SUCCESS
&SERVICE
IN C HALLENGIN G TIM E S
A U B U R N N AT I O N A L B A N C O R P O R AT I O N , I N C .
2 0 1 3 A N N U A L R E P O R T
SUCCESS
&SERVICE
IN CH ALLEN GI NG TI M E S
A U B U R N N A T I O N A L B A N C O R P O R A T I O N , I N C .
2 0 1 3 A N N U A L R E P O R T
TO OUR SHAREHOLDERS
AND FRIENDS
The last few years have been trying for the banking industry as
a whole. Recession, declining credit quality, a troubled housing
market, reserve requirements, and modest loan demand have all
been a challenge.
AuburnBank has been tested by these factors, but, through the
efforts of our officers and staff, and with the support of our
directors we have met the test and your bank is doing well.
We have always believed that credit issues and other problems
needed prompt resolution and we have made some difficult
decisions. As a result our reserves are strong, our loans are
performing in a timely manner and we reported record earnings in
2013. This report details results that include earnings of $1.95 per
share compared to $1.86 per share for the prior year.
We were founded in 1907 because the citizens of Auburn and this
area needed their own, local bank. From that beginning we have
been dedicating our time, our resources, and our skills to our
local communities. We are here for our customers. We take care
of your money and we are here to help when you need additional
resources.
Thanks for allowing us to help you as an owner and as a customer
of our bank. Remember, we are here for you.
E.L. Spencer, Jr.
Chairman, Board of Directors
AuburnBank and ANBC
CORPORATE PROFILE
I am pleased to report that 2013 was a record earnings year for
AuburnBank. Net income of $7.1 million or $1.95/per share was
reported for the full year. This represents a 5% increase over net
earnings for the year 2012. In addition to record earnings for the
year, the Bank also continued to improve its credit quality, increase
capital, reduce non-core funding, control our non-interest expense,
and increase our annual dividend to shareholders. By reducing
our higher cost borrowings by approximately $35 million in 2013,
we improved our net interest income and positively improved the
overall funding mix.
On behalf of the entire AuburnBank family, I would like to thank our
customers and our shareholders for making 2013 a special year.
In the regulatory environment that we operate in, I would like
to congratulate and commend our officers and staff on their
commitment to providing top quality customer service and for
their active involvement in many worthy community service
organizations.
As we move into our 107th year of operation, we look forward
to providing the financial products and services that all of our
customers need and desire. We extend our deepest gratitude
for your support and for your business and we look forward to
continuing to be your partner, neighbor and friend in 2014.
Robert W. Dumas
President and CEO
AuburnBank
SUCCESS&SERVICE
IN CHALLENGING TIMES
the past five years of challenging economic times, it is
In order to understand AuburnBank’s success during
important to look back at the very beginning of Auburn’s
only remaining chartered financial institution.
When Shel Toomer and a few supporters started The Bank
of Auburn, they believed in several founding principles. The
bank was organized to serve its citizens, the community
and the college. From the very beginning, AuburnBank was
focused on providing a safe place for customers to keep their
money. In return, the bank would help the community by
making loans to individuals, businesses, the city, and the
TOP 200
COMMUNITY
BANK
IN THE NATION
FOR SEVEN OF LAST EIGHT YEARS
according to American Banker
{ }
magazine based on average return
on equity for a three year period.
RECORD
NET EARNINGS
OVER $7 MILLION
I N 2 0 1 3
college, in order to allow local businesses to grow
its overall earnings, earnings per share, capital,
and expand and to assist individuals with their
dividends and maintain its asset quality. These
financial needs.
If we fast forward to the time-frame of 2009 – 2013,
102 years from the beginning of AuburnBank, the
same principles that the original founders believed
in are still guiding the leading financial institution
in East Alabama. Because AuburnBank is still a
community bank—a bank that cares—and because
the bank believes in providing all customers with
top quality service, the bank has continued to
prosper even during tough economic times. Since
are pretty good results when property values were
falling and not many businesses were expanding.
The desire to understand customer needs and then
provide sound prudent solutions to those needs are
skills required in order to help customers succeed.
Yes, 2013 was a record earnings year for AuburnBank,
but the results would not have been possible without
the vision of our founders and the leadership and
management of its current Board of Directors and
the entire AuburnBank team.
2009, AuburnBank has continued to meet the
On behalf of the AuburnBank family, thank you to
financial needs and desires of its customers in the
our shareholders and customers for believing and
communities it serves. In addition, for the past
trusting in a bank that has a conscience to do what
five years, AuburnBank has been able to increase
is right for its customers and its community.
EIGHTEEN
OUT OF THE LAST
NINETEEN
YEARS
DIVIDENDS
TO SHAREHOLDERS
HAVE INCREASED
They never declined
{ }
during the recession.
OVER $745
MILLION
in Home Loans
F R O M 2 0 0 9 T O 2 0 1 3
#1 IN MORTGAGE ORIGINATION
MARKET SHARE IN LEE COUNTY
Source: SNL Financial. Data originally
sourced to the Home Mortgage Disclosure
Act data compiled annually by the FFIEC.
Most recent market share data from 2012.
30%
MARKET
SHARE
FOR DEPOSITS
(OVER $600 MILLION)
# 1 OF 17 BANKS
IN LEE COUNTY
Source: FDIC Summary of Deposits.
Data as of June 30, 2013.
INCREASES
IN EARNINGS
PER SHARE
FOR FIVE
CONSECUTIVE
YEARS
SINCE 2009
A TIME OF GROWTH
Opened Bent Creek
Branch in Auburn.
New Super Six Drive-Thru
opens at main branch.
New branch in
Valley, Alabama
opens.
Main Office
campus
improvements.
2009
2010
2011
2012
COMMUNITY
SERVICE
Active involvement in community proj-
ects and charitable and civic organizations
has always been a part of AuburnBank’s
core values. The bank continues to support
numerous worthy causes along with many
individuals of the AuburnBank family who
also contribute to many worthwhile com-
munity organizations and projects.
Just like our record-breaking earnings in
2013, our employees also set a new record
in our giving to the Lee County United
Way. This is just one of the many ways
that our organization gives back to sup-
port the communities that we serve. Take
a look around our community and you
will find the AuburnBank team volunteer-
ing and extending a helping hand to make
a difference in our friends’ and neighbors’
well-being.
Main Office
campus
improvements.
2013
Sara Beth Carrington (left) and Mellissa Stevens (right) donate during a recent blood drive.
David Warren and Leigh Ann Thompson were
an integral part of AuburnBank’s United Way drive.
A TIME OF GROWTH
AUBURN NATIONAL BANCORPORATION, INC.
AND AUBURNBANK BOARD OF DIRECTORS
Seated left to right: J. Tutt Barrett, William F. Ham, Jr., E.L. Spencer, Jr., Robert W. Dumas, and Anne M. May
Standing: David E. Housel, Edward Lee Spencer, III, Terry W. Andrus, C. Wayne Alderman, and J.E. Evans
Terry W. Andrus
President, East Alabama
Medical Center
C. Wayne Alderman
Secretary to ANBC
Dean of Enrollment Services and
former Dean, College of Business,
Auburn University
J. Tutt Barrett
Attorney, Dean and Barrett
Robert W. Dumas
President & CEO, AuburnBank
J.E. Evans
Owner, Evans Realty
William F. Ham, Jr.
Mayor, City of Auburn
& Owner, Varsity Enterprises
David E. Housel
Director of Athletics Emeritus,
Auburn University
Anne M. May
Partner, Machen, McChesney
& Chastain, CPAs
E.L. Spencer, Jr.
Chairman, AuburnBank
and ANBC, Business Owner
Edward Lee Spencer, III
Investor
AUBURNBANK OFFICERS
E.L. Spencer, Jr.
Chairman
Robert W. Dumas
President & Chief
Executive Officer
Jo Ann Hall
Executive Vice President,
Chief Operations Officer/
Chief Risk Officer
Vernon C. Bice, Jr.
Senior Vice President
Residential Real Estate
Terrell E. Bishop
Senior Vice President,
Senior Mortgage Loan Officer
City President, Valley Branch
James E. Dulaney
Senior Vice President,
Business Development/Marketing
W. Thomas Johnson
Senior Vice President,
Senior Lender
Marla Kickliter
Senior Vice President,
Compliance/Internal Audit
Shannon O’Donnell
Senior Vice President,
Credit Administration
Jerry Siegel
Senior Vice President, IT/IS
Chief Technology Officer
C. Eddie Smith
Senior Vice President,
City President, Opelika Branch
Bob R. Adkins
Vice President,
Commercial/Consumer Loans
Patty Allen
Vice President,
Commercial/Consumer Loans
Scottie Arnold
Vice President,
Retail Internet/
Operations Officer
Kris Blackmon
Vice President,
Asset/Liability Manager
Chief Investment Officer
Susan K. McChesney
Vice President, IT/IS
Assistant Chief
Technology Officer
S. Mark Bridges
Vice President,
Commercial/Consumer Loans
James R. Pack
Vice President,
Financial Reporting
Laura Carrington
Vice President,
Human Resource Officer
Kathy Crawford
Vice President,
Commercial/Consumer Loans
Bruce Emfinger
Vice President,
Commercial/Consumer Loans
David Hedges
Vice President, Controller
and CFO
Ginnie Y. Lunsford
Vice President,
Consumer Loans/
Loan Operations
Cyndee Redmond
Vice President, Operational
Coordinator for Electronic
Products and Services
John P. Ronan
Vice President,
Commercial/Consumer Loans
Robert Smith
Vice President,
Commercial/Consumer Loans
David Warren
Vice President,
Commercial/Consumer Loans
Barbara Wilcox
Vice President, Security and
Bank Secrecy Act Officer
Suzanne Gibson
Assistant Vice President,
Portfolio Management Officer
Charlotte Lang
Assistant Bank Secrecy Act Officer
and Operations Officer
Woody Odom
Assistant Vice President, IT/IS
Marcia Otwell
Shareholder Relations and
Administrative Officer
Jeff Stewart
Assistant Vice President,
Consumer Loan Officer
Christy A. Fogle
Assistant Vice President,
Loan Review Officer
Sam S. Rainer
Marketing Officer
OPELIKA BRANCH ADVISORY BOARD
Seated left to right: C. Eddie Smith and Sherrie M. Stanyard
Standing: William G. Dyas, William H. Brown, Robert G. Young,
William P. Johnston, and Doug M. Horn
Not pictured: R. Kraig Smith, M.D.
VALLEY BRANCH ADVISORY BOARD
Seated left to right: Valerie G. Gray, Terrell E. Bishop, and H. David Ennis, Sr.
Standing: Roy W. McClendon, Jr., Claud E. (Skip) McCoy, Jr., Frank P. Norman and John H. Hood, II
William H. Brown
President, Brown Agency, Inc.
William G. Dyas
Businessman
Doug M. Horn
Owner, Doug Horn Roofing
& Contracting Co.
William P. Johnston
President, J & M Bookstore
C. Eddie Smith
President,
AuburnBank of Opelika
R. Kraig Smith, M.D.
Lee OBGYN
Sherrie Murphy Stanyard
Senior Account Manager,
Craftmaster Printers, Inc.
Robert G. Young
Vice President, Sales
Young's Plant Farm, Inc.
Terrell E. Bishop
Senior Vice President,
Senior Mortgage Loan Officer
City President, Valley Branch
H. David Ennis, Sr.
President, Novelli-Ennis & Company, CPAs
Valerie G. Gray
Executive Director of the Chambers County
Development Authority
John H. Hood, II
Pharmacist, Hood’s Pharmacy
Roy W. McClendon, Jr.
Retired Pharmacist
Claud E. (Skip) McCoy, Jr.
Attorney, Johnson, Caldwell
& McCoy Law Firm
Frank P. Norman
Owner, Johnny’s New York Style Pizza
and WingStop
FINANCIAL HIGHLIGHTS
Auburn National Bancorporation, Inc.
Financial Highlights
(Dollars in thousands, except per share data)
Earnings
Net Interest Income
Provision for Loan Losses
Net Earnings
Per Share:
Net Earnings
Cash Dividends
Book Value
Shares Issued
Weighted Average Shares Outstanding
Financial Condition
Total Assets
Loans, net of unearned income
Investment Securities
Total Deposits
Long Term Debt
Stockholders’ Equity
Selected Ratios
Return on Average Total Assets
Return on Average Total Equity
Average Stockholders’ Equity to Average Assets
Allowance for Loan Losses as a % of Loans
Loans to Total Deposits
For the Years Ended December 31,
2013
2012
2011
2010
2009
$20,922
$20,897
$19,225
$18,899
$18,815
400
7,118
1.95
0.84
17.70
3,815
6,763
1.86
0.82
19.26
2,450
5,538
1.52
0.80
17.96
3,580
5,346
1.47
0.78
15.47
5,250
2,404
0.66
0.76
15.42
3,957,135
3,643,003
3,957,135
3,957,135
3,957,135
3,642,831
3,642,735
3,642,851
3,957,135
3,644,691
751,343
383,339
271,219
668,844
12,217
64,485
0.94%
10.33%
9.07%
1.37%
57.31%
759,833
398,193
259,475
636,817
47,217
70,149
0.90%
9.85%
9.09%
1.69%
776,218
370,263
299,582
619,552
85,313
65,416
0.72%
9.10%
7.89%
1.87%
763,829
374,215
315,220
607,127
93,331
56,368
0.68%
9.00%
7.61%
2.05%
$773,382
376,103
334,762
579,409
118,349
56,183
0.31%
4.23%
7.21%
1.73%
62.53%
59.76%
61.64%
64.91%
Table of Contents
Financial Section
Auburn National Bancorporation, Inc. 2013 Annual Report
BUSINESS INFORMATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL TABLES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
STOCK PERFORMANCE GRAPH
CORPORATE INFORMATION
2
3 – 22
23 – 32
33
34
35
36
37
38
39
40 – 75
77
Inside Back Cover
Forward-Looking Statements
SPECIAL CAUTIONARY NOTE 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,” “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, (i) the effects of future economic, business and
market conditions and changes, domestic and foreign, including seasonality; (ii) governmental monetary and fiscal policies;
(iii)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; (iv) changes in accounting policies, rules and practices; (v) the risks of changes in interest rates on the levels,
composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest
sensitive assets and liabilities, and the risks and uncertainty of the amounts realizable and the timing of dispositions of
assets by the FDIC where we may have a participation or other interest; (vi) changes in borrower credit risks and payment
behaviors; (vii) 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; (viii) changes in the prices, values and sales volumes of
residential and commercial real estate; (ix) the effects of competition from a wide variety of local, regional, national and
other providers of financial, investment and insurance services; (x) the failure of assumptions and estimates underlying the
establishment of reserves for possible loan losses and other estimates; (xi) 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; (xii) changes in technology or products that may be more difficult, costly, or less effective
than anticipated; (xiii) the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect
general economic conditions; (xiv) the failure of assumptions and estimates, as well as differences in, and changes to,
economic, market and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those
used in our loan portfolio stress test; (xv) the risks that our deferred tax assets could be reduced if estimates of future
taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital
stock could trigger a reduction in the amount of net operating loss carry-forwards that we may be able to utilize for income
tax purposes; and (xvi) other factors and risks described under “Risk Factors” herein and in any of our subsequent reports
that we make with the Securities and Exchange Commission (the “Commission” or “SEC”) under the Exchange Act.
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. A more detailed description of these and other risks is contained in the Company’s 2013 Annual Report on Form 10-
K and in any of our subsequent reports that we make with the Securities and Exchange Commission (the “Commission” or
“SEC”) under the Exchange Act.
page 1
Business Information
BUSINESS INFORMATION
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, regulations and rules. The holding company structure also
provides greater financial and operating flexibility than is presently permitted to the Bank.
The Company’s principal executive offices are located at 100 N. Gay Street, Auburn, Alabama 36830, and its
telephone number at such address is (334) 821-9200. The Company maintains an Internet website at
www.auburnbank.com. The Company’s website and the information appearing on the website are not included or
incorporated in, and are not part of, this report. The Company files annual, quarterly and current reports, proxy statements,
and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public
reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the operation of the public reference rooms. The SEC maintains an Internet site that contains reports, proxy,
and other information. Our SEC filings are also available to the public free of charge from the SEC’s web site at
www.sec.gov.
Services
The Bank offers checking, savings, transaction deposit accounts and certificates of deposit, and is an active
residential mortgage lender in its primary service area. The Bank’s primary service area includes the cities of Auburn and
Opelika, Alabama and nearby surrounding areas in East Alabama, primarily in Lee County. The Bank also offers
commercial, financial, agricultural, real estate construction and consumer loan products and other financial services. The
Bank is one of the largest providers of automated teller services in East Alabama and operates ATM machines in 13
locations in its primary service area. The Bank offers Visa® Checkcards, which are debit cards with the Visa logo that work
like checks but can be used anywhere Visa is accepted, including ATMs. The Bank’s Visa Checkcards can be used
internationally through the Cirrus® network. The Bank offers online banking and bill payment services through its Internet
website, www.auburnbank.com.
Loans and Loan Concentrations
The Bank makes loans for commercial, financial and agricultural purposes, as well as for real estate mortgages, real
estate acquisition, construction and development and consumer purposes. While there are certain risks unique to each type
of lending, management believes that there is more risk associated with commercial, real estate acquisition, construction
and development, agricultural and consumer lending than with residential real estate mortgage loans. To help manage these
risks, the Bank has established underwriting standards used in evaluating each extension of credit on an individual basis,
which are substantially similar for each type of loan. These standards include a review of the economic conditions
affecting the borrower, the borrower’s financial strength and capacity to repay the debt, the underlying collateral and the
borrower’s past credit performance. We apply these standards at the time a loan is made and monitor them periodically
throughout the life of the loan. See “Legislative and Regulatory Changes” for a discussion of regulatory guidance on
commercial real estate lending.
The Bank has loans outstanding to borrowers in all industries within its primary service area. Any adverse economic
or other conditions affecting these industries would also likely have an adverse effect on the local workforce, other local
businesses, and individuals in the community that have entered into loans with the Bank. The auto manufacturing business
and its suppliers have positively affected our local economy, but automobile manufacturing is cyclical and adversely
affected by increases in interest rates. Decreases in automobile sales, including adverse changes due to interest rate
increases, could adversely affect the Kia and Hyundai plants and their suppliers' local spending and employment, and could
adversely affect economic conditions in the markets we serve. However, management believes that due to the diversified
mix of industries located within the Bank’s primary service area, adverse changes in one industry may not necessarily affect
other area industries to the same degree or within the same time frame. The Bank’s primary service area also is subject to
both local and national economic conditions and fluctuations. While most loans are made within our primary service area,
some residential mortgage loans are originated outside the primary service area, and the Bank from time to time has
purchased loan participations from outside its primary service area.
page 2
Management’s Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of our financial condition at December 31, 2013 and 2012 and our results of operations
for the years ended December 31, 2013, 2012, and 2011. The purpose of this discussion is to provide information about our
financial condition and results of operations which is not otherwise apparent from the consolidated financial statements.
The following discussion and analysis should be read along with our consolidated financial statements and the related notes
included elsewhere herein. In addition, this discussion and analysis contains forward-looking statements, so you should
refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding Forward-Looking Statements”.
OVERVIEW
The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding
company after it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the
Company's principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and
has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank
conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-
service branches in Auburn, Opelika, Hurtsboro, Notasulga and Valley, Alabama. In-store branches are located in the
Kroger and Wal-Mart SuperCenter stores in both Auburn and Opelika. The Bank also operates commercial loan production
offices in Montgomery and Phenix City, Alabama.
