,5756,328
5,620
12,512
11,4325,937
Noninterest income:
Service charges on deposit accounts
138142
126
270
298132
Mortgage lending
424253
683
973
913549
Bank-owned life insurance
99
108
202
506103
Other
449414
365
847
794
Securities gains, net
0
81
0
87398
Total noninterest income
1,110908
1,363
2,292
2,5981,182
Noninterest expense:
Salaries and benefits
2,8972,950
2,597
5,748
5,4282,851
Net occupancy and equipment
418434
920
856
1,517438
Professional fees
326230
389
582
647256
Other
1,2541,287
1,053
2,399
2,2231,145
Total noninterest expense
4,8954,901
4,959
9,585
9,8154,690
Earnings before income taxes
2,7902,335
2,024
5,219
4,2152,429
Income tax expense
504254
363
927
753423
Net earnings
$
2,2862,081
$
1,661
$
4,292
$
3,4622,006
Net earnings per share:
Basic and diluted
$
0.650.59
$
0.47
$
1.21
$
0.970.56
Weighted average shares
 
outstanding:
Basic and diluted
3,554,8713,518,657
3,566,166
3,560,554
3,566,1563,566,299
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive IncomeLoss
(Unaudited)
 
Quarter ended June 30,
Six months ended June 30,
March 31,
(Dollars in thousands)
2021
20202022
2021
2020
Net earnings
$
2,2862,081
$
1,661
$
4,292
$
3,4622,006
Other comprehensive income (loss),loss, net of
tax:
Unrealized net holding gain (loss)loss on securities
1,788(18,346)
1,043
(3,344)
5,392
Reclassification adjustment for net gain on securities
recognized in net earnings
0
(60)
0
(65)(5,132)
Other comprehensive income (loss)loss
1,788(18,346)
983
(3,344)
5,327(5,132)
Comprehensive incomeloss
$
4,074(16,265)
$
2,644
$
948
$
8,789(3,126)
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
income (loss)
stock
Total
Quarter ended June 30, 2021March 31, 2022
Balance, MarchDecember 31, 2021
3,566,3263,520,485
$
39
$
3,7913,794
$
106,696109,974
$
2,467891
$
(9,354)(10,972)
$
103,639103,726
Net earnings
—
0
0
2,2862,081
0
0
2,2862,081
Other comprehensive incomeloss
—
0
0
0
1,788(18,346)
0
1,788(18,346)
Cash dividends paid ($
.26.265
 
per share)
—
0
0
(922)(932)
0
0
(922)(932)
Stock repurchases
(20,511)(3,559)
0
0
0
0
(750)(120)
(750)(120)
Sale of treasury stock
4045
0
1
0
0
1
2
Balance, June 30, 2021March 31, 2022
3,545,8553,516,971
$
39
$
3,7923,795
$
108,060111,123
$
4,255(17,455)
$
(10,103)(11,091)
$
106,04386,411
Quarter ended June 30, 2020
Balance, March 31, 2020
3,566,146
$
39
$
3,784
$
102,692
$
6,403
$
(9,355)
$
103,563
Net earnings
—
0
0
1,661
0
0
1,661
Other comprehensive income
—
0
0
0
983
0
983
Cash dividends paid ($
.255
per share)
—
0
0
(909)
0
0
(909)
Sale of treasury stock
30
0
1
0
0
0
1
Balance, June 30, 2020
3,566,176
$
39
$
3,785
$
103,444
$
7,386
$
(9,355)
$
105,299
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
4,2922,006
0
0
4,2922,006
Other comprehensive loss
—
0
0
0
(3,344)(5,132)
0
(3,344)(5,132)
Cash dividends paid ($
.52.26
 
per share)
—
0
0
(1,849)(927)
0
0
(1,849)(927)
Stock repurchasesSale of treasury stock
(20,511)50
0
2
0
0
0
0
(750)
(750)
Sale of treasury stock
90
0
3
0
0
1
42
Balance, June 30,March 31, 2021
3,545,8553,566,326
$
39
$
3,7923,791
$
108,060106,696
$
4,2552,467
$
(10,103)(9,354)
$
106,043
Six months ended June 30,
2020
Balance, December 31, 2019
3,566,146
$
39
$
3,784
$
101,801
$
2,059
$
(9,355)
$
98,328
Net earnings
—
0
0
3,462
0
0
3,462
Other comprehensive income
—
0
0
0
5,327
0
5,327
Cash dividends paid ($
.51
per share)
—
0
0
(1,819)
0
0
(1,819)
Sale of treasury stock
30
0
1
0
0
0
1
Balance, June 30, 2020
3,566,176
$
39
$
3,785
$
103,444
$
7,386
$
(9,355)
$
105,299103,639
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Six monthsQuarter ended June 30,March 31,
 
(Dollars in thousands)
20212022
20202021
Cash flows from operating activities:
Net earnings
$
4,2922,081
$
3,4622,006
Adjustments to reconcile net earnings to net cash provided
by
operating activities:
Provision for loan losses
(600)(250)
8500
Depreciation and amortization
629244
989297
Premium amortization and discount accretion, net
1,940909
1,081
Net gain on securities available-for-sale
0
(87)959
Net gain on sale of loans held for sale
(935)(229)
(847)
Net gain on other real estate owned
0
(17)(537)
Loans originated for sale
(32,608)(5,792)
(36,385)(17,503)
Proceeds from sale of loans
35,2796,366
36,57620,036
Increase in cash surrender value of bank-owned life insurance
(202)(99)
(224)
Income recognized from death benefit on bank-owned life insurance
0
(282)(103)
Net (increase) decrease (increase) in other assets
22(5,161)
(1,013)15
Net decrease in accrued expenses and other liabilities
(2,404)3,938
(334)694
Net cash provided by operating activities
5,4132,007
3,7695,864
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
0
9,062
Proceeds from prepayments and maturities of securities available
-for-saleavailable-for-sale
38,20419,523
22,08524,145
Purchase of securities available-for-sale
(94,297)(40,498)
(91,318)(56,409)
Decrease (increase) in loans, net
4,80529,916
(3,400)(115)
Net purchases of premises and equipment
(7,926)(549)
(372)(5,577)
Proceeds from bank-owned life insurance death benefit
0
694
Decrease (increase)(Increase) decrease in FHLB stock
267(74)
(9)
Proceeds from sale of other real estate owned
0
116267
Net cash used inprovided by (used in) investing activities
(58,947)8,318
(63,142)(37,689)
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
37,958(7,794)
51,21120,471
Net increase in interest-bearing deposits
45,71231,293
54,44720,327
Net increase in federal funds purchased and securities sold
 
under agreements to repurchase
1,141546
926946
Stock repurchases
(750)(120)
0
Dividends paid
(1,849)(932)
(1,819)(927)
Net cash provided by financing activities
82,21222,993
104,76540,817
Net change in cash and cash equivalents
28,67833,318
45,3928,992
Cash and cash equivalents at beginning of period
112,575156,259
92,443112,575
Cash and cash equivalents at end of period
$
141,253189,577
$
137,835121,567
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
1,302609
$
2,023687
Income taxes
1,3350
678671
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure
0
990
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 individualindividuals and
corporatecommercial customers in Lee County,
 
Alabama and surrounding counties through its wholly owned subsidiary,
AuburnBank
(theAuburnBank (the “Bank”). The Company does not have any segments other than
 
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
 
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
 
all adjustments necessary to present a fair
statement of the financial position and the results of operations for all periods
 
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, 2020.2021.
The unaudited consolidated financial statements include the accounts of the
 
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
 
GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures
of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and
expenses during the reporting period.
 
Actual results could
differ from those estimates.
 
Material estimates that are particularly susceptible to significant change
in the near term
include other-than-temporary impairment on investment securities,
 
the determination of the allowance for loan losses, fair
value of financial instruments, and the valuation of deferred
tax assets and other real estate
owned (“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update
 
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
 
stream is generated from
interest income on loans and depositssecurities which are outside the scope
 
scope of ASC 606.
 
The Company’s sources of income that
 
fall within the scope of ASC 606 include service charges
on deposits, investment
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
 
that fall within the scope of ASC 606:
 
●
Service charges on deposits, investment services, ATM
 
and interchange fees – Fees from these services are either
transaction-based, for which the performance obligations are satisfied
 
when the individual transaction is processed,
or set periodic service charges, for which the performance obligations are
 
obligations are satisfied over the period the service is
provided. Transaction-based fees are recognized
 
at the time the transaction is processed, and periodic
service
charges are recognized over the service period.
 
●
Gains on sales of OREO
 
–
A gain on sale should be recognized when a contract for sale exists and
control of the
asset has been transferred to the buyer.
 
ASC 606 lists several criteria required to conclude that a contract
for sale
exists, including a determination that the institution will collect
 
collect substantially all of the consideration to which it is
entitled.
 
In addition to the loan-to-value, the analysis is based
on various other
factors, including the credit quality
of the borrower, the structure of the loan, and
any other factors
that may affect collectability.
 
 
 
 
 
 
 
 
 
 
 
9
Subsequent Events
 
The Company has evaluated the effects of events
and transactions through
the date of this filing that have
occurred
subsequent to June 30, 2021.March 31, 2022. 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
 
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 effect on the Company’s
previously reported net earnings or total stockholders’ equity.
Accounting Developments
In the first six monthsquarter of 2021,2022, the Company did not adopt any new accounting
 
accounting guidance.
 
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.quarters ended March 31, 2022 and 2021, respectively.
 
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,
March 31, 2022 and 2021, and 2020,respectively,
respectively, the Company had
no such securities or rights issued or outstanding,
and therefore,
no dilutive effect to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for
the respective periods
are presented below
 
Quarter ended June 30,
Six months ended June 30,
March 31,
(Dollars in thousands, except share and per share data)
2021
20202022
2021
2020
Basic and diluted:
Net earnings
$
2,2862,081
$
1,661
$
4,292
$
3,4622,006
Weighted average common
 
shares outstanding
3,554,8713,518,657
3,566,166
3,560,554
3,566,1563,566,299
Net earnings per share
$
0.650.59
$
0.47
$
1.21
$
0.970.56
NOTE 3: SECURITIES
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, 2021March 31, 2022, 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 March 31, 2022 and December 31, 2020,2021, respectively,
 
all securities within the scopeCompany had one such investment in the
amount of ASC 320,$2.2 million, which was included in other assets in the consolidated
Investments – Debt and
Equity Securities,
were classified as available-for-sale.balance sheets.
 
The fair value and amortized cost for securities available-for-saleCompany’s equity
by contractual maturity at June 30, 2021 and December 31,investment meets the definition of a VIE. While the Company’s
 
2020, respectively, are presentedinvestment exceeds 50% of the outstanding equity
interests, the Company does not consolidate the VIE because it does not
 
below.meet the characteristics of a primary beneficiary
since the Company lacks the power to direct the activities of the VIE.
 
1 yearType:
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, 2021
Agency obligations (a)New Markets Tax Credit investment
$
10,074
34,524
61,743
5,146
111,487
2,023
9992,158
$
110,4632,158
Agency MBS (a)
0
894
27,601
170,354
198,849
2,166
1,283
197,966
State and political subdivisions
381
982
11,874
61,292
74,529
3,945
170
70,754
Total available-for-sale
$
10,455
36,400
101,218
236,792
384,865
8,134
2,452
$
379,183
December 31, 2020
Agency obligations (a)
$
5,048
24,834
55,367
12,199
97,448
3,156
98
$
94,390
Agency MBS (a)
0
1,154
20,502
141,814
163,470
3,245
133
160,358
State and political subdivisions
477
632
8,405
64,745
74,259
3,988
11
70,282
Total available-for-sale
$
5,525
26,620
84,274
218,758
335,177
10,389
242
$
325,030
(a) Includes securities issued by U.S. government agencies or
government-sponsored entities.
Securities with aggregate fair values of $
168.5
million and $
166.9
million at June 30, 2021 and December 31, 2020,
respectively, were pledged to
secure public deposits, securities sold under agreements to repurchase,
Federal Home Loan
Bank (“FHLB”) advances, and for other purposes required
or permitted by law.
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
NOTE 4: SECURITIES
At March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021,
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
March 31, 2022
Agency obligations (a)
$
0
49,185
66,866
0
116,051
0
7,428
$
123,479
Agency MBS (a)
0
570
34,857
198,400
233,827
62
14,906
248,671
State and political subdivisions
170
627
14,494
52,290
67,581
902
1,937
68,616
Total available-for-sale
$
170
50,382
116,217
250,690
417,459
964
24,271
$
440,766
December 31, 2021
Agency obligations (a)
$
5,007
49,604
69,802
0
124,413
1,080
2,079
$
125,412
Agency MBS (a)
0
680
35,855
186,836
223,371
1,527
2,680
224,524
State and political subdivisions
170
647
15,743
57,547
74,107
3,611
270
70,766
Total available-for-sale
$
5,177
50,931
121,400
244,383
421,891
6,218
5,029
$
420,702
(a) Includes securities issued by U.S. government agencies or government-sponsored
entities.
Securities with aggregate fair values of $
189.9
million and $
172.3
million at March 31, 2022 and December 31, 2021,
respectively, were pledged to
secure public deposits, securities sold under agreements to repurchase, Federal Home
Loan
Bank (“FHLB”) advances, and for other purposes required or permitted by law.
Included in other assets on the accompanying consolidated balance sheets are non-marketable
 
are non-marketable equity investments.
 
The
carrying amounts of non-marketable equity investments were
$
1.2
 
million and $
1.4
million at June 30, 2021March 31, 2022 and December 31, 2021,
31, 2020, respectively.
 
Non-marketable equity investments
include FHLB of Atlanta Stock, Federal
Reserve Bank
(“FRB”) stock,
and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at June 30,March 31, 2022
 
2021 and December 31, 2020,2021, respectively,
segregated
segregated by those securities that have been in an unrealized loss position for
 
less than 12 months and 12 months or longer,
are
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,March 31, 2022:
Agency obligations
$
78,527
3,404
37,525
4,024
$
116,052
7,428
Agency MBS
173,957
9,964
52,473
4,942
226,430
14,906
State and political subdivisions
23,712
1,484
3,556
453
27,268
1,937
Total
$
276,196
14,852
93,554
9,419
$
369,750
24,271
December 31, 2021:
Agency obligations
 
$
51,04549,799
9991,025
026,412
01,054
$
51,04576,211
9992,079
Agency MBS
101,319130,110
1,2831,555
038,611
01,125
101,319168,721
1,2832,680
State and political subdivisions
8,3677,960
170109
03,114
0161
8,36711,074
170270
Total
 
$
160,731187,869
2,4522,689
068,137
02,340
$
160,731256,006
2,4525,029
December 31, 2020:
Agency obligations
$
15,416
98
0
0
$
15,416
98
Agency MBS
41,488
133
0
0
41,488
133
State and political subdivisions
11
0
0
2,945
11
Total
$
59,849
242
0
0
$
59,849
242
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
 
before recovery of the amortized cost basis, which may be
maturity.
 
On a quarterly basis, the Company assesses each security for credit impairment.
 
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
 
area (for(for example, changes in
the financial condition of the issuer of the security,
 
or in the case of an asset-backed debt security,
 
in the financial
condition of the underlying loan obligors, including changes in technology
or the discontinuance of
a segment of
the business that may affect the future earnings potential of
the issuer or
underlying loan obligors of the security or
changes in the quality of the credit enhancement);
●
the historical and implied volatility of the fair value of the security;
●
the payment structure of the debt security and the likelihood of the issuer
being able to
make payments that
increase in the future;
●
failure of the issuer of the security to make scheduled interest
or principal payments;
●
any changes to the rating of the security by a rating agency; and
●
recoveries or additional declines in fair value subsequent to the
balance sheet date.
11
Agency obligations
The unrealized losses associated with agency obligations were
primarily driven by declines
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.
Agency mortgage-backed securities (“MBS”)
The unrealized losses associated with agency MBS were primarily
driven by changes in interest rates and not due to the
credit quality of the securities. These securities were issued by U.S. government
 
government agencies or government-sponsoredgovernment-
sponsored entities
and did not have any credit losses given the explicit government guarantee
 
or other government support.
 
Agency mortgage-backed securities (“MBS”)
The unrealized losses associated with agency MBS 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.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions
 
political subdivisions were primarily driven by declinesincreases
in market interest rates and were not due to the credit quality of the securities.
Some of these
securities are guaranteed by a bond
bond insurer, but management did not rely on the guarantee
 
guarantee in making its investment decision.
 
These securities will
continue to
be monitored as part of the Company’s
 
quarterly impairment analysis, but are expected to
perform even if the rating
rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to
 
Company
expects to recover the entire
amortized cost
basis of these securities.
The carrying values of the Company’s investment
 
investment securities could decline in the future if market interest rates continue to
increase.
If the financial
condition of an issuer (other than the U.S. government or
issuerits agencies) deteriorates and the
Company determines it is probable
that it will not recover the entire amortized cost
basis for the security,
security. As a result, 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.
12
Other-Than-Temporarily
 
Impaired Securities
Credit-impaired debt securities are debt securities where the Company
 
has written down the amortized cost basis of a
security for other-than-temporary impairment and the credit
component of the loss is recognized
in earnings. At June 30,March 31,
20212022 and December 31, 2020,2021, 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
ended June 30, March 31, 2022 and
2021, and 2020,
respectively.
 
