TO G E T H E R EV E R Y O N E AC H I E V E S MO R E
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 . 2 014 A N N U A L R E P O R T
T E A M 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 . 2 014 A N N U A L R E P O R T
T
E A M
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 . 2 014 A N N U A L R E P O R T
To Our Shareholders and Friends
Through the years AuburnBank has maintained our history of success
and our reputation for taking care of our customers. We still do and the
phrase “May I help you?” means something to us. It also means our staff
members, our officers, and our directors are involved and try to provide
you with the best banking service and facilities possible.
Our efforts have allowed us to have a strong asset position, to continue
growth in capital, and to increase deposits and loans in the communities
we serve.
For 19 of the last 20 years, we have increased our dividends paid to
shareholders, and in 2014, we paid cash dividends of $0.86 per share.
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 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
2014 was another record earnings year for AuburnBank. Net earnings were $7.4 million, or $2.04
per share for the full year reflecting a 5% increase over 2013 earnings. Net interest income (tax
equivalent) was $22.7 million in 2014 compared to $22.4 million in 2013. This increase was
primarily due to growth in the balance sheet.
Total loans increased to $403.0 million at December 31, 2014, an increase of $19.6 million or
5% from December 31, 2013. Asset quality improved as continued efforts to reduce and resolve
non-performing assets lowered our credit costs. At December 31, 2014, the bank had $1.7 million
in non-performing assets, a decrease of 80%, compared to $8.1 million at December 31, 2013.
Equally important, the bank continues to successfully operate in a very competitive market by
controlling expenses and providing quality customer service. The AuburnBank Team is comprised
of team members who truly care about the quality of their work and assisting customers and each
other with daily challenges. This year’s annual report highlights two of our many behind-the-scenes
departments, bookkeeping and loan operations. Both departments provide critical support for
our entire bank. We would not enjoy the successes that we continue to achieve without their hard
work and commitment to our bank. To our entire support team – Thank you for a job well done.
For eight of the past nine years (including 2014), the American Banker magazine has featured
AuburnBank’s parent company as one of the Top 200 Community Banks publicly traded under
$2.0 billion in total assets based on average return on equity for a three-year period. In 2014,
AuburnBank was also selected by Keefe, Bruyette & Woods (KBW), an Investment Banking
Firm, to their Bank Honor Roll of superior performers based on three criteria related to net
income per share. Only 31 publicly traded banks in the U.S. over $500 million in assets met
the criteria required to receive this honor. All of these recognitions reflect the hard work and
commitment of the entire AuburnBank team.
On behalf of the entire AuburnBank team, I would like to thank our customers and our
shareholders for making 2014 such a successful year. We look forward to continuing to be your
partner, your neighbor, and your friend in 2015.
Robert W. Dumas
President and CEO
AuburnBank
TO G E T H E R EV E R Y O N E AC H I E V E S MO R E
NINETEEN
OUT OF THE LAST
TWENTY
YEARS
DIVIDENDS
TO SHAREHOLDERS
HAVE INCREASED
They never declined
during the recession.
As we reflect on the achievements for 2014, for
AuburnBank, it is important to focus on our approach
to meeting our goals. Through our service objective that
emphasizes the TEAM (Together Everyone Achieves
More) philosophy with each AuburnBank team member,
we are able to produce greater results.
Instilling and rewarding behavior that
incorporates core values such as integrity,
accountability, commitment, innovation,
individual respect and open communication
for every employee is critical for our
organization to fulfill its overall objectives.
T E A M The original founders of AuburnBank
(Bank of Auburn) formed the first financial
institution in Auburn based on quality
services for citizens, businesses and the
university. That legacy of founding principles
continues to be prevalent in AuburnBank’s
mission today.
Efficient and effective utilization of resources
are key objectives of every bank. AuburnBank
is fortunate to have strong support in all
departments within the bank. Featured in
this year’s report are two departments that
provide critical support for AuburnBank –
bookkeeping and loan operations. These
two support teams assist both customers
externally and staff internally with daily
activities. These team members along with
all employees take pride in their work by
controlling expenses, maintaining strong
compliance with policies and regulations, and
providing quality customer service. These
actions translate into strong financial results
and happy customers.
Team effort also means providing cutting
edge technology and online tools for many
customers. Digital interaction with customers
is critical to our current and future success.
Our mobile technology offers fast and
secure access to financial transactions and
INCREASES
IN EARNINGS
PER SHARE
FOR SIX
CONSECUTIVE
YEARS
SINCE 2009
enables customers to deposit checks, pay
bills, and transfer funds. All of these services
also require superior operational support to
ensure complete customer satisfaction.
In summary, the team approach values
each employee’s contribution and provides
outstanding results. The team approach
also encourages our employees to be
involved in many worthy civic and charitable
Loan Operations Team
Bookkeeping Team
Supporter of Food Bank of East Alabama
organizations, thus enhancing the quality of
life for all citizens in our community. As we
continue our journey of service in 2015, the
entire AuburnBank team extends its sincere
appreciation to all of our customers and
shareholders for a successful 2014. We look
forward to continuing to be your partner,
your neighbor and your friend for many
more years.
Supporter of Miracle League
Come visit us at our Corner Village Branch.
THE ONLY BANK
IN ALABAMA
RECOGNIZED BY BOTH
KBW’S BANK HONOR ROLL
AND
AMERICAN BANKER’S TOP
200 COMMUNITY BANKS
Auburn National Bancorporation, Inc.
and AuburnBank Board of Directors
Seated left to right: C. Wayne Alderman, J.E. Evans, E.L. Spencer, Jr., David E. Housel, and Anne M. May.
Standing: Robert W. Dumas, Edward Lee Spencer, III, Terry W. Andrus, J. Tutt Barrett, and William F. Ham, Jr.
AuburnBank Officers
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
E.L. Spencer, Jr.