Summary of Results of Operations
(Dollars in thousands, except per share data)
Net interest income (a)
Less: tax-equivalent adjustment
Net interest income (GAAP)
Noninterest income
Total revenue
Provision for loan losses
Noninterest expense
Income tax expense
Net earnings
Year ended December 31
2013
22,362
1,440
20,922
7,298
28,220
400
18,412
2,290
7,118
1.95
$
$
$
2012
22,539
1,642
20,897
10,483
31,380
3,815
19,383
1,419
6,763
1.86
$
$
$
2011
20,944
1,719
19,225
5,177
24,402
2,450
16,357
57
5,538
1.52
$
$
$
Basic and diluted earnings per share
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
The Company’s net earnings were $7.1 million, or $1.95 per share, for the full year 2013, compared to $6.8 million,
or $1.86 per share, for the full year 2012.
Net interest income (tax-equivalent) was $22.4 million for the full year 2013, compared to $22.5 million for the full
year 2012. Although net interest income (tax-equivalent) declined slightly, continued improvement in the Company’s
funding mix and cost of funds largely offset declining yields on earning assets.
The provision for loan losses was $0.4 million for the full year 2013, compared to $3.8 million for the full year 2012.
The decrease in the provision for loan losses was primarily due to a decline in net charge-offs and improvement in the
overall credit quality of the loan portfolio, including lower levels of adversely classified and nonperforming loans. Net
charge-offs were $1.9 million, or 0.48% of average loans, for the full year 2013, compared to $4.0 million, or 1.03% of
average loans, for the full year 2012. This decrease was primarily due to a decline in net charge-offs for commercial real
estate loans. In 2012, net charge-offs were impacted by a few individually significant charge-offs, including $3.1 million
related to three borrowing relationships.
page 3
Management’s Discussion and Analysis
Noninterest income was $7.3 million in 2013, compared to $10.5 million in 2012. The decrease was primarily due to
a non-recurring gain of $3.3 million realized in 2012 when the Company sold its interests in three affordable housing
limited partnerships and a decrease in mortgage lending income of $0.6 million as rising rates negatively impacted
refinance activity. These decreases were partially offset by a $1.0 million gain on sale of premises and equipment realized
in 2013 when the Company sold certain real property in downtown Auburn that was no longer used for Company
operations and was fully leased to third party tenants.
Noninterest expense was $18.4 million in 2013, compared to $19.4 million in 2012. The decrease was primarily due
to a decrease in prepayment penalties on long-term debt of $0.7 million. During 2013, the Company repaid $35.0 million
long-term debt with a weighted average interest rate of 3.46% and incurred prepayment penalties of $3.0 million. During
2012, the Company repaid $38.0 million of long-term debt with a weighted average interest rate of 4.26% and incurred
prepayment penalties of $3.7 million.
Income tax expense for the full year 2013 was $2.3 million, compared to $1.4 million for the full year 2012. The
Company’s effective income tax rate was 24.34% for the full year 2013, compared to 17.34% for the full year 2012. In
addition to a 15% increase in the level of earnings before taxes, the Company’s effective tax rate increased because the
Company’s annualized effective tax rate for 2012 was reduced by the reversal of a $0.5 million deferred tax valuation
allowance related to capital loss carry-forwards.
In 2013, the Company paid cash dividends of $3.1 million, or $0.84 per share. The Company remains well capitalized
under current regulatory guidelines with a total risk-based capital ratio of 18.40%, a tier one risk-based capital ratio of
17.19%, and a tier one leverage capital ratio of 10.10% at December 31, 2013.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting
principles and with general practices within the banking industry. In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our
assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements, the valuation of
other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position
and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our
financial position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The
level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset
quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay
(including the timing of future payment), the estimated value of any underlying collateral, composition of the loan
portfolio, economic conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory
recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and
timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans
are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan
may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant
to the terms of the loan is unlikely.
The Company deems loans impaired when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts
due according to the contractual terms means that both the interest and principal payments of a loan will be collected as
scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan.
The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected
future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, 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.
page 4
In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and
independent loan review processes. The Company’s loan review process assists in determining whether there are loans in
the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio.
The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers,
and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company
incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all
amounts due according to the contractual terms of a loan.
As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five
segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and
consumer installment 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 December 31, 2013 and 2012, and for the years then ended, the Company adjusted its historical loss rates for
the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of
probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors
is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated
probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based
upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic
conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing
factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance
allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of
these factors.
The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2013, the
Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical
loss factors are calculated. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a
rolling 6 quarter historical period. Beginning with the quarter ended June 30, 2013, the Company calculated average losses
for all loan segments (except for the commercial real estate loan segment) using a rolling 8 quarter historical period in order
to better capture the effects of the current economic cycle on the Company’s loan loss experience and continued this
methodology through December 31, 2013. Based upon management’s review of charge-off trends for each loan segment,
the Company continues to calculate average losses for the commercial real estate loan segment using a rolling 6 quarter
historical period. Other than the changes discussed above, the Company has not made any changes to its calculation of
historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the
periods included in the accompanying consolidated balance sheets and statements of earnings.
Assessment for Other-Than-Temporary Impairment of Securities
On a quarterly basis, management makes an assessment to determine whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity
securities with an unrealized loss, the Company considers many factors including the severity and duration of the
impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value;
and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to
be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains
(losses).
For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the
Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the
debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized
cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that 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
page 5
Management’s Discussion and Analysis
Management’s Discussion and Analysis
other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized
cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair
value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in
other comprehensive income, net of applicable taxes.
Fair Value Determination
U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value,
including investments classified as available-for-sale and derivatives. ASC 820, Fair Value Measurements and Disclosures,
which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands
disclosures about fair value measurements. For more information regarding fair value measurements and disclosures,
please refer to Note 17, 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 may lack an available or
comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,
prepayments, market volatility and other factors, taking into account current observable market data and experience.
These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related
income and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could
result in materially different net earnings and retained earnings results.
Other Real Estate Owned
Other real estate owned (“OREO”), consists of properties obtained through foreclosure or in satisfaction of loans and
is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as a
charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are
determined on a specific property basis and are included as a component of other noninterest expense along with holding
costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and
complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates
can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds
realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to
determine the fair value of other OREO.
Deferred Tax Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-
likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three
years and projections for future taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the we will realize the benefits of these deductible differences at
December 31, 2013. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of
future taxable income are reduced.
page 6
Average Balance Sheet and Interest Rates
(Dollars in thousands)
Loans and loans held for sale
Securities - taxable
Securities - tax-exempt (a)
Total securities
Federal funds sold
Interest bearing bank deposits
Total interest-earning assets
Deposits:
NOW
Savings and money market
Certificates of deposits less than $100,000
Certificates of deposits and other
time deposits of $100,000 or more
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Year ended December 31
2013
2012
2011
Average
Yield/
Average
Yield/
Average
Yield/
$
$
Balance
390,288
195,850
67,797
263,647
48,671
5,634
708,240
Rate
5.28%
2.00%
6.25%
3.09%
0.22%
0.75%
4.08%
Balance
395,938
199,794
77,447
277,241
27,466
Rate
5.54%
1.94%
6.24%
3.14%
0.20%
793 —
4.38%
701,438
101,034
171,413
105,631
0.32%
0.52%
1.36%
99,664
153,668
108,726
0.35%
0.56%
1.63%
155,781
533,859
2,817
31,518
568,194
22,362
1.77%
1.01%
0.50%
3.59%
1.15%
3.16%
161,128
523,186
2,970
49,115
575,271
22,539
2.08%
1.21%
0.54%
3.73%
1.42%
3.21%
Balance
376,000
223,638
79,329
302,967
28,905
1,394
709,266
Rate
5.67%
2.69%
6.37%
3.65%
0.19%
0.05%
4.57%
90,565
138,428
114,490
0.58%
0.72%
1.95%
181,242
524,725
2,423
86,899
614,047
20,944
2.38%
1.54%
0.50%
3.91%
1.87%
2.95%
$
$
Net interest income and margin (a)
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
$
$
RESULTS OF OPERATIONS
Net Interest Income and Margin
2013 vs. 2012 comparison
Net interest income (tax-equivalent) was $22.4 million in 2013, compared to $22.5 million in 2012. Although net
interest income (tax-equivalent) declined slightly, management continues to seek to increase earnings by growing the
Company’s loan portfolio (in total and as a percentage of earning assets), focusing on deposit pricing, and repaying higher-
cost wholesale funding sources. These efforts to increase earnings were offset by management’s decision to reduce the
Company’s securities portfolio as a percentage of total interest earning assets and carry higher levels of short-term interest
earning assets (e.g. federal funds sold) during 2013. As a result, the Company’s net interest margin (tax-equivalent)
declined to 3.16% in 2013, compared to 3.21% in 2012.
The tax-equivalent yield on total interest-earning assets decreased by 30 basis points in 2013 from 2012 to 4.08%.
The decrease was primarily due to the shift in our asset mix described above and increased pricing competition for quality
loan opportunities in our markets, which has limited the Company’s ability to increase loans, generally, and to increase the
yields on new and renewed loans, over the last several quarters.
The cost of total interest-bearing liabilities decreased 27 basis points in 2013 from 2012 to 1.15%. The net decrease
was largely the result of the continued shift in our deposit mix, as we increased our lower-cost noninterest-bearing demand
deposits, interest bearing demand deposits (NOW accounts), and savings and money market accounts and concurrently
reduced balances of higher-cost certificates of deposit and other higher-cost time deposits and long-term debt (i.e.
wholesale funding).
The Company continues to deploy various asset liability management strategies to manage its risk to interest rate
fluctuations. The Company’s net interest margin could experience pressure due to lower reinvestment yields in the
securities portfolio given the current interest rate environment, increased pricing competition for quality loan opportunities,
and fewer opportunities to further reduce our cost of funds due to the already low level of deposit rates currently.
page 7
Management’s Discussion and Analysis
2012 vs. 2011 comparison
Net interest income (tax-equivalent) was $22.5 million in 2012, compared to $20.9 million in 2011, as net interest
margin improvement offset a decline in average interest-earning assets of 1%. Net interest margin (tax-equivalent) was
3.21% in 2012, compared to 2.95% in 2011. The improved net interest margin reflected management’s efforts to increase
earnings by shifting the Company’s asset mix through loan growth, focusing on deposit pricing, and repaying higher-cost
wholesale funding sources. The cost of total interest-bearing liabilities decreased 45 basis points in 2012 from 2011 to
1.42%. The net decrease was largely the result of the continued shift in our deposit mix, as we increased our lower-cost
noninterest-bearing demand deposits, interest bearing demand deposits (NOW accounts), and savings and money market
accounts and concurrently reduced balances of higher-cost certificates of deposit and other higher-cost time deposits and
long-term debt (i.e. wholesale funding).
The tax-equivalent yield on total interest-earning assets decreased by 19 basis points in 2012 from 2011 to 4.38%.
This decrease was primarily driven by a 51 basis point reduction in the tax-equivalent yield on total securities to 3.14% as
reinvestment yields in the securities portfolio declined due to the continued low interest rate environment. Also, loan
pricing for creditworthy borrowers continues to be competitive in our markets and has limited the Company’s ability to
increase yields on new and renewed loans.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that, in
management’s evaluation, should be adequate to provide coverage for the probable losses on outstanding loans. The
provision for loan losses amounted to $0.4 million, $3.8 million, and $2.5 million for the years ended December 31, 2013,
2012, and 2011, respectively.
The provision for loan losses decreased in 2013 compared to 2012 primarily due to a decline in net charge-offs and
improvement in the overall credit quality of the loan portfolio, including lower levels of adversely classified and
nonperforming loans. Net charge-offs were $1.9 million, or 0.48% of average loans, in 2013, compared to $4.0 million, or
1.03% of average loans, in 2012. This decrease was primarily due to a decline in net charge-offs for commercial real estate
loans. In 2012, net charge-offs were impacted by a few individually significant charge-offs, including $3.1 million related
to three borrowing relationships.
The provision for losses increased in 2012 compared to 2011 due to an increase in net charge-offs and loan portfolio
growth. Net charge-offs were $4.0 million for 2012, compared to $3.2 million in 2011. This increase was primarily due to
an increase in net charge-offs in the commercial real estate loan portfolio of $2.7 million, which was partially offset by
declines in net charge-offs of $1.6 million and $0.4 million, respectively, in the construction and land development and
commercial and industrial loan portfolios.
Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it
believes to be appropriate to adequately cover probable losses in the loan portfolio. The Company’s allowance for loan
losses to total loans decreased to 1.37% at December 31, 2013 from 1.69% at December 31, 2012. Based upon our
evaluation of the loan portfolio, management believes the allowance for loan losses to be adequate to absorb our estimate of
probable losses existing in the loan portfolio at December 31, 2013. While our policies and procedures used to estimate the
allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are believed adequate by
management and are reviewed from time to time by our regulators, they are based on estimates and judgment and are
therefore approximate and imprecise. Factors beyond our control, such as conditions in the local and national economy, a
local real estate market or particular industry conditions exist which may negatively and materially affect our asset quality
and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.
page 8
Noninterest Income
(Dollars in thousands)
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Gain on sale of affordable housing investments
Affordable housing investment losses
Gain on sale of premises and equipment
Securities gains, net
Other
Total noninterest income
Year ended December 31
2013
930
2,895
427
—
—
1,018
651
1,377
7,298
$
$
2012
1,111
3,445
445
3,268
—
—
679
1,535
10,483
$
$
2011
1,167
1,922
460
—
(646)
—
878
1,396
5,177
$
$
The Company’s income from mortgage lending is primarily attributable to the (1) origination and sale of new
mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale
of the mortgage loans originated, origination fees, underwriting fees and other fees associated with the origination of loans,
which are netted against the commission expense associated with these originations. The Company’s normal practice is to
originate mortgage loans for sale in the secondary market and to either sell or retain the associated mortgage servicing
rights (“MSRs”) when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is
sold. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method.
Servicing fee income is reported net of any related amortization expense.
MSRs are also evaluated for impairment periodically. 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 for 2013, 2012, and 2011.
(Dollars in thousands)
Origination income
Servicing fees, net
Decrease (increase) in MSR valuation allowance
Total mortgage lending income
2013 vs. 2012 comparison
Year ended December 31
2013
2,030
479
386
2,895
$
$
2012
3,430
284
(269)
3,445
$
$
2011
1,680
359
(117)
1,922
$
$
The decrease in service charges on deposit accounts was primarily due to a decline in insufficient funds charges,
reflecting changes in customer behavior and spending patterns.
The decrease in mortgage lending income was primarily due to a decline in origination income as refinance activity
slowed. This decline was partially offset by a decrease in the valuation allowance for amortized MSRs and an increase in
net servicing fees. Changes in the valuation allowance for amortized MSRs are recognized in earnings as a component of
mortgage lending income. The decrease in the valuation allowance was primarily due to a slowing of prepayment speeds,
which increased the value of our amortized MSRs.
\
The Company recognized a gain on sale of $3.3 million related to the sale of its interests in three affordable housing
limited partnerships in January 2012. There were no such transactions in 2013.
In 2013, the Company recognized a $1.0 million gain on sale of premises and equipment when the Company sold
certain real property in downtown Auburn that was no longer used for Company operations and was fully leased to third
party tenants.
page 9
Management’s Discussion and Analysis
Net securities gains consist of realized gains and losses on the sale of securities and other-than-temporary impairment
charges. Net securities gains were $0.7 million in both 2013 and 2012. Gross realized gains of $0.8 million in 2013 were
reduced by gross realized losses of $0.1 million. Gross realized gains of $1.0 million in 2012 were reduced by gross
realized losses of $0.2 million and $0.1 million in other-than-temporary impairment charges related to trust preferred
securities. In December 2013, the Company sold all remaining trust preferred securities held by the Company for a net loss
of $0.1 million.
2012 vs. 2011 comparison
Service charges on deposit accounts were $1.1 million in 2012, compared to $1.2 million in 2011. The decrease was
primarily due to a decline in insufficient funds charges, reflecting changes in customer behavior and spending patterns.
Mortgage lending income was $3.4 million in 2012, compared to $1.9 million in 2011. A increase in the level of
mortgage refinance activity during 2012 when compared to the levels experienced during 2011 contributed to the increase
in mortgage lending income. The Company's income from mortgage lending typically fluctuates as mortgage interest rates
change and is primarily attributable to origination and sale of new mortgage loans.
The Company recognized a gain on sale of $3.3 million related to the sale of its interests in three affordable housing
limited partnerships in January 2012. Accordingly, the Company did not receive any federal tax credits related to affordable
housing partnership investments in 2012. Prior to the sale of these interests, the Company accrued its pro-rata share of
partnership losses in noninterest income. In 2011, the Company accrued approximately $0.6 million related to affordable
housing investment losses.
The net gain on securities was $0.7 million in 2012, compared to a net gain of $0.9 million in 2011. Gross realized
gains of $1.0 million in 2012 were reduced by gross realized losses of $0.2 million and other-than-temporary impairment
charges of $0.1 million related to trust preferred securities. Gross realized gains of $1.7 million in 2011 were reduced by
gross realized losses of $0.5 million and $0.3 million in other-than-temporary impairment charges related to trust preferred
securities.
Noninterest Expense
(Dollars in thousands)
Salaries and benefits
Net occupancy and equipment
Professional fees
FDIC and other regulatory assessments
Other real estate owned, net
Prepayment penalties on long-term debt
Other
Total noninterest expense
2013 vs. 2012 comparison
Year ended December 31
2013
8,788
1,335
774
512
570
3,028
3,405
18,412
$
$
2012
8,691
1,332
704
686
323
3,720
3,927
19,383
$
$
2011
8,167
1,404
735
792
2,007
—
3,252
16,357
$
$
Salaries and benefits expense increased primarily due to routine increases in salaries and wages. This increase was
largely offset by a decrease in group health insurance costs. Beginning in 2013, the Company returned to a fully insured
group health plan and was able to lower its benefits costs compared to 2012. Previously, the Company’s group health plan
was self insured.
The decrease in FDIC and other regulatory assessments expense was primarily due to a decrease in the Bank’s
quarterly assessment rate as several variables utilized by the FDIC in calculating our deposit insurance assessments
improved.
Other real estate owned expense, net was $0.6 million in 2013, compared to $0.3 million in 2012. The increase was
primarily due to realized holding losses or write-downs on the valuations of certain OREO properties. These properties
could also be subject to future valuation adjustments as a result of updated appraisal information and further deterioration in
real estate values, thus causing additional fluctuations in other real estate owned expense, net. Also, the Company will
continue to incur expenses associated with maintenance costs and property taxes associated with these assets.
page 10
During 2013, the Company repaid $35.0 million long-term debt with a weighted average interest rate of 3.46% and
incurred prepayment penalties of $3.0 million. During 2012, the Company repaid $38.0 million of long-term debt with a
weighted average interest rate of 4.26% and incurred prepayment penalties of $3.7 million.
2012 vs. 2011 comparison
Salaries and benefits expense was $8.7 million in 2012, compared to $8.2 million in 2011. The increase in 2012
when compared to 2011 reflected routine increases coupled with an increase in the number of full-time equivalent
employees due to the opening of a new branch during December 2011 in Valley, Alabama.
FDIC and other regulatory assessments expense was $0.7 million in 2012, compared to $0.8 million in 2011. The
decrease in 2012 when compared to 2011 was primarily due to the FDIC redefining the deposit insurance assessment base
effective April 1, 2011. As a result, most FDIC insured institutions with less than $10 billion in assets experienced a
reduction in their FDIC deposit insurance assessments.
Other real estate owned expense, net was $0.3 million in 2012, compared to $2.0 million in 2011. The decrease was
primarily due to a decline in realized holding losses or write-downs on the valuations of certain OREO properties. Despite
the improvement in net expenses related to OREO, these properties could also be subject to future valuation adjustments as
a result of updated appraisal information and further deterioration in real estate values, thus causing additional fluctuations
in other real estate owned expense, net. Also, the Company will continue to incur expenses associated with maintenance
costs and property taxes associated with these assets.
On January 19, 2012, the Company restructured its balance sheet by paying off $38.0 million of FHLB advances with
a weighted average interest rate of 4.26% and a weighted average duration of 2.6 years. In connection with repaying the
FHLB advances, the Company incurred a $3.7 million prepayment penalty in 2012, compared to none in 2011.