Realized Gains and Losses
The following table presents the grossCompany had no realized gains and losses on salessale of securities during the first quarters ended
 
of securities.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)March 31, 2022 and
2021,
2020
2021
2020
Gross realized gains
$
0
100
$
0
106
Gross realized losses
0
(19)
0
(19)
Realized gains, net
$
0
81
$
0
87
respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1213
NOTE 4:5: LOANS AND ALLOWANCE
 
FOR LOAN LOSSES
June 30,March 31,
December 31,
(Dollars in thousands)
20212022
20202021
Commercial and industrial
$
87,93373,297
$
82,58583,977
Construction and land development
37,47733,058
33,51432,432
Commercial real estate:
Owner occupied
51,52059,429
54,03363,375
Hotel/motel
46,96337,377
42,90043,856
Multi-family
39,31625,253
40,20342,587
Other
105,046113,003
118,000108,553
Total commercial real estate
242,845235,062
255,136258,371
Residential real estate:
Consumer mortgage
33,14030,182
35,02729,781
Investment property
49,02448,920
49,12747,880
Total residential real estate
82,16479,102
84,15477,661
Consumer installment
7,7628,412
7,0996,682
Total loans
458,181428,931
462,488459,123
Less: unearned income
(1,197)(514)
(788)(759)
Loans, net of unearned income
$
456,984428,417
$
461,700458,364
Loans secured by real estate were approximately
79.1%81.0%
 
of the Company’s total loan portfolio
 
at June 30, 2021.March 31, 2022.
 
At June 30,March
2021,
31, 2022, the Company’s geographic
loan distribution
was concentrated primarily in Lee County,
 
Alabama, and surrounding
surrounding areas.
In accordance with ASC 310, a portfolio segment is defined as the level
at which an entity
develops and documents a
systematic method for determining its allowance for loan losses.
As part of the
Company’s quarterly assessment
 
assessment of the
allowance, the loan portfolio is disaggregated intoincluded the following portfolio
segments: commercial and
industrial,
construction and land
development, commercial real estate, residential
real estate, and consumer installment.
Where
appropriate, the Company’s
loan
portfolio segments are further disaggregated into classes.
A class is generally determined
based on the initial
measurement attribute, risk characteristics of the
loan, and an entity’s method
 
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
 
or other needs
for small and medium-sized commercial customers. Also included
 
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.
 
We participated
as a lender inAs of March 31, 2022, the Paycheck Protection Program (“PPP”),
which ended May 31, 2021.
PPP loans
are forgivable in whole or in part, if the proceeds
are used for payroll and other permitted purposes in accordance
with the
requirements of the PPP.
The Company had
288
and
265
has 82 PPP loans with an aggregate outstanding principal
balance of $4.1
$
22.1
million and $
19.0
million included in this category,category.
 
asThe Company had 138 PPP loans with an aggregate principal balance of June 30, 2021 and$8.1
million
included in this category at December 31, 2020, respectively.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.
 
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 four classes: (1) owner occupied, (2)
 
(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.
1314
●
Hotel/motel
– includes loans for hotels and motels.
 
Generally, the primary source of repayment
 
of repayment is dependent upon
income generated from the real estate collateral.
 
The underwriting of these loans takes into consideration the
occupancy and rental rates, as well as the financial health of the borrower.
●
Multi-family
 
– primarily includes loans to finance income-producing multi-family properties
 
properties..
 
Loans in this class
include loans for 5 or more unit residential property and apartments
leased to residents.
Generally,
 
the primary
source of repayment is dependent upon income generated from the real estate collateral.
 
estate collateral. The underwriting of these
loans takes into consideration the occupancy and rental rates
,
as well as the financial health of the borrower.
●
Other
– primarily includes loans to finance income-producing commercial
properties that 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 businesses. Generally,
the primary source of repayment
is dependent upon income generated from the real estate collateral.
The underwriting of these loans takes into
consideration the occupancy and rental rates, as well as the financial
 
health of the borrower.
 
●
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 businesses.
Generally,
the primary source of repayment is dependent upon income generated from the real
estate collateral. The underwriting of these loans takes into consideration the occupancy and
rental rates, as well as
the financial health of the borrower.
Residential real estate (“RRE”) —
includes loans disaggregated into two classes: (1) consumer mortgage
and (2)
investment property.
●
Consumer mortgage
 
– primarily includes first or second lien mortgages and home equity
lines of credit
to
consumers that are secured by a primary residence or second home. These
loans are underwritten
in accordance
with the Bank’s general loan polipolicies and
 
cies and procedures which require, among other things, proper
documentation of
each borrower’s financial condition, satisfactory credit history
 
history, ,
and property
value.
 
●
Investment property
 
– primarily includes loans to finance income-producing 1-4 family residential
properties.
Generally,
the primary source
of repayment is dependent upon income generated
from leasing the
property
securing the loan. The underwriting of these loans takes into consideration
the rental rates and
property value, as
well as the financial health of the borrower.
 
Consumer installment —
includes loans to individuals both secured by personal property
and unsecured.
 
Loans include
personal lines of credit, automobile loans, and other retail loans.
 
These loans are underwritten in accordance with the
Bank’s general loan policies and procedures
 
procedures which require, among other things, proper
documentation of each borrower’s
financial condition, satisfactory credit history,
 
and, if applicable, property value.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1415
The following is a summary of current, accruing past due, and nonaccrual
loans by portfolio
segment and class as of JuneMarch
30, 202131, 2022 and December 31, 2020.2021.
 
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
 
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
June 30,March 31, 2022:
Commercial and industrial
$
73,290
7
0
73,297
0
$
73,297
Construction and land development
33,057
1
0
33,058
0
33,058
Commercial real estate:
Owner occupied
59,429
0
0
59,429
0
59,429
Hotel/motel
37,377
0
0
37,377
0
37,377
Multi-family
25,253
0
0
25,253
0
25,253
Other
112,821
0
0
112,821
182
113,003
Total commercial real estate
234,880
0
0
234,880
182
235,062
Residential real estate:
Consumer mortgage
29,600
393
0
29,993
189
30,182
Investment property
48,817
103
0
48,920
0
48,920
Total residential real estate
78,417
496
0
78,913
189
79,102
Consumer installment
8,397
15
0
8,412
0
8,412
Total
$
428,041
519
0
428,560
371
$
428,931
December 31, 2021:
Commercial and industrial
$
87,93283,974
13
0
87,93383,977
0
$
87,93383,977
Construction and land development
37,27332,228
204
0
37,47732,432
0
37,47732,432
Commercial real estate:
Owner occupied
51,52063,375
0
0
51,52063,375
0
51,52063,375
Hotel/motel
46,96343,856
0
0
46,96343,856
0
46,96343,856
Multi-family
39,31642,587
0
0
39,31642,587
0
39,31642,587
Other
104,642
205108,366
0
104,8470
199108,366
105,046187
108,553
Total commercial real estate
242,441
205258,184
0
242,6460
199258,184
242,845187
258,371
Residential real estate:
Consumer mortgage
32,74529,070
68516
0
32,81329,586
327195
33,14029,781
Investment property
48,92247,818
0
0
48,92247,818
10262
49,02447,880
Total residential real estate
81,66776,888
68516
0
81,73577,404
429257
82,16477,661
Consumer installment
7,7556,657
725
0
7,7626,682
0
7,7626,682
Total
$
457,068457,931
485748
0
457,553458,679
628444
$
458,181459,123
December 31, 2020:
Commercial and industrial
$
82,355
230
0
82,585
0
$
82,585
Construction and land development
33,453
61
0
33,514
0
33,514
Commercial real estate:
Owner occupied
54,033
0
0
54,033
0
54,033
Hotel/motel
42,900
0
0
42,900
0
42,900
Multi-family
40,203
0
0
40,203
0
40,203
Other
117,759
29
0
117,788
212
118,000
Total commercial real estate
254,895
29
0
254,924
212
255,136
Residential real estate:
Consumer mortgage
33,169
1,503
140
34,812
215
35,027
Investment property
49,014
6
0
49,020
107
49,127
Total residential real estate
82,183
1,509
140
83,832
322
84,154
Consumer installment
7,069
29
1
7,099
0
7,099
Total
$
459,955
1,858
141
461,954
534
$
462,488
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior
 
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,
 
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
 
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.
15
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.
 
16
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
 
impaired are recorded at the present value of expected
future cash flows discounted at the loan’s effective
 
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
 
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 chargedcharged-off.
 
-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
 
of the entire loan portfolio. The
Company’s loan review process includes the judgment
 
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 dividesevaluates the loan portfolioportfolio’s
 
into five segments:
commercial and industrial, construction and land development, commercial
real estate, residential
real estate, and consumer
installment. The Company analyzes each segment and estimates
an allowance allocation
for each loan segment.
 
The allocation of the allowance for loan losses begins with a
process of estimating the
probable losses inherent for each
loan segment. The estimates for these loans are established by category and based
 
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
 
may make adjustments based, in part, on loss rates of peer
bank
groups.
��
At June 30, 2021March 31, 2022 and December 31, 2020,2021, and for the periods
then ended, the Company adjusted
its historical loss
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
 
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,
 
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.
 
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. Sincelosses and its balance would decrease.
For the fourthquarter ended March 31, 2022, the Company increased
its look-back period to 52 quarters to continue to include losses incurred by the Company
beginning with the first quarter of
2016, the2009.
The Company has increasedwill likely continue to increase its look-back period each quarterto incorporate
 
to incorporate the effects of at least one economic
downturn in its loss history. The
Company believes the extension of its look-back period
is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, 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, 2021, the Company increased its look-back
period to 49 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 2020, the Company
adjusted certain qualitative and economic factors related to changes in
economic conditions driven by the impact of the
novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse
economic conditions, including higher
unemployment in our primary market area.
 
During the second quarter of 2021, the Company adjusted certain qualitative and
 
certain qualitativeeconomic
and economic factors, previously downgraded as a result of the COVID-19 pandemic, to reflect improvements in
economic conditions in
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1617
The following table details the changes in the allowance for loan
losses by portfolio segment
for the respective periods.
 
June 30,March 31, 2022
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
857
518
2,739
739
86
$
4,939
Charge-offs
0
0
0
0
(48)
(48)
Recoveries
2
0
0
7
8
17
Net recoveries (charge-offs)
2
0
0
7
(40)
(31)
Provision for loan losses
(85)
(10)
(203)
(9)
57
(250)
Ending balance
$
774
508
2,536
737
103
$
4,658
March 31, 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 (charge-offs)
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)0
(5)
(6)(5)
Recoveries
542
0
050
2613
154
9569
Net recoveries (charge-offs)
542
0
050
2513
10(1)
8964
Provision for loan losses
(32)19
45(43)
(465)40
(131)(6)
(17)(10)
(600)0
Ending balance
$
829828
639551
2,7043,259
838951
9793
$
5,107
June 30, 2020
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
675
582
2,596
877
137
$
4,867
Charge-offs
(4)
0
0
0
(27)
(31)
Recoveries
2
0
0
14
6
22
Net (charge-offs) recoveries
(2)
0
0
14
(21)
(9)
Provision for loan losses
6
31
319
63
31
450
Ending balance
$
679
613
2,915
954
147
$
5,308
Six months ended:
Beginning balance
$
577
569
2,289
813
138
$
4,386
Charge-offs
(4)
0
0
0
(32)
(36)
Recoveries
55
0
0
45
8
108
Net recoveries (charge-offs)
51
0
0
45
(24)
72
Provision for loan losses
51
44
626
96
33
850
Ending balance
$
679
613
2,915
954
147
$
5,3085,682
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1718
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, 2021
March 31, 2022 and 2020.2021.
 
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, 2021:March 31, 2022:
Commercial and industrial (3)
$
829774
87,93373,297
0
0
829774
87,93373,297
Construction and land development
639508
37,47733,058
0
0
639508
37,47733,058
Commercial real estate
2,7042,536
242,646234,880
0
199182
2,7042,536
242,845235,062
Residential real estate
838737
82,067
0
97
838
82,164
Consumer installment
97
7,76279,102
0
0
97737
7,76279,102
Consumer installment
103
8,412
0
0
103
8,412
Total
$
5,1074,658
457,885428,749
0
296182
5,1074,658
458,181428,931
June 30, 2020:March 31, 2021:
Commercial and industrial (4)
$
679828
87,75488,687
0
0
679828
87,75488,687
Construction and land development
613551
32,96730,332
0
0
613551
32,96730,332
Commercial real estate
2,9153,259
250,370254,525
0
218206
2,9153,259
250,588254,731
Residential real estate
954951
85,71482,745
0
111103
954951
85,82582,848
Consumer installment
14793
8,6316,524
0
0
14793
8,6316,524
Total
$
5,3085,682
465,436462,813
0
329309
5,3085,682
465,765463,122
(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
 
for non-impaired loans.
(2)
Represents loans individually evaluated for impairment in accordance
 
accordance with ASC 310-30,
Receivables
, and
 
pursuant to amendments by ASU 2010-20 regarding allowance for
 
for impaired loans.
(3)
Includes $22.1$4.1 million of PPP loans for which no allowance
 
allowance for loan losses was allocated due to
100% SBA guarantee.
(4)
Includes $36.5$28.7 million of PPP loans for which no allowance
 
for loan losses was allocated due to 100% SBA guarantee.
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently
than quarterly using categories
similar to the
standard asset classification system used by the federal banking agencies.
 
The following table presents credit quality
indicators for the loan portfolio segments and classes. These
categories are utilized to develop
the associated allowance for
loan losses using historical losses adjusted for qualitative and environmental
 
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
 
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
 
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
 
not corrected.
.
●
Nonaccrual – includes loans where management has determined
that full payment
of principal and interest is not
expected.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1819
(Dollars in thousands)
 
Pass
 
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
June 30, 2021:March 31, 2022:
 
Commercial and industrial
$
86,09273,060
1,55022
291215
0
$
87,93373,297
Construction and land development
37,23533,044
31
23913
0
37,47733,058
Commercial real estate:
Owner occupied
49,36159,060
2,026247
133122
0
51,52059,429
Hotel/motel
39,151
7,812
0
—
46,963
Multi-family
35,786
3,53037,377
0
0
39,3160
37,377
Multi-family
25,253
0
0
0
25,253
Other
103,413111,785
1,3891,008
4528
199182
105,046113,003
Total commercial real estate
227,711233,475
14,7571,255
178150
199182
242,845235,062
Residential real estate:
Consumer mortgage
30,63128,136
417449
1,7651,408
327189
33,14030,182
Investment property
48,40848,640
18396
331184
1020
49,02448,920
Total residential real estate
79,03976,776
600545
2,0961,592
429189
82,16479,102
Consumer installment
7,7498,389
615
78
0
7,7628,412
Total
$
437,826424,744
16,9161,838
2,8111,978
628371
$
458,181428,931
December 31, 2020:2021:
Commercial and industrial
$
79,98483,725
2,38326
218226
0
$
82,58583,977
Construction and land development
33,26032,212
2
218
0
254
0
33,51432,432
Commercial real estate:
Owner occupied
51,26561,573
2,6271,675
141127
0
54,03363,375
Hotel/motel
35,08436,162
7,8167,694
0
0
42,90043,856
Multi-family
36,67339,093
3,5303,494
0
0
40,20342,587
Other
116,498107,426
1,243911
4729
212187
118,000108,553
Total commercial real estate
239,520244,254
15,21613,774
188156
212187
255,136258,371
Residential real estate:
Consumer mortgage
32,51827,647
397452
1,8971,487
215195
35,02729,781
Investment property
48,50147,459
18798
332261
10762
49,12747,880
Total residential real estate
81,01975,106
584550
2,2291,748
322257
84,15477,661
Consumer installment
7,0696,650
720
2312
0
7,0996,682
Total
$
440,852441,947
18,19014,372
2,9122,360
534444
$
462,488459,123
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).
20
The following tables set forth certain information regarding the Company’s
impaired loans that were individually evaluated
for impairment at March 31, 2022 and December 31, 2021.
.
March 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 real estate:
Other
$
202
(20)
182
$
0
Total commercial real estate
202
(20)
182
0
Total
impaired loans
$
202
(20)
182
$
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
$
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.
 