Chairman
Robert W. Dumas
President & Chief
Executive Officer
Jo Ann Hall
Executive Vice President,
Chief Operations Officer
Terrell E. Bishop
Senior Vice President,
City President, Valley Branch
James E. Dulaney
Senior Vice President,
Business Development/Marketing
David Hedges
Senior Vice President,
Controller and CFO
W. Thomas Johnson
Senior Vice President,
Senior Lender
Shannon O’Donnell
Senior Vice President,
Credit Administration/Chief Risk
Officer
Kris Blackmon
Vice President,
Asset/Liability Manager
Chief Investment Officer
Jerry Siegel
Senior Vice President, IT/IS
Chief Technology Officer
S. Mark Bridges
Vice President,
Commercial/Consumer Loans
C. Eddie Smith
Senior Vice President,
City President, Opelika Branch
Robert Smith
Senior Vice President,
Chief Lending Officer
Bob R. Adkins
Vice President,
Commercial/Consumer
Loans
Patty Allen
Vice President,
Commercial/Consumer
Loans
Laura Carrington
Vice President,
Human Resource Officer
Kathy Crawford
Vice President,
Commercial/Consumer
Loans
Bruce Emfinger
Vice President,
Commercial/Consumer
Loans
Christy A. Fogle
Vice President,
Credit Administration
Ginnie Y. Lunsford
Vice President,
Loan Operations
Susan K. McChesney
Vice President, IT/IS
Assistant Chief
Technology Officer
Marcia Otwell
Vice President,
Administration/Shareholder
Relations
James R. Pack
Vice President,
Financial Reporting
Cyndee Redmond
Vice President, Operational
Coordinator for Electronic
Products and Services
Jeff Stewart
Vice President,
Mortgage Loan Officer
David Warren
Vice President,
Commercial/Consumer
Loans
Barbara Wilcox
Vice President, Security
and BSA/OFAC Officer
Karen Bence
Assistant Vice President
BSA/OFAC 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
Sam S. Rainer
Marketing Officer
Rhonda Sanders
Customer Service
Officer/Assistant Patriot
Act Officer
Leigh Ann Thompson
Branch Operations
Administrative Officer
Marla Kickliter
Senior Vice President,
Compliance/Internal Auditor
Scottie Arnold
Vice President,
Retail Internet/Operations Officer
Opelika Branch Advisory Board
Seated left to right: Doug M. Horn, C. Eddie Smith, and Sherrie M. Stanyard.
Standing: William H. Brown, William P. Johnston, and William G. Dyas.
Not pictured: R. Kraig Smith, M.D., and Robert G. Young
Valley Branch Advisory Board
Seated left to right: Roy W. McClendon, Jr., Terrell E. Bishop, and H. David Ennis, Sr.
Standing: John H. Hood, II, Frank P. Norman, and Claud E. (Skip) McCoy, Jr.
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,
City President, Valley Branch
H. David Ennis, Sr.
President, Novelli-Ennis &
Company, CPAs
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,
2014
2013
2012
2011
2010
$21,453
$20,922
$20,897
$19,225
$18,899
50
7,448
2.04
0.86
20.80
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
3,957,135
3,643,328
3,957,135
3,643,003
3,957,135
3,957,135
3,642,831
3,642,735
3,957,135
3,642,851
789,231
402,954
267,603
693,390
12,217
75,799
0.97%
10.53%
9.17%
1.20%
58.11%
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%
62.53%
59.76%
61.64%
Table of Contents
Financial Section
Auburn National Bancorporation, Inc. 2014 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 – 23
24 – 33
34
35
36
37
38
39
40
41 – 7 5
7 6
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) cyber attacks and data breaches that may compromise our systems or customers’
information; (xv) 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; (xvi) 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
(xvii) other factors and risks described under “Risk Factors” in the Company’s 2014 Annual Report on Form-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.
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 2014 Annual Report on Form 10-
K and in any of our subsequent reports that we make with the SEC under the Exchange Act.
PAGE 2
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 and regulations. The holding company structure also provides
greater financial and operating flexibility than is presently permitted to the Bank.
The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama,
including Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April
1995. The Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”). The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”) since 1991.
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 14
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
The Bank also has a commercial loan production office in Phenix City, Alabama.
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 “Lending Practices” 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 3
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, 2014 and 2013 and our results of operations
for the years ended December 31, 2014, 2013, and 2012. 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 “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 in Opelika and Wal-Mart SuperCenter stores in both Auburn and Opelika. The Bank also operates a commercial
loan production office in Phenix City, Alabama.
Summary of Results of Operations
(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
$
$
Basic and diluted earnings per share
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
$
Financial Summary
2014
22,741
1,288
21,453
3,933
25,386
50
15,104
2,784
7,448
2.04
$
$
$
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
The Company’s net earnings were $7.4 million, or $2.04 per share, for the full year 2014, compared to $7.1 million,
or $1.95 per share, for the full year 2013.
Net interest income (tax-equivalent) was $22.7 million in 2014, compared to $22.4 million in 2013. The increase was
primarily due to a reduction in interest expense as the Company repaid higher-cost wholesale funding sources and lowered
its deposit costs. The decrease in interest expense was partially offset by a decrease in interest income as yields on interest-
earning assets also declined.
The provision for loan losses was $0.1 million in 2014, compared to $0.4 million in 2013. 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 $0.5
million, or 0.12% of average loans, in 2014, compared to $1.9 million, or 0.48% of average loans, in 2013.
Noninterest income was $3.9 million in 2014, compared to $7.3 million in 2013. The decrease in noninterest income
was due to several factors, including a decrease in mortgage lending income of $1.3 million as refinance activity declined, a
decrease in net securities gains (losses) of $1.2 million, and a decrease of $1.0 million due to a gain on sale of premises and
equipment realized in 2013 when the Company sold certain real property in downtown Auburn.
PAGE 4
Noninterest expense was $15.1 million in 2014, compared to $18.4 million in 2013. The decrease was primarily due
to a decrease in prepayment penalties on long-term debt. The Company incurred no prepayment penalties on long-term
debt in 2014, compared to $3.0 million in 2013 when the Company repaid $35.0 million long-term debt with a weighted
average interest rate of 3.46%.
Income tax expense was $2.8 million in 2014, compared to $2.3 million in 2013. The Company’s effective income
tax rate was 27.21% in 2014, compared to 24.34% in 2013. The Company’s effective income tax rate increased primarily
due to a decrease in tax-exempt interest income on municipal securities. In addition, the impact of tax preference items,
such as tax-exempt interest income, on the Company’s effective tax rate is reduced as earnings before income taxes
increases.