Income Tax Expense
2013 vs. 2012 comparison
Income tax expense for 2013 was $2.3 million, compared to $1.4 million in 2012. The Company’s effective income
tax rate was 24.34% in 2013, compared to 17.34% in 2012. In addition to a 15% increase in the level of earnings before
taxes, the Company’s effective tax rate increased because the Company’s annualized effective tax rate for 2012 was
reduced by the reversal of a $0.5 million deferred tax valuation allowance related to capital loss carry-forwards.
2012 vs. 2011 comparison
Income tax expense for 2012 was $1.4 million, compared to $0.1 million in 2011. The Company’s effective income
tax rate was 17.34% in 2012, compared to 1.02% in 2011. The increase in the Company’s effective tax rate was due to a
46% increase in the level of earnings before taxes and a decrease in federal tax credits related to the Company’s
investments in affordable housing limited partnerships, which were sold in January 2012. The impact of these changes on
the Company’s effective tax rate for the full year 2012 was partially reduced by the reversal of a previously established
deferred tax asset valuation allowance of $0.5 million related to capital loss carry-forwards. Excluding the reversal of the
valuation allowance, the Company’s effective tax rate for 2012 would have been approximately 23.51%.
.
page 11
Management’s Discussion and Analysis
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale, were $271.2 million at December 31, 2013, an increase of $11.8 million, or 4%,
compared to $259.5 million as of December 31, 2012. This increase reflects an increase in the amortized cost basis of
securities available-for-sale of $27.1 million, which was partially offset by a decline in the fair value of securities-available-
for sale of $15.4 million. The increase in the amortized cost basis of securities available-for-sale was primarily attributable
to management allocating more funding to the investment portfolio as the loan portfolio declined and investment yields
improved in 2013. The decrease in the fair value of securities was primarily due to an increase in long-term interest rates.
The average tax-equivalent yields earned on total securities were 3.09% in 2013 and 3.14% in 2012.
The following table shows the carrying value and weighted average yield of securities available-for-sale as of
December 31, 2013 according to contractual maturity. Actual maturities may differ from contractual maturities of
residential mortgage-backed securities (“RMBS”) because the mortgages underlying the securities may be called or prepaid
with or without penalty.
(Dollars in thousands)
Agency obligations
Agency RMBS
State and political subdivisions
Total available-for-sale
Weighted average yield:
Agency obligations
Agency RMBS
State and political subdivisions
Total available-for-sale
Loans
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
Less: unearned income
$
$
$
1 year
or less
1 to 5
years
5 to 10
years
After 10
Total
years
Fair Value
December 31, 2013
—
—
—
—
—
—
—
—
—
—
1,735
1,735
—
—
4.14%
4.14%
23,247
8,306
21,366
52,919
2.06%
1.74%
4.05%
2.81%
21,275
154,052
41,238
216,565
2.79%
2.35%
4.12%
2.70%
44,522
162,358
64,339
271,219
2.34%
2.32%
4.10%
2.74%
2013
57,780
36,479
174,920
101,706
12,893
383,778
(439)
2012
59,334
37,631
183,611
105,631
12,219
398,426
(233)
2011
54,988
39,814
162,435
101,725
11,454
370,416
(153)
2010
53,288
47,850
166,241
96,241
10,676
374,296
(81)
December 31
2009
53,884
56,820
156,928
97,407
11,236
376,275
(172)
376,103
Loans, net of unearned income
$
383,339
398,193
370,263
374,215
Total loans, net of unearned income, were $383.3 million at December 31, 2013, a decrease of $14.9 million, or 4%,
from $398.2 million at December 31, 2012. The decrease was primarily attributable to reduced loan demand and increased
competition for quality loan opportunities in our markets and management’s efforts to resolve problem loans as nonaccrual
loans declined by $6.3 million in 2013. Four loan categories represented the majority of the loan portfolio as December 31,
2013: commercial real estate mortgage loans (46%), residential real estate mortgage loans (27%), commercial and industrial
loans (15%) and construction and land development loans (10%).
Within its residential real estate mortgage portfolio, the Company had junior lien mortgages of approximately $15.8
million, or 4%, of total loans, net of unearned income at both December 31, 2013 and 2012. For residential real estate
mortgage loans with a consumer purpose, approximately $1.2 million and $1.3 million required interest-only payments at
December 31, 2013 and 2012, respectively. 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.
page 12
Purchased loan participations included in the Company’s loan portfolio were approximately $1.4 million and $3.1
million as of December 31, 2013 and 2012, respectively. All purchased loan participations are underwritten by the
Company independent of the selling bank. In addition, all loans, including purchased participations, are evaluated for
collectability during the course of the Company’s normal loan review procedures. If the Company deems a participation
loan impaired, it applies the same accounting policies and procedures as described in “CRITICAL ACCOUNTING
POLICIES.”
The average yield earned on loans and loans held for sale was 5.28% in 2013 and 5.54% in 2012.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of
current economic conditions on our borrowers’ cash flows, real estate market sales volumes, valuations, and availability
and cost of financing for properties, real estate industry concentrations, deterioration in certain credits, interest rate
fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration
of borrowers, fraud, and any violation of applicable laws and regulations.
The Company attempts to reduce these economic and credit risks by adhering to loan to value guidelines for
collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we
establish and periodically review our lending policies and procedures. Banking regulations limit a bank’s credit exposure
by prohibiting unsecured loan relationships that exceed 10% of its capital accounts; or 20% of capital accounts, if loans in
excess of 10% are fully secured. Under these regulations, we are prohibited from having unsecured loan relationships in
excess of approximately $16.0 million. Furthermore, we have an internal limit for aggregate credit exposure (loans
outstanding plus unfunded commitments) to a single borrower of $14.4 million. Our loan policy requires that the Loan
Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2013,
the Bank had no loan relationships exceeding these limits.
We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one
or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize
our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total
risk-based capital at December 31, 2013 (and related balances at December 31, 2012).
(In thousands)
Lessors of 1-4 family residential properties
Multi-family residential properties
Shopping centers
Allowance for Loan Losses
$
December 31
2013
43,835
27,673
29,953
$
2012
47,544
30,392
20,760
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 in the loan portfolio. As of December 31, 2013 and 2012, respectively, the
allowance for loan losses was $5.3 million and $6.7 million, respectively, which management believed to be adequate at
each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses
are described under “CRITICAL ACCOUNTING POLICIES”.
page 13
Management’s Discussion and Analysis
A summary of the changes in the allowance for loan losses and certain asset quality ratios for each of the five years in
the five year period ended December 31, 2013 is presented below.
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period
Charge-offs:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total charge-offs
Recoveries:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total recoveries
Net charge-offs
Provision for loan losses
Ending balance
as a % of loans
as a % of nonperforming loans
Net charge-offs as a % of average loans
2013
2012
2011
2010
2009
Year ended December 31
$
6,723
6,919
7,676
6,495
4,398
(514)
(39)
(262)
(808)
(397)
(2,020)
48
6
4
88
19
165
(1,855)
400
$
5,268
1.37 %
124 %
0.48 %
(289)
(231)
(3,184)
(545)
(85)
(4,334)
54
46
71
134
18
323
(4,011)
3,815
6,723
1.69
64
1.03
(679)
(1,758)
(422)
(533)
(21)
(3,413)
34
2
—
155
15
206
(3,207)
2,450
6,919
1.87
67
0.86
(537)
(1,487)
—
(552)
(111)
(2,687)
63
54
—
151
20
288
(2,399)
3,580
7,676
2.05
65
0.64
(495)
(2,088)
—
(704)
(61)
(3,348)
47
50
—
92
6
195
(3,153)
5,250
6,495
1.73
69
0.84
As noted 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 quality indications 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 1.37% at December 31, 2013, compared to
1.69% at December 31, 2012. In the future, the allowance to total loans outstanding ratio will increase or decrease to the
extent the factors that influence our quarterly allowance assessment in their entirety either improve or weaken.
Net charge-offs were $1.9 million, or 0.48% of average loans, in 2013, compared to net charge-offs of $4.0 million,
or 1.03%, in 2012. In 2012, net charge-offs were affected by a few individually significant charge-offs in the commercial
real estate portfolio segment, including $3.1 million related to three borrowing relationships.
At December 31, 2013 and 2012, the ratio of our allowance for loan losses as a percentage of nonperforming loans
was 124% and 64%, respectively. The increase was primarily due to payoffs received on three nonperforming commercial
loans real estate loans during 2013 with a total recorded investment of $5.9 million and no related allowance for loan losses
at December 31, 2012. Excluding these nonperforming loans, the ratio of our allowance for loan losses as a percentage of
nonperforming loans was 144% at December 31, 2012.
At December 31, 2013 and 2012, the Company’s recorded investment in loans considered impaired was $5.6 million
and $10.5 million, respectively, with corresponding valuation allowances (included in the allowance for loan losses) at each
respective date of $0.3 million.
Our regulators, as an integral part of their examination process, 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.
page 14
Nonperforming Assets
At December 31, 2013 the Company had $8.1 million in nonperforming assets compared to $15.5 million at
December 31, 2012. Nonperforming assets decreased during 2013 due to continued efforts by management to reduce and
resolve problem assets. The majority of the balance in nonperforming assets at December 31, 2013 related to deterioration
in the commercial real estate and construction and land development loan portfolios.
The table below provides information concerning total nonperforming assets and certain asset quality ratios.
(Dollars in thousands)
Nonperforming assets:
Nonperforming (nonaccrual) loans
Other real estate owned
Total nonperforming assets
as a % of loans and foreclosed properties
as a % of total assets
Nonperforming loans as a % of total loans
Accruing loans 90 days or more past due
2013
2012
2011
2010
2009
December 31
$
$
$
4,261
3,884
8,145
2.10 %
1.08 %
1.11 %
73
10,535
4,919
15,454
3.83
2.03
2.65
58
10,354
7,898
18,252
4.83
2.35
2.80
—
11,833
8,125
19,958
5.22
2.61
3.16
—
9,352
7,292
16,644
4.34
2.15
2.49
5
The table below provides information concerning the composition of nonaccrual loans at December 31, 2013 and
2012, respectively.
(In thousands)
Nonaccrual loans:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Total nonaccrual loans / nonperfoming loans
2013
55
1,582
1,456
1,168
4,261
$
$
December 31
2012
60
1,706
6,714
2,055
10,535
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 more
than 90 days past due, unless the loan is both well-secured and in the process of collection. At December 31, 2013, the
Company had $4.3 million in loans on nonaccrual, compared to $10.5 million at December 31, 2012. The decrease was
primarily attributable to a decrease of $5.3 million and $0.9 million in nonaccrual loans for the commercial real estate and
residential real estate loan portfolio segments, respectively.
Due to the weakening credit status of a borrower, the Company may elect to formally restructure certain loans to
facilitate a repayment plan that minimizes the potential losses that we might incur. Restructured loans, or troubled debt
restructurings (“TDRs”), are classified as impaired loans, and if the loans are on nonaccrual status as of the date of
restructuring, the loans are included in the nonaccrual loan balances noted above. Nonaccrual loan balances do not include
loans that have been restructured that were performing as of the restructure date. At December 31, 2013 and 2012, the
Company had $1.6 million and $1.1 million, respectively, in accruing TDRs.
At December 31, 2013 there were $73,000 in loans 90 days past due and still accruing interest compared to $58,000
at December 31, 2012.
page 15
Management’s Discussion and Analysis
The table below provides information concerning the composition of OREO at December 31, 2013 and 2012,
respectively.
(In thousands)
Other real estate owned:
Commercial:
Building
Developed lots
Residential:
Condominiums
Undeveloped land
Other
Total other real estate owned
December 31
2013
2012
$
$
1,772
1,260
—
113
739
3,884
608
1,275
425
1,464
1,147
4,919
At December 31, 2013, the Company held $3.8 million in OREO, which we acquired from borrowers, a decrease of
$1.0 million, or 21%, compared to December 31, 2012. At December 31, 2013, approximately $3.2 million, or 82%, of the
total balance in OREO related to properties acquired from three borrowers.
Potential Problem Loans
Potential problem loans represent those loans with a well-defined weakness and where information about possible
credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with
present repayment terms. This definition is believed to be substantially consistent with the standards established by the
Federal Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans.
Potential problem loans, which are not included in nonperforming assets, amounted to $10.6 million, or 2.7% of total loans
at December 31, 2013, compared to $12.6 million, or 3.2% of total loans at December 31, 2012.
The table below provides information concerning the composition of potential problem loans at December 31, 2013
and 2012, respectively.
(In thousands)
Potential problem loans:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total potential problem loans
December 31
2013
2012
$
$
482
1,101
1,683
7,182
146
10,594
563
1,125
2,727
7,978
214
12,607
At December 31, 2013, approximately $0.8 million or 7.6% of total potential problem loans were past due at least 30
but less than 90 days. At December 31, 2013, the remaining balance of potential problem loans were current or past due
less than 30 days.
The following table is a summary of the Company’s performing loans that were past due at least 30 days but less than
90 days as of December 31, 2013 and 2012, respectively.
(In thousands)
Performing loans past due 30 to 89 days:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total performing loans past due 30 to 89 days
page 16
2013
167
14
861
1,343
100
2,485
$
$
December 31
2012
173
8
230
1,537
62
2,010
Deposits
(In thousands)
Noninterest bearing demand
NOW
Money market
Savings
Certificates of deposit under $100,0000
Certificates of deposit and other time deposits of $100,000 or more
Brokered certificates of deposit
Total deposits
2013
125,740
99,406
147,116
35,383
104,964
139,721
16,514
668,844
$
$
December 31
2012
118,014
96,332
124,676
34,600
106,371
134,591
22,233
636,817
Total deposits were $668.9 million and $636.8 million at December 31, 2013 and 2012, respectively. The increase in
total deposits of $32.0 million reflects market share growth in Chambers County due to the business development efforts of
the Bank’s full-service branch in Valley, Alabama which opened in December 2011 and changes in customer preferences
for short-term instruments in a low interest rate environment.
The average rates paid on total interest-bearing deposits were 1.01% in 2013 and 1.21% in 2012. Noninterest bearing
deposits were 19% of total deposits at both December 31, 2013 and 2012.
Other Borrowings
Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings consist of federal
funds purchased and securities sold under agreements to repurchase with an original maturity of one year or less. The Bank
had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2013, compared to $40.0
million with none outstanding at and December 31, 2012. Securities sold under agreements to repurchase totaled $3.4
million and $2.7 million at December 31, 2013 and 2012, respectively.
The average rates paid on short-term borrowings were 0.50% in 2013 and 0.54% in 2012. Information concerning
the average balances, weighted average rates, and maximum amounts outstanding for short-term borrowings during the
three-year period ended December 31, 2013 is included in Note 10 to the accompanying consolidated financial statements
included in this annual report.
Long-term debt includes FHLB advances with an original maturity greater than one year, securities sold under
agreements to repurchase with an original maturity greater than one year, and subordinated debentures related to trust
preferred securities. The Bank had $5.0 million in long-term FHLB advances at December 31, 2013, compared to $25.0
million at December 31, 2012. During 2013, the Company repaid $20.0 million of FHLB advances with a weighted average
interest rate of 3.38%. At December 31, 2013, the Bank had no securities sold under agreements to repurchase with an
original maturity greater than one year, compared to $15.0 million at December 31, 2012. During 2013, the Company
repaid $15.0 million of securities sold under agreements to repurchase with an interest rate of 3.58%. At both December
31, 2013 and 2012, the Company had $7.2 million in junior subordinated debentures related to trust preferred securities
outstanding.
The average rates paid on long-term debt were 3.59% in 2013 and 3.73% in 2012.
CAPITAL ADEQUACY
The Company's consolidated stockholders' equity was $64.5 million and $70.1 million as of December 31, 2013 and
2012, respectively. The change from December 31, 2012 was primarily driven by an other comprehensive loss due to the
change in unrealized gains (losses) on securities available-for-sale of $9.7 million and cash dividends paid of $3.1 million,
partially offset by net earnings of $7.1 million.
The Company’s tier 1 leverage ratio was 10.10%, tier 1 risk-based capital ratio was 17.19% and total risk-based
capital ratio was 18.40% at December 31, 2013. These ratios exceed the minimum regulatory capital percentages of 4.0%
for Tier 1 leverage ratio, 4.0% for Tier 1 risk-based capital ratio and 8.0% for Total risk-based capital ratio. Based on
current regulatory standards, the Company is classified as “well capitalized.”
page 17
Management’s Discussion and Analysis
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability
within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability
Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to
ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate risk and
liquidity risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates.
The Company is subject to interest rate risk because assets and liabilities may mature or reprice at different times. For
example, if liabilities reprice faster than assets, and interest rates are generally rising, earnings will initially decline. In
addition, assets and liabilities may reprice at the same time but by different amounts. For example, when the general level
of interest rates is rising, the Company may increase rates paid on interest bearing demand deposit accounts and savings
deposit accounts by an amount that is less than the general increase in market interest rates. Also, short-term and long-term
market interest rates may change by different amounts. For example, a flattening yield curve may reduce the interest spread
between new loan yields and funding costs. Further, the remaining maturity of various assets and liabilities may shorten or
lengthen as interest rates change. For example, if long-term mortgage interest rates decline sharply, mortgage-backed
securities in the securities portfolio may prepay significantly earlier than anticipated, which could reduce earnings. Interest
rates may also have a direct or indirect effect on loan demand, loan losses, mortgage origination volume, the fair value of
MSRs and other items affecting earnings.
ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans
and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items.
Measurements used to help manage interest rate sensitivity include an earnings simulation and an economic value of equity
model.
Earnings simulation. Management believes that interest rate risk is best estimated by our earnings simulation
modeling. On at least a quarterly basis, the following 12 month time period is simulated to determine a baseline net interest
income forecast and the sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an unchanged
or flat interest rate environment. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in
order to produce various earnings simulations and estimates.
To limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest
income to less than a 10 percent decline for a 200 basis point gradual change up or down in rates from management’s
baseline net interest income forecast over the next 12 months. The following table reports the variance of net interest
income over the next 12 months assuming a gradual change in interest rates of 200 basis points when compared to the
baseline net interest income forecast at December 31, 2013.
Changes in Interest Rates
200 basis points
(200) basis points
NM=not meaningful
Net Interest Income % Variance
1.35 %
NM
At December 31, 2013, our earnings simulation model indicated a slightly asset-sensitive position over the next 12
months, which could serve to improve net interest income during that time period if interest rates increased by 200 basis
points. The actual realized change in net interest income would depend upon several factors, which could also serve to
diminish, or eliminate the asset sensitivity noted above. The impact of rate scenarios assuming a gradual downward 200
basis point change in interest rates was not considered meaningful because of the historically low interest rate environment.
Economic Value of Equity. Economic value of equity (“EVE”) measures the extent that estimated economic values
of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are
estimated by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base
case EVE. In contrast with our earnings simulation model which evaluates interest rate risk over a 12 month timeframe,
EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further,
EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to
or anticipating changes in interest rates, or market and competitive conditions.
page 18
To help limit interest rate risk, we have a guideline stating that for a 200 basis point instantaneous change in interest
rates up or down, EVE should not decrease by more than 25 percent. The following table reports the variance of EVE
assuming an immediate change in interest rates of 200 basis points when compared to the base case EVE at December 31,
2013.
Changes in Interest Rates
200 basis points
(200) basis points
NM=not meaningful
EVE % Variance
(16.16) %
NM
At December 31, 2013, the results of our EVE model would indicate that we are in compliance with our guidelines.
The actual realized change in the economic value of equity would depend upon several factors, which could also serve to
diminish, or eliminate the interest sensitivity noted above. The impact of rate shock scenarios assuming a downward 200
basis point change in interest rates was not considered meaningful because of the historically low interest rate environment.