 
21
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
respective periods.
Quarter ended March 31, 2022
Quarter ended March 31, 2021
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
236
0
208
$
0
Total commercial real estate
236
0
208
0
Residential real estate:
Investment property
15
0
104
0
Total residential real estate
15
0
104
0
Total
$
251
0
312
$
0
Troubled Debt
Restructurings
Impaired loans also include troubled debt restructurings (“TDRs”).
Section 4013 of the CARES Act, “Temporary
Relief
From Troubled Debt Restructurings,” provides 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, encourages 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 is eligible, a bank may elect to account for the loan under
section 4013 of the CARES Act. If a loan modification is not eligible under section 4013,
or if the bank elects not to
account for the loan modification under section 4013, the Revised Statement includes
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.
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1922
Impaired loans
The following tables present details related to the Company’s
impaired loans. Loans that have been fully charged-off
is a summary of accruing and nonaccrual TDRs, which are
not included in the following tables. The relatedimpaired
 
loan totals, and the
related allowance generally represents the following components that correspond
to impaired loans:
for loan losses, by portfolio segment and class as of March 31, 2022
 
●
Individually evaluated impaired loans equal to or greater than $500,000
secured by real estate (nonaccrual
construction and land development, commercial real estate, and
residential real estate loans).
●
Individually evaluated impaired loans equal to or greater than $250,000
not secured by real estate (nonaccrual
commercial and industrial and consumer installment loans).
The following tables set forth certain information regarding the
Company’s impaired loans
that were individually evaluated
for impairment at June 30, 2021 and December 31, 2020.2021,
respectively.
June 30, 2021TDRs
Related
(Dollars in thousands)
Unpaid principalAccruing
balance (1)Nonaccrual
Charge-offs andTotal
payments appliedAllowance
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:March 31, 2022
Commercial real estate:
Other
$
2110
(12)182
199182
$
0—
Total commercial real estate
211
(12)
199
0
Residential real estate:182
Investment property182
103
(6)
97
0
Total residential real estate
103
(6)
97
0—
Total
 
impaired loans
$
314
(18)
296
$
0
(1) Unpaid principal balance represents the contractual obligation due
from the customer.182
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments
that have been182
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.—
TDRs
Related
(In thousands)
Accruing
Nonaccrual
Total
Allowance
December 31, 2020
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:2021
Commercial real estate:
Other
$
2160
(4)187
212187
$
0—
Total commercial real estate
216
(4)
212
0
Residential real estate:187
187
—
Investment property
1090
(2)62
10762
0—
Total residential real estate
1090
(2)62
10762
—
Total
$
0
249
249
$
—
At March 31, 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 ended March 31,
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 Company’s MSRs is determined
using assumptions that market
participants would use in estimating future net servicing income, including estimates
of prepayment speeds, discount rate,
default rates, cost to service, escrow account earnings, contractual servicing
fee income, ancillary income, and late fees.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Under
the amortization method, MSRs are amortized in proportion to, and over the period
of, estimated net servicing income.
Increases in market interest rates generally increase the fair value of MSRs by reducing
prepayments and refinancings and
therefore the prepayment speed.
The Company has recorded MSRs related to loans sold to Fannie Mae.
The Company generally sells conforming, fixed-
rate, closed-end, residential mortgages to Fannie Mae.
MSRs are included in other assets on the accompanying
consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis.
Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and loan type.
If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established.
The valuation allowance is adjusted
as the fair value changes.
Changes in the valuation allowance are recognized in earnings
as a component of mortgage
lending income.
23
The change in amortized MSRs and the related valuation allowance for the quarters
ended March 31, 2022 and 2021 are
presented below.
Quarter ended March 31,
(Dollars in thousands)
2022
2021
MSRs, net:
Beginning balance
$
1,309
$
1,330
Additions, net
54
142
Amortization expense
(78)
(150)
Ending balance
$
1,285
$
1,322
Valuation
allowance included in MSRs, net:
Beginning of period
$
0
$
0
End of period
0
0
Fair value of amortized MSRs:
Beginning of period
$
1,908
$
1,489
End of period
2,277
1,774
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
(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 quarter ended
March 31, 2022, there were no
transfers between levels and no changes in valuation techniques for the Company’s
financial assets and liabilities.
24
Assets and liabilities measured at fair value on a recurring
basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured
using Level 2 inputs.
For these securities, the Company
obtains pricing from third party pricing services.
These third party pricing services consider observable data that may
include broker/dealer quotes, market spreads, cash flows, benchmark
yields, reported trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and
conditions.
On a quarterly basis,
management reviews the pricing received from the third party pricing services for
reasonableness given current market
conditions.
As part of its review, management
may obtain non-binding third party broker quotes to validate the fair value
measurements.
In addition, management will periodically submit pricing provided
by the third party pricing services to
another independent valuation firm on a sample basis.
This independent valuation firm will compare the price provided by
the third party pricing service with its own price and will review the significant assumptions
and valuation methodologies
used with management.
The following table presents the balances of the assets and liabilities measured at fair value
on a recurring basis as of March
31, 2022 and December 31, 2021, 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)
March 31, 2022:
Securities available-for-sale:
Agency obligations
$
116,051
0
116,051
0
Agency RMBS
233,827
0
233,827
0
State and political subdivisions
67,581
0
67,581
0
Total securities available-for-sale
417,459
0
417,459
0
Total
 
impaired loansassets at fair value
$
325417,459
(6)0
319417,459
0
December 31, 2021:
Securities available-for-sale:
Agency obligations
$
124,413
0
(1) Unpaid124,413
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.
Impaired Loans
Loans considered impaired under ASC 310-10-35,
Receivables
, are loans for which, based on current information and
events, it is probable that the Company will be unable to collect all principal balance represents and interest
payments due in accordance with
the contractual obligation dueterms of the loan agreement. Impaired loans can be measured based
 
fromon the customer.present value of expected
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest paymentsusing the loan’s original effective
 
that have been
applied againstrate as the outstanding principal balance subsequent todiscount rate, the loansloan’s observable
 
being placed on nonaccrual status.market price, or the fair value of
(3) Recorded investment represents the unpaid principal balancecollateral less selling costs if the loan is collateral dependent.
 
charge-offs and payments applied; it is shown before
any related allowance for loan losses.
25
The fair value of impaired loans was primarily measured based on the value of the collateral
securing these loans. Impaired
loans are classified within Level 3 of the fair value hierarchy.
Collateral may be real estate and/or business assets including
equipment, inventory, and/or
accounts receivable. The Company determines the value of the collateral based
on
independent appraisals performed by qualified licensed appraisers. These
appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income approach. Appraised
values are discounted for
costs to sell and may be discounted further based on management’s
historical knowledge, changes in market conditions
from the date of the most recent appraisal, and/or management’s
expertise and knowledge of the customer and the
customer’s business. Such discounts by management are subjective
and are typically significant unobservable inputs for
determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly
basis for additional impairment
and adjusted accordingly, based
on the same factors discussed above.
Other real estate owned
Other real estate
owned, consisting of properties obtained through foreclosure or in satisfaction
of loans, are initially
recorded at the lower of the loan’s carrying amount
or the fair value less costs to sell upon transfer of the loans to other rea.
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, cost to service, escrow
account earnings, contractual servicing fee income, ancillary income, and late
fees.
Periodically, the Company
will review
broker surveys and other market research to validate significant assumptions used
in the model.
The significant
unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”)
and the weighted average
discount rate.
Because the valuation of MSRs requires the use of significant unobservable
inputs, all of the Company’s
MSRs are classified within Level 3 of the valuation hierarchy.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2026
The following table providespresents the averagebalances of the assets and liabilities measured
at fair value on a nonrecurring basis as of
March 31, 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)
March 31, 2022:
Loans held for sale
$
977
0
977
0
Loans, net
(1)
182
0
0
182
Other assets
(2)
1,659
0
0
1,659
Total assets at fair value
$
2,818
0
977
1,841
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, ifnet
of any by portfolio
segment, and the
amount of interest income recognized on impaired loans after
impairment by portfolio segment and class during the
respective periods.related allowance for loan losses.
Quarter ended June 30,(2)
Represents other real estate owned and MSRs, net
both of which are carried at lower of cost or estimated
fair value.
Quantitative Disclosures for Level 3 Fair Value
Measurements
At March 31, 2022 and December 31, 2021, the Company had no Level 3 assets measured
at fair value on a recurring basis.
Six months ended June 30,For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2022
and December 31, 2021, the
significant unobservable inputs used in the fair value measurements are presented
below.
Weighted
Carrying
Significant
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investmentAmount
recognizedValuation Technique
investmentUnobservable Input
recognizedRange
of Input
March 31, 2022:
Impaired loans:
Commercial real estate:
Otherloans
$
202182
0Appraisal
205Appraisal discounts
010.0
Total commercial-
10.0
%
10.0
%
Other real estate owned
202374
0Appraisal
205Appraisal discount
055.0
Residential real estate:-
Investment property55.0
10055.0
0Mortgage servicing rights, net
1021,285
0Discounted cash flow
Total residential real estatePrepayment speed or CPR
1007.7
0-
1029.4
09.3
Total
 
Discount rate
9.5
-
9.5
9.5
December 31, 2021:
Impaired loans
$
302249
0Appraisal
307Appraisal discounts
010.0
-
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
Fair Value
of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial instruments,
whether or not
recognized on the face of the balance sheet, for which it is practicable to estimate that value.
The assumptions used in the
estimation of the fair value of the Company’s
financial instruments are explained below.
Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow analyses.
Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent
markets and should not be considered
representative of the liquidation value of the Company’s
financial instruments, but rather are a good-faith estimate of the
fair value of financial instruments held by the Company.
ASC 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
27
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 March 31, 2022 and December 31, 2021 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.
Quarter ended June 30, 2020Fair Value Hierarchy
Six months ended June 30, 2020Carrying
AverageEstimated
Total interestLevel 1
AverageLevel 2
Total interest
recorded
income
recorded
incomeLevel 3
(Dollars in thousands)
investmentamount
recognizedfair value
investmentinputs
recognizedinputs
Impaired loans:Inputs
Commercial real estate:March 31, 2022:
OtherFinancial Assets:
Loans, net (1)
$
54423,759
$
417,024
$
0
31$
0
Total commercial real estate$
54417,024
Loans held for sale
977
979
0
31979
0
Residential real estate:Financial Liabilities:
Investment propertyTime Deposits
28$
158,797
$
159,626
$
0
16$
159,626
$
0
Total residential real estateDecember 31, 2021:
28Financial Assets:
Loans, net (1)
$
453,425
$
449,105
$
0
16$
0
Total$
449,105
Loans held for sale
1,376
1,410
0
1,410
0
Financial Liabilities:
Time Deposits
$
82156,650
$
160,581
$
0
47$
160,581
$
0
(1) Represents loans, net of unearned income and the allowance
for loan losses.
The fair value of loans was measured using an exit price
notion.
Troubled DebtTable of Contents
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
 
RestructuringsOF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The following discussion and analysis is designed to provide a better understanding of
various factors related to the results
of operations and financial condition of 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 ended March 31, 2022 and 2021, as well as the information contained
in our Annual Report on Form
10-K for the year ended December 31, 2021.
 
Special Notice Regarding Forward-Looking Statements
Impaired loansVarious
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” 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 known and unknown risks,
uncertainties and other factors, which may be beyond our control, and
which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different
from future results, performance,
achievements or financial condition expressed or implied by such forward-looking
statements.
You
should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be
forward-looking statements.
You
can
identify these forward-looking statements through our use of words such as
“may,” “will,” “anticipate,”
“assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”
“estimate,” “continue,” “plan,” “point to,” “project,”
“could,” “intend,” “target” and other similar words and expressions
of the future.
These forward-looking statements may
not be realized due to a variety of factors, including, without limitation:
●
the effects of future economic, business and market conditions and
changes, 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 epidemics or pandemics;
●
the effects of war or other conflicts, acts of terrorism, or other events that
may affect general economic conditions;
●
governmental monetary and fiscal policies, including the continuing effects
of COVID-19 fiscal and monetary
stimulus, and changes in monetary policies in response to inflations;
●
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;
●
the failure of assumptions and estimates, as well as differences in, and changes to,
economic, market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors
from those used in our loan
portfolio reviews;
●
the risks of changes in interest rates on the levels, composition and costs of deposits, loan
demand and mortgage
loan originations, and the values and liquidity of loan collateral, securities, and interest-sensitive
assets and
liabilities, and the risks and uncertainty of the amounts realizable;
●
changes in borrower credit risks, and savings 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;
29
●
the effects of competition from a wide variety of local, regional, national
and other providers of financial,
investment and insurance services, including the disruption effects of
financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank;
●
the failure of assumptions and estimates underlying the establishment of allowances
for possible loan losses and
other asset impairments, losses valuations of assets and liabilities and other estimates;
●
the costs of redeveloping our headquarters and the timing and amount of rental income
upon completion of the
project;
●
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 vendor systems
or customers’
information;
●
the risks that our deferred tax assets (“DTAs”),
if any, could be reduced
if estimates of future taxable income from
our operations and tax planning strategies are less than currently estimated, and sales
of our capital stock could
trigger a reduction in the amount of net operating loss carry-forwards that we
may be able to utilize for income tax
purposes; and
●
other factors and information in this report and other filings that we make with the SEC
under the Exchange Act,
including our Annual Report on Form 10-K for the year ended December 31,
2021 and subsequent quarterly and
current reports. See Part II, Item 1A. “RISK FACTORS”.
All written or oral forward-looking statements that are made by us 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.
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 include troubled debt restructurings (“TDRs”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 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.
30
Summary of Results of Operations
Quarter ended March 31,
(Dollars in thousands, except per share data)
2022
2021
Net interest income (a)
$
6,190
$
6,057
Less: tax-equivalent adjustment
112
120
Net interest income (GAAP)
6,078
5,937
Noninterest income
908
1,182
Total revenue
6,986
7,119
Provision for loan losses
(250)
—
Noninterest expense
4,901
4,690
Income tax expense
254
423
Net earnings
$
2,081
$
2,006
Basic and diluted earnings per share
$
0.59
$
0.56
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP
Financial Measures."
Financial Summary
The Company’s net earnings were $2.1
million for the first quarter of 2022, compared to $2.0 million for the first quarter of
2021.
Basic and diluted earnings per share were $0.59 per share for the first quarter of 2022, compared
to $0.56 per share
for the first quarter of 2021.
Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022,
a 2% increase compared to $6.1 million
for the first quarter of 2021.
This increase was primarily due to balance sheet growth, partially offset
by a decrease in the
Company’s net interest margin
(tax-equivalent).
Net interest margin (tax-equivalent) declined to 2.43%
in the first quarter
of 2022, compared to 2.66% for the first quarter of 2021 due to the continued lower interest
rate environment and changes
in our asset mix resulting from the continuing elevated levels of customer deposits
.
Net interest income (tax-equivalent)
included $0.1
million in PPP loan fees, net of related costs for the first quarter of 2022, compared to $0.
2
million for the
first quarter of 2021.
At March 31, 2022, the Company’s allowance
for loan losses was $4.7 million, or 1.09% of total loans, compared to $4.9
million, or 1.08% of total loans, at December 31, 2021, and $5.7
million, or 1.23% of total loans, at March 31, 2021.
The Company recorded a negative provision for loan losses of $0.3
million during the first quarter of 2022,
compared to no
provision for loan losses during the first quarter of 2021.
The negative provision for loan losses was primarily related to a
decrease in total loans, excluding PPP,
during the first quarter of 2022.
Total loans, excluding PPP,
were $424.3 million at
March 31, 2022, a decrease of $25.9 million, or 6%, compared to
December 31, 2021.
This decline was primarily due to
decreases in multi-family loans of $17.3 million and hotel loans of $6.5
million due to payoffs.
The provision for loan
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 $0.9 million for the first quarter of 2022 compared to
$1.2 million for the first quarter of
2021.
The decrease in noninterest income was primarily due to a decrease
in mortgage lending income of $0.3 million as
refinance activity slowed in our primary market area, as market interest rates
on mortgage loans increased.
Noninterest expense was $4.9 million for the first quarter of 2022 compared to
$4.7 million for the first quarter of 2021.
The increase in noninterest expense was due to increases in salaries and benefits
expense and other noninterest expense.
Income tax expense was $0.3 million for the first quarter of 2022
compared to $0.4 million during the first quarter of 2021.
The Company’s effective tax
rate for the first quarter of 2022 was 10.88%, compared to 17.41% in the first quarter
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.
31
The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same
period
of 2021.
The Company’s share repurchases of $0.1
million since December 31, 2021 resulted in 3,559 fewer outstanding
common shares at March 31, 2022.
At March 31, 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 18.08%,
a tier 1 leverage ratio of 9.09%
and a common equity tier 1 (“CET1”) ratio of 17.26%
at March 31, 2022.
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 operations
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 forgivable,
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 disrupti
ons 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 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.
Through 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 MarchDecember 27, 2020, the CoronavirusEconomic Aid Relief, to Hard-Hit Small Businesses, Nonprofits,
and Venues
Act (the “Economic Aid
Economic Security Act (“CARES Act”) was signed into law. The
 
Section 4013Economic 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
March 31, 2022, we have recognized $0.8
million of these fees, net of related costs. As of March 31, 2022, we have
received payments and forgiveness on 172 PPP loans under
the Economic Aid Act, totaling $16.1 million. The outstanding
balance for the remaining 82 PPP loans under the Economic Aid Act was approximately
$4.1 million at March 31, 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 quarter
ended March 31, 2022, and our financial condition at that date reflect only
the ongoing effects of the CARES Act, “Temporarypandemic, and may not be indicative of
 
Relief Fromfuture results or financial conditions, including possible
Troubled Debt Restructurings,” provideschanges in monetary or fiscal stimulus, and the possible effects of the expiration
 
banksor extension of temporary accounting and
bank regulatory relief measures in response to the optionCOVID-19 pandemic.
As of March 31, 2022,
all of our capital ratios were in excess of all regulatory requirements to temporarily suspend certain requirements under ASCbe
 
340-10’swell capitalized.
The
TDR classifications 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
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. generally accepted
accounting
principles and with general practices within the banking industry.
In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our allowance
for loan losses, our
assessment of other-than-temporary impairment, recurring and
non-recurring fair value measurements, the valuation of
other real estate owned, and the valuation of deferred tax assets, were critical to the determination
of our financial position
and results of operations. Other policies also require subjective judgment and assumptions
and may accordingly impact our
financial position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior
to the end of each calendar quarter. The
level of
the allowance is based upon management’s
evaluation of the loan portfolio, past loan loss experience, current asset quality
trends, known and inherent risks in the portfolio, adverse situations that may affect
a limited 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, 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
and by releases from the allowance when determined to be
appropriate to the levels of loans and probable 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
review process assists in determining whether there are loans in the portfolio
whose credit quality has weakened over time and evaluating the risk characteristics of the
entire loan portfolio. The
Company’s loan review process includes the judgment
of management, the input from our independent loan reviewers, and
reviews that may have been conducted by bank regulatory agencies as part of their examination
process. The Company
incorporates loan review results in the determination of whether or not it is probable
that it will be able to collect all
amounts due according to the contractual terms of a loan.
As part of the Company’s quarterly assessment
of the allowance, management divides the loan portfolio into five segments:
commercial and industrial, construction and land development, commercial real estate, residential
real estate, and consumer
installment loans. 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 these
types of loans. 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 March 31, 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.
34
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s
estimate of
probable losses for several “qualitative and environmental” factors.
The allocation for qualitative and environmental
factors is particularly subjective and does not lend itself to exact mathematical calculation.
This amount represents
estimated probable inherent credit losses which exist, but have not yet been identified, as of
the balance sheet date, and are
based upon quarterly trend assessments in delinquent and nonaccrual loans, credit
concentration changes, prevailing
economic conditions, changes in lending personnel experience, changes in lending
policies or procedures and other
influencing factors.
These qualitative and environmental factors are considered for each of the five loan segments
and the
allowance allocation, as determined by the processes noted above, is increased or
decreased based on the incremental
assessment of these factors.
The Company regularly re-evaluates its practices in determining the allowance for
loan losses. The Company’s look-back
period each quarter incorporates the effects of timeat least one economic downturn
in its loss history. The
Company believes
this look-back period is appropriate due to accountthe 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
March 31, 2022, the Company increased its
look-back period to 52 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 COVID-19. On April 7, 2020,at least one economic
downturn in its loss history.
During the Federal
Reserve andquarter ended June 30, 2021, the other banking regulators issued a statement, “InteragencyCompany adjusted certain qualitative
 
Statement on Loan Modifications and Reporting
for Financial Institutions Workingeconomic factors, previously downgraded as a result of the COVID-19
 
With Customers Affectedpandemic, to reflect improvements in economic
conditions in our primary market area.
 
byFurther adjustments may be made from time to time in the Coronavirus (Revised)” (the “Interagency Statement on
COVID-19 Loan Modifications”), to encourage banks to work prudently
with borrowers and to describe 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 Effectfuture as a result of the
COVID-19 Pandemicpandemic 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 Institutions.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 intent to sell a debt security,
(2) it is more likely than not that the Company will be required to sell the
debt security before recovery of its amortized cost basis, or (3) the Company does not expect
to recover the entire amortized
cost basis of the debt security.
 