In 2014, the Company paid cash dividends of $3.1 million, or $0.86 per share. The Company remains “well
capitalized”under current regulatory guidelines with a total risk-based capital ratio of 18.54%, a tier one risk-based capital
ratio of 17.45%, and a tier one leverage capital ratio of 10.32% at December 31, 2014.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting
principles and with general practices within the banking industry. In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our
assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements, the valuation of
other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position
and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our
financial position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The
level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset
quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay
(including the timing of future payment), the estimated value of any underlying collateral, composition of the loan
portfolio, economic conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory
recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and
timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans
are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan
may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant
to the terms of the loan is unlikely.
The Company deems loans impaired when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts
due according to the contractual terms means that both the interest and principal payments of a loan will be collected as
scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan.
The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected
future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, 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,
independent loan review process. The Company’s loan review process assists in determining whether there are loans in the
portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio.
The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers,
and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company
incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all
amounts due according to the contractual terms of a loan.
PAGE 5
Management’s Discussion and Analysis
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, 2014 and 2013, 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 2014 and
2013, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture
the effects of the most recent economic cycle on the Company’s loan loss experience. 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 using a rolling 8 quarter historical period
(except for the commercial real estate loan segment, which used a 6 quarter historical period) and continued this
methodology through March 31, 2014. Beginning with the quarter ended June 30, 2014, the Company calculated average
losses for all loan segments using a rolling 20 quarter historical period and continued this methodology through December
31, 2014. Other than the changes discussed above, the Company has not made any material changes to its calculation of
historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the
periods included in the accompanying consolidated balance sheets and statements of earnings.
Assessment for Other-Than-Temporary Impairment of Securities
On a quarterly basis, management makes an assessment to determine whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity
securities with an unrealized loss, the Company considers many factors including the severity and duration of the
impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value;
and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to
be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains
(losses).
For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the
Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the
debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized
cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will
be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference
between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not
more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-
down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The
credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the
present value of its expected future cash flows. The remaining difference between the security’s fair value and the present
value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive
income, net of applicable taxes.
PAGE 6
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 lack an available or
comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,
prepayments, market volatility and other factors, taking into account current observable market data and experience.
These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related
income and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could
result in materially different net earnings and retained earnings results.
Other Real Estate Owned
Other real estate owned (“OREO”), consists of properties obtained through foreclosure or in satisfaction of loans and
is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as a
charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are
determined on a specific property basis and are included as a component of other noninterest expense along with holding
costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and
complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates
can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds
realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to
determine the fair value of other OREO.
Deferred Tax Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-
likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three
years and projections for future taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that we will realize the benefits of these deductible differences at December
31, 2014. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future
taxable income are reduced.
PAGE 7
Management’s Discussion and Analysis
Average Balance Sheet and Interest Rates
Year ended December 31
2014
2013
2012
Average
Yield/
Average
Yield/
Average
Yield/
(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
Balance
$ 388,373
207,655
62,870
270,525
56,110
6,559
721,567
105,533
191,882
101,561
Rate
5.03%
2.23%
6.03%
3.11%
0.19%
0.43%
3.89%
0.31%
0.51%
1.15%
Balance
$ 390,288
195,850
67,797
263,647
48,671
5,634
708,240
101,034
171,413
105,631
156,029
555,005
3,814
12,217
571,036
22,741
1.57%
0.89%
0.50%
3.42%
0.94%
3.15%
155,781
533,859
2,817
31,518
568,194
22,362
Rate
5.28%
2.00%
6.25%
3.09%
0.22%
0.75%
4.08%
0.32%
0.52%
1.36%
1.77%
1.01%
0.50%
3.59%
1.15%
3.16%
Balance
$ 395,938
199,794
77,447
277,241
27,466
793
701,438
99,664
153,668
108,726
161,128
523,186
2,970
49,115
575,271
22,539
$
Rate
5.54%
1.94%
6.24%
3.14%
0.20%
—
4.38%
0.35%
0.56%
1.63%
2.08%
1.21%
0.54%
3.73%
1.42%
3.21%
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
2014 vs. 2013 comparison
Net interest income (tax-equivalent) was $22.7 million in 2014, compared to $22.4 million in 2013. The increase was
primarily due to a reduction in interest expense as the Company repaid higher-cost wholesale funding sources and lowered
its deposit costs. The decrease in interest expense was partially offset by a decrease in interest income as yields on interest-
earning assets also declined. Although management continues to seek to increase earnings and net interest margin 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 improve net interest margin were offset by management’s
decision to carry higher levels of short-term interest earning assets (e.g. federal funds sold) during 2014.
The tax-equivalent yield on total interest-earning assets decreased by 19 basis points in 2014 from 2013 to 3.89%.
The decrease was primarily due to 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.
The cost of total interest-bearing liabilities decreased 21 basis points in 2014 from 2013 to 0.94%. The net decrease
was largely the result of the continued shift in our funding 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.
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.
2013 vs. 2012 comparison
Net interest income (tax-equivalent) was $22.4 million in 2013, compared to $22.5 million in 2012. The decrease was
primarily due to 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.
PAGE 8
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.
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 funding 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.
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 $0.1 million, $0.4 million, and $3.8 million for the years ended December 31, 2014,
2013, and 2012, respectively.
These decreases were 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 $0.5
million, or 0.12% of average loans, $1.9 million, or 0.48% of average loans, and $4.0 million, or 1.03% of average loans,
for the years ended December 31, 2014, 2013, and 2012, respectively. In 2012, net charge-offs were impacted by a few
individually significant charge-offs, including $3.1 million related to three borrowing relationships.
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 1.20% at December 31, 2014 from 1.37% at December 31, 2013. 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, 2014. 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.
Noninterest Income
(Dollars in thousands)
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Gain on sale of affordable housing investments
Gain on sale of premises and equipment
Securities (losses) gains, net
Other
Total noninterest income
2014
872
1,636
501
—
—
(530)
1,454
3,933
$
$
$
$
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
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.