Earnings simulation and EVE are both modeling analyses, which change quarterly and consist of hypothetical
estimates based upon numerous assumptions, including the interest rate levels, shape of the yield curve, prepayments on
loans and securities, rates on loans and deposits, reinvestments of paydowns and maturities of loans, investments and
deposits, and others. While assumptions are developed based on the current economic and market conditions, management
cannot make any assurances as to the predictive nature of these assumptions, including how these estimates may be affected
by customer preferences, competitors, or competitive conditions, or that the predictions will be realized.
In addition, each of the preceding analyses may not, on its own, be an accurate indicator of how our net interest
income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated
with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and
duration of changes in interest rates may have a significant impact on net interest income. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in
market interest rates, and other economic and market factors. Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market
rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate
caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate
significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to
service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across
industries and economic sectors. Depositor and borrower behaviors also affect those relationships and results. 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 one tool to manage interest rate sensitivity while continuing to meet the credit and
deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging
instruments. At December 31, 2013 and 2012, the Company had no derivative contracts to assist in managing interest rate
sensitivity.
Liquidity Risk Management
Liquidity is the Company's ability to convert assets into cash equivalents in order to meet daily cash flow
requirements, primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its
liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive
liquidity can lead to a decline in earnings due to the opportunity cost of foregoing alternative higher-yielding investment
opportunities.
Liquidity is managed at two levels: at the Company and at the Bank. The management of liquidity at both levels is
essential, because the Company and the Bank have different funding needs and sources, are separate legal entities, and each
are subject to regulatory guidelines and requirements.
page 19
Management’s Discussion and Analysis
The primary source of funding and the primary source of liquidity for the Company includes dividends received from
the Bank, and secondarily proceeds from the issuance of common stock or other securities. Primary uses of funds for the
Company include dividends paid to shareholders, stock repurchases, and interest payments on junior subordinated
debentures issued by the Company in connection with trust preferred securities. The junior subordinated debentures are
presented as long-term debt in the accompanying consolidated balance sheets and the related trust preferred securities are
includible in Tier 1 Capital for regulatory capital purposes.
Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of
securities, and 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 has participated in the FHLB's advance
program to obtain funding for its growth. Advances include both fixed and variable terms and are taken out with varying
maturities. As of December 31, 2013, the Bank had a remaining available line of credit with the FHLB totaling $212.4
million. As of December 31, 2013, the Bank also had $41.0 million of federal funds lines, with none outstanding. Primary
uses of funds include repayment of maturing obligations and growing the loan portfolio.
The following table presents additional information about our contractual obligations as of December 31, 2013,
which by their terms had contractual maturity and termination dates subsequent to December 31, 2013:
(Dollars in thousands)
Contractual obligations:
Deposit maturities (1)
Long-term debt
Operating lease obligations
Total
Total
668,844
12,217
617
$681,678
$
$
Payments due by period
1 year
or less
536,260
—
287
$536,547
1 to 3
years
75,784
—
285
$76,069
3 to 5
years
More than
5 years
46,369
5,000
45
$51,414
10,431
7,217
—
$17,648
(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the "1 year or less" column
Management believes that the Company and the Bank have adequate sources of liquidity to meet all known
contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and
creditor requirements over the next 12 months.
Off-Balance Sheet Arrangements
At December 31, 2013, the Bank had outstanding standby letters of credit of $8.6 million and unfunded loan
commitments outstanding of $38.9 million. Because these commitments generally have fixed expiration dates and many
will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.
If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities
available-for-sale, or on a short-term basis to borrow and purchase federal funds from other financial institutions.
Mortgage lending activities
Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining
the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors
include various representations and warranties regarding the origination and characteristics of the residential mortgage
loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan,
validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan,
compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local
laws, among other matters.
As of December 31, 2013, the unpaid principal balance of the residential mortgage loans, which we have originated
and sold, but retained the servicing rights was $356.3 million. Although these loans are generally sold on a non-recourse
basis, except for breaches of customary seller representations and warranties, we may have to repurchase residential
mortgage loans in cases where we breach such representations or warranties or the other terms of the sale, such as where we
fail to deliver required documents or the documents we deliver are defective. Investors also may require the repurchase of a
mortgage loan when an early payment default underwriting review reveals significant underwriting deficiencies, even if the
mortgage loan has subsequently been brought current. Repurchase demands 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 event has
occurred. We seek to reduce and manage the risks of potential repurchases or other claims by mortgage loan investors
page 20
through our underwriting, quality assurance and servicing practices, including good communications with our residential
mortgage investors.
We were not required to repurchase any residential mortgage loans in 2013 or 2011. In 2012, we repurchased one
residential mortgage loan with an unpaid principal balance of $0.3 million. This loan was current as to principal and interest
at the time of repurchase, and we incurred no losses upon repurchase.
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties
are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest;
(3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans;
(4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and
(5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with
the agreements governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us
in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the
respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject
to termination if the breach is not cured within a specified period following notice. The standards governing servicing and
the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as
the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected
loan.
Although to date repurchase requests related to representation and warranty provisions, and servicing activities have
been limited, it is possible that requests to repurchase mortgage loans may increase in frequency if investors more
aggressively pursue all means of recovering losses on their purchased loans. As of December 31, 2013, we believe that this
exposure is not material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99.5%
of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing
communications with our investors and will continue to evaluate this exposure by monitoring the level and number of
repurchase requests as well as the delinquency rates in our investor portfolios.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented herein have been prepared in
accordance with GAAP and practices within the banking industry which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance
than the effects of general levels of inflation.
CURRENT ACCOUNTING DEVELOPMENTS
The following Accounting Standards Updates (“Updates” or “ASUs”) have been issued by the FASB but are not yet
effective.
(cid:127) ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar
Tax Loss, or a Tax Credit Carryforward Exists;
(cid:127) ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects; and
(cid:127) ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure.
Information about these pronouncements is described in more detail below.
ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar
Tax Loss, or a Tax Credit Carryforward Exists, is expected to eliminate diversity in practice as it provides guidance on
financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax
loss, or a tax credit carryforward exists. These changes are effective for the Company in the first quarter of 2014 with
prospective application applied to all unrecognized tax benefits that exist at the effective date. Early adoption and
retrospective application are permitted. Adoption of this ASU will not have a significant impact on the financial statements
of the Company.
page 21
Management’s Discussion and Analysis
ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, amends the criteria a company
must meet to elect to account for investments in qualified affordable housing projects using a method other than the cost or
equity methods. If the criteria are met, a company is permitted to amortize the initial investment cost in proportion to and
over the same period as the total tax benefits the company expects to receive. The amortization of the initial investment cost
and tax benefits are to be recorded in the income tax expense line. The Update also requires new disclosures about all
investments in qualified affordable housing projects regardless of the accounting method used. These changes are effective
for the Company in the first quarter of 2015 with retrospective application. Early adoption is permitted. The Company is
evaluating the impact this ASU will have on our consolidated financial statements.
ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure, clarifies the timing of when a creditor is considered to have taken physical possession of residential real estate
collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate owned. A
creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure, or
(2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal
agreement. The Update also requires disclosure of the amount of foreclosed residential real estate property held by the
creditor and the recorded investment in residential real estate mortgage loans that are in process of foreclosure. These
changes are effective for the Company in the first quarter of 2015 with retrospective application. Early adoption is
permitted. Adoption of this ASU will not have a significant impact on the financial statements of the Company.
page 22
Financial Tables
Table 1 – Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this annual report on Form 10-K includes certain
designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the
presentation of total revenue and the calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-
GAAP financial measures from GAAP to non-GAAP are presented below.
(in thousands)
Net interest income (GAAP)
Tax-equivalent adjustment
Net interest income (Tax-equivalent) $
$
Fourth
Quarter
5,279
342
5,621
Third
Second
Quarter
5,270
351
5,621
Quarter
5,232
365
5,597
2013
First
Quarter
5,141
382
5,523
Fourth
Quarter
5,325
396
5,721
Third
Second
Quarter
5,259
416
5,675
Quarter
5,312
416
5,728
2012
First
Quarter
5,001
414
5,415
(In thousands)
Net interest income (GAAP)
Tax-equivalent adjustment
Net interest income (Tax-equivalent)
Year ended December 31
2013
20,922
1,440
22,362
2012
20,897
1,642
22,539
2011
19,225
1,719
20,944
2010
18,899
1,765
20,664
2009
18,815
1,633
20,448
$
$
page 23
Financial Tables
Table 2 - Selected Financial Data
(Dollars in thousands, except per share amounts)
Income statement
Tax-equivalent interest income (a)
Total interest expense
Tax equivalent net interest income (a)
Provision for loan losses
Total noninterest income
Total noninterest expense
Net earnings before income taxes and
tax-equivalent adjustment
Tax-equivalent adjustment
Income tax expense (benefit)
Net earnings
Per share data:
Basic and diluted net earnings
Cash dividends declared
Weighted average shares outstanding
Basic and diluted
Shares outstanding
Book value
Common stock price
High
Low
Period-end
To earnings ratio
To book value
Performance ratios:
Return on average equity
Return on average assets
Dividend payout ratio
Average equity to average assets
Asset Quality:
Allowance for loan losses as a % of:
Loans
Nonperforming loans
Nonperforming assets as a % of:
Loans and foreclosed properties
Total assets
Nonperforming loans as % of loans
Net charge-offs as a % of average loans
Capital Adequacy:
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 Leverage ratio
Other financial data:
Net interest margin (a)
Effective income tax expense (benefit) rate
Efficiency ratio (b)
Selected period end balances:
Securities
Loans, net of unearned income
Allowance for loan losses
Total assets
Total deposits
Long-term debt
Total stockholders’ equity
$
$
$
$
$
$
$
$
2013
2012
2011
Year ended December 31
2009
2010
28,898
6,536
22,362
400
7,298
18,412
10,848
1,440
2,290
7,118
1.95
0.84
30,709
8,170
22,539
3,815
10,483
19,383
9,824
1,642
1,419
6,763
1.86
0.82
32,425
11,481
20,944
2,450
5,177
16,357
7,314
1,719
57
5,538
1.52
0.80
35,237
14,573
20,664
3,580
6,718
15,893
7,909
1,765
798
5,346
1.47
0.78
38,467
18,019
20,448
5,250
2,433
13,934
3,697
1,633
(340)
2,404
0.66
0.76
3,643,003
3,643,118
17.70
3,642,831
3,642,903
19.26
3,642,735
3,642,738
17.96
3,642,851
3,642,718
15.47
3,644,691
3,643,117
15.42
25.75
20.80
25.00
12.89x
141 %
10.33 %
0.94 %
43.08 %
9.07 %
1.37 %
124 %
2.10 %
1.08 %
1.11 %
0.48 %
17.19 %
18.40 %
10.10 %
3.16 %
24.34 %
62.08 %
26.65
18.23
20.85
11.21
108
9.85
0.90
44.09
9.09
1.69
64
3.83
2.03
2.65
1.03
16.20
17.46
9.58
3.21
17.34
58.70
20.37
18.52
18.52
12.10
103
9.10
0.72
52.63
7.89
1.87
67
4.83
2.35
2.80
0.86
15.40
16.66
8.82
2.95
1.02
62.62
22.00
16.86
20.06
13.74
130
9.00
0.68
53.06
7.61
2.05
65
5.22
2.61
3.16
0.64
14.57
15.82
8.47
2.86
12.99
58.04
271,219
383,339
5,268
751,343
668,844
12,217
64,485
259,475
398,193
6,723
759,833
636,817
47,217
70,149
299,582
370,263
6,919
776,218
619,552
85,313
65,416
315,220
374,215
7,676
763,829
607,127
93,331
56,368
30.00
18.07
19.69
29.39
128
4.23
0.31
115.15
7.21
1.73
69
4.34
2.15
2.49
0.84
13.73
14.98
8.13
2.78
(16.47)
60.90
334,762
376,103
6,495
773,382
579,409
118,349
56,183
(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.
page 24
Table 3 - Selected Quarterly Financial Data
(Dollars in thousands, except per share amounts)
Income statement
Tax-equivalent interest income (a)
Total interest expense
Tax equivalent net interest income (a)
Provision for loan losses
Total noninterest income
Total noninterest expense
Net earnings before income taxes and
tax-equivalent adjustment
Tax-equivalent adjustment
Income tax expense
Net earnings
Per share data:
Basic and diluted net earnings
Cash dividends declared
Weighted average shares outstanding
Basic and diluted
Shares outstanding, at period end
Book value
Common stock price
High
Low
Period-end
To earnings ratio
To book value
Performance ratios:
Return on average equity
Return on average assets
Dividend payout ratio
Average equity to average assets
Asset Quality:
Allowance for loan losses as a % of:
Loans
Nonperforming loans
Nonperforming assets as a % of :
Loans and foreclosed properties
Total assets
Nonperforming loans as % of loans
Net charge-offs as % of average loans (c)
Capital Adequacy:
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 Leverage ratio
Other financial data:
Net interest margin (a)
Effective income tax rate
Efficiency ratio (b)
Selected period end balances:
Securities
Loans, net of unearned income
Allowance for loan losses
Total assets
Total deposits
Long-term debt
Total stockholders’ equity
$
$
$
$
$
$
$
Fourth
Third
Second
7,108
1,487
5,621
—
2,140
5,188
2,573
342
501
1,730
7,207
1,586
5,621
—
1,432
4,274
2,779
351
636
1,792
7,226
1,629
5,597
—
2,071
4,724
2,944
365
672
1,907
2013
First
7,357
1,834
5,523
400
1,655
4,226
2,552
382
481
1,689
Fourth
Third
Second
7,646
1,925
5,721
1,065
1,788
4,023
2,421
396
365
1,660
7,628
1,953
5,675
1,550
2,017
3,770
2,372
416
347
1,609
7,773
2,045
5,728
600
1,814
4,048
2,894
416
449
2,029
2012
First
7,662
2,247
5,415
600
4,864
7,542
2,137
414
258
1,465
0.47
0.21
0.49
0.21
0.52
0.21
0.46
0.21
0.46
0.205
0.44
0.205
0.56
0.205
0.40
0.205
3,643,110
3,643,118
17.70
3,643,028
3,643,058
18.06
3,642,955
3,642,993
17.90
3,642,918
3,642,928
19.27
3,642,903
3,642,903
19.26
3,642,876
3,642,903
19.27
3,642,826
3,642,843
18.75
3,642,738
3,642,738
18.11
25.75
23.93
25.00
12.89 x
141 %
10.33 %
0.92 %
44.68 %
8.95 %
1.37 %
124 %
2.10 %
1.08 %
1.11 %
0.71 %
17.19 %
18.40 %
10.10 %
3.20 %
22.46 %
66.85 %
24.71
22.00
24.40
12.64
135
10.78
0.95
42.86
8.85
1.56
134
2.34
1.21
1.16
0.53
17.29
18.55
9.96
3.19
26.19
60.60
22.33
21.54
22.00
11.70
123
10.74
1.00
40.38
9.32
1.65
138
2.10
1.08
1.19
0.32
16.45
17.70
9.76
3.16
26.06
61.61
22.60
20.80
22.00
11.46
114
9.47
0.87
45.65
9.17
1.73
143
2.42
1.24
1.22
0.36
16.32
17.57
9.42
3.09
22.17
58.87
24.87
20.85
20.85
11.21
108
9.30
0.88
44.57
9.45
1.69
64
3.83
2.03
2.65
0.39
16.20
17.46
9.58
3.22
18.02
53.58
23.20
21.00
22.25
12.94
115
9.22
0.86
46.59
9.33
1.52
44
4.61
2.46
3.43
2.00
15.75
17.00
9.54
3.23
17.74
49.01
26.65
21.50
21.50
12.95
115
12.06
1.07
36.61
8.85
1.63
79
3.31
1.75
2.06
1.61
15.39
16.65
9.26
3.26
18.12
53.67
21.99
18.23
21.99
14.66
121
8.86
0.77
51.25
8.74
1.97
73
4.53
2.31
2.69
0.02
15.69
16.95
9.06
3.11
14.97
73.37
$
271,219
383,339
5,268
751,343
668,844
12,217
64,485
259,467
380,705
5,946
744,602
650,421
22,217
65,807
270,794
390,726
6,457
767,747
666,490
27,217
65,211
270,219
390,570
6,769
772,155
659,056
37,217
70,217
259,475
398,193
6,723
759,833
636,817
47,217
70,149
254,819
397,738
6,045
753,467
629,824
47,217
70,206
277,246
399,370
6,503
766,161
644,246
47,217
68,292
299,902
380,377
7,496
760,522
641,195
47,308
65,972
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
(c) Net charge-offs are annualized.
page 25
Financial Tables
Table 4 - Average Balance and Net Interest Income Analysis
2013
Year ended December 31
Average
Balance
Interest
Income/ Yield/
Rate
Expense
Average
Balance
106 0.22%
42 0.75%
195,850
67,797
263,647
48,671
5,634
708,240
3,912 2.00% 199,794
77,447
4,234 6.25%
8,146 3.09% 277,241
27,466
793
28,898 4.08% 701,438
(Dollars in thousands)
Interest-earning assets:
Loans and loans held for sale (1) $ 390,288 $ 20,604 5.28% $ 395,938 $
Securities - taxable
Securities - tax-exempt (2)
Total securities
Federal funds sold
Interest bearing bank deposits
Total interest-earning assets
Cash and due from banks
Other assets
Total assets
Interest-bearing liabilities:
Deposits:
NOW
Savings and money market
Certificates of deposits
less than $100,000
Certificates of deposits and
other time deposits of
$100,000 or more
Total interest-bearing deposits
Short-term borrowings
Long-term debt
319 0.32% $ 99,664
886 0.52% 153,668
13,694
37,836
$ 759,770
14,125
39,742
$ 755,305
1,437 1.36% 108,726
$ 101,034
171,413
105,631
155,781
533,859
2,817
31,518
568,194
119,136
3,522
68,918
2,750 1.77% 161,128
5,392 1.01% 523,186
2,970
14 0.50%
49,115
1,130 3.59%
6,536 1.15% 575,271
107,948
3,410
68,676
Total interest-bearing
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
Total liabilities and
and stockholders' equity
2012
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2011
Interest
Income/ Yield/
Rate
Expense
21,943 5.54% $ 376,000 $ 21,306 5.67%
6,006 2.69%
3,883 1.94% 223,638
5,056 6.37%
79,329
4,829 6.24%
11,062 3.65%
8,712 3.14% 302,967
56 0.19%
28,905
1 0.05%
1,394
32,425 4.57%
30,709 4.38% 709,266
54 0.20%
—
—
13,054
48,796
$ 771,116
349 0.35% $ 90,565
859 0.56% 138,428
527 0.58%
996 0.72%
1,769 1.63% 114,490
2,227 1.95%
3,347 2.08% 181,242
6,324 1.21% 524,725
2,423
16 0.54%
86,899
1,830 3.73%
8,170 1.42% 614,047
92,764
3,463
60,842
4,318 2.38%
8,068 1.54%
12 0.50%
3,401 3.91%
11,481 1.87%
$ 759,770
$ 755,305
$ 771,116
Net interest income and margin
$ 22,362 3.16%
$ 22,539 3.21%
$ 20,944 2.95%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
in the computation of average balances.