If the Company has the intent to sell a loan modificationdebt security or if it is eligible, a bank may electmore likely than not that it will
be required to account forsell the debt security before recovery,
 
the loan underother-than-temporary write-down is equal to the entire difference
section 4013between the debt security’s amortized cost
and its fair value.
If the Company does not intend to sell the security or it is not
more likely than not that it will be required to sell the security before recovery,
the other-than-temporary impairment write-
down is separated into the amount that is credit related (credit loss component) and the amount due to
all other factors.
The
credit loss component is recognized in earnings and is the difference between
the security’s amortized cost basis and
the
present value of its expected future cash flows.
The remaining difference between the security’s
fair value and the present
value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive
income, net of applicable taxes.
The Company is required to own certain stock as a condition of membership, such as
Federal Home Loan Bank (“FHLB”)
and Federal Reserve Bank (“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
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 CARES Act. Ifpar value rather than by recognizing temporary declines in
value.
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 loan modification is notframework for measuring fair value in accordance
 
eligible under section 4013,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 consolidated financial statements that accompany this report.
35
Fair values are based on active market prices of identical assets or ifliabilities 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 bank elects notCompany’s
assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between
willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and
other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s
best estimates for appropriate discount rates, default rates,
prepayments,
market volatility and other factors, taking into account current observable market data and
experience.
These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions, as
well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Other Real Estate Owned
Other real estate owned (“OREO”), consists of properties obtained through foreclosure or
in satisfaction of loans and is
reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss
recognized as a
charge-off through the allowance for loan losses. Additional
OREO losses for subsequent valuation adjustments are
determined on a specific property basis and are included as a component of other noninterest
expense along with holding
costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense.
Significant judgments and
complex estimates are required in estimating the fair value of OREO, and the period of time
within which such estimates
can be considered current is significantly shortened during periods of
market volatility. As a result, the net proceeds
realized from sales transactions could differ significantly from appraisals,
comparable sales, and other estimates used to
accountdetermine the fair value of OREO.
Deferred Tax
Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the loan modification under section 4013, the Revised Statementweight of available
 
includes criteria when a bank may presume aevidence, it is more-likely-
loan modification isthan-not that some portion or the entire deferred tax asset will not a TDR in accordance with ASC 310be realized. The
 
-40.ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
 
in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of taxable income over
the last three years and
projections for future taxable income over the periods in which the deferred tax assets are
deductible, management believes
it is more likely than not that we will realize the benefits of these deductible differences
at March 31, 2022. The amount of
the deferred tax assets considered realizable, however,
could be reduced if estimates of future taxable income are reduced.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36
RESULTS
 
21OF OPERATIONS
The Company evaluates loan extensions or modifications notAverage Balance
 
qualified under Section 4013 of the CARES Act or under theSheet and Interest Rates
Interagency Statement 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 similar risk characteristics
as the restructured debt.
In making the determination of
whether a loan modification is a TDR, the Company considers
the individual facts and circumstances surrounding each
modification.
As part of the credit approval process, the restructured loans are evaluated
for adequate collateral protection
in determining the appropriate accrual status at the time of restructure.
Similar to other impaired loans, TDRs are measured for impairment
based on the present value of expected payments using
the loan’s original effective
interest rate as the discount rate, or the fair value of the collateral,
less selling costs if the loan is
collateral dependent. If the recorded investment in the loan exceeds
the measure of fair value, impairment is recognized by
establishing a valuation allowance as part of the allowance for
loan losses or a charge-off to the allowance for
loan losses.
In periods subsequent to the modification, all TDRs are individually
evaluated for possible impairment.
The following is a summary of accruing and nonaccrual TDRs, which
are included in the impaired loan totals, and the
related allowance for loan losses, by portfolio segment and class as of
June 30, 2021 and DecemberQuarter ended March 31, 2020, respectively.
 
TDRs2022
Related2021
Average
Yield/
Average
Yield/
(Dollars in thousands)
AccruingBalance
NonaccrualRate
TotalBalance
AllowanceRate
June 30, 2021
Commercial real estate:
Other
$
0
199
199
$
0
Total commercial real estate
0
199
199
0
Residential real estate:
Investment property
0
97
97
$
0
Total residential real estate
0
97
97
0
TotalLoans and loans held for sale
 
$
0440,608
296
2964.46%
$
0466,368
4.50%
Securities - taxable
374,825
1.45%
289,981
1.33%
Securities - tax-exempt
60,272
3.57%
63,050
3.68%
Total securities
435,097
1.74%
353,031
1.75%
Federal funds sold
73,575
0.17%
32,809
0.15%
Interest bearing bank deposits
83,161
0.16%
70,350
0.09%
Total interest-earning assets
1,032,441
2.66%
922,558
2.96%
Deposits:
TDRs
RelatedNOW
(In thousands)200,907
Accruing0.12%
Nonaccrual172,055
0.16%
Savings and money market
345,549
0.20%
281,844
0.25%
Time Deposits
159,785
0.90%
159,466
1.09%
Total interest-bearing deposits
Allowance706,241
December 31, 20200.34%
Commercial real estate:613,365
Other0.44%
Short-term borrowings
3,943
0.50%
3,161
0.50%
Total interest-bearing liabilities
710,184
0.34%
616,526
0.44%
Net interest income and margin (tax-equivalent)
$
06,190
212
2122.43%
$
06,057
Total commercial real estate2.66%
0Net Interest Income and Margin
212Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022
,
a 2% increase compared to $6.1 million
212for the first quarter of 2021.
This increase was primarily due to balance sheet growth, partially offset
by a decrease in the
0Company’s net interest margin
Investment property
0
107
107
0
Total residential real estate
0
107
107
0
Total(tax-equivalent).
 
$
0
319
319
$
0
The tax-equivalent yield on total interest-earning assets decreased by 30 basis points
 
to 2.66% in the first quarter of 2022
compared to 2.96%
in the first quarter of 2021.
At June 30,
This decrease was primarily due to the lower interest environment and
changes in our asset mix resulting from the significant increase in customer deposits.
The cost of total interest-bearing liabilities decreased by 10 basis points to 0.34%
in the first quarter of 2022 compared to
0.44% in the first quarter of 2021, there were no significant outstanding commitmentseven as interest bearing deposits increased.
The net decrease in our funding costs was
primarily due to lower prevailing market interest rates.
Our funding costs declined less than the rates earned on our interest
earning assets.
The Company continues to deploy various asset liability management strategies
to manage its risk to interest rate
fluctuations. The Company’s
net interest margin could continue to experience pressure due to
 
advance additional fundsreduced earning asset yields
and increased competition for quality loan opportunities.
Provision for Loan Losses
The provision for loan losses represents a charge to customers whoseearnings necessary to provide
an allowance for loan losses that
management believes, based on its processes and estimates, should be adequate
to provide for the probable losses on
outstanding loans.
The Company recorded a negative provision for loan losses of $0.3 million for the
first quarter of 2022,
compared to no charge to provision for loan losses for the first
quarter of 2021.
The negative provision for loan losses was
primarily related to a decrease in total loans, excluding PPP,
during the first quarter of 2022. Total
loans, excluding PPP,
had been restructured.were $424.3 million at March 31, 2022, a decrease of $25.9 million, or 6%,
compared to December 31, 2021.
This decline
was primarily due to decreases in multi-family loans of $17.3 million and hotel loans
of $6.5 million due to payoffs.
The
provision for loan losses is based upon various factors, including the absolute level of loans,
economic conditions, credit
quality, and the amount of net
charge-offs.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
37
Based upon its assessment of the loan portfolio, management adjusts the allowance for loan
 
22losses to an amount it believes
should be appropriate to adequately cover its estimate of probable losses in the loan portfolio.
The Company’s allowance
for loan losses as a percentage of total loans was 1.09% at March 31, 2022, compared to 1.08%
at December 31, 2021.
While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting
provision for loan
losses charged to operations, are considered adequate by management and are
reviewed from time to time by our regulators,
they are based on estimates and judgments and are therefore approximate and imprecise.
Factors beyond our control (such
as conditions in the local and national economy,
local real estate markets, or industries) may have a material adverse effect
on our asset quality and the adequacy of our allowance for loan losses resulting in significant
increases in the provision for
loan losses.
Noninterest Income
Quarter ended June 30,
Six months ended June 30,
Pre-
Post -
Pre-
Post -
modification
modification
modification
modification
Number
outstanding
outstanding
Number
outstanding
outstanding
of
recorded
recorded
of
recorded
recordedMarch 31,
(Dollars in thousands)
contracts2022
investment2021
investmentService charges on deposit accounts
contracts$
investment142
investment$
2020:132
CommercialMortgage lending income
253
real estate:
549
Bank-owned life insurance
99
103
Other
—414
398
Total noninterest income
$
—
—
1908
$
2161,182
216The Company’s income from mortgage lending
was primarily attributable to the (1) origination and sale of mortgage loans
Total commercial real estateand (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
1
216
216
Residential real estate:
Investment property
—
—
—
3
111
111
Total residential real estate
—
—
—
3
111
111
TotalMSRs when the loan is sold.
 
—
$
—
—
4
$
327
327
There were no loans modified in a TDR during the quarter and
six months ended June 30, 2021.
During the quarter and six months ended ended June 30, 2021
and 2020, respectively, there
were no loans modified in a
TDR within the previous 12 months for which there was a payment default
(defined as 90 days or more past due).
NOTE 5: MORTGAGE SERVICING
RIGHTS, NET
Mortgage servicing rights (“MSRs”)MSRs are recognized based on
the fair value of the servicing rightsright on the date the corresponding
corresponding mortgage loans areloan is sold.
 
An estimate of the fair value of the Company’s
MSRs is determined using
assumptions that market participants would use in estimating
future net servicing income, including estimates of
prepayment speeds, discount rates, default rates, costs to service,
escrow account earnings, contractual servicing fee
income, ancillary income, and late fees.
Subsequent to the date of transfer, the Company
 
the Company has elected to measure its MSRs
under the amortization method.
 
Under theServicing
fee income is reported net of any related amortization method, MSRs are amortized in proportionexpense.
 
to, and over the period
of, estimated net servicing income.
The Company has recorded MSRs related to loans sold without
recourse to Fannie Mae.
The Company generally sells
conforming, fixed-rate, closed-end, residential mortgages to Fannie
Mae.
MSRs are included in other assets on the
accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis.
 
Impairment is determined by stratifyinggrouping MSRs intoby
groupings based oncommon predominant risk characteristics, such as interest
rate and loan type.
 
If by individual stratum, the
aggregate carrying amount of thea particular
group of MSRs exceeds the group’s aggregate fair
value, a valuation allowance for that group is established.
 
allowance is established. The valuation
allowance is adjusted
as the fair value changes.
 
ChangesAn increase in mortgage interest rates typically results in an increase in the
fair value of the valuation allowance are recognizedMSRs while a decrease in mortgage interest rates typically results in a decrease
 
in earnings as a componentthe fair value of mortgage
lending income.MSRs.
 
The following table presents a breakdown of the Company’s
mortgage lending income.
Quarter ended March 31,
(Dollars in thousands)
2022
2021
Origination income, net
$
229
$
537
Servicing fees, net
24
12
Total mortgage lending income
$
253
$
549
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
in in the first quarter of 2022
compared to the first quarter of 2021 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 during the
first quarter of 2022, resulting in decreased
amortization expense.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
38
Noninterest Expense
23
The following table details the changes in amortized MSRs and
the related valuation allowance for the respective periods.
Quarter ended June 30,
Six months ended June 30,
March 31,
(Dollars in thousands)
2021
20202022
2021
2020
MSRs, net:
Beginning balanceSalaries and benefits
$
1,3222,950
$
1,2492,851
Net occupancy and equipment
434
438
Professional fees
230
256
Other
1,287
1,145
Total noninterest expense
$
1,3304,901
$
1,2994,690
Additions, net
172
188
315
237
Amortization expense
(134)
(166)
(285)
(265)
Ending balance
$
1,360
$
1,271
$
1,360
$
1,271
ValuationThe increase in salaries and benefits was primarily due to a decrease in deferred costs related
 
allowance includedto the PPP loan program, and
routine annual wage and benefit increases.
The increase in MSRs, net:
Beginningother noninterest expense was due to a variety of period
$
0
$
0
$
0
$
0
End of period
0
0
0
0
Fair value of amortized MSRs:
Beginning of period
$
1,774
$
1,917
$
1,489
$
2,111
End of period
1,833
1,690
1,833
1,690
miscellaneous items
 
including: increased marketing costs,
ATM
NOTE 6: FAIR VALUE
and checkcard expenses, and stationary and supplies.
 
Fair ValueIncome Tax
 
HierarchyExpense
Income tax expense was $0.3 million for the first quarter of 2022
 
compared to $0.4 million for the first quarter of 2021.
 
“Fair value” is defined by ASC 820,
Fair ValueThe Company’s effective income
 
Measurements and Disclosures
tax rate for the first quarter of 2022 was 10.88%, as the price that would be receivedcompared to sell
an asset or paid to transfer a liability in an orderly transaction occurring17.41%
 
in the principal market (or most advantageousfirst quarter
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.2021.
 
The fair value hierarchydecrease 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 as follows:principally impacted by tax-exempt earnings
from the Company’s investments in
 
Level 1—inputs to the valuation methodology are quoted prices, unadjusted,municipal securities, bank-owned life insurance, and New Markets Tax
 
for identical assets or liabilities in active
markets.Credits.
 
BALANCE SHEET ANALYSIS
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.Securities
 
Level 3—inputs to the valuation methodology are unobservableSecurities available-for-sale were $417.5
 
and reflect the Company’s own assumptions
about the
inputs market participants would use in pricing the asset or liability.million at March 31, 2022 compared to $421.9 million at December 31, 2021.
 
Level changesThis increase reflects an increase in fair value measurementsthe amortized cost basis of securities available-for-sale
 
of $20.1 million, and a decrease
Transfers between levels of $24.5 million in the fair value hierarchyof 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.
The average annualized tax-equivalent yields earned on total securities
were 1.74%
in the
first quarter of 2022 and 1.75%
in the first quarter of 2021.
Loans
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
73,297
83,977
79,202
87,933
88,687
Construction and land development
33,058
32,432
34,890
37,477
30,332
Commercial real estate
235,062
258,371
252,798
242,845
254,731
Residential real estate
79,102
77,661
80,205
82,164
82,848
Consumer installment
8,412
6,682
7,060
7,762
6,524
Total loans
428,931
459,123
454,155
458,181
463,122
Less:
unearned income
(514)
(759)
(923)
(1,197)
(1,243)
Loans, net of unearned income
$
428,417
458,364
453,232
456,984
461,879
Total loans, net of unearned income,
were $428.4 million at March 31, 2022, and $458.4 million at December 31,
2021.
Excluding PPP loans, total loans, net of unearned income, were $424.3
million, a decrease of $25.9 million, or 6% from
December 31, 2021.
This decline was primarily due to decreases in multi-family loans of $17.3
million and hotel loans of
$6.5 million.
Four loan categories represented the majority of the loan portfolio at March
31, 2022: commercial real estate
(55%), residential real estate (18%), commercial and industrial (17%)
and construction and land development (8%).
Approximately 25% of the Company’s commercial
real estate loans were classified as owner-occupied at March 31, 2022.
39
Within the residential real estate portfolio segment, the Company
had junior lien mortgages of approximately $7.1 million,
or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at March 31, 2022 and
December 31, 2021,
respectively.
For residential real estate mortgage loans with a consumer purpose, the Company
had no loans that required
interest only payments at March 31, 2022 and December 31, 2021. The Company’s
residential real estate mortgage
portfolio does not include any option ARM loans, subprime loans, or any material amount
of other high-risk consumer
mortgage products.
The average yield earned on loans and loans held for sale was 4.46% in the first quarter of
2022 and 4.50% in the first
quarter of 2021.
The specific economic and credit risks associated with our loan portfolio include,
but are generally recognizednot limited to, the effects of
current economic conditions, including the continuing effects from the
COVID-19 pandemic, on our borrowers’ cash flows,
real estate market sales volumes, valuations, availability and cost of financing properties,
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.
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 $21.2 million.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding
plus
unfunded commitments) to a single borrower of $19.1 million. Our loan policy requires
that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit.
At March 31, 2022, the Bank had no
relationships exceeding these limits.
We periodically analyze
our commercial and industrial and commercial real estate loan portfolios to determine if
a
concentration of credit risk exists in any one or more industries. We
use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers.
Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk
-based capital at March 31, 2022 and December 31, 2021.
March 31,
December 31,
(Dollars in thousands)
2022
2021
Lessors of 1-4 family residential properties
$
48,920
$
47,880
Hotel/motel
37,377
43,856
Shopping centers
29,147
29,574
In light of disruptions in economic conditions caused by COVID-19, the endfinancial 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 each reportingthe 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
Company monitors the valuation techniques utilized for each
category of financial assets and liabilities to ascertain when
transfers between levels have been affected.
The naturerecognizes that a combination of the Company’s financialpayment relief options may be prudent dependent
 
assets and liabilities generallyon a borrower’s business type.
As
of March 31, 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 such
that transfers in and out of any level are expected to be infrequent.exempt by law
 