PAGE 9
Management’s Discussion and Analysis
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation
allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s mortgage lending income for 2014, 2013, and 2012.
(Dollars in thousands)
Origination income
Servicing fees, net
(Increase) decrease in MSR valuation allowance
Total mortgage lending income
2014 vs. 2013 comparison
Year ended December 31
2014
1,163
526
(53)
1,636
$
$
2013
2,030
479
386
2,895
$
$
2012
3,430
284
(269)
3,445
$
$
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. In addition, mortgage lending income in 2013 was elevated due to decreases in the MSR valuation allowance.
The increase in income from bank-owned life insurance was primarily due to improved policy returns. During the
fourth quarter of 2013, the Bank exchanged certain bank-owned life insurance policies with a cash surrender value of
approximately $5.9 million. These policies were exchanged for policies from two new carriers with better credit ratings and
policy returns. The assets that support these policies are administered by the life insurance carriers and the income we
receive from changes to the cash surrender value of the policies is dependent upon the returns the insurance carriers are able
to earn on the underlying investments that support these policies. Earnings on these policies are generally not taxable.
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.
Net securities gains (losses) consist of realized gains and losses on the sale of securities and other-than-temporary
impairment charges. Net securities losses were $0.5 million in 2014, compared to net securities gains of $0.7 million in
2013. Gross realized gains of $0.5 million in 2014 were reduced by gross realized losses of $0.7 million and $0.3 million
in other-than-temporary impairment charges. The Company recorded an other-than-temporary impairment charge of $0.3
million in the first quarter of 2014 related to securities management intended to sell at March 31, 2014. Subsequent to
March 31, 2014, the Company sold available-for-sale agency residential mortgage-backed securities (“RMBS”) with a fair
value of $18.9 million and realized the expected loss of $0.3 million. The Company incurred no additional other-than-
temporary impairment charges in 2014. Gross realized gains of $0.8 million in 2013 were reduced by gross realized losses
of $0.1 million. In December 2013, the Company sold all remaining trust preferred securities held by the Company for a
net loss of $0.1 million.
2013 vs. 2012 comparison
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.
PAGE 10
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.
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.
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
2014 vs. 2013 comparison
2014
8,943
1,431
920
465
(450)
—
3,795
15,104
$
$
$
$
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
The increase in salaries and benefits expense reflected routine annual increases.
The increase in net occupancy and equipment expense was primarily due to a decrease in rental income. During the
fourth quarter of 2013, the Company sold an office building in downtown Auburn that was leased to third party tenants.
The increase in professional fees expense was primarily due to routine annual increases and an increase in consulting
and advisory services related to various compliance and strategic initiatives.
The decrease in FDIC and other regulatory assessments expense was primarily due to a decrease in the Bank’s
quarterly assessment rate as several variables utilized by the FDIC in calculating our deposit insurance assessments
improved.
The decrease in OREO expense, net was primarily due to an increase in net gains realized on the sale of OREO of
$0.6 million and a decrease in OREO write-downs of $0.3 million. The remaining improvement was due to a decrease in
expenses related to maintenance costs and property taxes for these assets.
The Company incurred no prepayment penalties on long-term debt in 2014, compared to $3.0 million in 2013 when
the Company repaid $35.0 million long-term debt with a weighted average interest rate of 3.46%.
2013 vs. 2012 comparison
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.
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.
PAGE 11
Management’s Discussion and Analysis
Income Tax Expense
2014 vs. 2013 comparison
Income tax expense was $2.8 million in 2014, compared to $2.3 million in 2013. The Company’s effective income
tax rate was 27.21% in 2014, compared to 24.34% in 2013. The Company’s effective income tax rate increased primarily
due to a decrease in tax-exempt interest income on municipal securities. In addition, the impact of tax preference items,
such as tax-exempt interest income, on the Company’s effective tax rate is reduced as earnings before income taxes
increases.
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. The Company’s effective tax rate increased primarily because
of a decrease in tax-exempt interest income on municipal securities in 2013 and 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 that were fully realized.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $267.6 million at December 31, 2014, a decrease of $3.6 million, or 1.3%,
compared to $271.2 million as of December 31, 2013. This decline was primarily due to a decrease of $14.7 million in the
amortized cost basis of securities available-for-sale as proceeds from sales, calls, and maturities were not reinvested. This
decrease was partially offset by changes in unrealized gains (losses) on securities available-for-sale of $11.1 million,
reflecting price gains as long-term interest rates fell during 2014. The average tax-equivalent yields earned on total
securities were 3.11% in 2014 and 3.09% in 2013.
The following table shows the carrying value and weighted average yield of securities available-for-sale as of
December 31, 2014 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
1 year
or less
1 to 5
years
5 to 10
years
After 10
years
Total
Fair Value
December 31, 2014
$
$
—
—
—
—
—
—
—
—
30,947
—
502
31,449
1.53%
—
4.30%
1.57%
14,869
14,523
15,520
44,912
2.47%
2.14%
3.99%
2.89%
14,433
120,520
56,289
191,242
2.79%
2.34%
3.77%
2.79%
60,249
135,043
72,311
267,603
2.08%
2.32%
3.82%
2.67%
PAGE 12
Loans
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
Less: unearned income
$
2014
54,329
37,298
192,006
107,641
12,335
403,609
(655)
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)
December 31
2010
53,288
47,850
166,241
96,241
10,676
374,296
(81)
Loans, net of unearned income
$
402,954
383,339
398,193
370,263
374,215
Total loans, net of unearned income, were $403.0 million at December 31, 2014, an increase of $19.6 million, or 5%,
from $383.3 million at December 31, 2013. The increase was primarily attributable to growth in commercial real estate
loans of $17.1 million. Four loan categories represented the majority of the loan portfolio at December 31, 2014:
commercial real estate mortgage loans (48%), residential real estate mortgage loans (27%), commercial and industrial loans
(13%) and construction and land development loans (9%).
Within its residential real estate mortgage portfolio, the Company had junior lien mortgages of approximately $16.5
million, or 4%, and $15.8 million, or 4% of total loans, net of unearned income at December 31, 2014 and 2013,
respectively. For residential real estate mortgage loans with a consumer purpose, approximately $1.9 million and $1.2
million required interest-only payments at December 31, 2014 and 2013, 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.