(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.
page 26
Table 5 - Volume and Rate Variance Analysis
Years ended December 31, 2013 vs. 2012
Years ended December 31, 2012 vs. 2011
$
$
$
(Dollars in thousands)
Interest income:
Loans and loans held for sale
Securities - taxable
Securities - tax-exempt (1)
Total securities
Federal funds sold
Interest bearing bank deposits
Total interest income
Interest expense:
Deposits:
NOW
Savings and money market
Certificates of deposits less
than $100,000
Certificates of deposits and
other time deposits of
$100,000 or more
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest expense
$
$
$
(298)
(79)
(603)
(682)
46
36
(898)
5
92
Due to change in
Rate (2)
Volume (2)
Net
Change
(1,339)
29
(595)
(566)
52
42
(1,811)
(1,041)
108
8
116
6
6
(913)
(30)
27
(35)
(65)
(332)
(290)
(42)
(597)
(932)
(2)
(700)
(1,634)
(503)
(893)
(1)
(69)
(963)
(94)
(39)
(1)
(631)
(671)
Net
Change
637
(2,123)
(227)
(2,350)
(2)
(1)
(1,716)
(178)
(137)
(458)
(971)
(1,744)
4
(1,571)
(3,311)
Due to change in
Rate (2)
Volume (2)
(468)
(1,660)
(110)
(1,770)
1
(1)
(2,238)
(210)
(222)
(364)
(553)
(1,349)
1
(163)
(1,511)
1,105
(463)
(117)
(580)
(3)
—
522
32
85
(94)
(418)
(395)
3
(1,408)
(1,800)
Net interest income
$
(177)
50
(227)
$
1,595
(727)
2,322
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income
tax rate of 34%.
(2) Changes that are not solely a result of volume or rate have been allocated to volume.
page 27
Financial Tables
Table 6 - Loan Portfolio Composition
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
Less: unearned income
Loans, net of unearned income
Less: allowance for loan losses
$
2013
57,780
36,479
174,920
101,706
12,893
383,778
(439)
383,339
(5,268)
2012
59,334
37,631
183,611
105,631
12,219
398,426
(233)
398,193
(6,723)
Loans, net
$
378,071
391,470
2011
54,988
39,814
162,435
101,725
11,454
370,416
(153)
370,263
(6,919)
363,344
2010
53,288
47,850
166,241
96,241
10,676
374,296
(81)
374,215
(7,676)
366,539
December 31
2009
53,884
56,820
156,928
97,407
11,236
376,275
(172)
376,103
(6,495)
369,608
page 28
Table 7 - Loan Maturities and Sensitivities to Changes in Interest Rates
(Dollars in thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
$
$
December 31, 2013
1 year
1 to 5
After 5
Adjustable
Fixed
or less
4,927
3,018
60
556
51
8,612
years
47,697
27,117
70,128
28,761
11,340
185,043
years
5,156
6,344
104,732
72,389
1,502
190,123
Total
57,780
36,479
174,920
101,706
12,893
383,778
Rate
36,015
19,154
25,587
51,386
3,127
135,269
Rate
21,765
17,325
149,333
50,320
9,766
248,509
Total
57,780
36,479
174,920
101,706
12,893
383,778
page 29
Financial Tables
Table 8 - Allowance for Loan Losses and Nonperforming Assets
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period
Charge-offs:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total charge-offs
Recoveries:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total recoveries
Net charge-offs
Provision for loan losses
Ending balance
as a % of loans
as a % of nonperforming loans
Net charge-offs as % of average loans
Nonperforming assets:
Nonaccrual/nonperforming loans
Other real estate owned
Total nonperforming assets
as a % of loans and foreclosed properties
as a % total assets
Nonperforming loans as a % of total loans
Accruing loans 90 days or more past due
2013
2012
2011
2010
2009
Year ended December 31
$
6,723
6,919
7,676
6,495
4,398
(514)
(39)
(262)
(808)
(397)
(2,020)
48
6
4
88
19
165
(1,855)
400
$
$
$
$
5,268
1.37 %
124 %
0.48 %
4,261
3,884
8,145
2.10 %
1.08 %
1.11 %
73
(289)
(231)
(3,184)
(545)
(85)
(4,334)
54
46
71
134
18
323
(4,011)
3,815
6,723
1.69
64
1.03
(679)
(1,758)
(422)
(533)
(21)
(3,413)
34
2
—
155
15
206
(3,207)
2,450
6,919
1.87
67
0.86
(537)
(1,487)
—
(552)
(111)
(2,687)
63
54
—
151
20
288
(2,399)
3,580
7,676
2.05
65
0.64
10,535
4,919
15,454
3.83
2.03
2.65
58
10,354
7,898
18,252
4.83
2.35
2.80
—
11,833
8,125
19,958
5.22
2.61
3.16
—
(495)
(2,088)
—
(704)
(61)
(3,348)
47
50
—
92
6
195
(3,153)
5,250
6,495
1.73
69
0.84
9,352
7,292
16,644
4.34
2.15
2.49
5
page 30
2013
2012
2011
2010
2009
Amount %*
Amount %*
Amount %*
Amount %*
$
386 15.1 $
812 14.9 $
948 14.8 $
972 14.2 $
Amount %*
784 14.3
December 31
Table 9 - Allocation of Allowance for Loan Losses
(Dollars in thousands)
Commercial and industrial
Construction and
land development
Commercial real estate
Residential real estate
Consumer installment
Unallocated
Total allowance for loan losses $
366
9.5
3,186 45.6
1,114 26.5
3.4
216
—
5,268
$
1,545
9.4
3,137 46.1
1,126 26.5
3.1
103
—
6,723
$
* Loan balance in each category expressed as a percentage of total loans.
1,470 10.7
3,009 43.9
1,363 27.5
3.1
129
—
6,919
$
2,223 12.8
2,893 44.4
1,336 25.7
2.9
141
111
7,676
$
2,063 15.1
1,264 41.7
1,706 25.9
3.0
227
451
6,495
page 31
December 31, 2013
$
December 31, 2013
15,642
$
15,136
15,642
40,886
15,136
84,571
40,886
156,235
84,571
156,235
$
$
Financial Tables
Table 10 - CDs and Other Time Deposits of $100,000 or More
Table 10 - CDs and Other Time Deposits of $100,000 or More
(Dollars in thousands)
Maturity of:
(Dollars in thousands)
3 months or less
Maturity of:
Over 3 months through 6 months
3 months or less
Over 6 months through 12 months
Over 3 months through 6 months
Over 12 months
Over 6 months through 12 months
Over 12 months
Total CDs and other time deposits of $100,000 or more (1)
Total CDs and other time deposits of $100,000 or more (1)
(1) includes brokered certificates of deposit.
(1) includes brokered certificates of deposit.
page 32
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s
management and board of directors regarding the preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the direction of the Company’s Chief Executive Officer and Principal Financial and Accounting Officer,
management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2013 in accordance with the criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded
that such internal control over financial reporting was effective as of December 31, 2013.
This annual report does not include an attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to the final rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual report.
page 33
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Auburn National Bancorporation, Inc.:
We have audited the accompanying consolidated balance sheets of Auburn National Bancorporation, Inc. and subsidiaries
(the Company) as of December 31, 2013 and 2012, and the related consolidated statements of earnings, comprehensive
income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Auburn National Bancorporation, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2013 in conformity
with U.S. generally accepted accounting principles.
Birmingham, Alabama
March 24, 2014
page 34
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
Assets:
Cash and due from banks
Federal funds sold
Interest bearing bank deposits
Cash and cash equivalents
Securities available-for-sale
Loans held for sale
Loans, net of unearned income
Allowance for loan losses
Loans, net
Premises and equipment, net
Bank-owned life insurance
Other real estate owned
Other assets
Total assets
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Long-term debt
Accrued expenses and other liabilities
Total liabilities
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
issued shares - none
Common stock of $.01 par value; authorized 8,500,000 shares;
issued 3,957,135 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net
Less treasury stock, at cost - 314,017 shares and 314,232 shares
at December 31, 2013 and 2012, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements
$
$
$
$
2013
13,437
26,965
13,820
54,222
271,219
2,296
383,339
(5,268)
378,071
10,442
17,503
3,884
13,706
751,343
$
$
125,740
543,104
668,844
3,363
12,217
2,434
686,858
—
39
3,759
71,879
(4,552)
(6,640)
64,485
$
751,343
$
December 31
2012
18,762
42,682
505
61,949
259,475
2,887
398,193
(6,723)
391,470
10,528
17,076
4,919
11,529
759,833
118,014
518,803
636,817
2,689
47,217
2,961
689,684
—
39
3,756
67,821
5,174
(6,641)
70,149
759,833
page 35
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars in thousands, except share and per share data)
Interest income:
Loans, including fees
Securities
Federal funds sold and interest bearing bank deposits
Total interest income
Interest expense:
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Gain on sale of affordable housing investments
Affordable housing investment losses
Gain on sale of premises and equipment
Other
Securities gains, net:
Realized gains, net
Total other-than-temporary impairments
Non-credit portion of other-than-temporary impairments
recognized in other comprehensive income
Total securities gains, net
Total noninterest income
Noninterest expense:
Salaries and benefits
Net occupancy and equipment
Professional fees
FDIC and other regulatory assessments
Other real estate owned, net
Prepayment penalties on long-term debt
Other
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Net earnings per share:
Basic and diluted
2013
2012
2011
Year ended December 31
$
$
$
20,604
6,706
148
27,458
5,392
14
1,130
6,536
20,922
400
20,522
930
2,895
427
—
—
1,018
1,377
651
—
—
651
7,298
8,788
1,335
774
512
570
3,028
3,405
18,412
9,408
2,290
7,118
1.95
$
$
$
21,943
7,070
54
29,067
6,324
16
1,830
8,170
20,897
3,815
17,082
1,111
3,445
445
3,268
—
—
1,535
809
(130)
—
679
10,483
8,691
1,332
704
686
323
3,720
3,927
19,383
8,182
1,419
6,763
1.86
$
$
$
21,306
9,343
57
30,706
8,068
12
3,401
11,481
19,225
2,450
16,775
1,167
1,922
460
—
(646)
—
1,396
1,216
(468)
130
878
5,177
8,167
1,404
735
792
2,007
—
3,252
16,357
5,595
57
5,538
1.52
Weighted average shares outstanding:
Basic and diluted
See accompanying notes to consolidated financial statements
3,643,003
3,642,831
3,642,735
page 36
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net earnings
Other comprehensive (loss) income, net of tax:
Unrealized net holding loss on other-than-temporarily
impaired securities due to factors other than credit
Unrealized net holding (loss) gain on all other securities
Reclassification adjustment for net gain on securities
recognized in net earnings
Other comprehensive (loss) income
Year ended December 31
2013
2012
2011
$
7,118
$
6,763 $
5,538
—
(9,315)
(411)
(9,726)
—
1,379
(427)
952
(82)
7,959
(554)
6,423
Comprehensive (loss) income
$
(2,608)
$
7,715 $
11,961
See accompanying notes to consolidated financial statements
page 37
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Stock
Additional
paid-in
capital
Amount
earnings
(loss) income
Accumulated
other
Retained
comprehensive Treasury
39 $
—
—
—
—
39 $
—
—
—
—
39 $
—
—
—
—
39 $
3,752 $
—
—
—
1
3,753 $
—
—
—
3
3,756 $
—
—
—
3
3,759 $
61,421 $
5,538
—
(2,914)
—
64,045 $
6,763
—
(2,987)
—
67,821 $
7,118
—
(3,060)
—
71,879 $
(2,201) $
—
6,423
—
—
4,222 $
—
952
—
—
5,174 $
—
(9,726)
—
—
(4,552) $
stock
(6,643) $
—
—
—
—
(6,643) $
—
—
—
2
(6,641) $
—
—
—
1
(6,640) $
Total
56,368
5,538
6,423
(2,914)
1
65,416
6,763
952
(2,987)
5
70,149
7,118
(9,726)
(3,060)
4
64,485
3,957,135 $
3,957,135 $
Shares
—
—
—
—
(Dollars in thousands, except share data)
Balance, December 31, 2010
Net earnings
Other comprehensive income
Cash dividends paid ($0.80 per share)
Sale of treasury stock (20 shares)
Balance, December 31, 2011
Net earnings
Other comprehensive income
Cash dividends paid ($0.82 per share)
Sale of treasury stock (165 shares)
Balance, December 31, 2012
Net earnings
Other comprehensive loss
Cash dividends paid ($0.84 per share)
Sale of treasury stock (215 shares)
Balance, December 31, 2013
See accompanying notes to consolidated financial statements
—
—
—
—
—
—
—
—
3,957,135 $
3,957,135 $
page 38
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loan losses
Depreciation and amortization
Premium amortization and discount accretion, net
Deferred tax expense (benefit)
Net gain on securities available for sale
Net gain on sale of loans held for sale
Net loss on other real estate owned
Loss on prepayment of long-term debt
Loans originated for sale
Proceeds from sale of loans
Net gain on disposition of premises and equipment
Increase in cash surrender value of bank owned life insurance
Gain on sale of affordable housing partnership investments
Loss on affordable housing partnership investments
Net decrease in other assets
Net (decrease) increase in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Purchase of securities available-for-sale
Decrease (increase) in loans, net
Net purchases of premises and equipment
Decrease in FHLB stock
Capital contributions to affordable housing limited partnerships
Proceeds from sale of affordable housing limited partnerships
Proceeds from sale of premises and equipment
Proceeds from sale of other real estate owned
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase in noninterest-bearing deposits
Net increase (decrease) in interest-bearing deposits
Net increase (decrease) in federal funds purchased and securities
under agreements to repurchase
Repayments or retirement of long-term debt
Proceeds from sale of treasury stock
Dividends paid
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure
See accompanying notes to consolidated financial statements
Year ended December 31
2013
2012
2011
$
7,118
$
6,763
$
5,538
400
827
1,956
1,537
(651)
(2,030)
477
3,028
(94,980)
96,779
(1,018)
(427)
—
—
1,232
(527)
13,721
40,251
54,737
(123,449)
10,721
(462)
1,153
—
—
1,148
2,836
(13,065)
7,726
24,301
674
(38,028)
4
(3,060)
(8,383)
(7,727)
61,949
54,222
3,815
837
2,992
624
(679)
(3,430)
245
3,720
(154,044)
156,967
—
(445)
(3,268)
—
1,131
(171)
15,057 $
57,650
112,005
(130,352)
(33,456)
(1,549)
2,067
—
8,499
—
4,249
19,113 $
11,738
5,527
(116)
(41,816)
5
(2,987)
(27,649) $
6,521 $
55,428
61,949 $
2,450
665
2,445
(368)
(878)
(1,680)
1,830
—
(71,350)
73,550
—
(460)
—
646
1,015
685
14,088
128,715
95,641
(200,106)
(2,824)
(1,568)
856
(4,378)
—
—
1,966
18,302
18,616
(6,191)
120
(8,018)
1
(2,914)
1,614
34,004
21,424
55,428
$
$
$
$
$
6,761 $
758
8,535 $
1,224
11,713
347
2,278
$
1,515
$
3,569
$
$
$
$
$
$
$
page 39
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company whose primary business is
conducted by its wholly-owned subsidiary, AuburnBank (the “Bank”). AuburnBank is a commercial bank located in
Auburn, Alabama. The Bank provides a full range of banking services in its primary market area, Lee County, which
includes the Auburn-Opelika Metropolitan Statistical Area.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Auburn National Bancorporation Capital Trust I is an affiliate of the Company and was included in these consolidated
financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities as of the balance sheet date and the reported amounts of income and expense 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 the determination of the allowance for loan losses, fair value measurements,
valuation of other real estate owned, and valuation of deferred tax assets.
In the first quarter of 2013, the Company adopted new guidance related to the following Accounting Standards
Updates (“Updates” or “ASUs”):
ASU 2011-11, Disclosures about Offsetting Assets and Liabilities;
ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities; and
ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.
In the third quarter of 2013, the Company adopted new guidance related to the following Update:
ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark
Interest Rate for Hedge Accounting Purposes.
Information about these pronouncements is described in more detail below.
ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, expands the disclosure requirements for financial
instruments and derivatives that may be offset in accordance with enforceable master netting agreements or similar
arrangements. The disclosures are required regardless of whether the instruments have been offset (or netted) in the
statement of financial position. Under ASU 2011-11, companies must describe the nature of offsetting arrangements and
provide quantitative information about those agreements, including the gross and net amounts of financial instruments that
are recognized in the statement of financial position. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope
of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of the offsetting disclosures and addresses
any unintended consequences due to feedback from stakeholders that standard commercial provisions of many contracts
would equate to a master netting arrangement. These changes were effective for the Company in the first quarter of 2013
with retrospective application. Adoption of this ASU did not have any impact on the financial statements of the Company.
ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, seeks to
improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update
require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the
respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its
entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
page 40
income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP
that provide additional detail about those amounts. These changes were effective for the Company in the first quarter of
2013 with retrospective application. This Update did not affect our consolidated financial results as it amends only the
presentation of comprehensive income. See Consolidated Statements of Comprehensive Income.
ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark
Interest Rate for Hedge Accounting Purposes, permits the Fed Funds Effective Swap Rate (Overnight Index Swap Rate) to
be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to LIBOR and U.S. Treasury. The
ASU also removes the restriction on using different benchmark rates for similar hedges. These changes are effective for the
Company in the third quarter of 2013 with prospective application for qualifying new or redesignated hedging relationships
entered into on or after July 17, 2013. Adoption of this ASU did not have a significant impact on the financial statements of
the Company.
Cash Equivalents
Cash equivalents include cash on hand, cash items in process of collection, amounts due from banks, including
interest bearing deposits with other banks, and federal funds sold.
Securities
Securities are classified based on management’s intention at the date of purchase. At December 31, 2013, all of the
Company’s securities were classified as available-for-sale. Securities available-for-sale are used as part of the Company’s
interest rate risk management strategy, and they may be sold in response to changes in interest rates, changes in prepayment
risks or other factors. All securities classified as available-for-sale are recorded at fair value with any unrealized gains and
losses reported in accumulated other comprehensive loss, net of the deferred income tax effects. Interest and dividends on
securities, including the amortization of premiums and accretion of discounts are recognized in interest income over the
anticipated life of the security using the effective interest method, taking into consideration prepayment assumptions.
Realized gains and losses from the sale of securities are determined using the specific identification method.
On a quarterly basis, management makes an assessment to determine whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity
securities with an unrealized loss, the Company considers many factors including the severity and duration of the
impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value;
and recent events specific to the issuer or industry. Equity securities on which there is an unrealized loss that is deemed to
be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains
(losses), net.
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 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, as a realized loss in securities gains (losses), 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.
Loans held for sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value
in the aggregate. Loan sales are recognized when the transaction closes, the proceeds are collected, and ownership is
transferred. Continuing involvement, through the sales agreement, consists of the right to service the loan for a fee for the
life of the loan, if applicable. Gains on the sale of loans held for sale are recorded net of related costs, such as
commissions, and reflected as a component of mortgage lending income in the consolidated statements of earnings.
page 41
Audited Financial Statements
In the course of conducting the Bank’s mortgage lending activities of originating mortgage loans and selling those
loans in the secondary market, the Bank makes various representations and warranties to the purchaser of the mortgage
loans. Every loan closed by the Bank’s mortgage center is run through a government agency automated underwriting
system. Any exceptions noted during this process are remedied prior to sale. These representations and warranties also
apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Failure by the
Company to comply with the underwriting and/or appraisal standards could result in the Company being required to
repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot
be cured by the Company within the specified period following discovery. In 2012, we repurchased one residential
mortgage loan with an unpaid principal balance of $0.3 million. This loan was current as to principal and interest at the
time of repurchase, and we incurred no losses upon repurchase. Except for this loan, during 2013, 2012, and 2011, no loans
were repurchased and no reimbursements for investor losses were made by the Company.
Loans
Loans are reported at their outstanding principal balances, net of any unearned income, charge-offs, and any deferred
fees or costs on originated loans. Interest income is accrued based on the principal balance outstanding. Loan origination
fees, net of certain loan origination costs, are deferred and recognized in interest income over the contractual life of the loan
using the effective interest method. Loan commitment fees are generally deferred and amortized on a straight-line basis
over the commitment period, which results in a recorded amount that approximates fair value.
The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of
the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days
past due, unless the loan is both well-collateralized and in the process of collection. Generally, all interest accrued but not
collected for loans that are placed on nonaccrual status is reversed against current interest income. Interest collections on
nonaccrual loans are generally applied as principal reductions. The Company determines past due or delinquency status of a
loan based on contractual payment terms.
A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest
payments due according to the contractual terms of the loan agreement. Individually identified impaired loans are 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 if the loan is collateral dependent. If the recorded investment in
the impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for
loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.