Forfrom classification as a TDR
pursuant to GAAP.
In addition, the six months ended June 30, 2021, there were no
transfers between levels and no changes in valuation techniques forInteragency Statement on COVID-19 Loan Modifications provides
 
the Company’s financialcircumstances in
which a loan modification is not subject to classification as a TDR if such loan is not eligible
 
assets and liabilities.for modification under
Section 4013.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
40
24
Assets and liabilities measured at fair value
on a recurring basis
Securities available-for-sale
Fair values of securities availableAllowance for sale were primarily measured
using Level 2 inputs.
For these securities, the Company
obtains pricing from third party pricing services.
These third party pricing services consider observable data
that may
include broker/dealer quotes, market spreads, cash flows, benchmark
yields, reported trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’
terms and conditions.
On a quarterly basis,
management reviews the pricing received from the third party
pricing services for reasonableness given current market
conditions.
As part of its review, management
may obtain non-binding third party broker quotes to validate the fair
value
measurements.
In addition, management will periodically submit pricing provided
by the third party pricing services to
another independent valuation firm on a sample basis.
This independent valuation firm will compare the price provided
by
the third party pricing service with its own price and will review the
significant assumptions and valuation methodologies
used with management.
The following table presents the balances of the assets and liabilities
measured at fair value on a recurring basis as of June
30, 2021 and December 31, 2020, respectively,
by caption, on the accompanying consolidated balance
sheets by ASC 820
valuation hierarchy (as described above).
Loan Losses
 
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, 2021:
Securities available-for-sale:
Agency obligations
$
111,487
0
111,487
0
Agency RMBS
198,849
0
198,849
0
State and political subdivisions
74,529
0
74,529
0
Total securities available
-for-sale
384,865
0
384,865
0
Total
assets at fair value
$
384,865
0
384,865
0
December 31, 2020:
Securities available-for-sale:
Agency obligations
$
97,448
0
97,448
0
Agency RMBS
163,470
0
163,470
0
State and political subdivisions
74,259
0
74,259
0
Total securities available
-for-sale
335,177
0
335,177
0
Total
assets at fair value
$
335,177
0
335,177
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.
Impaired Loans
Loans considered impaired under ASC 310-10-35,
Receivables
, are loans for which, based on current information and
events, it is probable that the Company will be unable to collect
all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Impaired loans can
be measured based on the present value of expected
payments using the loan’s original
effective rate as the discount rate, the loan’s
observable market price, or the fair value of
the collateral less selling costs if the loan is collateral dependent.
25
The fair value of impaired loans was primarily measured based
on the value of the collateral securing these loans. Impaired
loans are classified within Level 3 of the fair value hierarchy.
Collateral may be real estate and/or business assets including
equipment, inventory, and/or
accounts receivable. The Company determinesmaintains the value of the
collateral based on
independent appraisals performed by qualified licensed appraisers.
These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income
approach. Appraised values are discounted for
costs to sell and may be discounted further based on management’s
historical knowledge, changes in market conditions
from the date of the most recent appraisal, and/or management’s
expertise and knowledge of the customer and the
customer’s business. Such discounts by management are subjective
and are typically significant unobservable inputs for
determining fair value. Impaired loans are reviewed and evaluated
on at least a quarterly basis for additional impairment
and adjusted accordingly, based
on the same factors discussed above.
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, cost to service, escrow
account earnings, contractual servicing fee income, ancillary income,
and late fees.
Periodically, the Compa
ny 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, 2021 and December 31, 2020, 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, 2021:
Loans held for sale
$
1,367
0
1,367
0
Loans, net
(1)
296
0
0
296
Other assets
(2)
1,360
0
0
1,360
Total assets at fair value
$
3,023
0
1,367
1,656
December 31, 2020:
Loans held for sale
$
3,418
0
3,418
0
Loans, net
(1)
319
0
0
319
Other assets
(2)
1,330
0
0
1,330
Total assets at fair value
$
5,067
0
3,418
1,649
(1)
Loans considered impaired under ASC 310-10-35 Receivables.
This amount reflects the recorded investment in impaired loans,
net
of any related allowance for loan losses.
(2)
Represents MSRs, net.losses at a level that
 
These are carried at lowermanagement believes appropriate to adequately cover
the Company’s estimate of cost or estimated fair value.
probable
 
26
Quantitative Disclosures for Level 3 Fair
Value Measurements
At June 30, 2021 and December 31, 2020,
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, 2021 and December 31, 2021,
the significant
unobservable inputs usedlosses inherent 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, 2021:
Impaired loans
$
296
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,360
Discounted cash flow
Prepayment Speed or CPR
7.7
-
15.7
15.1
Discount rate
9.5
-
11.5
9.5
December 31, 2020:
Impaired loans
$
319
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,330
Discounted cash flow
Prepayment Speed or CPR
18.2
-
36.4
20.7
Discount rate
10.0
-
12.0
10.0
Fair Value
of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial
instruments, whether or not
recognized on the face of the balance sheet, for which it is practicable
to estimate that value.loan portfolio. The assumptions used in the
estimation of the fair value of the Company’s
financial instruments are explained below.
Where quoted market prices are
not available, fair values are based on estimates using discounted
cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison
to independent markets and should not be considered
representative of the liquidation value of the Company’s
financial instruments, but rather are a good-faith estimate of the
fair value of financial instruments held by the Company.
ASC 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The
discount rates reflected current rates at which similar
loans would be made for the same remaining maturities. 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, 2021 and December 31, 2020
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.
27
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
June 30, 2021:
Financial Assets:
Loans, net (1)
$
451,877
$
448,540
$
0
$
0
$
448,540
Loans held for sale
1,367
1,415
0
1,415
0
Financial Liabilities:
Time Deposits
$
159,011
$
160,247
$
0
$
160,247
$
0
December 31, 2020:
Financial Assets:
Loans, net (1)
$
456,082
$
451,816
$
0
$
0
$
451,816
Loans held for sale
3,418
3,509
0
3,509
0
Financial Liabilities:
Time Deposits
$
160,401
$
162,025
$
0
$
162,025
$
0
(1) Represents loans, net of unearned income and the allowance
for loan losses.
The fair value of loans was measured using an exit price notion.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
General
The following discussion and analysis is designed to provide
a better understanding of various factors related to the results
of operations and financial condition of 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, 2021
and 2020, as well as the information contained in our Annual
Report on Form 10-K for the year ended December 31,
2020 and our Quarterly Reports on Form 10-Q.
Special 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” 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,” “expec
t,” “estimate,” “continue,” “plan,” “point to,” “project,”
“could,” “intend,” “target” and other similar words and
expressions of the future.
These forward-looking statements may
not be realized due to a variety of factors, including, without
limitation:
●
the effects of future economic, business and market conditions
and changes, foreign, domestic and locally,
including seasonality, natural
disasters or climate change, such as rising sea and water levels,
hurricanes and
tornados, coronavirus or other epidemics or pandemics;
●
the effects of war or other conflicts, acts of terrorism, or
other events that may affect general economic conditions;
●
governmental monetary and fiscal policies;
●
legislative and regulatory changes, including changes in banking,
securities and tax laws, regulations and rules and
their application by our regulators, including capital and liquidity
requirements, and changes in the scope and cost
of FDIC insurance;
●
the failure of assumptions and estimates, as well as differences
in, and changes to, economic, market and credit
conditions, including changes in borrowers’ credit risks and
payment behaviors from those used in our loan
portfolio reviews;
●
the risks of changes in interest rates on the levels, composition
and costs of deposits, loan demand, and the values
and liquidity of loan collateral, securities, and interest-sensitive assets
and liabilities, and the risks and uncertainty
of the amounts realizable;
●
changes in borrower credit risks and payment behaviors;
●
changes in the availability and cost of credit and capital in the
financial markets, and the types of instruments that
may be included as capital for regulatory purposes;
●
changes in the prices, values and sales volumes of residential and
commercial real estate;
29
●
the effects of competition from a wide variety of local,
regional, national and other providers of financial,
investment and insurance services, including the disruption effects
of financial technology and other competitors
who are not subject to the same regulations as the Company and
the Bank;
●
the failure of assumptions and estimates underlying the establishment
of allowances for possible loan losses and
other asset impairments, losses valuations of assets and liabilities and
other estimates;
●
the costs of redeveloping our headquarters and the timing and
amount of rental income upon completion of the
project;
●
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 vendor systems
or customers’
information;
●
the risks that our deferred tax assets (“DTAs”),
if any, could be reduced
if estimates of future taxable income from
our operations and tax planning strategies are less than currently estimated,
and sales of our capital stock could
trigger a reduction in the amount of net operating loss carry-forwards that
we may be able to utilize for income tax
purposes; and
●
other factors and information in this report and other filings that we
make with the SEC under the Exchange Act,
including our Annual Report on Form 10-K for the year ended
December 31, 2020 and subsequent quarterly and
current reports. See Part II, Item 1A. “RISK FACTORS”.
All written or oral forward-looking statements that are made by us 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.
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.
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 of 1933, as amended, (the “Securities Act”) and Section 21E
of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”).
30
Summary of Results of Operations
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2021
2020
2021
2020
Net interest income (a)
$
6,093
$
6,197
$
12,150
$
12,529
Less: tax-equivalent adjustment
118
127
238
247
Net interest income (GAAP)
5,975
6,070
11,912
12,282
Noninterest income
1,110
1,363
2,292
2,598
Total revenue
7,085
7,433
14,204
14,880
Provision for loan losses
(600)
450
(600)
850
Noninterest expense
4,895
4,959
9,585
9,815
Income tax expense
504
363
927
753
Net earnings
$
2,286
$
1,661
$
4,292
$
3,462
Basic and diluted earnings per share
$
0.65
$
0.47
$
1.21
$
0.97
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $4.3
million for the first six months of 2021, compared to $3.5
million for the first six
months of 2020.
Basic and diluted earnings per share were $1.21 per
share for the first six months of 2021, compared to
$0.97 per share for the first six months of 2020.
Total revenue declined
approximately 5% due to reduced net interest margin,
reduced mortgage lending income and
approximately 1% lower outstanding loans compared to
June 30, 2020.
Net interest income (tax-equivalent) was $12.2 million for the
first six months of 2021, a 3% decrease compared to $12.5
million for the first six months of 2020.
This decrease was primarily due to net interest margin
compression resulting from
the Federal Reserve’s interest rate
reductions and bond purchases in response to COVID-19.
Our securities holdings,
which generally yield less than loans, increased as a percentage
of our total assets reflecting deployment of increased
deposits. Net interest margin (tax-equivalent) decreased
to 2.63% in the first six months of 2021, compared to
3.09% for
the first six months of 2020,
primarily due to the lower interest rate environment and changes in
our asset mix resulting
from the significant increase in deposits from government stimulus
and relief programs and customers’ increased savings.
Net interest income (tax-equivalent) included $0.5 million in PPP
loan fees, net of related costs for the six months of 2021,
compared to $0.2 million for the six months of 2020.
At June 30, 2021, the Company’s allowance
for loan losses was $5.1 million, or 1.12%
of total loans, compared to $5.6
million, or 1.22%
of total loans, at December 31, 2020, and $5.3 million, or 1.1
4% of total loans, at June 30, 2020.
Excluding PPP loans, which are guaranteed by the SBA, the Company’s
allowance for loan losses was 1.17%
of total loans$4.7 million at
March 31, 2022 compared to $4.9 million at June 30, 2021.
The Company had a negative provision for loan losses of $0.6
million during the first six months of
December 31, 2021,
 
compared to a provision for loan losses of $0.9
million during the first six months of 2020.
The negative provision
for loan losses was primarily related to improvements in economic conditions
in our primary market area,
and related
improvements in our asset quality.
The provision for loan losses is based upon various estimates and
judgements, including
the absolute level of loans, loan growth, credit quality and the
amount of net charge-offs.
Noninterest income was $2.3 million for the first six months
of 2021 compared to $2.6 million for the first six months of
2020.
The decrease was primarily due to a $0.3 million non-taxable
death benefit from bank-owned life insurance received
in 2020.
Noninterest expense was $9.6 million for the first six months
of 2021 compared to $9.8 million for the first six months of
2020.
The decrease was primarily due to a reduction of $0.7 million in various
expenses related to the redevelopment of
the Company’s headquarters in downtown
Auburn.
This decrease was mostly offset by increases in salaries
and benefits
expense of $0.3 million and other noninterest expense of $0.2
million during the first six months of 2021.
Income tax expense was $0.9 million for the first six months
of 2021 compared to $0.8 million during the first six months
of 2020,
reflecting an increase in earnings before tax and effective
tax rate of 17.76% and 17.86%, respectively.
31
The Company paid cash dividends of $0.52 per share in the first six months
of 2021, an increase of 2% from the same
period of 2020.
Our $0.8 million of share repurchases since June 30, 2020
resulted in 20,511 fewer outstanding common
shares at June 30, 2021.
At June 30, 2021, the Bank’s regulatory capital
ratios were well above the minimum amounts
requiredwhich management believed to be “well capitalized” under current regulatory standa
rds with a total risk-based capital ratio of 17.94%, a tier
1
leverage ratio of 9.81%
and a common equity
tier 1 (“CET1”) ratio of 17.03%
adequate at June 30, 2021.
For the second quarter of 2021, net earnings were $2.3
million, or $0.65 per share, compared to $1.7 million, or $0.47
per
share, for the second quarter of 2020.
Net interest income (tax-equivalent) was $6.1 million for the second quarter
of 2021,
a 2% decrease compared to $6.2 million for the second quarter
of 2020.
This decrease was primarily due to net interest
margin compression resulting from the Federal Reserve’s
interest rate reductions and bond purchases in response
to
COVID-19.
Our securities holdings, which generally yield less than loans, increased
as a percentage of our total assets
reflecting deployment of increased deposits.
The Company’s net interest margin
(tax-equivalent) decreased to 2.60% in the
second quarter of 2021, compared to 2.95% for the second
quarter of 2020 primarily due to the lower rate environment and
changes in our asset mix resulting from the significant increase in deposits
from government stimulus and relief programs
and customers’ increased savings. Net interest income (tax-equivalent)
included $0.2 million in PPP loan fees, net of
related costs for both the second quarter of 2021 and
2020.
The Company recorded a negative provision for loan losses of
$0.6 million during the second quarter of 2021 compared
to $0.5 million in provision for loan losses during the second
quarter 2020.
The negative provision for loan losses was primarily related to
improvements in economic conditions in our
primary market areas, and related improvements in our asset quality.
Noninterest income was $1.1 million in the second
quarter of 2021, compared to $1.4 million in the second quarter
of 2020.
The decrease in noninterest income was primarily
due to a decrease in mortgage lending income of $0.3 million
as refinance activity slowed in our primary market area.
Noninterest expense was $4.9 million in the second quarter of
2021 compared to $5.0 million during the second quarter of
2020.
Income tax expense was $0.5
million for the second quarter of 2021 compared to $0.4 million during second
quarter
of 2020 reflecting an increase in earnings before taxes.
The Company's effective tax rate for the second
quarter of 2021
was 18.06%, compared to 17.93% in the second quarter of 2020.
COVID-19 Impact Assessment
In December 2019, COVID-19 was first reported in China and
has since spread to a number of other countries, including
the United States. In March 2020, the World
Health Organization declared COVID-19 a global
pandemic and the United
States declared a National Public Health Emergency.
The COVID-19 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,
increases in reported cases could cause these measures to be
reestablished.
Auburn University, a major
source of economic
activity in Lee County, went to
remote instruction on March 16, 2020.
Auburn University announced its guidelines for the
remainder of the 2021 school year, which involves
resumption of full on-site operations as well as other measures.
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, the
development and distribution of COVID-19 testing and contact
tracing, effective drug treatments and vaccines, 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
operations 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.
See “Balance Sheet Analysis – Loans” for supplemental COVID
-19
disclosures.
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.
32
• 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.
During 2021,
we opened our remaining branch lobbies. We
continue to provide services through our online and other electronic channels.
In addition, we established remote work access to help employees
stay at home where job duties permit.
• We
are focused on servicing 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 a participating lender in the PPP.
PPP loans are forgivable, 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 dayeach of the
covered period if the borrower does not apply for forgiveness
within that 10-month period.
We believe these loans
respective dates. The judgments and our
participation in the program is good for our customers and the
communities we serve.
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 related to our PPP loans during 2020.
Through June 30, 2021, we have
recognized all but $16 thousand of these fees, net of related costs.
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 the six months ended
June 30, 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
%
As of June 30, 2021, we collected approximately $1.0
million in fees related to PPP loans under the Economic Aid Act.
Through June 30, 2021, we have recognized $0.2 million of these fees, net
of related costs.
We continue to closely
monitor this pandemic, and are working to continue our services
during the pandemic and to address
developments as those occur.
Our results of operations for the six months ended June 30,
2021,
and our financial condition
at that date reflect only the initial effects of the pandemic,
and may not be indicative of future results or financial
conditions, including possible additional 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.
33
As of June 30, 2021,
all of our capital ratios were in excess of all regulatory requirements to
be well capitalized.
The
effects of the COVID-19 pandemic on our borrowers
could result in adverse changes to credit quality and our regulatory
capital ratios.
We continue to closely
monitor this pandemic, and are working to continue our services during
the pandemic
and to address developments as those occur.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform
with U.S. GAAP and with general practices
within the banking industry.
In connectionestimates associated with the application of those principles, we havedetermination
 
made judgments and estimates
which, in the case of the determination of our allowance for loan
losses, our assessment of other-than-temporary
impairment, recurring and non-recurring fair value measurements and
the valuation of OREO and deferred tax assets, were
critical to the determination of our financial position and results of
operations. Other policies also require subjective
judgment and assumptions and may accordingly impact our financial
position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan
losses prior to the end of each calendar quarter.
Determining
the amount of the allowance for loan losses is consideredare
described under “Critical Accounting Policies.”
A summary of the changes in the allowance for loan losses and certain asset quality ratios
 
for the first quarter of 2022 and
the previous four quarters is presented below.
2022
2021
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
4,939
5,119
5,107
5,682
5,618
Charge-offs:
Commercial real estate
—
(254)
—
—
—
Residential real estate
—
(2)
—
(1)
—
Consumer installment
(48)
(32)
—
—
(5)
Total charge
-offs
(48)
(288)
—
(1)
(5)
Recoveries
17
108
12
26
69
Net (charge-offs) recoveries
(31)
(180)
12
25
64
Provision for loan losses
(250)
—
—
(600)
—
Ending balance
$
4,658
4,939
5,119
5,107
5,682
as a critical accounting estimate because% of loans
1.09
%
1.08
1.13
1.12
1.23
as a % of nonperforming loans
1,256
%
1,112
1,053
813
726
Net charge-offs (recoveries) as % of average loans (a)
0.03
%
0.16
(0.01)
(0.02)
(0.06)
(a) Net (charge-offs) recoveries 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 portfolio,portfolios, past loan
loss experience, current
asset quality trends, known
and inherent risks in the portfolio, adverse situations that may
 
may affect athe borrower’s ability to repay (including
(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.pertinent factors. This evaluation is
is inherently subjective as it requires various material estimates and judgments, including the
 
the amounts and timing of future
cash flows expected to
be received on impaired loans that may be susceptible to significant
 
significant change. Loans are charged off, in whole orThe ratio of our
allowance for loan losses to total loans outstanding was 1.09%
 
in part,at March 31, 2022, compared to 1.08% at December 31,
when management believes that the full collectability of the loan2021.
 
is unlikely. A loan may beExcluding PPP loans, which are guaranteed by the SBA,
 
partially charged-offthe Company’s allowance for
 
after aloan losses was 1.10% of
“confirming event” has occurred, which servestotal loans at both March 31, 2022 and December 31, 2021. In the future, the allowance to validate thattotal
 
full repayment pursuantloans outstanding ratio will
increase or decrease to the termsextent the factors that influence our quarterly allowance assessment,
including the duration and
magnitude of the loan is unlikely.
COVID-19 effects, in their entirety either improve or weaken.
 