Purchased loan participations included in the Company’s loan portfolio were approximately $1.5 million and $1.4
million as of December 31, 2014 and 2013, 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 described in “Critical Accounting Policies.”
The average yield earned on loans and loans held for sale was 5.03% in 2014 and 5.28% in 2013.
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 positions. 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 secured loan relationships
in excess of approximately $16.8 million. Furthermore, we have an internal limit for aggregate credit exposure (loans
outstanding plus unfunded commitments) to a single borrower of $15.1 million. Our loan policy requires that the Loan
Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2014,
the Bank had no loan relationships exceeding this limit.
PAGE 13
Management’s Discussion and Analysis
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, 2014 (and related balances at December 31, 2013).
(In thousands)
Lessors of 1-4 family residential properties
Multi-family residential properties
Shopping centers
Allowance for Loan Losses
$
2014
41,152
35,961
30,016
$
December 31
2013
43,835
27,673
29,953
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, 2014 and 2013, respectively, the
allowance for loan losses was $4.8 million and $5.3 million, respectively, which management believed to be adequate at
each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses
are described under “Critical Accounting Policies”.
A summary of the changes in the allowance for loan losses and certain asset quality ratios for each of the five years in
the five year period ended December 31, 2014 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
2014
2013
2012
2011
2010
Year ended December 31
$
5,268
6,723
6,919
7,676
6,495
(46)
(235)
—
(438)
(89)
(808)
71
8
119
112
16
326
(482)
50
$
4,836
1.20 %
433 %
0.12 %
(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
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 1.20% at December 31, 2014, compared to 1.37% at December 31,
2013. 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.
PAGE 14
Net charge-offs were $0.5 million, or 0.12% of average loans, in 2014, compared to net charge-offs of $1.9 million,
or 0.48%, in 2013. With the exception of the construction and land development portfolio segment, all loan segments
experienced a decline in net charge-offs in 2014.
At December 31, 2014 and 2013, the ratio of our allowance for loan losses as a percentage of nonperforming loans
was 433% and 124%, respectively. The increase was primarily due to a decrease in nonperforming loans of 74% in 2014.
At December 31, 2014 and 2013, the Company’s recorded investment in loans considered impaired was $3.3 million
and $5.6 million, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $0.2
million and $0.3 million at each respective date.
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.
Nonperforming Assets
At December 31, 2014 the Company had $1.7 million in nonperforming assets compared to $8.1 million at December
31, 2013. Nonperforming assets decreased during 2014 due to continued efforts by management to reduce and resolve
problem assets.
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 other real estate owned
as a % of total assets
Nonperforming loans as a % of total loans
Accruing loans 90 days or more past due
2014
2013
2012
2011
2010
December 31
$
$
$
1,117
534
1,651
0.41 %
0.21 %
0.28 %
—
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
—
The table below provides information concerning the composition of nonaccrual loans at December 31, 2014 and
2013, respectively.
(In thousands)
Nonaccrual loans:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Total nonaccrual loans / nonperfoming loans
December 31
2014
2013
$
$
55
605
263
194
1,117
55
1,582
1,456
1,168
4,261
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, 2014, the
Company had $1.1 million in loans on nonaccrual, compared to $4.3 million at December 31, 2013. The decrease primarily
related to the Company’s three largest nonperforming loans at December 31, 2013. In 2014, the first loan’s recorded
investment was reduced by $0.7 million due to principal repayments, the second loan, with a recorded investment of $0.7
million at December 31, 2013, was paid off, and the third loan, with a recorded investment of $0.8 million, was returned to
accrual status.
PAGE 15
Management’s Discussion and Analysis
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, 2014 and 2013, the
Company had $2.2 million and $1.6 million, respectively, in accruing TDRs.
At December 31, 2014 there were no loans 90 days past due and still accruing interest compared to $73,000 at
December 31, 2013.
The table below provides information concerning the composition of OREO at December 31, 2014 and 2013,
respectively.
(In thousands)
Other real estate owned:
Commercial:
Building
Developed lots
Residential
Total other real estate owned
December 31
2014
2013
$
$
—
252
282
534
1,772
1,260
852
3,884
At December 31, 2014, the Company held $0.5 million in OREO, which we acquired from borrowers, a decrease of
$3.4 million, or 86%, compared to December 31, 2013. The decrease was primarily due to increased sales activity and a
reduction of inflows into OREO.
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 $7.8 million, or 1.9% of total loans
at December 31, 2014, compared to $10.6 million, or 2.7% of total loans at December 31, 2013.
The table below provides information concerning the composition of potential problem loans at December 31, 2014
and 2013, 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
2014
2013
$
$
376
556
884
5,917
114
7,847
482
1,101
1,683
7,182
146
10,594
At December 31, 2014, approximately $1.3 million or 17.1% of total potential problem loans were past due at least
30 but less than 90 days. At December 31, 2014, the remaining balance of potential problem loans were current or past due
less than 30 days.
PAGE 16
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, 2014 and 2013, 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
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
December 31
2014
2013
$
$
$
$
168
210
201
2,231
45
2,855
2014
130,160
111,243
163,237
39,624
96,890
135,722
16,514
693,390
167
14
861
1,343
100
2,485
December 31
2013
125,740
99,406
147,116
35,383
104,964
139,721
16,514
668,844
Total deposits were $693.4 million and $668.8 million at December 31, 2014 and 2013, respectively. The increase in
total deposits of $24.5 million and the change in deposit mix reflect customer preferences for short-term instruments in a
low interest rate environment.
The average rates paid on total interest-bearing deposits were 0.89% in 2014 and 1.01% in 2013. Noninterest bearing
deposits were 19% of total deposits at both December 31, 2014 and 2013.
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 $38.0 million with none outstanding at December 31, 2014, compared to $41.0
million with none outstanding at December 31, 2013. Securities sold under agreements to repurchase totaled $4.7 million
and $3.4 million at December 31, 2014 and 2013, respectively.