Impaired loans also included troubled debt restructurings (“TDRs”). In the normal course of business, management
may grant concessions to borrowers who are experiencing financial difficulty. The concessions granted most frequently for
TDRs involve reductions or delays in required payments of principal and interest for a specified time, the rescheduling of
payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan. In most cases, the conditions of
the credit also warrant nonaccrual status, even after the restructuring occurs. 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 restructuring. TDR loans may be returned to accrual status if there has been at least a six-month sustained period of
repayment performance by the borrower.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management believes is adequate to absorb probable losses
inherent in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries
are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of
the portfolio, current economic conditions, growth, composition of the loan portfolio, homogeneous pools of loans, risk
ratings of specific loans, historical loan loss factors, identified impaired loans and other factors related to the portfolio. This
evaluation is performed quarterly and is inherently subjective, as it requires various material estimates that are susceptible
to significant change, including the amounts and timing of future cash flows expected to be received on any impaired loans.
In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s
allowance for loan losses, and may require the Company to record additions to the allowance based on their judgment about
information available to them at the time of their examinations.
Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on a
straight-line method over the useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include
lease option periods to the extent that the exercise of such options is reasonably assured.
page 42
Other Real Estate Owned
Other real estate owned (“OREO”) includes properties acquired through, or in lieu of, loan foreclosure that are held
for sale and are initially recorded at the lower of the loan’s carrying amount or fair value less cost to sell at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying value amount or fair value less cost to sell. Gains or losses realized upon
sale of OREO and additional losses related to subsequent valuation adjustments are determined on a specific property basis
and are included as a component of noninterest expense along with holding costs.
Nonmarketable equity investments
Nonmarketable equity investments include equity securities that are not publicly traded and securities acquired for
various purposes. The Bank is required to maintain certain minimum levels of equity investments with certain regulatory
and other entities in which the Bank has an ongoing business relationship based on the Bank’s common stock and surplus
(with regard to the relationship with the Federal Reserve Bank) or outstanding borrowings (with regard to the relationship
with the Federal Home Loan Bank of Atlanta). These securities are accounted for under the cost method and are included in
other assets. For cost-method investments, on a quarterly basis, the Company evaluates whether an event or change in
circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the
investment. If the Company determines that a decline in value is other-than-temporary, the Company will recognize the
estimated loss in securities gains (losses), net.
Transfers of Financial Assets
Transfers of an entire financial asset (i.e. loan sales), a group of entire financial assets, or a participating interest in an
entire financial asset (i.e. loan participations sold) are accounted for as sales when control over the assets have been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the
Company, (2) the transferee obtains the right (free of conditions that constrain it from taking that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs. The Company
determines the fair value of MSRs at the date the loan is transferred. 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 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. The amortization of MSRs is analyzed monthly and is adjusted to reflect changes in prepayment speeds, as well as
other factors. MSRs are evaluated for impairment based on the fair value of those assets. 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 through a
charge to earnings. The valuation allowance is adjusted as the fair value changes. MSRs are included in the other assets
category in the accompanying consolidated balance sheets.
Derivative Instruments
In accordance with ASC Topic 815, Derivatives and Hedging, all derivative instruments are recorded on the
consolidated balance sheet at their respective fair values.
The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If the derivative
instrument is not designated as part of a hedging relationship, the gain or loss on the derivative instrument is recognized in
earnings in the period of change. None of the derivatives utilized by the Company have been designated as a hedge.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase generally mature less than one year from the transaction date.
Securities sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated
balance sheets at the amount of cash received in connection with each transaction.
page 43
Audited Financial Statements
Income Taxes
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized. The net deferred tax asset is reflected as a component of other
assets in the accompanying consolidated balance sheets.
Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income
(loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss
from continuing operations that occurred during the year, plus or minus income tax effects of (1) changes in certain
circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in
income tax laws or rates, and (3) changes in income tax status, subject to certain exceptions. The amount allocated to other
comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted
for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.
In accordance with ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not
meeting the “more likely than not” test, no tax benefit is recorded. It is the Company’s policy to recognize interest and
penalties related to income tax matters in income tax expense. The Company and its wholly-owned subsidiaries file a
consolidated income tax return.
Fair Value Measurements
ASC 820, which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted
accounting principles and expands disclosures about fair value measurements. ASC 820 applies only to fair-value
measurements that are already required or permitted by other accounting standards. The definition of fair value focuses on
the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the
asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-
based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based
on the assumptions that market participants would use in pricing the asset or liability. For more information related to fair
value measurements, please refer to Note 17, Fair Value.
Subsequent Events
The Company has evaluated the effects of events or transactions through the date of this filing that have occurred
subsequent to December 31, 2013. The Company does not believe there are any material subsequent events that would
require further recognition or disclosure.
page 44
NOTE 2: BASIC AND DILUTED EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average common shares
outstanding for the year. 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. As of December 31, 2013, 2012,
and 2011, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect
to consider for the diluted earnings per share calculation.
The basic and diluted earnings per share computations for the respective years are presented below.
(Dollars in thousands, except share and per share data)
Basic and diluted:
Net earnings
Weighted average common shares outstanding
Earnings per share
NOTE 3: VARIABLE INTEREST ENTITIES
Year ended December 31
2013
2012
2011
$
$
7,118
3,643,003
1.95
$
$
6,763
3,642,831
1.86
$
$
5,538
3,642,735
1.52
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 December 31, 2013, the Company did not have any consolidated VIEs to disclose but did have one
nonconsolidated VIE, discussed below.
Trust Preferred Securities
The Company owns the common stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust
I, which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of
approximately $7.0 million at the time of issuance. This trust meets the definition of a VIE of which the Company is not the
primary beneficiary; the trust’s only assets are junior subordinated debentures issued by the Company, which were acquired
by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior
subordinated debentures of approximately $7.2 million are included in long-term debt and the Company’s equity interest of
$0.2 million in the business trust is included in other assets. Interest expense on the junior subordinated debentures is
included in interest expense on long-term debt.
The following table summarizes VIEs that are not consolidated by the Company as of December 31, 2013.
(Dollars in thousands)
Type:
Trust preferred issuances
NOTE 4: RESTRICTED CASH BALANCES
Maximum
Loss
Exposure
Liability
Recognized
Classification
N/A
$
7,217
Long-term debt
Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve
Bank based principally on the type and amount of their deposits. As of December 31, 2013 and 2012, the Bank did not
have a required reserve balance at the Federal Reserve Bank.
page 45
Audited Financial Statements
NOTE 5: SECURITIES
At December 31, 2013 and 2012, 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 December 31, 2013 and 2012, respectively, are presented below.
1 year
or less
1 to 5
years
5 to 10
After 10
years
years
Fair
Value
Gross Unrealized Amortized
Gains
Losses
Cost
(Dollars in thousands)
December 31, 2013
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
$
—
—
— 1,735
44,522
— 23,247
— 8,306 154,052 162,358
64,339
21,275
21,366
41,238
— 4,557 $
976
1,560
4,733
459
49,079
166,115
63,238
9,749 $ 278,432
$
— 1,735
52,919 216,565 271,219
Total available-for-sale
December 31, 2012
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
Trust preferred securities
Total available-for-sale
(a) Includes securities issued by U.S. government agencies or government sponsored entities.
— 20,065
39,525
— 4,700 136,760 141,460
77,838
652
45,771 211,763 259,475
—
—
111
—
111
1,830
—
1,830
21,006
—
54,891
652
19,460
$
$
2,536
187
3,012
5,222
113
8,534
19 $
39,357
162
138,610
—
72,616
693
154
335 $ 251,276
Securities with aggregate fair values of $120.5 million and $134.0 million at December 31, 2013 and 2012,
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 cost-method investments. The carrying
amounts of cost-method investments were $1.8 and $3.0 million at December 31, 2013 and 2012, respectively. Cost-
method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal
Reserve Bank (“FRB”) stock.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at December 31, 2013 and 2012, respectively, segregated by
those securities that have been in an unrealized loss position for less than 12 months and 12 months or more are presented
below.
(Dollars in thousands)
December 31, 2013:
Agency obligations
Agency RMBS
State and political subdivisions
Total
December 31, 2012:
Agency obligations
Agency RMBS
Trust preferred securities
Total
Less than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
$
$
$
35,933
109,774
9,575
155,282
9,966
25,207
—
35,173
3,182
4,393
459
8,034
19
162
—
181
8,590
7,683
—
16,273
—
—
346
346
1,376
339
—
1,715
44,523 $
117,457
9,575
171,555 $
—
—
154
154
9,966 $
25,207
346
35,519 $
4,558
4,732
459
9,749
19
162
154
335
page 46
For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more
likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may
be maturity. The Company assesses each security for credit impairment. For debt securities, the Company evaluates, where
necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’
amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances
has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.
In determining whether a loss is temporary, the Company considers all relevant information including:
the length of time and the extent to which the fair value has been less than the amortized cost basis;
adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in
the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial
condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of
the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or
changes in the quality of the credit enhancement);
the historical and implied volatility of the fair value of the security;
the payment structure of the debt security and the likelihood of the issuer being able to make payments that
increase in the future;
failure of the issuer of the security to make scheduled interest or principal payments;
any changes to the rating of the security by a rating agency; and
recoveries or additional declines in fair value subsequent to the balance sheet date.
Agency obligations
The unrealized losses associated with agency obligations were primarily driven by changes in interest rates and not
due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-
sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.
Agency residential mortgage-backed securities (“RMBS”)
The unrealized losses associated with agency RMBS were primarily driven by changes in interest rates and not due to
the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored
entities and did not have any credit losses given the explicit government guarantee or other government support.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by
changes in interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a
bond insurer, but management did not rely on the guarantee in making its investment decision. These securities will
continue to be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the
rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire
amortized cost basis of these securities.
Cost-method investments
At December 31, 2013, cost-method investments with an aggregate cost of $1.8 million were not evaluated for
impairment because the Company did not identify any events or changes in circumstances that may have a significant
adverse effect on the fair value of these cost-method investments.
The carrying values of the Company’s investment securities could decline in the future if the financial condition of an
issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the
security. As a result, there is a risk that significant other-than-temporary impairment charges may occur in the future.
page 47
Audited Financial Statements
Other-Than-Temporarily Impaired Securities
The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that
the Company has written down for other-than-temporary impairment and the credit component of the loss is recognized in
earnings (referred to as “credit-impaired” debt securities). Other-than-temporary impairments recognized in earnings for the
years ended 2013, 2012, and 2011, for credit-impaired debt securities are presented as additions in two components based
upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not
the first time the debt security was credit-impaired (subsequent credit impairments). The credit loss component is reduced if
the Company sells, intends to sell, or believes it will be required to sell previously credit-impaired debt securities.
Additionally, the credit loss component is reduced if the Company receives cash flows in excess of what it expected to
receive over the remaining life of the credit-impaired debt security, the security matures or the security is fully written-
down and deemed worthless. Changes in the credit loss component of credit-impaired debt securities were:
(Dollars in thousands)
Balance, beginning of period
Additions:
Subsequent credit impairments
Reductions:
Securities sold
Securities fully written down and deemed worthless
Balance, end of period
Other-Than-Temporary Impairment
Year ended December 31
$
$
2013
1,257
—
(757)
(500)
—
2012
3,276
130
(2,149)
—
1,257
2011
2,938
338
—
—
3,276
The following table presents details of the other-than-temporary impairment related to securities.
(Dollars in thousands)
Other-than-temporary impairment charges (included in earnings):
Debt securities:
Individual issuer trust preferred securities
Total debt securities
Total other-than-temporary impairment charges (included in earnings)
Other-than-temporary impairment on debt securities:
Recorded as part of gross realized losses:
Credit-related
Securities with intent to sell
Recorded directly to other comprehensive income for non-credit
related impairment
Total other-than-temporary impairment on debt securities
$
$
$
$
$
Realized Gains and Losses
Year ended December 31
2013
2012
2011
—
—
—
—
—
130
130
130
130
—
—
—
—
130
338
338
338
338
—
130
468
The following table presents the gross realized gains and losses on sales and other-than-temporary impairment charges
related to securities.
(Dollars in thousands)
Gross realized gains
Gross realized losses
Other-than-temporary impairment charges
Realized gains, net
$
$
2013
745
(94)
—
651
Year ended December 31
2012
1,005
(196)
(130)
679
2011
1,698
(482)
(338)
878
page 48
NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total loans
Less: unearned income
Loans, net of unearned income
2013
57,780
36,479
$
56,102
118,818
174,920
57,871
43,835
101,706
12,893
383,778
(439)
383,339
$
December 31
2012
59,334
37,631
64,368
119,243
183,611
58,087
47,544
105,631
12,219
398,426
(233)
398,193
$
$
Loans secured by real estate were approximately 81.6% of the total loan portfolio at December 31, 2013. At
December 31, 2013, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama and
surrounding areas.
In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a
systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the
allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial,
construction and land development, commercial real estate, residential real estate and consumer installment. Where
appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined
based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and
determining credit risk.
The following describe the risk characteristics relevant to each of the portfolio segments.
Commercial and industrial (“C&I”) — includes loans to finance business operations, equipment purchases, or other
needs for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural
production. Generally the primary source of repayment is the cash flow from business operations and activities of the
borrower.
Construction and land development (“C&D”) — includes both loans and credit lines for the purpose of purchasing,
carrying and developing land into commercial developments or residential subdivisions. Also included are loans and lines
for construction of residential, multi-family and commercial buildings. Generally the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate (“CRE”) — includes loans disaggregated into two classes: (1) owner occupied and (2) other.
Owner occupied – includes loans secured by business facilities to finance business operations, equipment
and owner-occupied facilities primarily for small and medium-sized commercial customers. Generally the
primary source of repayment is the cash flow from business operations and activities of the borrower, who
owns the property.
Other – primarily includes loans to finance income-producing commercial and multi-family properties.
Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices,
single retail stores, industrial buildings, warehouses and apartments leased generally to local businesses and
residents. Generally the primary source of repayment is dependent upon income generated from the real
estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates as
well as the financial health of the borrower.
page 49
Audited Financial Statements
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 to consumers
that are secured by a primary residence or second home. These loans are underwritten in accordance with the
Bank’s general loan policies and procedures which require, among other things, proper documentation of
each borrower’s financial condition, satisfactory credit history and property value.
Investment property – primarily includes loans to finance income-producing 1-4 family residential
properties. Generally the primary source of repayment is dependent upon income generated from leasing the
property securing the loan. The underwriting of these loans takes into consideration the rental rates as well
as the financial health of the borrower.
Consumer installment — includes loans to individuals both secured by personal property and unsecured. Loans
include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with
the Bank’s general loan policies and procedures which require, among other things, proper documentation of each
borrower’s financial condition, satisfactory credit history, and if applicable, property value.
The following is a summary of current, accruing past due and nonaccrual loans by portfolio class as of December
31, 2013 and 2012.
(In thousands)
Current
Past Due
90 days
Loans
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Accrual
Total
Loans
December 31, 2013:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
December 31, 2012:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
$
57,558
34,883
54,214
118,389
172,603
56,191
42,935
99,126
12,789
$ 376,959
$
59,101
35,917
63,323
113,344
176,667
55,521
46,460
101,981
12,157
$ 385,823
167
14
861
—
861
745
598
1,343
100
2,485
173
8
—
230
230
1,202
335
1,537
62
2,010
—
—
57,725
34,897
55
1,582
$
57,780
36,479
1,027
429
1,456
866
302
1,168
—
4,261
56,102
118,818
174,920
57,871
43,835
101,706
12,893
$ 383,778
—
55,075
— 118,389
— 173,464
57,005
43,533
100,538
12,893
379,517
69
—
69
4
73
—
—
59,274
35,925
60
1,706
$
59,334
37,631
—
63,323
— 113,574
— 176,897
1,045
5,669
6,714
64,368
119,243
183,611
58
—
58
—
58
56,781
46,795
103,576
12,219
387,891
1,306
749
2,055
—
58,087
47,544
105,631
12,219
10,535 $ 398,426
The gross interest income which would have been recorded under the original terms of those nonaccrual loans had
they been accruing interest, amounted to approximately $270 thousand, $511 thousand and $494 thousand for the years
ended December 31, 2013, 2012, and 2011, respectively.
page 50
Allowance for Loan Losses
The allowance for loan losses as of and for the years ended December 31, 2013, 2012 and 2011, is presented below.
(In thousands)
Beginning balance
Charged-off loans
Recovery of previously charged-off loans
Net charge-offs
Provision for loan losses
Ending balance
Year ended December 31
2013
6,723
(2,020)
165
(1,855)
400
5,268
$
$
2012
6,919
(4,334)
323
(4,011)
3,815
6,723
$
$
$
$
2011
7,676
(3,413)
206
(3,207)
2,450
6,919
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The
level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset
quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay
(including the timing of future payment), the estimated value of any underlying collateral, composition of the loan
portfolio, economic conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory
recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and
timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans
are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan
may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant
to the terms of the loan is unlikely.
The Company deems loans impaired when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts
due according to the contractual terms means that both the interest and principal payments of a loan will be collected as
scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan.
The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected
future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment
measurement is based on the fair value of the collateral, less estimated disposal costs.
The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in
the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by
charge-offs, net of recoveries of amounts previously charged-off.
In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and
independent loan review processes. The Company’s loan review process assists in determining whether there are loans in
the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio.
The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers,
and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company
incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all
amounts due according to the contractual terms of a loan.
As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five
segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and
consumer installment 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 December 31, 2013 and 2012, and for the years 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.
page 51
Audited Financial Statements
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of
probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors
is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated
probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based
upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic
conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing
factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance
allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of
these factors.
The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2013, the
Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical
loss factors are calculated. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a
rolling 6 quarter historical period. Beginning with the quarter ended June 30, 2013, the Company calculated average losses
for all loan segments (except for the commercial real estate loan segment) using a rolling 8 quarter historical period in order
to better capture the effects of the current economic cycle on the Company’s loan loss experience and continued this
methodology through December 31, 2013. Based upon management’s review of charge-off trends for each loan segment,
the Company continues to calculate average losses for the commercial real estate loan segment using a rolling 6 quarter
historical period. Other than the changes discussed above, the Company has not made any changes to its calculation of
historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the
periods included in the accompanying consolidated balance sheets and statements of earnings.
The following table details the changes in the allowance for loan losses by portfolio segment for the years ended
December 31, 2013, 2012, and 2011.
(in thousands)
Balance, December 31, 2010 $
Charge-offs
Recoveries
Net charge-offs
Provision
Balance, December 31, 2011 $
Charge-offs
Recoveries
Net charge-offs
Provision
Balance, December 31, 2012 $
Charge-offs
Recoveries
Net charge-offs
Provision
Balance, December 31, 2013 $
Commercial
and
industrial
972
(679)
34
(645)
621
948
(289)
54
(235)
99
812
(514)
48
(466)
40
386
Construction
and land
Development
2,223
(1,758)
2
(1,756)
1,003
1,470
(231)
46
(185)
260
1,545
(39)
6
(33)
(1,146)
366
Commercial
Real Estate
Residential
Real Estate
2,893
(422)
—
(422)
538
3,009
(3,184)
71
(3,113)
3,241
3,137
(262)
4
(258)
307
3,186
1,336
(533)
155
(378)
405
1,363
(545)
134
(411)
174
1,126
(808)
88
(720)
708
1,114
Consumer
Installment
141
(21)
15
(6)
(6)
129
(85)
18
(67)
41
103
(397)
19
(378)
491
216
Unallocated
111 $
—
—
—
(111)
— $
—
—
—
—
— $
—
—
—
—
— $
Total
7,676
(3,413)
206
(3,207)
2,450
6,919
(4,334)
323
(4,011)
3,815
6,723
(2,020)
165
(1,855)
400
5,268
page 52
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 December 31, 2013 and 2012.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
(In thousands)
December 31, 2013:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
December 31, 2012:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
$
$
$
$
for loan
investment
for loan
investment
for loan
investment
losses
in loans
losses
in loans
losses
in loans
386
278
3,014
1,114
216
5,008
812
1,416
3,003
1,126
103
6,460
57,656
34,897
171,987
100,780
12,893
378,213
59,165
36,008
176,085
104,414
12,219
387,891
—
88
172
—
—
260
—
129
134
—
—
263
124
1,582
2,933
926
—
5,565
169
1,623
7,526
1,217
—
10,535
386
366
3,186
1,114
216
5,268
812
1,545
3,137
1,126
103
6,723
57,780
36,479
174,920
101,706
12,893
383,778
59,334
37,631
183,611
105,631
12,219
398,426
(1) Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies
(formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans
(2) Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly
FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
page 53
Audited Financial Statements
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the
standard asset classification system used by the federal banking agencies. The following table presents credit quality
indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for
loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows:
Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or
guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or
inadequately protect the Company’s position at some future date. These loans are not adversely classified and
do not expose an institution to sufficient risk to warrant an adverse classification.
Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt
repayment, even though they are currently performing. These loans are characterized by the distinct
possibility that the Company may incur a loss in the future if these weaknesses are not corrected;
Nonaccrual – includes loans where management has determined that full payment of principal and interest is
in doubt.
(In thousands)
December 31, 2013
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
December 31, 2012
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
$
53,060
33,616
4,183
180
53,430
117,490
170,920
50,392
40,517
90,909
12,713
361,218
58,487
34,490
59,270
111,719
170,989
49,462
43,559
93,021
11,850
368,837
$
$
$
770
91
861
1,137
1,310
2,447
34
7,705
224
310
2,528
653
3,181
1,544
1,033
2,577
155
6,447
482
1,101
875
808
1,683
5,476
1,706
7,182
146
10,594
563
1,125
1,525
1,202
2,727
5,775
2,203
7,978
214
12,607
55
1,582
$ 57,780
36,479
1,027
429
1,456
866
302
1,168
—
4,261
56,102
118,818
174,920
57,871
43,835
101,706
12,893
$ 383,778
60
1,706
$ 59,334
37,631
1,045
5,669
6,714
64,368
119,243
183,611
1,306
749
2,055
—
58,087
47,544
105,631
12,219
10,535 $ 398,426
page 54
Impaired loans
The following table presents details related to the Company’s impaired loans. Loans which have been fully charged-off
do not appear in the following table. The related allowance generally represents the following components which
correspond to impaired loans:
Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual
construction and land development, commercial real estate, and residential real estate loans).
Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual
commercial and industrial and consumer loans).
The following table sets forth certain information regarding the Company’s impaired loans that were individually
evaluated for impairment at December 31, 2013 and 2012.
(In thousands)
With no allowance recorded:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
With allowance recorded:
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Total
Total impaired loans
December 31, 2013
Unpaid
principal
balance (1)
Charge-offs
and payments
applied (2)
Recorded
investment (3)
Related
allowance
$
$
$
$
124
2,879
1,217
518
1,735
952
207
1,159
5,897
452
875
602
1,477
1,929
7,826
—
(1,682)
(190)
(89)
(279)
(198)
(35)
(233)
(2,194)
(67)
—
—
—
(67)
(2,261)
124
1,197
1,027
429
1,456
754
172
926
3,703
385
875
602
1,477
1,862
5,565
$
$
(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.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
any related allowance for loan losses.
88
110
62
172
260
260
page 55
Audited Financial Statements
(In thousands)
With no allowance recorded:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
With allowance recorded:
Construction and land development
Commercial real estate:
Owner occupied
Total commercial real estate
Total
Total impaired loans
December 31, 2012
Unpaid
principal
balance (1)
Charge-offs
and payments
applied (2)
Recorded
investment (3)
Related
allowance
$
$
$
$
169
2,879
787
7,914
8,701
971
508
1,479
13,228
471
899
899
1,370
—
(1,682)
(212)
(1,862)
(2,074)
(152)
(110)
(262)
(4,018)
(45)
—
—
(45)
169
1,197
575
6,052
6,627
819
398
1,217
9,210
426
899
899
1,325
14,598
(4,063)
10,535
129
134
134
263
263
$
$
(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.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
any related allowance for loan losses.
The following table provides the average recorded investment in impaired loans and the amount of interest income
recognized on impaired loans after impairment by portfolio segment and class.
Year ended December 31, 2013 Year ended December 31, 2012
Year ended December 31, 2011
Average
Total interest
Average
Total interest
Average
Total interest
recorded
income
recorded
income
recorded
income
investment
recognized
investment
recognized
investment
recognized
$
188
9 $
194
13 $
316
1,603
1,972
1,454
3,426
786
274
1,060
6,277
—
51
12
63
—
—
—
72
$
3,888
2,449
2,621
5,070
861
652
1,513
10,665
—
4,136
64
—
64
—
—
—
$
77
1,828
2,374
4,202
1,376
146
1,522
10,176
9
—
24
—
24
—
—
—
33
(In thousands)
Impaired loans:
Commercial and industrial
Construction and land
development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
$
page 56
Troubled Debt Restructurings
Impaired loans also include troubled debt restructuring (“TDRs”). In the normal course of business, management
may grant concessions to borrowers who are experiencing financial difficulty. A concession may include, but is not limited
to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the
loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the
debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts
due, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to
access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In determining
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 restructuring.
Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments
using the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the
loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is
recognized by establishing a valuation allowance as part of the allowance for loan losses or a charge-off to the allowance
for loan losses. In periods subsequent to the modification, all TDRs are evaluated individually, including those that have
payment defaults, for possible impairment.
The following is a summary of accruing and nonaccrual TDRs and the related loan losses, by portfolio segment and
class.
(In thousands)
December 31, 2013
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
December 31, 2012
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
TDRs
Accruing
Nonaccrual
Total
Related
Allowance
$
$
$
$
124
—
875
602
1,477
—
—
—
1,601
169
—
899
—
899
—
—
—
1,068
—
1,582
285
429
714
754
172
926
3,222
—
1,623
1,045
432
1,477
819
188
1,007
4,107
124
1,582
1,160
1,031
2,191
754
172
926
4,823
169
1,623
1,944
432
2,376
819
188
1,007
5,175
$
$
$
$
—
88
110
62
172
—
—
—
260
—
129
134
—
134
—
—
—
263
At December 31, 2013, there were no significant outstanding commitments to advance additional funds to customers
whose loans had been restructured.
page 57
Audited Financial Statements
The following table summarizes loans modified in a TDR during the respective years both before and after
modification.
($ in thousands)
December 31, 2013
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
December 31, 2012
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
December 31, 2011
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Residential real estate:
Investment property
Total residential real estate
Total
Pre-
Post-
modification
outstanding
recorded
investement
modification
outstanding
recorded
investement
Number of
contracts
$
390
387
1
1
2
3
3
1
4
8
4
4
2
6
2
2
4
14
2
3
5
1
6
1
1
12
$
$
$
$
882
1,037
1,919
849
172
1,021
3,330
882
1,041
1,923
844
172
1,016
3,326
5,419
4,305
3,167
1,803
4,970
863
567
1,430
11,819
791
4,925
3,127
1,229
4,356
391
391
$
10,463
2,225
1,657
3,882
858
563
1,421
9,608
523
4,894
2,840
1,229
4,069
391
391
9,877
The majority of the loans modified in a TDR during the years ended December 31, 2013, 2012, and 2011,
respectively, included delays in required payments of principal and/or interest or where the only concession granted by the
Company was that the interest rate at renewal was not considered to be a market rate.
For the year ended December 31, 2012, decreases in the post modification outstanding recorded investment were
primarily due to principal payments made by borrowers at the date of modification for construction and land development
loans and A/B note restructurings for two owner occupied commercial real estate loans. In certain circumstances, the
Company may require the borrower to reduce the principal balance in order to grant an extension or renewal of the loan.
Total charge-offs related to B notes were $0.9 million for the year ended December 31, 2012.
For the year ended December 31, 2011, decreases in the post modification outstanding recorded investment were
primarily due to two A/B note restructurings, where the B note was charged off. Total charge-offs related to B notes during
the year ended December 31, 2011 were approximately $0.6 million.
page 58
The following table summarizes the recorded investment in loans modified in a TDR within the previous twelve
months for which there was a payment default (defined as 90 days or more past due) during the respective years.
($ in thousands)
December 31, 2013
Construction and land development
Commercial real estate:
Other
Total commercial real estate
Total
December 31, 2012
Construction and land development
Total
December 31, 2011
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Total
(1) Amount as of applicable month end during the respective year for which there was a payment default.
NOTE 7: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2013 and 2012 is presented below.
(Dollars in thousands)
Land
Buildings and improvements
Furniture, fixtures, and equipment
Total premises and equipment
Less: accumulated depreciation
Premises and equipment, net
Number of
Contracts
Recorded
investment (1)
1
1
1
2
1
1
2
1
3
3
$
$
$
$
$
$
1,197
425
425
1,622
2,386
2,386
1,172
1,201
2,373
2,373
2013
5,288
8,539
3,164
16,991
(6,549)
10,442
$
$
December 31
2012
4,983
9,110
3,132
17,225
(6,697)
10,528
Depreciation expense was approximately $418 thousand, $366 thousand, and $328 thousand for the years ended
December 31, 2013, 2012 and 2011, respectively, and is a component of net occupancy and equipment expense in the
consolidated statements of earnings.
NOTE 8: 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.
Servicing fee income is recorded net of related amortization expense and recognized in earnings as part of mortgage
lending 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 periodically evaluates MSRs for impairment. 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
page 59
Audited Financial Statements
as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage
lending income.
The following table details the changes in amortized MSRs and the related valuation allowance for the years ended
December 31, 2013, 2012, and 2011.
(Dollars in thousands)
Beginning balance
Additions, net
Amortization expense
Change in valuation allowance
Ending balance
Valuation allowance included in MSRs, net:
Beginning of period
End of period
Fair value of amortized MSRs:
Beginning of period
End of period
Year ended December 31
$
$
$
$
2013
1,526
822
(384)
386
2,350
386
—
1,526
3,452
2012
1,245
966
(416)
(269)
1,526
117
386
1,245
1,526
2011
1,189
415
(242)
(117)
1,245
—
117
1,335
1,245
Data and assumptions used in the fair value calculation related to MSRs at December 31, 2013 and 2012,
respectively, are presented below.
(Dollars in thousands)
Unpaid principal balance
Weighted average prepayment speed (CPR)
Discount rate (annual percentage)
Weighted average coupon interest rate
Weighted average remaining maturity (months)
Weighted average servicing fee (basis points)
$
2013
356,334
7.5 %
10.0 %
3.9 %
268
25.0
December 31
2012
283,306
23.7
11.0
3.9
275
25.0
At December 31, 2013, the weighted average amortization period for MSRs was 7.5 years. Estimated amortization
expense for each of the next five years is presented below.
(Dollars in thousands)
2014
2015
2016
2017
2018
NOTE 9: DEPOSITS
$
December 31, 2013
313
272
242
209
183
At December 31, 2013, the scheduled maturities of certificates of deposit and other time deposits are presented
below.
(Dollars in thousands)
2014
2015
2016
2017
2018
Thereafter
Total certificates of deposit and other time deposits
page 60
$
December 31, 2013
128,615
58,045
17,739
25,985
20,384
10,431
261,199
$
Additionally, at December 31, 2013 and 2012, approximately $156.2 and $156.8 million, respectively, of certificates
of deposit and other time deposits were issued in denominations of $100,000 or greater.
At December 31, 2013 and 2012, the amount of deposit accounts in overdraft status that were reclassified to loans on
the accompanying consolidated balance sheets was not material.
NOTE 10: SHORT-TERM BORROWINGS
At December 31, 2013, 2012, and 2011, the composition of short-term borrowings is presented below.
(Dollars in thousands)
Federal funds purchased:
2013
2012
Weighted
Weighted
2011
Weighted
Amount
Avg. Rate
Amount
Avg. Rate
Amount
Avg. Rate
$
As of December 31
Average during the year
Maximum outstanding at
any month-end
Securities sold under
agreements to repurchase:
$
As of December 31
Average during the year
Maximum outstanding at
any month-end
—
43
2,376
3,363
2,774
3,363
—
0.92 %
0.50 %
0.50 %
$
$
—
225
1,925
2,689
2,746
3,174
—
0.96 %
$
0.50 %
0.50 %
$
—
6
—
2,805
2,416
2,936
—
1.00 %
0.50 %
0.50 %
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. The
Bank had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2013.
Securities sold under agreements to repurchase represent short-term borrowings with maturities less than one year
collateralized by a portion of the Company’s securities portfolio. Securities with an aggregate carrying value of $6.9
million and $8.0 million at December 31, 2013 and 2012, respectively, were pledged to secure securities sold under
agreements to repurchase.
NOTE 11: LONG-TERM DEBT
At December 31, 2013 and 2012, the composition of long-term debt is presented below.
(Dollars in thousands)
FHLB advances, due 2014 to 2018
Securities sold under agreements to repurchase, due 2017
Subordinated debentures, due 2033
Total long-term debt
2013
2012
Amount
5,000
—
7,217
Weighted
Avg. Rate
$
3.59%
—
3.38
Amount
25,000
15,000
7,217
12,217
3.47%
$
47,217
$
$
Weighted
Avg. Rate
3.42%
4.21
3.38
3.66%
The Bank had $5.0 million and $25.0 million of FHLB advances with original maturities greater than one year at
December 31, 2013 and 2012, respectively. Securities with an aggregate carrying value of $1.0 million and $1.5 million
and certain qualifying residential mortgage loans with an aggregate carrying value of $42.1 million and $45.5 million at
December 31, 2013 and 2012, respectively, were pledged to secure long-term FHLB advances.
The Bank had no securities sold under agreements to repurchase with an original maturity greater than one year at
December 31, 2013 and $15.0 million in securities sold under agreements to repurchase with an original maturity greater
than one year at December 31, 2012. Securities with an aggregate carrying value of $19.0 million at December 31, 2012
were pledged to secure long-term securities sold under agreements to repurchase.
page 61
Audited Financial Statements
The Company formed Auburn National Bancorporation Capital Trust I, a wholly-owned statutory business trust, in
2003. The Trust issued $7.0 million of trust preferred securities that were sold to third parties. The proceeds from the sale
of the trust preferred securities and trust common securities that we hold, were used to purchase subordinated debentures of
$7.2 million from the Company, which are presented as long-term debt in the consolidated balance sheets and qualify for
inclusion in Tier 1 capital for regulatory capital purposes, subject to certain limitations. The debentures mature on
December 31, 2033 and have been redeemable since December 31, 2008.
The following is a schedule of contractual maturities of long-term debt:
(Dollars in thousands)
FHLB advances
Subordinated debentures
Total long-term debt
$
$
2014
—
—
—
2015
—
—
—
2016
—
—
—
2017
—
—
—
2018
Thereafter
5,000
—
5,000
—
7,217
7,217
Total
5,000
7,217
12,217
NOTE 12: OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders,
and it includes net earnings and other comprehensive income (loss). Other comprehensive income (loss) for the years
ended December 31, 2013, 2012, and 2011, is presented below.
(In thousands)
Pre-tax
amount
Tax benefit
Net of
(expense)
tax amount
2013:
Unrealized net holding loss on all other securities
Reclassification adjustment for net gain on securities recognized in net earnings
$
Other comprehensive loss
$
2012:
Unrealized net holding gain on all other securities
Reclassification adjustment for net gain on securities recognized in net earnings
$
Other comprehensive income
2011:
Unrealized net holding loss on other-than-temporarily impaired securities
due to factors other than credit
$
$
Unrealized net holding gain on all other securities
Reclassification adjustment for net gain on securities recognized in net earnings
Other comprehensive income
$
(14,761)
(651)
(15,412)
2,188
(679)
1,509
(130)
11,187
(878)
10,179
5,446
240
5,686
(809)
252
(557)
48
(4,128)
324
(3,756)
(9,315)
(411)
(9,726)
1,379
(427)
952
(82)
7,059
(554)
6,423
page 62
NOTE 13: INCOME TAXES
For the years ended December 31, 2013, 2012, and 2011 the components of income tax expense from continuing
operations are presented below.
Year ended December 31
(Dollars in thousands)
Current income tax expense:
Federal
State
Total current income tax expense
Deferred income tax expense (benefit):
Federal
State
Total deferred income tax expense (benefit)
2013
2012
$
594
159
753
1,330
207
1,537
737
58
795
472
152
624
Total income tax expense
$
2,290
1,419
2011
72
353
425
(344)
(24)
(368)
57
Total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of
34% to earnings before income taxes. A reconciliation of the differences for the years ended December 31, 2013, 2012,
and 2011, is presented below.
(Dollars in thousands)
Earnings before income taxes
Amount
$
9,408
Percent of
pre-tax
earnings
Percent of
pre-tax
earnings
Amount
8,182
Percent of
pre-tax
earnings
Amount
5,595
2013
2012
2011
Income taxes at statutory rate
Tax-exempt interest
State income taxes, net of
federal tax effect
Low-income housing credit
Bank owned life insurance
Change in valuation allowance
Other
3,199
(884)
242
—
(145)
—
(122)
34.0 %
(9.4)
2.6
—
(1.5)
—
(1.3)
Total income tax expense
$
2,290
24.4 %
2,782
(997)
179
—
(151)
(505)
111
1,419
34.0 %
(12.2)
1,902
(1028)
34.0 %
(18.4)
2.2
—
(1.8)
(6.2)
1.4
17.4 %
183
(891)
(157)
—
48
57
3.3
(15.9)
(2.8)
—
0.9
1.1 %
page 63
Audited Financial Statements
The Company had net deferred tax assets of $5.4 million and $1.2 million at December 31, 2013 and 2012,
respectively, included in other assets on the consolidated balance sheets. The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are
presented below:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Other-than-temporary impairment on securities
Unrealized loss on securities
Write-downs on other real estate owned
Tax credit carry-forwards
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Unrealized gain on securities
Originated mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax asset
December 31
2013
2012
$
1,944
—
2,661
282
1,137
531
6,555
90
—
867
205
1,162
$
5,393
2,480
464
—
489
932
670
5,035
11
3,025
563
192
3,791
1,244
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 of 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 historical taxable income and
projection for future taxable income over the periods which the temporary differences resulting in the remaining deferred
tax assets are deductible, management believes it is more-likely-than-not that the Company will realize the benefits of these
deductible differences at December 31, 2013. The amount of the deferred tax assets considered realizable, however, could
be reduced in the near term if estimates of future taxable income are reduced.
The change in the net deferred tax asset for the years ended December 31, 2013, 2012, and 2011, is presented below.
(Dollars in thousands)
Net deferred tax asset:
Balance, beginning of year
Deferred tax (expense) benefit related to continuing operations
Stockholders' equity, for accumulated other comprehensive loss (income)
Balance, end of year
Year ended December 31
2013
2012
2011
$
$
1,244
(1,537)
5,686
5,393
2,425
(624)
(557)
1,244
5,813
368
(3,756)
2,425
ASC 740 defines the threshold for recognizing the benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the de-recognition,
measurement, and classification of income tax uncertainties in interim periods. As of December 31, 2013, the Company
had no unrecognized tax benefits related to federal or state income tax matters. The Company does not anticipate any
material increase or decrease in unrecognized tax benefits during 2014 relative to any tax positions taken prior to December
31, 2013. As of December 31, 2013, the Company has accrued no interest and no penalties related to uncertain tax
positions. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax
expense.
The Company and its subsidiaries file consolidated U.S. federal and State of Alabama income tax returns. The
Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the State of
Alabama for the years ended December 31, 2010 through 2013.
page 64
NOTE 14: EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan that covers substantially all employees. Participants may contribute up to 10% of
eligible compensation subject to certain limits based on federal tax laws. The Company’s matching contributions to the
Plan are determined by the board of directors. Participants become 20% vested in their accounts after two years of service
and 100% vested after six years of service. Company matching contributions to the Plan were $115 thousand, $115
thousand, and $110 thousand for the years ended December 31, 2013, 2012, and 2011, respectively, and are included in
salaries and benefits expense.