The Company deems loans impaired when, based on current information
and events, it is probable that the Company willIn addition, our regulators, as an integral part
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 dependen
t, the impairment
measurement is based on the fair value of the collateral, less estimated
disposal costs.
The level of allowance maintained is believed by management to
be adequate
to absorb probable losses inherent in the
portfolio at the balance sheet date. The allowance is increased
by provisions charged to expense and decreased by charge-
offs, net of recoveries of amounts previously charged
-off.
In assessing the adequacy of the allowance, the Company also
considers the results of its ongoing internal and independent
loan review processes. The Company’s
loan review process assists in determining whether there are
loans in the portfolio
whose credit quality has weakened over time and evaluating the risk characteristics
of the entire loan portfolio. The
Company’s loan review process includes
the judgment of management, the input from our independent
loan reviewers, and
reviews that may have been conducted by bank regulatory agencies
as part of their examination process. The Company
incorporates loanprocess, will periodically review results in the determination of whetherCompany’s
 
or not it is probable that it will be ableallowance for loan losses, and may require the
Company to collect all
amounts due accordingmake additional provisions to the contractual terms of a loan.
As part of the Company’s quarterly assessment
of the allowance, management divides the loan portfolio
into five segments:
commercial and industrial, construction and land development, commercial
real estate, residential real estate, and consumer
installment. The Company analyzes each segment and estimates
an allowance allocation for each loan segment.
34
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 internaltheir
 
systemjudgment about information
available to them at the time 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, 2021 and December 31, 2020, 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 fact
ors
is particularly subjective and does not lend itself to exact mathematical
calculation. This amount represents estimated
probable inherent credit losses which exist, but have not yet been
identified, as of the balance sheet date, and are based
upon quarterly trend assessments in delinquent and nonaccrual
loans, credit concentration changes, prevailing economic
conditions, changes in lending personnel experience, changes
in lending policies or procedures, and other influencing
factors. These qualitative and environmental factors are considered
for each of the five loan segments and the allowance
allocation, as determined by the processes noted above, is increased
or decreased based on the incremental assessment of
these factors. their examinations.
 
Nonperforming Assets
The Company regularly re-evaluates its practices in determining the
allowance for loan losses. Since the fourth quarter of
2016, the Company has increased
its look-back period each quarter to incorporate the effects
of at least one economic
downturn in its loss history. The
Company believes the extension of its look-back period
is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, 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, 2021, the Company increased its look-back
period to 49 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 2020, the Company
adjusted certain qualitative and economic factors related to changes in
economic conditions driven by the impact of the
novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse
economic conditions, including higher
unemployment in our primary market area.
During the second quarter of 2021,At March 31, 2022
 
the Company adjusted certain qualitative
and economic factorshad $0.7 million in nonperforming assets compared to reflect improvements in economic conditions$0.8 million at December 31,
 
in our primary market area.
Further adjustments may
be made in the future as a result of the continuing COVID-19
pandemic.
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 intent to sell a debt security,
(2) it is more likely than not that the Company will be required
to sell the
debt security before recovery of its amortized cost basis, or
(3) the Company does not expect to recover the entire amortized
cost basis of the debt security.
If the Company has the intent to sell a debt security or if it is more
likely than not that it will
be required to sell the debt security before recovery,
the other-than-temporary write-down is equal to the entire
difference
between the debt security’s amortized
cost and its fair value.
If the Company does not intend to sell the security or it is not
more likely than not that it will be required to sell the security
before recovery, the other
-than-temporary impairment write-
down is separated into the amount that is credit related (credit loss component)
and the amount due to all other factors.
The
credit loss component is recognized in earnings and is the difference
between the security’s
amortized cost basis and the
present value of its expected future cash flows.
The remaining difference between the security’s
fair value and the present
value of future expected cash flows is due to factors that are not credit
related and is recognized in other comprehensive
income, net of applicable taxes.
The Company is required to own certain stock as a condition of
membership, such as Federal Home Loan Bank (“FHLB”)
and Federal Reserve Bank (“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 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.
2021.
 
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 with U.S. GAAP and expands
disclosures about fair value measurements.
For more information regarding fair value measurements and disclosures,
please refer to Note 6, Fair Value,
of the consolidated financial statements that accompany this report.
Fair values are based on active market prices of identical assets or
liabilities when available.
Comparable assets or
liabilities or a composite of comparable assets in active markets are
used when identical assets or liabilities do not have
readily available active market pricing.
However, some of the Company’s
assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between
willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash
flows and other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s
best estimates for appropriate discount rates, default rates,
prepayments, market volatility,
and other factors, taking into account current observable market data
and experience.
These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income
and expense. As such, the use of different models and
assumptions, as well as changes in market conditions, could
result in
materially different net earnings and retained earnings
results.
Other Real Estate Owned
OREO consists of properties obtained through foreclosure or in satisfaction
of loans and is reported at the lower of cost or
fair value of collateral, less estimated costs to sell at the date acquired,
with any loss recognized as a charge-off through the
allowance for loan losses. Additional OREO losses for subsequent
valuation adjustments are determined on a specific
property basis and are included as a component of other noninterest
expense along with holding costs. Any gains or losses
on disposal of OREO are also reflected in noninterest expense.
Significant judgments and complex estimates are required in
estimating the fair value of OREO, and the period of time within which
such estimates can be considered current is
significantly shortened during periods of market volatility.
As a result, the net proceeds realized from sales transactions
could differ significantly from appraisals, comparable
sales, and other estimates used to determine the fair value of other
OREO.
At June 30, 2021 and December 31, 2020 the Company had no OREO properties.
Deferred Tax
Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based
on the weight of available evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be
realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during
the periods in which those temporary differences
become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level
of taxable income over the last three years and
projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes
it is more likely than not that we will realize the benefits of these
deductible differences at June 30, 2021.
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,
2021
2020
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
464,332
4.47%
$
461,245
4.75%
Securities - taxable
299,011
1.32%
211,503
2.06%
Securities - tax-exempt
62,844
3.64%
62,822
3.76%
Total securities
361,855
1.72%
274,325
2.45%
Federal funds sold
34,700
0.13%
30,716
0.71%
Interest bearing bank deposits
71,252
0.09%
50,365
0.79%
Total interest-earning assets
932,139
2.91%
816,651
3.58%
Deposits:
NOW
173,102
0.13%
151,785
0.43%
Savings and money market
284,174
0.23%
226,240
0.46%
Time Deposits
159,406
1.07%
166,685
1.42%
Total interest-bearing deposits
616,682
0.42%
544,710
0.75%
Short-term borrowings
3,266
0.50%
1,394
0.50%
Total interest-bearing liabilities
619,948
0.42%
546,104
0.75%
Net interest income and margin (tax-equivalent)
$
12,150
2.63%
$
12,529
3.09%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $12.2 million for the
first six months of 2021 compared to $12.5 million for the
first six months of 2020.
This decrease was due to a decline in the Company’s
net interest margin (tax-equivalent).
The tax-equivalent yield on total interest-earning assets decreased
by 67 basis points to 2.91% in the first six months of
2021 compared to 3.58% in the first six months of 2020.
This decrease was primarily due to the lower interest rate
environment and changes in our asset mix resulting from the
significant increase in deposits from government stimulus and
relief programs and customers’ increased savings.
The cost of total interest-bearing liabilities decreased by 33 basis
points to 0.42% in the first six months of 2021 compared
to 0.75% in the first six months of 2020.
The net decrease in our funding costs was primarily due to lower prevail
ing
market interest rates.
Our funding costs declined less than the rates earned on our interest
earning assets.
The Company continues to deploy various asset liability management
strategies to manage its risk to interest rate
fluctuations. The Company’s net
interest margin could continue to experience pressure due
to reduced earning asset yields
and increased competition for quality loan opportunities.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings
necessary to provide an allowance for loan losses that
management believes, based on its processes and estimates,
should be adequate to provide for the probable losses on
outstanding loans.
The Company recorded a negative provision for loan losses of $0.6
million for the first six months of
2021, compared to $0.9 million in provision for loan losses for
the first six months of 2020.
The negative provision for
loan losses was primarily related to improvements in economic conditions
in our primary market area.
The provision for
loan losses is based upon various factors, including the absolute level
of loans, loan growth, the credit quality,
and the
amount of net charge-offs or recoveries.
37
Based upon its assessment of the loan portfolio, management
adjusts the allowance for loan losses to an amount it believes
should be appropriate to adequately cover its estimate of probable
losses in the loan portfolio. The Company’s
allowance
for loan losses as a percentage of total loans was 1.12%
at June 30, 2021, compared to 1.22% at December 31, 2020.
At
June 30, 2021,
the Company’s allowance for loan losses
was 1.17% of total loans, excluding PPP loans, which are
guaranteed by the SBA.
While the policies and procedures used to estimate the allowance
for loan losses, as well as the
resulting provision for loan losses charged to operations,
are considered adequate by management and are reviewed from
time to time by our regulators, they are based on estimates and
judgments and are therefore approximate and imprecise.
Factors beyond our control (such as conditions in the local and
national economy, local
real estate markets, or industries)
may have a material adverse effect on our asset quality and
the adequacy of our allowance for loan losses resulting in
significant increases in the provision for loan losses.
Noninterest Income
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Service charges on deposit accounts
$
138
$
126
$
270
$
298
Mortgage lending income
424
683
973
913
Bank-owned life insurance
99
108
202
506
Securities gains, net
—
81
—
87
Other
449
365
847
794
Total noninterest income
$
1,110
$
1,363
$
2,292
$
2,598
The Company’s income from mortgage
lending was primarily attributable to the (1) origination and sale of new
mortgage
loans and (2) servicing of mortgage loans. Origination income, net, is
comprised of gains or losses from the sale of the
mortgage loans originated, origination fees, underwriting fees,
and other fees associated with the origination of loans,
which are netted against the commission expense associated with these
originations. The Company’s normal
practice is to
originate mortgage loans for sale in the secondary market and
to either sell or retain the associated 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)
2021
2020
2021
2020
Origination income
$
398
$
684
$
935
$
847
Servicing fees, net
26
(1)
38
66
Total mortgage lending income
$
424
$
683
$
973
$
913
The Company’s income from mortgage
lending typically fluctuates as mortgage interest rates change and
is primarily
attributable to the origination and sale of new mortgage loans.
Origination income decreased in the second quarter of 2021
compared to the second quarter of 2020 due to a decrease in refinance
activity in our primary market area.
Mortgage loan
origination volume also declined for the first six months of 2021
compared to the first six months of 2020, but origination
income increased due to improved pricing margins.
38
Income from bank-owned life insurance decreased primarily due to
$0.3 million in non-taxable death benefits received in
2020.
The assets that support these policies are administered by the life
insurance carriers and the income we receive (i.e.,
increases or decreases in the cash surrender value of the policies
and death benefits received) on these policies is dependent
upon the returns the insurance carriers are able to earn on the
underlying investments that support these policies. Earnings
on these policies are generally not taxable.
Noninterest Expense
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Salaries and benefits
$
2,897
$
2,597
$
5,748
$
5,428
Net occupancy and equipment
418
920
856
1,517
Professional fees
326
389
582
647
Other
1,254
1,053
2,399
2,223
Total noninterest expense
$
4,895
$
4,959
$
9,585
$
9,815
The increase in salaries and benefits was primarily due to a decrease
in deferred costs related to the PPP loan program,
routine annual wage and benefit increases, and management increasing
the minimum hourly wage for banking positions to
$15.
The decrease in net occupancy and equipment expense was primarily
due to a reduction of various expenses related to the
redevelopment of the Company’s headquarters
in downtown Auburn.
This amount includes revised depreciation estimates
and other temporary relocation costs.
Income Tax
Expense
Income tax expense was $0.9
million for the first six months of 2021 compared to $0.8
million for the first six months of
2020,
reflecting an increase in earnings before taxes and effective tax
rate of 17.76% and 17.86%, respectively.
BALANCE SHEET ANALYSI
S
Securities
Securities available-for-sale were $3
84.9 million at June 30, 2021 compared to $335.2 million at December
31, 2020.
This
increase reflects an increase in the amortized cost basis of securities
available-for-sale of $54.2 million, and a decrease
of
$4.5 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 interest rates.
The average annualized tax-equivalent yields earned on total
securities were 1.72%
in the first six
months of 2021 and 2.45%
in the first six months of 2020.
Loans
2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
87,933
88,687
82,585
98,244
87,754
Construction and land development
37,477
30,332
33,514
31,651
32,967
Commercial real estate
242,845
254,731
255,136
250,992
250,588
Residential real estate
82,164
82,848
84,154
85,054
85,825
Consumer installment
7,762
6,524
7,099
7,731
8,631
Total loans
458,181
463,122
462,488
473,672
465,765
Less:
unearned income
(1,197)
(1,243)
(788)
(1,219)
(1,491)
Loans, net of unearned income
$
456,984
461,879
461,700
472,453
464,274
39
Total loans, net of unearned
income, were $457.0 million at June 30, 2021, a
decrease of $4.7 million from $461.7 million
at December 31, 2020.
Excluding PPP loans, total loans net of unearned income, were $4
35.7 million, a decrease of $6.5
million, or 1% from $442.3 million at December 31, 2020
.
Four loan categories represented the majority of the loan
portfolio at June 30, 2021: commercial real estate (53%), residential real
estate (18%), commercial and industrial (19%) and
construction and land development (8%).
Approximately 21%
of the Company’s commercial
real estate loans were
classified as owner-occupied at June 30, 2021.
Within the residential real estate portfolio
segment, the Company had junior lien mortgages of approximately $8.1
million,
or 2% of total loans, at June 30, 2021, compared to $8.7 million,
or 2% of total loans, at December 31, 2020.
For
residential real estate mortgage loans with a consumer purpose,
the Company had no loans that required interest-only
payments at June 30, 2021 and December 31, 2020. The
Company’s residential real estate
mortgage portfolio does not
include any option ARM loans, subprime loans, or any material
amount of other high-risk consumer mortgage products.
The average yield earned on loans and loans held for sale was 4.47
%
in the first six months of 2021 and 4.75% in the first
six months of 2020.
The specific economic and credit risks associated with our loan po
rtfolio include, but are not limited to, the effects of
current economic conditions, including the COVID-19 pandemic’s
effects, on our borrowers’ cash flows, real
estate market
sales volumes, valuations, availability and cost of financing properties,
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.
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 $20.7 million.
Furthermore, we have an internal limit for aggregate credit
exposure (loans outstanding plus
unfunded commitments) to a single borrower of $18.6
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, 2021, the Bank had no
relationships exceeding these limits.
We periodically
analyze our commercial and industrial and commercial real estate
loan portfolios to determine if a
concentration of credit risk exists in any one or more industries.
We use classification
systems broadly accepted by the
financial services industry in order to categorize our
commercial borrowers. Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s
total risk-based capital at June 30, 2021 (and related
balances at December
31, 2020).
June 30,
December 31,
(Dollars in thousands)
2021
2020
Hotel/motel
$
46,963
$
42,900
Lessors of 1-4 family residential properties
49,024
49,127
Multi-family residential properties
39,316
40,203
Shopping centers
29,834
30,000
40
COVID-19 Modifications
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, 2021 and December 31, 2020, we have granted loan
payment deferrals or payments of interest-only primarily
on commercial and industrial and commercial real estate loans totaling
$32.3 million, or 7% of total loans, compared to
$112.7 million, or 24% of total loans at
June 30, 2020, the end of the first quarterly period we began loan
modifications to
assist customers through the COVID-19 pandemic.
Based on discussions with our borrowers, we expect
these to further
decline over the second half of 2021.
The tables below provide information concerning the composition
of these COVID-19 modifications as of June 30, 2021
and December 31, 2020.
Modification Types
(Dollars in thousands)
# of Loans
Modified
Balance
% of Portfolio
Modified
Interest Only
Payment
P&I
Payments
Deferred
June 30, 2021:
Commercial and industrial
2
$
740
—
%
100
%
—
%
Commercial real estate
12
31,363
7
100
—
Residential real estate
2
242
—
—
100
Total
16
$
32,345
7
%
99
%
1
%
December 31, 2020:
Commercial and industrial
2
$
741
—
%
100
%
—
%
Commercial real estate
12
31,399
7
100
—
Residential real estate
2
133
—
—
100
Total
16
$
32,273
7
%
99
%
1
%
COVID-19 Modifications within Commercial Real
Estate Segment
(Dollars in thousands)
# of Loans
Modified
Balance of
Loans Modified
% of Total
Loan Class
June 30, 2021:
Hotel/motel
10
$
26,391
49
%
Multifamily
1
3,530
9
Restaurants
1
1,442
11
December 31, 2020:
Hotel/motel
10
$
26,427
49
%
Multifamily
1
3,530
9
Restaurants
1
1,442
10
41
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.
Allowance for Loan Losses
The Company maintains the allowance for loan losses at a level
that management believes appropriate to adequately cover
the Company’s estimate of probable
losses inherent in the loan portfolio. The allowance for loan losses was $5.
1
million at
June 30, 2021 compared to $5.6 million at December 31,
2020, which management believed to be adequate at each of the
respective dates. The judgments and estimates associated with the determination
of the allowance for loan losses are
described under “Critical Accounting Policies.”
A summary of the changes in the allowance for loan losses and certain
asset quality ratios for the second quarter of 2021
and the previous four quarters is presented below.
2021
2020
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
5,682
5,618
5,575
5,308
4,867
Charge-offs:
Commercial and industrial
—
—
(4)
—
(3)
Residential real estate
(1)
—
—
—
—
Consumer installment
—
(5)
(1)
(4)
(28)
Total charge
-offs
(1)
(5)
(5)
(4)
(31)
Recoveries
26
69
48
21
22
Net recoveries (charge-offs)
25
64
43
17
(9)
Provision for loan losses
(600)
—
—
250
450
Ending balance
$
5,107
5,682
5,618
5,575
5,308
as a % of loans
1.12
%
1.23
1.22
1.18
1.14
as a % of nonperforming loans
813
%
726
1,052
1,015
783
Net (recoveries) charge-offs as % of average loans
(a)
(0.02)
%
(0.06)
(0.04)
(0.01)
0.01
(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 1.12
%
at June 30, 2021, compared to 1.22% at December 31,
2020.
At June 30, 2021, the Company’s allowance
for loan losses was 1.17% of total loans, excluding PPP
loans. 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, 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
The Company had $0.6
million and $0.5
million in nonperforming assets at June 30, 2021 and December 31,
2020,
respectively.
42
The table below provides information concerning total nonperforming assets
 
assets and certain asset quality ratios for the secondfirst
quarter of 20212022 and the previous four quarters.
 