The average rates paid on short-term borrowings were 0.50% in both 2014 and 2013. Information concerning the
average balances, weighted average rates, and maximum amounts outstanding for short-term borrowings during the three-
year period ended December 31, 2014 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 and subordinated debentures
related to trust preferred securities. At both December 31, 2014 and 2013, the Bank had $5.0 million in long-term FHLB
advances outstanding and 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 3.42% in 2014 and 3.59% in 2013.
PAGE 17
Management’s Discussion and Analysis
CAPITAL ADEQUACY
The Company's consolidated stockholders' equity was $75.8 million and $64.5 million as of December 31, 2014 and
2013, respectively. The change from December 31, 2013 was primarily driven by net earnings of $7.4 million and other
comprehensive income due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $7.0
million, partially offset by cash dividends paid of $3.1 million.
The Company’s tier 1 leverage ratio was 10.32%, tier 1 risk-based capital ratio was 17.45% and total risk-based
capital ratio was 18.54% at December 31, 2014. 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.”
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, 2014.
Changes in Interest Rates
200 basis points
(200) basis points
NM=not meaningful
PAGE 18
Net Interest Income % Variance
1.31 %
NM
At December 31, 2014, 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.
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,
2014.
Changes in Interest Rates
200 basis points
(200) basis points
NM=not meaningful
EVE % Variance
(11.46) %
NM
At December 31, 2014, 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
loan,
satisfactory, consistent
investment, borrowing, and capital policies.
levels of profitability within the framework of the Company’s established liquidity,
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, 2014 and 2013, the Company had no derivative contracts to assist in managing interest rate
sensitivity.
PAGE 19
Management’s Discussion and Analysis
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.
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, 2014, the Bank had a remaining available line of credit with the FHLB totaling $224.6
million. As of December 31, 2014, the Bank also had $38.0 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, 2014,
which by their terms had contractual maturity and termination dates subsequent to December 31, 2014:
(Dollars in thousands)
Contractual obligations:
Deposit maturities (1)
Long-term debt
Operating lease obligations
Total
Total
693,390
12,217
573
$706,180
$
$
Payments due by period
1 year
or less
567,593
—
256
$567,849
1 to 3
years
73,669
—
258
$73,927
3 to 5
years
More than
5 years
51,958
5,000
59
$57,017
170
7,217
—
$7,387
(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, 2014, the Bank had outstanding standby letters of credit of $8.3 million and unfunded loan
commitments outstanding of $49.8 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.
PAGE 20
Residential mortgage lending and servicing 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, 2014, the unpaid principal balance of the residential mortgage loans, which we have originated
and sold, but retained the servicing rights was $359.3 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
through our underwriting, quality assurance and servicing practices, including good communications with our residential
mortgage investors.
In 2014, the Company was required to repurchase one loan with a principal balance of $0.4 million as a result of the
representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae. This loan was
current as to principal and interest at the time of repurchase. The Company repurchased no residential mortgage loans in
2013 and one loan in 2012 with a principal balance of $0.3 million that was current as to principal and interest at the time
of repurchase. At December 31, 2014, the Company had one pending repurchase request related to representation and
warranty provisions.
In 2013, Fannie Mae issued updated requirements for lender quality control programs which became effective
January 1, 2014. As a result of these new requirements, the Company self-reported three loans to Fannie Mae for possible
breaches related to representation and warranty provisions in 2014. At December 31, 2014, the three self-reported loans
pending review by Fannie Mae had an aggregate principal balance of $0.9 million and were current as to principal and
interest. One of the three loans self-reported to Fannie Mae was for investment property, which has different underwriting
guidelines than loans for primary residences. As part of its quality control review related to this one investment property
loan, the Company identified certain underwriting deficiencies for nine additional investment property loans that were
related to the same borrower. All ten loans were originated and sold to Fannie Mae. At December 31, 2014, the aggregate
principal balance for all ten investment property loans was $4.0 million and each loan was current as to principal and
interest. The Company submitted a voluntary repurchase request to Fannie Mae in January 2015 for all ten investment
property loans, which was approved. At December 31, 2014 and the date of repurchase in January 2015, the aggregate fair
value of the ten investment property loans was greater than the repurchase price required by Fannie Mae. In response to the
quality control review findings related to this one borrower, the Company has put additional controls in place for
investment property loans originated for sale, including additional quality control reviews and management approvals.
Furthermore, management has performed additional reviews of investment property loans originated for sale, including a
review of the number of loans to one borrower, and does not believe there is any material exposure related to representation
and warranty provisions for these loans. In 2014, investment property loans were only 7.0% of the total dollar volume of
loans sold to Fannie Mae.
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.
PAGE 21
Management’s Discussion and Analysis
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, 2014, we believe that this
exposure is not material due to the historical level of repurchase requests and loss trends, the results of our quality control
reviews, and the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We
maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level
and number of repurchase requests as well as the delinquency rates in our investor portfolios.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented herein have been prepared in
accordance with 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.
•
•
•
•
•
•
ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects;
ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure;
ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity;
ASU 2014-09, Revenue from Contracts with Customers (Topic 606);
ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures; and
ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.
Information about these pronouncements is described in more detail below.
ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, amends the criteria a company
must meet to elect to account for investments in qualified affordable housing projects using a method other than the cost or
equity methods. If the criteria are met, a company is permitted to amortize the initial investment cost in proportion to and
over the same period as the total tax benefits the company expects to receive. The amortization of the initial investment cost
and tax benefits are to be recorded in the income tax expense line. The Update also requires new disclosures about all
investments in qualified affordable housing projects regardless of the accounting method used. These changes 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 material impact on the consolidated financial statements of the Company.
ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure, clarifies the timing of when a creditor is considered to have taken physical possession of residential real estate
collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate owned. A
creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure, or
(2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal
agreement. The Update also requires disclosure of the amount of foreclosed residential real estate property held by the
creditor and the recorded investment in residential real estate mortgage loans that are in 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 material impact on the consolidated financial statements of the Company.
PAGE 22
ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,
changes the definition and reporting requirements for discontinued operations. Under the new guidance, an entity’s disposal
of a component or group of components must be reported in discontinued operations if the disposal is a strategic shift that
has or will have a significant effect on the entity’s operations and financial results. Major strategic shifts include disposals
of a major geographic area or line of business. This guidance also requires new disclosures on discontinued operations.