NOTE 15: DERIVATIVE INSTRUMENTS
Financial derivatives are reported at fair value in other assets or other liabilities on the accompanying Consolidated
Balance Sheets. The accounting for changes in the fair value of a derivative depends on whether it has been designated and
qualifies as part of a hedging relationship. For derivatives not designated as part of a hedging relationship, the gain or loss
is recognized in current earnings within other noninterest income on the accompanying Consolidated Statements of
Earnings. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions
and meet their financing needs. Upon entering into these swaps, the Company enters into offsetting positions in order to
minimize the risk to the Company. These swaps qualify as derivatives, but are not designated as hedging instruments. At
December 31, 2013 and December 31, 2012, the Company had no derivative contracts to assist in managing its own interest
rate sensitivity.
Interest rate swap agreements involve the risk of dealing with counterparties and their ability to meet contractual
terms. When the fair value of a derivative instrument is positive, this generally indicates that the counterparty or customer
owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is
negative, the Company owes the customer or counterparty and therefore, has no credit risk.
A summary of the Company’s interest rate swaps as of and for the years ended December 31, 2013 and 2012 is
presented below.
(Dollars in thousands)
December 31, 2013:
Pay fixed / receive variable
Pay variable / receive fixed
Total interest rate swap agreements
December 31, 2012:
Pay fixed / receive variable
Pay variable / receive fixed
Total interest rate swap agreements
Other
Assets
Estimated
Fair Value
Other
Liabilities
Estimated
Fair Value
Other
noninterest
income
Gains
(Losses)
—
844
844
—
1,210
1,210
844
—
844
1,210
—
1,210
$
$
$
$
366
(366)
—
115
(115)
—
Notional
5,017
5,017
10,034
5,367
5,367
10,734
$
$
$
$
page 65
Audited Financial Statements
NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES
Credit-Related Financial Instruments
The Company is party to credit related financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include commitments to extend credit
and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The
Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
At December 31, 2013 and 2012, the following financial instruments were outstanding whose contract amount
represents credit risk:
(Dollars in thousands)
Commitments to extend credit
Standby letters of credit
December 31
2013
38,870
8,562
$
2012
48,525
7,093
$
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, total
commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is
deemed necessary by the Company, is based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds various assets as collateral, including accounts receivable,
inventory, equipment, marketable securities, and property to support those commitments for which collateral is deemed
necessary. The Company has recorded a liability for the estimated fair value of these standby letters of credit in the amount
of $78 thousand and $74 thousand at December 31, 2013 and 2012, respectively.
Other Commitments
Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to
December 31, 2013, are as follows: 2014, $287 thousand; 2015, $174 thousand; 2016, $111 thousand; 2017, $45 thousand;
2018, none.
Contingent Liabilities
The Company and the Bank are involved in various legal proceedings, arising in connection with their business. In
the opinion of management, based upon consultation with legal counsel, the ultimate resolution of these proceeding will not
have a material adverse affect upon the consolidated financial condition or results of operations of the Company and the
Bank.
page 66
NOTE 17: FAIR VALUE
Fair Value Hierarchy
“Fair value” is defined by ASC 820, Fair Value Measurements and Disclosures, as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most
advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in
active markets.
Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are
observable for the asset or liability, either directly or indirectly.
Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about
the inputs market participants would use in pricing the asset or liability.
Level changes in fair value measurements
Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The
Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when
transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For the years ended December 31, 2013, 2012, and 2011,
there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and
liabilities.
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the
Company obtains pricing from third party pricing services. These third party pricing services consider observable data that
may include broker/dealer quotes, market spreads, cash flows, market consensus prepayment speeds, benchmark yields,
reported trades for similar securities, market consensus prepayment speeds, credit information and the securities’ terms and
conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for
reasonableness given current market conditions. As part of its review, management may obtain non-binding third party
broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided
by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation
firm will compare the price provided by the third party pricing service with its own price and will review the significant
assumptions and valuation methodologies used with management.
Interest rate swap agreements
The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other
liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap
agreements were based on information obtained from a third party bank. This information is periodically tested by the
Company and validated against other third party valuations. If needed, other third party market participants may be utilized
to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative
assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as
hedging instruments.
page 67
Audited Financial Statements
The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of
December 31, 2013 and 2012, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
(Dollars in thousands)
December 31, 2013:
Securities available-for-sale:
Agency obligations
Agency RMBS
State and political subdivisions
Total securities available-for-sale
Other assets (1)
Total assets at fair value
Other liabilities(1)
Total liabilities at fair value
December 31, 2012:
Securities available-for-sale:
Agency obligations
Agency RMBS
State and political subdivisions
Trust preferred securities
Total securities available-for-sale
Other assets (1)
Total assets at fair value
Other liabilities(1)
Total liabilities at fair value
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Amount
$
$
$
$
$
$
44,522
162,358
64,339
271,219
844
272,063
844
844
39,525
141,460
77,838
652
259,475
1,210
260,685
1,210
1,210
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44,522
162,358
64,339
271,219
844
272,063
844
844
39,525
141,460
77,838
—
258,823
1,210
260,033
1,210
1,210
—
—
—
—
—
—
—
—
—
—
—
652
652
—
652
—
—
(1)Represents the fair value of interest rate swap agreements.
Assets and liabilities measured at fair value on a nonrecurring basis
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined
using quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair
value hierarchy.
Impaired Loans
Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and
events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected
payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of
the collateral less selling costs if the loan is collateral dependent.
The fair value of impaired loans were primarily measured based on the value of the collateral securing these loans.
Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets
including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on
independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the income approach. Appraised values are
discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market
conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and
the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs
page 68
for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly, based on the same factors discussed above.
Other real estate owned
Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially
recorded at the lower of the loan’s carrying amount or the fair value less costs to sell upon transfer of the loans to other real
estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are
generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The
appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market
conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and
the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases
where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense.
Mortgage servicing rights, net
Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried
at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To
determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s
valuation model calculates the present value of estimated future net servicing income using assumptions that market
participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate,
default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees.
Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in
the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and
the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all
of the Company’s MSRs are classified within Level 3 of the valuation hierarchy.
The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as
of December 31, 2013 and 2012, respectively, by caption, on the accompanying consolidated balance sheets and by ASC
820 valuation hierarchy (as described above):
(Dollars in thousands)
December 31, 2013:
Loans held for sale
Loans, net(1)
Other real estate owned
Other assets (2)
Total assets at fair value
December 31, 2012:
Loans held for sale
Loans, net(1)
Other real estate owned
Other assets (2)
Total assets at fair value
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Amount
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
$
$
$
$
2,296
5,305
3,884
2,350
13,835
2,887
10,272
4,919
1,526
19,604
—
—
—
—
—
—
—
—
—
—
2,296
—
—
—
2,296
2,887
—
—
—
2,887
—
5,305
3,884
2,350
11,539
—
10,272
4,919
1,526
16,717
(1)Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in
impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.
page 69
Audited Financial Statements
Quantitative Disclosures for Level 3 Fair Value Measurements
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements for trust
preferred securities, included within available-for-sale securities, and recognized in the accompanying consolidated balance
sheets using Level 3 inputs:
(Dollars in thousands)
Beginning balance
Total realized and unrealized gains and (losses):
Included in net earnings
Included in other comprehensive income
Sales
Settlements
Ending balance
Year ended December 31
$
2013
652
$
2012
1,986
$
(87)
41
(606)
—
— $
(6)
146
(974)
(500)
652 $
$
2011
2,149
(338)
175
—
—
1,986
The Company had no Level 3 assets measured at fair value on a recurring basis at December 31, 2013. For Level 3
assets measured at fair value on a non-recurring basis as of December 31, 2013, the significant unobservable inputs used in
the fair value measurements are presented below.
Carrying
Amount
Valuation Technique
Significant Unobservable Input
of Input
Weighted
Average
(Dollars in thousands)
Nonrecurring:
Impaired loans
$
5,305 Appraisal
Appraisal discounts (%)
Other real estate owned
3,884 Appraisal
Appraisal discounts (%)
Mortgage servicing rights, net
2,350 Discounted cash flow
Prepayment speed or CPR (%)
Discount rate (%)
Fair Value of Financial Instruments
17.6%
14.0%
7.5%
10.0%
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether
or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in
the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices
are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather are a good–faith estimate of the
fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of its financial
instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at
which similar loans would be made for the same remaining maturities. This method of estimating fair value does not
incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an
exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for
estimated prepayments.
Loans held for sale
Fair values of loans held for sale are determined using quoted market 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.
page 70
Long-term debt
The fair value of the Company’s fixed rate long-term debt is estimated using discounted cash flows based on
estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s
variable rate long-term debt approximates its fair value.
The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial
instruments at December 31, 2013 and 2012 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, interest-bearing demand, and savings deposits due to these products having no stated maturity. In addition,
financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds
purchased and securities sold under agreements to repurchase.
(Dollars in thousands)
December 31, 2013:
Financial Assets:
Loans, net (1)
Loans held for sale
Financial Liabilities:
Time Deposits
Long-term debt
December 31, 2012:
Financial Assets:
Loans, net (1)
Loans held for sale
Financial Liabilities:
Time Deposits
Long-term debt
Carrying
amount
Estimated
fair value
Level 1
inputs
Level 2
inputs
Level 3
Inputs
Fair Value Hierarchy
$
378,071 $
2,296
387,180
2,310
$
$
261,199 $
263,985 $
12,217
12,569
$
391,470
2,887
$
399,533
2,952
$
$
263,195 $
267,636 $
47,217
51,752
$
$
$
$
—
—
—
—
—
—
—
—
$
—
2,310
387,180
—
263,985 $
12,569
—
—
$
—
2,952
399,533
—
267,636 $
51,752
—
—
(1) Represents loans, net of unearned income and the allowance for loan losses.
page 71
Audited Financial Statements
NOTE 18: RELATED PARTY TRANSACTIONS
A director of the Company is an officer in a construction company that the Company contracted with during 2012
and 2011 for the construction of a new branch facility in Valley, Alabama and the construction of a new drive-through
banking facility and completion of other site work on the Bank’s main office campus in Auburn, Alabama. Total payments
made to the construction company under the terms of the construction contracts were $0.4 million, $1.2 million and $0.8
million for the years ended December 31, 2013, 2012, and 2011, respectively.
Another executive officer and director of the Company is the owner of a heating and air conditioning company that
the Company contracted with during 2011 for the replacement and improvement of the heating and cooling systems in the
Bank’s 23,000 square foot operations center. Total payments made to the heating and air conditioning company under the
terms of the contract were $82 thousand and $200 thousand for the years ended December 31, 2012 and 2011, respectively.
The Bank has made, and expects in the future to continue to make in the ordinary course of business, loans to
directors and executive officers of the Company, the Bank, and their affiliates. In management’s opinion, these loans were
made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements, and do
not represent more than normal credit risk. An analysis of such outstanding loans is presented below.
(Dollars in thousands)
Loans outstanding at December 31, 2012
New loans/advances
Repayments
Loans outstanding at December 31, 2013
Amount
5,405
3,327
(4,471)
4,261
$
$
During 2013 and 2012, certain executive officers and directors of the Company and the Bank, including companies
with which they are affiliated, were deposit customers of the bank. Total deposits for these persons at December 31, 2013
and 2012 amounted to $20.3 million and $19.1 million, respectively.
NOTE 19: REGULATORY RESTRICTIONS AND CAPITAL RATIOS
The Company and the Bank are subject to various regulatory capital requirements and policies administered by
federal and State of Alabama banking regulators. Failure to meet minimum capital requirements can initiate certain
mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a material effect
on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the
Company’s and Bank’s assets, liabilities, and certain off–balance sheet items as calculated under regulatory accounting
practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors, including anticipated capital needs. Supervisory
assessments of capital adequacy may differ significantly from conclusions based solely upon risk-based capital ratios.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) Tier 1 leverage capital ratio, Tier 1 risk-based ratio and total
risk-based ratio. Management believes, as of December 31, 2013, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2013, the Bank is “well capitalized” under the regulatory framework for prompt corrective
action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk–based, Tier I risk–based, and
Tier I leverage ratios as set forth in the table. Management has not received any notification from the Company’s or the
Bank's regulators that changes the Bank’s regulatory capital status.
page 72
The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2013 and 2012 are
presented below.
(Dollars in thousands)
At December 31, 2013:
Tier 1 Leverage Capital
Auburn National Bancorporation $
AuburnBank
Tier 1 Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
Total Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
At December 31, 2012:
Tier 1 Leverage Capital
Auburn National Bancorporation $
AuburnBank
Tier 1 Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
Total Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
Actual
Minimum for capital
adequacy purposes
Minimum to be
well capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
76,037
74,716
10.10 % $
9.94
30,119
30,069
4.00 %
4.00
$
N/A
37,587
76,037
74,716
17.19 % $
16.84
17,696
17,742
4.00 %
4.00
$
N/A
26,614
N/A
5.00 %
N/A
6.00 %
81,385
80,064
18.40 % $
18.05
35,392
35,485
8.00 %
8.00
$
N/A
44,356
N/A
10.00 %
71,982
71,277
9.58 % $
9.50
30,069
30,011
4.00 %
4.00
$
N/A
37,514
71,982
71,277
16.20 % $
16.02
17,768
17,794
4.00 %
4.00
$
N/A
26,691
N/A
5.00 %
N/A
6.00 %
77,558
76,853
17.46 % $
17.28
35,536
35,588
8.00 %
8.00
$
N/A
44,485
N/A
10.00 %
Dividends paid by the Bank are a principal source of funds available to the Company for payment of dividends to its
stockholders and for other needs. Applicable federal and state statutes and regulations impose restrictions on the amounts of
dividends that may be declared by the subsidiary bank. State law and Federal Reserve policy restrict the Bank from
declaring dividends in excess of the sum of the current year’s earnings plus the retained net earnings from the preceding
two years without prior approval. In addition to the formal statutes and regulations, regulatory authorities also consider the
adequacy of the Bank’s total capital in relation to its assets, deposits, and other such items. Capital adequacy considerations
could further limit the availability of dividends from the Bank. At December 31, 2013, the Bank could have declared
additional dividends of approximately $9.8 million without prior approval of regulatory authorities. As a result of this
limitation, approximately $60.4 million of the Company’s investment in the Bank was restricted from transfer in the form
of dividends.
page 73
Audited Financial Statements
NOTE 20: AUBURN NATIONAL BANCORPORATION (PARENT COMPANY)
The Parent Company’s condensed balance sheets and related condensed statements of earnings and cash flows are as
follows:
CONDENSED BALANCE SHEETS
(Dollars in thousands)
Assets:
Cash and due from banks
Investment in bank subsidiary
Premises and equipment
Other assets
Total assets
Liabilities:
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
CONDENSED STATEMENTS OF EARNINGS
(Dollars in thousands)
Income:
Dividends from bank subsidiary
Noninterest income
Total income
Expense:
Interest expense
Noninterest expense
Total expense
Earnings before income tax benefit and equity
in undistributed earnings of bank subsidiary
Income tax expense (benefit)
Earnings before equity in undistributed earnings
of bank subsidiary
Equity in undistributed earnings of bank subsidiary
Net earnings
$
$
$
$
December 31
2013
2012
2,408
70,164
—
846
73,418
1,716
7,217
8,933
64,485
73,418
1,316
76,547
158
1,162
79,183
1,817
7,217
9,034
70,149
79,183
Year ended December 31
2013
2012
$
$
3,304
1,284
4,588
236
302
538
4,050
275
3,775
3,343
7,118
3,231
288
3,519
236
318
554
2,965
(45)
3,010
3,753
6,763
2011
3,158
385
3,543
236
485
721
2,822
(31)
2,853
2,685
5,538
page 74
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization
Net gain on disposition of premises and equipment
Net decrease in other assets
Net decrease in other liabilities
Equity in undistributed earnings of bank subsidiary
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of premises and equipment
Proceeds from sale of premises and equipment to third party
Proceeds from sale of premises and equipment to bank subsidiary
Capital contribution to bank subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from sale of treasury stock
Dividends paid
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year ended December 31
2013
2012
2011
$
7,118
6,763
5,538
28
(1,018)
316
(101)
(3,343)
3,000
—
1,148
—
—
1,148
4
(3,060)
(3,056)
1,092
1,316
2,408
29
—
16
(109)
(3,753)
2,946
(17)
—
—
—
(17)
5
(2,987)
(2,982)
(53)
1,369
1,316
80
—
22
(727)
(2,685)
2,228
—
—
4,450
(3,200)
1,250
1
(2,914)
(2,913)
565
804
1,369
$
page 75
This Page Intentionally Left Blank.
page 76
Stock Performance Graph
STOCK PERFORMANCE GRAPH
The following performance graph compares the cumulative, total return on the Company’s Common Stock from
December 31, 2008 to December 31, 2013, with that of the Nasdaq Composite Index and SNL Southeast Bank Index
(assuming a $100 investment on December 31, 2008). Cumulative total return represents the change in stock price and the
amount of dividends received over the indicated period, assuming the reinvestment of dividends.
Total Return Performance
Auburn National Bancorporation, Inc.
NASDAQ Composite
SNL Southeast Bank
300
250
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Index
Auburn National Bancorporation, Inc.
NASDAQ Composite
SNL Southeast Bank
12/31/08
100.00
100.00
100.00
Period Ending
12/31/09 12/31/10 12/31/11 12/31/12
120.53
200.63
94.75
101.30
145.36
100.41
107.43
171.74
97.49
103.28
170.38
57.04
12/31/13
149.88
281.22
128.40
page 77
CORPORATE INFORMATION
Corporate Headquarters
Investor Relations
A copy of the Company’s annual report on
Form 10-K, filed with the Securities and
Exchange Commission (SEC), as well as our
other SEC filings and our latest press releas-
es are available free of charge through a link
on our internet website at www.auburnbank.
com. Requests for these documents may also be
made by emailing Investor Relations at
investorrelations@auburnbank.com or by
contacting Investor Relations by telephone or
mail at the Company’s corporate headquarters.
Common Stock Listing
Auburn National Bancorporation, Inc.
Common Stock is traded on the Nasdaq
Global Market under the symbol AUBN.
Dividend Reinvestment
and Stock Purchase Plan
Auburn National Bancorporation, Inc. offers
a Dividend Reinvestment Plan (DRIP) for
automatic reinvestment of dividends in the
stock of the company. Participants in the
DRIP may also purchase additional shares
with optional cash payments. For additional
information or for an authorization form,
please contact Investor Relations.
Direct Deposit of Dividends
Dividends may be automatically deposited
into a shareholder’s checking or savings
account free of charge. For more information,
contact Investor Relations.
100 N. Gay Street
P.O. Box 3110
Auburn, AL 36831-3110
Phone: 334-821-9200
Fax: 334-887-2796
www.auburnbank.com
Independent Auditors
KPMG LLP
Wells Fargo Tower
Suite 1800
420 20th Street N.
Birmingham, AL 35203
Shareholder Services
Shareholders desiring to change the name,
address or ownership of Auburn National
Bancorporation, Inc. common stock or to
report lost certificates should contact our
Transfer Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
Phone: 1-800-368-5948
Fax: 1-908-497-2318
e-mail: info@rtco.com
For frequently asked questions, visit the
Transfer Agent’s home page at www.rtco.com
Annual Meeting
Tuesday, May 13, 2014
3:00 p.m. (Central Time)
AuburnBank Center
132 N. Gay Street
Auburn, AL 36830
100 N. Gay Street, P.O. Box 3110, Auburn, AL 36831-3110
Telephone: 334-821-9200 Fax: 334-887-2796
www.auburnbank.com
Member FDIC