20212022
2020
Second2021
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
371
444
486
628
783
534Other real estate owned
549374
678374
—
—
—
Total nonperforming assets
$
745
818
486
628
783
534
549
678
as a % of loans and other real estate owned
0.140.17
%
0.170.18
0.120.11
0.120.14
0.150.17
as a % of total assets
0.060.07
%
0.080.07
0.05
0.06
0.06
0.070.08
Nonperforming loans as a % of total loans
0.140.09
%
0.10
0.11
0.14
0.17
0.12Accruing loans 90 days or more past due
0.12$
0.15—
—
69
—
—
The table below provides information concerning the composition of nonaccrual
 
of nonaccrual loans for the secondfirst quarter of 2021
2022 and the
the previous four quarters.
 
20212022
2020
Second2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial real estate
$
182
187
193
199
206
212
216
218
Residential real estate
189
257
293
429
577
322
332
459
Consumer installment
—
—
—
1
1
Total nonaccrual loans
$
371
444
486
628
783
534
549
678
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.collection
 
At June 30, 2021, the.
The Company had $0.6$0.4
million in loans on nonaccrual status compared to $0.5 million at March 31, 2022 and December 31,
 
2020.2021, respectively.
 
The Company had no loans 90 days or more past due and still
accruing at June 30, 2021 compared to $0.1 million atMarch 31,
2022 and December 31, 2020.2021,
respectively.
The Company had no OREO at June 30, 2021 or December 31,table below provides information concerning the composition of
 
2020.OREO for the first quarter of 2022 and the previous
four quarters.
 
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Other real estate owned:
Commercial real estate
$
374
374
—
—
—
Total other real estate owned
$
374
374
—
—
—
Potential Problem Loans
Potential problem loans represent those loans with a well-defined weakness and
 
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
 
standards established by the Federal
Reserve, the Company’s priprimary regulator,
 
mary regulator, for loans classified as
substandard, excluding nonaccrual loans.
 
Potential
problem loans, which are not included in nonperforming assets,
amounted to $2.8 $2.0
million, or 0.6%0.5% of total loans at June 30,March
2021,31, 2022, and $2.9$2.4 million, or 0.6%0.5% of total loans at December 31,
2020.
2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4342
The table below provides information concerning the composition
of potential problem
loans for the secondfirst quarter of 20212022
and the previous four quarters.
 
20212022
2020
Second2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Potential problem loans:
Commercial and industrial
$
215
226
274
291
299
218
230
211
Construction and land development
13
218
231
239
247
254
563
568
Commercial real estate
150
156
172
178
173
188
188
165
Residential real estate
1,592
1,748
1,848
2,096
2,092
2,229
2,486
2,645
Consumer installment
8
12
19
7
9
23
42
55
Total potential problem loans
$
1,978
2,360
2,544
2,811
2,820
2,912
3,509
3,644
At March 31, 2022, approximately $0.2 million or 8% of total potential problem loans
 
At June 30, 2021 the Company had $0.1 million in potential problem
loans that 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 secondfirst quarter of 20212022 and the previous four quarters
.quarters.
 
20212022
2020
Second2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial
$
7
3
68
1
42
230
48
83
Construction and land development
2041
10
61204
—
—204
10
Commercial real estate
205
180
29—
—
168—
205
180
Residential real estate
496
516
409
68
399
1,509
106
620
Consumer installment
15
25
25
7
36
29
6
8
Total
 
$
519
748
502
485
667
1,858
160
879
Deposits
Total deposits increased
 
$83.723.5 million, or 10%2%, to $923.5 million$1.0 billion at June 30, 2021,
March 31, 2022, compared to $839.8 $994.2
million at December
31, 2020.2021.
 
Noninterest-bearing deposits were $283.4$308.3 million, or 31%30% of total
deposits, at June 30, 2021,March 31,
2022, compared to
$245.4316.1 million, or 29%
32% of total deposits at December 31, 2020.
These increases reflect deposits from customers who
received PPP loans, the impact of government stimulus checks, delayed
tax payments
and less customer spending during
the COVID-19 pandemic.2021.
 
Estimated uninsured deposits totaled $427.3 million and $420.8 million at March 31,
2022 and December 31, 2021,
respectively.
Uninsured amounts are estimated based on the portion of account balances in excess of
FDIC insurance
limits.
The average rate paid on total interest-bearing deposits was 0.42
%
0.34% in the first six monthsquarter of 2021 2022
compared to 0.75%0.44% in the
first six monthsquarter of 2020.
The decline in average rates paid on total interest-bearing deposits
was largely driven by generally
lower market interest rates.2021.
 
Other Borrowings
Other borrowings consist of short-term borrowings and long-term debt.
 
debt. Short-term borrowings generally consist of federal
funds purchased and agreements with certain customers to sell certain
securities sold under agreements to repurchase
with an
original maturity less thanof one year.year or less.
 
The Bank
had available federal funds lines totaling $51.0 million and $41.0
 
million with none
outstanding at June 30, 2021,March 31, 2022, and at
December 31, 2020,2021, respectively.
 
respectively. Securities sold
under agreements to repurchase
totaled $3.5 million at June 30, 2021, compared to $2.4$4.0
 
million and $3.4 million at
March 31, 2022 and December 31, 2020.2021, respectively.
 
The average rate paid on short-term borrowings was 0.50% in the first sixquarter of 2022
 
months ofand 2021, compared to 0.75% in the first
six months of 2020.
 
respectively.
The Company had no long-term debt at June 30, 2021March 31, 2022 and
December 31, 2020.
2021.
4443
CAPITAL ADEQUACY
 
The Company’s consolidated stockholders’
 
stockholders’ equity was $106.0$86.4 million and $107.7$103.7 million as of June 30,March 31, 2022
 
2021 and
December 31, 2020,2021, respectively.
 
The decrease from December 31, 20202021 was primarily driven by an
other comprehensive
loss due to the change in unrealized gains (losses)losses on securities available-for-sale,
 
available-for-sale, net of tax of $3.3 million, cash dividends
paid of $1.8 million, and repurchases of the Company’s
stock of $0.8$18.3 million.
 
DuringThe increase in the
unrealized loss on securities was primarily due to an increase in long-term
market interest rates.
These unrealized losses do
not affect the Bank’s capital
for regulatory capital purposes.
The Company paid cash dividends of $0.265 per share in the first six monthsquarter of 2021,2022, an increase of 2% from the
Company repurchased 20,511 shares under the same
 
period
in 2021. The Company’s current stock repurchase program.share repurchases of
 
These$0.1 million since December 31, 2021 resulted in 3,559
fewer outstanding
common shares were
repurchased at an average cost per share of $36.56 and
a total cost of $0.8 million.
These decreases in the Company’s
consolidated stockholders’ equity were partially offset
by net earnings of $4.3 million.
March 31, 2022.
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 phasephase-in period
 
-in period that began on January 1, 2016 and was fully phased
-inphased-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, 2021,
March 31, 2022, the Bank’s ratio
was sufficient to
meet the fully phased-in conservation buffer.
Effective March 20, 2020, the Federal Reserve and the other
 
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
 
of the maximum payout ratio to allow banking
organizations to more freely use their capital buffers to
 
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
 
associated tax effects not reflected in net income; and
(ii)
the average of all net income over the preceding four quarters.
 
The interim final 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 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 9.81%9.09%, CET1 risk-based capital ratio
was 17.03%17.26%, tier 1 risk-based
capital ratio was 17.03%17.26%, and
total risk-based capital ratio was 17.94%18.08%
 
at June 30, 2021.March 31, 2022. These ratios exceed the minimum regulatory capital percentages
percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio,
 
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
 
buffer was 9.94%
10.08%
 
at
June 30, 2021.
March 31, 2022.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and
 
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
 
Bank’s Asset Liability
Management Committee (“ALCO”) is charged with the responsibility
 
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
 
from fluctuations in interest rates. ALCO
measures and evaluates interest rate risk so that the Bank can meet customer demands
 
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.
4544
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation
 
earnings simulation modeling.
Forecasted levels of earning assets, interest-bearing liabilities, and off
 
and off-balance-balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next
12 months and other
factors in order to produce
various earnings
simulations and estimates. To
 
help limit interest rate risk, we have guidelines for earnings at
risk which seek to limit the
variance of net interest income from gradual changes in interest rates.
 
For changes up or down in rates from management’s
flat interest rate forecast over the next 12 months, policy limits
for net interest income variances are
as follows:
●
+/- 20% for a gradual change of 400 basis points
●
+/- 15% for a gradual change of 300 basis points
●
+/- 10% for a gradual change of 200 basis points
●
+/- 5% for a gradual change of 100 basis points
At June 30, 2021,March 31, 2022, 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 offoff-balance
 
-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,
 
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, 2021,March 31, 2022, our EVE model indicated that we were in compliance
 
with theour policy guidelines noted above.
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,
 
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
 
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
 
adjustable rate mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes
in interest rates. Prepayment
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
 
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
customer transactions and meet their financing needs. These interest rate swaps qualify
 
swaps qualify as derivatives, but are not
designated as
hedging instruments. At June 30, 2021March 31, 2022 and December 31, 2021,
 
2020, the Company had no derivative contracts
designated as part
of a hedging relationship to assist in managing its interest rate
sensitivity.
 
4645
Liquidity Risk Management
 
Liquidity is the Company’s ability to convert
 
to convert assets into cash equivalents in order
to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations. Without
 
Without proper management of its liquidity,
 
the
Company could experience higher costs of obtaining funds due to insufficient liquidity,
 
insufficient liquidity, while
excessive liquidity cancould lead
to a decline inlower earnings due to the cost of foregoing alternative higher-yield
 
higher-yieldingmarket investment opportunities.
 
Liquidity is managed at two levels. The first is the liquidity of the Company.
 
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
 
are subject to regulatory guidelines and requirements.
 
The
Company depends upon dividends from the Bank for liquidity to
pay its operating expenses,
debt obligations and
dividends.
 
The Bank’s payment of dividends depends
 
depends on its earnings, liquidity, capital
 
capital and the absence of any regulatory
restrictions.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
 
and Company expenses.
 
Primary sources of funding for the Bank include customer deposits, other borrowings,
 
other borrowings, repayment and maturity of securities,
sales of securities, and the sale and repayment of loans. The
Bank has access to federal
funds lines from various banks and
borrowings from the Federal Reserve discount window.
 
In addition to these sources, the Bank may participate in the
FHLB’s advance program to obtain funding for
 
funding for its growth. Advances include
both fixed and variable terms and may be
taken out with varying maturities. At June 30, 2021,March 31, 2022, the Bank had
a remaining available
line of credit with the FHLB of
$297.9331.4 million. At June 30, 2021,March 31, 2022, the Bank also had $41.0$51.0
 
million of available federal funds lines with no borrowings
outstanding. Primary uses of funds include repayment of maturing obligations and
 
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
 
loan commitments and reasonable borrower, depositor,
 
depositor, and
creditor requirements over the next twelve months.
 
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual
 
and Contractual Obligations
At June 30, 2021,March 31, 2022, the Bank had outstanding standby letters of credit
of $1.4
 
million and unfunded loan commitments
outstanding of $69.4$53.7 million.
 
Because these commitments generally have fixed expiration dates and
 
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
 
federal funds sold or a portion of our securities available-for-available-
sale,for-sale, or draw on its available credit facilities.
 
Mortgage lending activities
We primarily 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
 
characteristics of the residential mortgage loans.
 
Although the
representations and warranties vary among investors, they typically cover ownership
 
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,
 
applicable federal, state, and local laws, among other
matters.
As of June 30, 2021,March 31, 2022,
 
the unpaid principal balance of residential mortgage loans, which we have originated
 
and sold, but
retained the servicing rights, was $260.8$250.3 million.
 
Although these loans are generally sold on a non-recourse basis, we
may
be obligated to repurchase residential mortgage loans or reimburse investors for
 
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
 
We seek to reduce
and manage the risks of potential
repurchases, make whole requests, or other claims by mortgage loan investors
 
loan investors through our underwriting and quality
assurance practices and by servicing mortgage loans to meet investor and secondary
 
and secondary market standards.
4746
The Company was not required to repurchase any loans during the first
 
six monthsfirst quarter of 20212022 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, 2021.
March 31, 2022.
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
 
relating to the mortgage loans;
 
(4) maintain any
required escrow accounts for payment of taxes and insurance
and administer escrow payments;
 
and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the
potential losses to investors
consistent with the agreements
governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies
 
a standard standards
of responsibility for actions taken by us in such
such capacity and provides protection against expenses and liabilities incurred
by us when
acting in compliance with the
respective servicing agreements.
 
However, if we commit a material breach
of our obligations
as servicer,
we may be
subject to termination if the breach is not cured within a specified
period following notice.
 
The standards governing
servicing and the possible remedies for violations of such standards
are determined by servicing
guides issued by Fannie
Mae as well as the contract provisions established between Fannie Mae
and the Bank.
 
Remedies could include repurchase
of an affected loan.
Although repurchase and make whole requests related to representation and
 
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
 
aggressively pursue all means of recovering losses on
their purchased loans.
 
As of June 30, 2021,
March 31, 2022, 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
 
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 1-41-to-4 family residential
 
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.
Such forbearance will be up to 180 days, subject to
up to a 180 day extension.
During forbearance,
no fees, penalties or interest shall be charged beyond
those applicable if all contractual payments were fully and timely
paid.
 
Except for vacant or abandoned properties, Fannie Mae servicers may not initiate
 
initiate foreclosures on
similar procedures
or related evictions or sales until December 31, 2020. The
 
2020.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
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 U.S. GAAP and practices within the banking industry which require
 
which require the measurement of financial position and
and operating results in terms of historical dollars without considering
the changes in
the relative purchasing power of money
money over time due to inflation. Unlike most industrial companies,
virtually all the assets and
liabilities of a financial institution
institution are monetary in nature. As a result, interest rates have a more significant
impact on a
financial institution’s performance
performance than the effects of general levels of inflation.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASUs have been issued by the FASB
 
but are not yet effective.
 
●
ASU 2016-13,
Financial Instruments – Credit Losses (Topic
 
326):
 
Measurement of Credit Losses on
Financial
Instruments;
4847
Information about these pronouncements is described in more
detail below.
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
 
326): - Measurement of Credit
 
Losses on Financial
Instruments
, amends guidance on reporting credit losses for assets held at
amortized cost basis and
available for sale debt
securities.
 
For assets held at amortized cost basis, 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
 
and net investment in leases that are
not accounted for at fair value through net income. The amendments affect
 
affect loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables,
 
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 gener
algeneral 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 impact the Company’s
 
consolidated financial statements, in particular
the level of the reserve for credit losses.
 
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 will now be required to implement the new standard
in January
2023, with early adoption permitted in any period prior
to that date.
 
 
 
 
 
 
 
 
 
 
4948
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
 
amounts presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculation of the efficiency
 
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
 
facilitates comparability within the industry.
Although the
Company believes these non-GAAP financial measures enhance investors’
 
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.
 