These changes are effective for the Company in the first quarter 2015 with prospective application. Early adoption is
permitted for disposals that have not been previously reported. Adoption of this ASU will not have a material impact on
the consolidated financial statements of the Company.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), provides a comprehensive and converged
standard on revenue recognition. The new guidance is intended to improve comparability of revenue recognition practices
across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration
to which the entity expects to be entitled in exchange for those goods and services. This guidance also requires new
qualitative and quantitative disclosures related to revenue from contracts with customers. These changes are effective for
the Company in the first quarter 2017 with retrospective application to each prior reporting period or with the cumulative
effect of initially applying this Update recognized at the date of initial application. Early adoption is not permitted. The
Company is evaluating the impact this ASU will have on our consolidated financial statements.
ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, changes current
accounting and expands secured borrowing accounting for repurchase-to-maturity transactions and repurchase financings.
This guidance requires new disclosures for certain repurchase agreements and similar transactions that identify which items
are accounted for as secured borrowings and which items are accounted for as sales. These changes are effective for the
Company in the first quarter 2015. The Company will be required to present changes in accounting for transactions
outstanding as of January 1, 2015 as a cumulative-effect adjustment to retained earnings at the same date. Early adoption is
not permitted. Adoption of this ASU will not have a material impact on the consolidated financial statements of the
Company.
ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, clarifies
how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure.
Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others
reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and
that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a
government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has
the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the
ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the
basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based
on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. These changes are
effective for the Company in the first quarter of 2015 with prospective or modified retrospective application. Early adoption
is permitted. Adoption of this ASU will not have a material impact on the consolidated financial statements of the
Company.
PAGE 23
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
5,482
331
5,813
Third
Quarter
5,448
321
5,769
Second
Quarter
5,253
312
5,565
2014
First
Quarter
5,270
324
5,594
Fourth
Quarter
5,279
342
5,621
Third
Quarter
5,270
351
5,621
Second
Quarter
5,232
365
5,597
2013
First
Quarter
5,141
382
5,523
(In thousands)
Net interest income (GAAP)
Tax-equivalent adjustment
Net interest income (Tax-equivalent)
Year ended December 31
2014
21,453
1,288
22,741
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
$
$
PAGE 24
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
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 other real estate owned
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 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
$
$
$
$
$
$
$
$
2014
2013
2012
Year ended December 31
2010
2011
28,105
5,364
22,741
50
3,933
15,104
11,520
1,288
2,784
7,448
2.04
0.86
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
3,643,278
3,643,328
20.80
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
25.80
22.10
23.64
11.59x
114 %
10.53 %
0.97 %
42.16 %
9.17 %
1.20 %
433 %
0.41 %
0.21 %
0.28 %
0.12 %
17.45 %
18.54 %
10.32 %
3.15 %
27.21 %
56.62 %
25.75
20.80
25.00
12.89
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
267,603
402,954
4,836
789,231
693,390
12,217
75,799
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
(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 25
Financial Tables
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 other real estate owned
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
$
$
$
$
$
$
$
$
7,117
1,304
5,813
150
1,079
3,780
2,962
331
735
1,896
0.52
0.215
Fourth
Third
Second
2014
First
6,959
1,365
5,594
(400)
756
3,948
2,802
324
657
1,821
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
7,100
1,331
5,769
300
1,017
3,584
2,902
321
709
1,872
6,929
1,364
5,565
—
1,081
3,792
2,854
312
683
1,859
0.51
0.215
0.51
0.215
0.50
0.215
0.47
0.21
0.49
0.21
0.52
0.21
0.46
0.21
3,643,328
3,643,328
20.80
3,643,328
3,643,328
20.09
3,643,295
3,643,328
19.84
3,643,161
3,643,173
18.74
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
24.64
22.10
23.64
11.59 x
114 %
10.21 %
0.98 %
41.35 %
9.56 %
1.20 %
433 %
0.41 %
0.21 %
0.28 %
0.07 %
17.45 %
18.54 %
10.32 %
3.14 %
27.94 %
54.85 %
24.92
23.17
24.64
12.38
123
10.19
0.97
42.16
9.52
1.20
281
0.73
0.37
0.43
0.28
17.43
18.50
10.26
3.16
27.47
52.81
25.00
22.90
24.02
12.19
121
10.72
0.96
42.16
8.98
1.23
169
1.13
0.57
0.73
(0.02)
17.45
18.53
10.07
3.09
26.87
57.06
25.80
23.20
23.20
11.72
124
11.11
0.96
43.00
8.60
1.25
148
1.66
0.81
0.84
0.17
17.55
18.64
10.03
3.20
26.51
62.17
25.75
23.93
25.00
12.89
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
267,603
402,954
4,836
789,231
693,390
12,217
75,799
264,827
394,602
4,754
781,136
680,763
12,217
73,193
276,953
385,826
4,728
775,128
684,181
12,217
72,291
279,989
377,350
4,711
773,333
687,088
12,217
68,284
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
(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 26
Table 4 - Average Balance and Net Interest Income Analysis
2014
Interest
Income/