2022
2021
2020
Second
First
Fourth
Third
Second
First
(Inin thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,078
6,037
6,041
5,975
5,937
6,188
5,868
6,070
Tax-equivalent adjustment
112
115
117
118
120
123
122
127
Net interest income (Tax
 
-equivalent)
$
6,190
6,152
6,158
6,093
6,057
6,311
5,990
6,197
Six months ended June 30,
(In thousands)
2021
2020
Net interest income (GAAP)
$
11,912
12,282
Tax-equivalent adjustment
238
247
Net interest income (Tax
-equivalent)
$
12,150
12,529
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5049
Table 2
 
- Selected Quarterly Financial Data
 
2022
2021
2020
Second
First
Fourth
Third
Second
First
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,190
6,152
6,158
6,093
6,057
6,311
5,990
6,197
Less: tax-equivalent adjustment
112
115
117
118
120
123
122
127
Net interest income (GAAP)
6,078
6,037
6,041
5,975
5,937
6,188
5,868
6,070
Noninterest income
1,110908
1,019
956
1,131
1,182
1,403
1,374
1,363
Total revenue
7,0856,986
7,056
6,997
7,106
7,119
7,591
7,242
7,433
Provision for loan losses
(600)(250)
—
 
—
 
250(600)
450—
Noninterest expense
4,8954,901
5,092
4,736
4,916
4,690
5,086
4,653
4,959
Income tax expense
254
93
386
504
423
449
403
363
Net earnings
$
2,081
1,871
1,875
2,286
2,006
2,056
1,936
1,661
Per share data:
Basic and diluted net earnings
 
$
0.59
0.53
0.53
0.65
0.56
0.58
0.54
0.47
Cash dividends declared
0.265
0.26
0.26
0.2550.26
0.255
0.2550.26
Weighted average shares outstanding:
Basic and diluted
3,518,657
3,524,311
3,536,320
3,554,871
3,566,299
3,566,276
3,566,239
3,566,166
Shares outstanding, at period end
3,516,971
3,520,485
3,529,338
3,545,855
3,566,326
3,566,276
3,566,276
3,566,176
Book value
$
24.57
29.46
29.73
29.91
29.06
30.20
29.81
29.53
Common stock price
High
$
34.49
34.79
35.36
38.90
48.00
43.00
56.80
63.40
Low
 
31.75
31.32
33.25
34.50
37.55
36.75Period end:
26.2633.21
36.8132.30
Period end33.80
35.46
38.37
42.29
36.26
57.09
To earnings ratio
14.44
14.23
14.57
15.22
x
17.85
20.23
15.97
24.29
To book value
119135
%
132110
140114
122119
193132
Performance ratios:
Return on average equity
 
8.747.97
%
7.377.07
7.637.01
7.268.74
6.347.37
Return on average assets
 
0.910.75
%
0.820.70
0.870.72
0.840.91
0.740.82
Dividend payout ratio
40.0044.92
%
46.4349.06
43.9749.06
47.2240.00
54.2646.43
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.121.09
%
1.231.08
1.221.13
1.181.12
1.141.23
Nonperforming loans
8131,256
%
7261,112
1,0521,053
1,015813
783726
Nonperforming assets as a % of:
Loans and other real estate owned
0.140.17
%
0.170.18
0.120.11
0.120.14
0.150.17
Total assets
 
0.060.07
%
0.080.07
0.05
0.06
0.06
0.070.08
Nonperforming loans as a % of total loans
0.140.09
%
0.170.10
0.120.11
0.120.14
0.150.17
Annualized net charge-offs (recoveries) chargeoffs as a % of average loans
(0.02)0.03
%
(0.06)
(0.04)0.16
(0.01)
0.01(0.02)
(0.06)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
17.0317.26
%
17.2116.23
17.2716.82
17.7017.03
18.0017.21
Tier 1 risk-based capital ratio
17.0317.26
%
17.2116.23
17.2716.82
17.7017.03
18.0017.21
Total risk-based capital ratio
17.9418.08
%
18.2517.06
18.3117.72
18.7717.94
19.0418.25
Tier 1 leverage ratio
9.819.09
%
9.999.35
10.329.57
10.389.81
10.629.99
Other financial data:
Net interest margin (a)
2.602.43
%
2.662.45
2.812.51
2.722.60
2.952.66
Effective income tax rate
18.0610.88
%
17.414.74
17.9217.07
17.2318.06
17.9317.41
Efficiency ratio (b)
67.9669.05
%
64.7971.01
65.9366.57
63.1968.05
65.6064.79
Selected average balances:
Securities available-for-sale
$
435,097
414,061
395,529
370,582
353,031
325,102
315,542
291,333
Loans, net of unearned income
439,713
455,726
452,668
460,672
463,424
466,704
465,285
466,971
Total assets
1,114,407
1,073,564
1,040,985
1,005,041
980,884
944,439
924,949
893,720
Total deposits
1,003,394
961,544
927,368
894,757
863,194
828,801
810,747
782,381
Total stockholders’ equity
104,493
105,925
106,936
104,591
108,890
107,791
106,709
104,820
Selected period end balances:
 
Securities available-for-sale
$
417,459
421,891
407,474
384,865
359,630
335,177
320,922
302,193
Loans, net of unearned income
428,417
458,364
453,232
456,984
461,879
461,700
472,453
464,274
Allowance for loan losses
4,658
4,939
5,119
5,107
5,682
5,618
5,575
5,308
Total assets
1,109,664
1,105,150
1,065,871
1,036,232
993,263
956,597
937,890
942,887
Total deposits
1,017,742
994,243
954,971
923,462
880,590
839,792
823,980
829,810
Total stockholders’ equity
86,411
103,726
104,929
106,043
103,639
107,689
106,314
105,299
(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)
2021
2020
Results of Operations
Net interest income (a)
$
12,150
12,529
Less: tax-equivalent adjustment
238
247
Net interest income (GAAP)
11,912
12,282
Noninterest income
2,292
2,598
Total revenue
14,204
14,880
Provision for loan losses
(600)
850
Noninterest expense
9,585
9,815
Income tax expense
927
753
Net earnings
$
4,292
3,462
Per share data:
Basic and diluted net earnings
$
1.21
0.97
Cash dividends declared
0.520
0.51
Weighted average shares outstanding:
Basic and diluted
3,560,554
3,566,156
Shares outstanding, at period end
3,545,855
3,566,176
Book value
$
29.91
29.53
Common stock price
High
$
48.00
63.40
Low
34.50
24.11
Period end
35.46
57.09
To earnings ratio
15.22
x
24.29
To book value
119
%
193
Performance ratios:
Return on average equity
8.04
%
6.78
Return on average assets
0.86
%
0.80
Dividend payout ratio
42.98
%
52.58
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.12
%
1.14
Nonperforming loans
813
%
783
Nonperforming assets as a % of:
Loans and other real estate owned
0.14
%
0.15
Total assets
0.06
%
0.07
Nonperforming loans as a % of total loans
0.14
%
0.15
Annualized net recoveries as a % of average loans
(0.04)
%
(0.03)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
17.03
%
18.00
Tier 1 risk-based capital ratio
17.03
%
18.00
Total risk-based capital ratio
17.94
%
19.04
Tier 1 leverage ratio
9.81
%
10.62
Other financial data:
Net interest margin (a)
2.63
%
3.09
Effective income tax rate
17.76
%
17.86
Efficiency ratio (b)
66.37
%
64.88
Selected average balances:
Securities
$
361,855
274,325
Loans, net of unearned income
462,040
459,091
Total assets
992,940
866,222
Total deposits
879,063
758,215
Total stockholders’ equity
106,729
102,190
Selected period end balances:
Securities
$
384,865
302,193
Loans, net of unearned income
456,984
464,274
Allowance for loan losses
5,107
5,308
Total assets
1,036,232
942,887
Total deposits
923,462
829,810
Total stockholders’ equity
106,043
105,299
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5250
Table 43
 
- Average Balances
 
Balances and Net Interest Income Analysis
Quarter ended June 30,March 31,
2022
2021
2020
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)
$
462,319440,608
$
5,1124,850
4.44%4.46%
$
470,335466,368
$
5,4945,178
4.70%4.50%
Securities - taxable
307,941374,825
1,0091,336
1.31%1.45%
226,585289,981
1,056949
1.87%1.33%
Securities - tax-exempt (2)
62,64160,272
562531
3.60%3.57%
64,74863,050
603572
3.75%3.68%
Total securities
 
370,582435,097
1,5711,867
1.70%1.74%
291,333353,031
1,6591,521
2.29%1.75%
Federal funds sold
36,57073,575
1131
0.12%0.17%
31,67332,809
1612
0.20%0.15%
Interest bearing bank deposits
72,14483,161
1732
0.09%0.16%
51,35270,350
1116
0.09%
Total interest-earning assets
941,6151,032,441
$
6,7116,780
2.86%2.66%
844,693922,558
$
7,1806,727
3.42%2.96%
Cash and due from banks
14,82415,105
13,36113,880
Other assets
48,60266,861
35,66644,446
Total assets
$
1,005,0411,114,407
$
893,720980,884
Interest-bearing liabilities:
Deposits:
 
 
NOW
$
174,138200,907
$
4557
0.10%0.12%
$
154,225172,055
$
13866
0.36%0.16%
Savings and money market
286,477345,549
150172
0.21%0.20%
231,571281,844
263172
0.46%0.25%
Time deposits
159,347159,785
419356
1.05%0.90%
165,922159,466
580428
1.41%1.09%
Total interest-bearing deposits
619,962706,241
614585
0.40%0.34%
551,718613,365
981666
0.72%0.44%
Short-term borrowings
3,3703,943
45
0.50%
1,4283,161
24
0.50%
Total interest-bearing liabilities
623,332710,184
$
618590
0.40%0.34%
553,146616,526
$
983670
0.71%0.44%
Noninterest-bearing deposits
274,795297,153
 
230,663249,829
 
Other liabilities
2,3232,577
5,0915,639
Stockholders' equity
104,591104,493
 
104,820108,890
 
Total liabilities and
stockholders' equity
$
1,005,0411,114,407
$
893,720980,884
Net interest income and margin (tax-equivalent)
$
6,0936,190
2.60%2.43%
$
6,1976,057
2.95%2.66%
 
 
 
(1) Average loan balances
are shown net of unearned income and loans on nonaccrual status
have been included
 
 
in the computation of average balances.
(2) Yields on tax-exempt securities
have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5351
Table 5
- Average
Balances and Net Interest Income Analysis
Six months ended June 30,
2021
2020
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)
$
464,332
$
10,290
4.47%
$
461,245
$
10,906
4.75%
Securities - taxable
299,011
1,958
1.32%
211,503
2,167
2.06%
Securities - tax-exempt (2)
62,844
1,134
3.64%
62,822
1,176
3.76%
Total securities
361,855
3,092
1.72%
274,325
3,343
2.45%
Federal funds sold
34,700
23
0.13%
30,716
109
0.71%
Interest bearing bank deposits
71,252
33
0.09%
50,365
197
0.79%
Total interest-earning assets
932,139
$
13,438
2.91%
816,651
$
14,555
3.58%
Cash and due from banks
14,355
13,773
Other assets
46,446
35,798
Total assets
$
992,940
$
866,222
Interest-bearing liabilities:
Deposits:
NOW
$
173,102
$
111
0.13%
$
151,785
$
326
0.43%
Savings and money market
284,174
321
0.23%
226,240
516
0.46%
Time deposits
159,406
848
1.07%
166,685
1,180
1.42%
Total interest-bearing deposits
616,682
1,280
0.42%
544,710
2,022
0.75%
Short-term borrowings
3,266
8
0.50%
1,394
4
0.50%
Total interest-bearing liabilities
619,948
$
1,288
0.42%
546,104
$
2,026
0.75%
Noninterest-bearing deposits
262,381
213,505
Other liabilities
3,882
4,423
Stockholders' equity
106,729
102,190
Total liabilities and
stockholders' equity
$
992,940
$
866,222
Net interest income and margin (tax-equivalent)
$
12,150
2.63%
$
12,529
3.09%
(1) Average loan balances
are shown net of unearned income and loans on nonaccrual stat
us have been included
in the computation of average balances.
(2) Yields on tax-exempt securities
have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
54
Table 6
- Loan Portfolio Composition
2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
87,933
88,687
82,585
98,244
87,754
Construction and land development
37,477
30,332
33,514
31,651
32,967
Commercial real estate
242,845
254,731
255,136
250,992
250,588
Residential real estate
82,164
82,848
84,154
85,054
85,825
Consumer installment
7,762
6,524
7,099
7,731
8,631
Total loans
458,181
463,122
462,488
473,672
465,765
Less:
unearned income
(1,197)
(1,243)
(788)
(1,219)
(1,491)
Loans, net of unearned income
456,984
461,879
461,700
472,453
464,274
Less: allowance for loan losses
(5,107)
(5,682)
(5,618)
(5,575)
(5,308)
Loans, net
$
451,877
456,197
456,082
466,878
458,966
55
Table 7
- Allowance for Loan Losses and Nonperforming Assets
2021
2020
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Allowance for loan losses:
Balance at beginning of period
$
5,682
5,618
5,575
5,308
4,867
Charge-offs:
Commercial and industrial
—
—
(4)
—
(3)
Residential real estate
(1)
—
—
—
—
Consumer installment
—
(5)
(1)
(4)
(28)
Total charge
-offs
(1)
(5)
(5)
(4)
(31)
Recoveries
26
69
48
21
22
Net recoveries (charge-offs)
25
64
43
17
(9)
Provision for loan losses
(600)
—
—
250
450
Ending balance
$
5,107
5,682
5,618
5,575
5,308
as a % of loans
1.12
%
1.23
1.22
1.18
1.14
as a % of loans (excluding PPP loans)
1.17
%
1.31
1.27
1.28
1.24
as a % of nonperforming loans
813
%
726
1,052
1,015
783
Net (recoveries) charge-offs as % of avg. loans
(a)
(0.02)
%
(0.06)
(0.04)
(0.01)
0.01
Nonperforming assets:
Nonaccrual loans
$
628
783
534
549
678
Total nonperforming assets
$
628
783
534
549
678
as a % of loans and other real estate owned
0.14
%
0.17
0.12
0.12
0.15
as a % of total assets
0.06
%
0.08
0.06
0.06
0.07
Nonperforming loans as a % of total loans
0.14
%
0.17
0.12
0.12
0.15
Accruing loans 90 days or more past due
$
—
—
21
71
49
(a) Net recoveries (charge-offs) are annualized.
56
Table 8
 
- Allocation of Allowance for Loan Losses
2022
2021
2020
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
774
17.1
$
857
18.3
$
816
17.4
$
829
19.2
$
828
19.1
$
807
17.9
$
798
20.7
$
679
18.8
Construction and land
 
development
508
7.7
518
7.1
590
7.7
639
8.2
551
6.5
594
7.2
582
6.7
613
7.1
Commercial real estate
2,536
54.8
2,739
56.2
2,823
55.6
2,704
53.0
3,259
55.1
3,169
55.2
3,120
53.0
2,915
53.8
Residential real estate
737
18.4
739
16.9
799
17.7
838
17.9
951
17.9
944
18.2
954
18.0
954
18.4
Consumer installment
103
2.0
86
1.5
91
1.6
97
1.7
93
1.4
104
1.5
121
1.6
147
1.9
Total allowance for loan losses
$
4,658
$
4,939
$
5,119
$
5,107
$
5,682
$
5,618
$
5,575
$
5,308
* Loan balance in each category expressed as a percentage of total loans.
 
 
 
 
 
 
 
 
 
 
5752
Table 95
 
- CDs and Other– Estimated Uninsured Time Deposits of $100,000by Maturity
 
or More
(Dollars in thousands)
June 30, 2021March 31, 2022
Maturity of:
3 months or less
$
21,5871,603
Over 3 months through 6 months
22,64017,746
Over 6 months through 12 months
21,07217,917
Over 12 months
40,6934,185
Total CDs and otherestimated uninsured
 
time deposits of $100,000 or more
$
105,99241,451
5853
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
“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
 
and operation of its disclosure controls and procedures
(as (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
 
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
 
control over financial reporting that occurred during the period
covered by this report
that have materially affected, or are reasonably likely to materially
 
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
 
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
 
Annual Report on Form 10-K for the
year ended December 31, 2020.2021.
 
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
 
Report on Form 10-K for the year ended December 31,
2020, 2021,
which could materially affect our business, financial condition
 
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 is expected
to continue to affect mortgage originations
and income and the market values of our securities portfolio.
These could also affect our deposit, costs and mixes, and
change consumer savings and payment behaviors.
Additional risks and uncertainties not currently known to us or that
we
that we currently deem to be immaterial also may materially
adversely affect our
business, financial condition, and/or operating
operating results in the future.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5954
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
The Company’s repurchases of its common stock
 
stock during the secondfirst quarter of 20212022 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)
AprilJanuary 1 - April 30, 2021January 31, 2022
2,477—
$
35.84—
2,477—
$
4,911,2353,380,597
MayFebruary 1 - May 31, 2021February 28, 2022
18,0343,559
36.6633.33
18,0343,559
4,250,0483,261,979
JuneMarch 1 - June 30, 2021March 31, 2022
—
—
—
4,250,0483,261,979
Total
20,5113,559
36.5633.33
20,5113,559
4,250,0483,261,979
(1)
 
On March 9, 2021, the Company adopted a $5 million stock repurchase program which the Company had $3.3 remaining
at March 31, 2021 when the program expired.
On April 12, 2022, the Company adopted a new $5 million stock repurchase program that become
became effective April 1, 2021.
12, 2022.
ITEM 3.
 
DEFAULTS
 
UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
 
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
 
OTHER INFORMATION
Not applicable.
 
 
 
6055
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.
 
 
 
 
 
SIGNATURES
Pursuant to the
 
the requirements
of the
 
Securities Exchange Act
 
Act of
1934, the
 
registrant has duly
 
duly caused
this report
 
to
be signed on its behalf by the undersigned thereunto duly authorized.
AUBURN NATIONAL
 
BANCORPORATION,
 
INC.
 
(Registrant)
Date:
 
July 30, 2021May 5, 2022
 
By:
 
/s/ Robert W.
 
Dumas
 
Robert W.
 
Dumas
Chairman, President and CEO
Date:
 
July 30, 2021May 5, 2022
 
By:
 
/s/ David A. Hedges
 
David A. Hedges
Executive Vice President and Chief Financial
 
Chief Financial Officer