Expense
Average
Balance
(Dollars in thousands)
Interest-earning assets:
Loans and loans held for sale (1) $ 388,373 $ 19,551
4,627
Securities - taxable
3,790
Securities - tax-exempt (2)
8,417
109
28
28,105
Total securities
Federal funds sold
Interest bearing bank deposits
Total interest-earning assets
207,655
62,870
270,525
56,110
6,559
721,567
12,915
36,490
$ 770,972
Year ended December 31
Yield/
Rate
Average
Balance
5.03% $ 390,288 $
2.23% 195,850
6.03% 67,797
3.11% 263,647
0.19% 48,671
0.43%
5,634
3.89% 708,240
13,694
37,836
$ 759,770
2013
Interest
Income/
Expense
20,604
3,912
4,234
8,146
106
42
28,898
Yield/
Rate
Average
Balance
2012
Interest
Income/
Expense
5.28% $ 395,938 $ 21,943
3,883
2.00% 199,794
4,829
6.25% 77,447
8,712
3.09% 277,241
0.22% 27,466
54
0.75%
793
4.08% 701,438
14,125
39,742
$ 755,305
—
30,709
Yield/
Rate
5.54%
1.94%
6.24%
3.14%
0.20%
—
4.38%
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
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
Total liabilities and
$ 105,533
191,882
331
982
0.31% $ 101,034
0.51% 171,413
319
886
0.32% $ 99,664
0.52% 153,668
349
859
0.35%
0.56%
101,561
1,169
1.15% 105,631
1,437
1.36% 108,726
1,769
1.63%
156,029
555,005
3,814
12,217
571,036
126,122
3,100
70,714
2,445
4,927
19
418
5,364
1.57% 155,781
0.89% 533,859
0.50%
2,817
3.42% 31,518
0.94% 568,194
119,136
3,522
68,918
2,750
5,392
14
1,130
6,536
1.77% 161,128
1.01% 523,186
0.50%
2,970
3.59% 49,115
1.15% 575,271
107,948
3,410
68,676
3,347
6,324
16
1,830
8,170
2.08%
1.21%
0.54%
3.73%
1.42%
and stockholders' equity
$ 770,972
$ 759,770
$ 755,305
Net interest income and margin
$ 22,741
3.15%
$
22,362
3.16%
$ 22,539
3.21%
(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 27
Financial Tables
Table 5 - Volume and Rate Variance Analysis
Years ended December 31, 2014 vs. 2013
Years ended December 31, 2013 vs. 2012
Due to change in
Rate (2)
Volume (2)
Due to change in
Rate (2)
Volume (2)
(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
Net
Change
(1,053)
715
(444)
271
3
(14)
(793)
12
96
$
$
$
(957)
452
(147)
305
(11)
(18)
(681)
(2)
(9)
(268)
(221)
(305)
(465)
5
(712)
(1,172)
(309)
(541)
0
(52)
(593)
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)
(597)
(932)
(2)
(700)
(1,634)
(503)
(893)
(1)
(69)
(963)
$
$
$
(96)
263
(297)
(34)
14
4
(112)
14
105
(47)
4
76
5
(660)
(579)
(298)
(79)
(603)
(682)
46
36
(898)
5
92
(42)
(94)
(39)
(1)
(631)
(671)
(227)
Net interest income
$
379
(88)
467
$
(177)
50
(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 28
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
Loans, net
2014
54,329
37,298
192,006
107,641
12,335
403,609
(655)
402,954
(4,836)
398,118
$
$
2013
57,780
36,479
174,920
101,706
12,893
383,778
(439)
383,339
(5,268)
378,071
2012
59,334
37,631
183,611
105,631
12,219
398,426
(233)
398,193
(6,723)
391,470
2011
54,988
39,814
162,435
101,725
11,454
370,416
(153)
370,263
(6,919)
363,344
December 31
2010
53,288
47,850
166,241
96,241
10,676
374,296
(81)
374,215
(7,676)
366,539
PAGE 29
Financial Tables
Table 7 - Loan Maturities and Sensitivities to Changes in Interest Rates
1 year
1 to 5
After 5
Adjustable
Fixed
December 31, 2014
(Dollars in thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
$
$
or less
740
1,342
2,027
854
142
5,105
years
46,701
29,866
92,536
27,289
10,923
207,315
years
6,888
6,090
97,443
79,498
1,270
191,189
Total
54,329
37,298
192,006
107,641
12,335
403,609
Rate
28,701
17,129
16,231
62,136
3,254
127,451
Rate
25,628
20,169
175,775
45,505
9,081
276,158
Total
54,329
37,298
192,006
107,641
12,335
403,609
PAGE 30
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 other real estate owned
as a % total assets
Nonperforming loans as a % of total loans
Accruing loans 90 days or more past due
2014
2013
2012
2011
2010
Year ended December 31
$
5,268
6,723
6,919
7,676
6,495
(46)
(235)
—
(438)
(89)
(808)
71
8
119
112
16
326
(482)
50
$
4,836
1.20 %
433 %
0.12 %
1,117
534
1,651
0.41 %
0.21 %
0.28 %
—
$
$
$
(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
10,535
4,919
15,454
3.83
2.03
2.65
58
(679)
(1,758)
(422)
(533)
(21)
(3,413)
34
2
—
155
15
206
(3,207)
2,450
6,919
1.87
67
0.86
10,354
7,898
18,252
4.83
2.35
2.80
—
(537)
(1,487)
—
(552)
(111)
(2,687)
63
54
—
151
20
288
(2,399)
3,580
7,676
2.05
65
0.64
11,833
8,125
19,958
5.22
2.61
3.16
—
PAGE 31
Financial Tables
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 $
2014
2013
December 31
2012
2011
2010
Amount %*
639
13.5 $
Amount %*
386
15.1 $
Amount %*
812
14.9 $
Amount %*
948
14.8 $
Amount %*
972
14.2
$
974
1,928
1,119
176
—
4,836
9.2
47.6
26.7
3.1
$
366
3,186
1,114
216
—
5,268
9.5
45.6
26.5
3.4
$
1,545
3,137
1,126
103
—
6,723
9.4
46.1
26.5
3.1
$
1,470
3,009
1,363
129
—
6,919
10.7
43.9
27.5
3.1
$
2,223
2,893
1,336
141
111
7,676
12.8
44.4
25.7
2.9
* Loan balance in each category expressed as a percentage of total loans.
PAGE 32
Table 10 - CDs and Other Time Deposits of $100,000 or More
(Dollars in thousands)
Maturity of:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total CDs and other time deposits of $100,000 or more (1)
(1) includes brokered certificates of deposit.
December 31, 2014
$
$
19,063
12,684
41,998
78,492
152,237
PAGE 33
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,
2014 in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated Framework (1992). Based on this assessment, management has concluded that
such internal control over financial reporting was effective as of December 31, 2014.
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 a management’s report in this annual report.
PAGE 34
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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2014 in conformity
with U.S. generally accepted accounting principles.
Birmingham, Alabama
March 24, 2015
PAGE 35
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 income (loss), net
Less treasury stock, at cost - 313,807 shares and 314,017 shares
at December 31, 2014 and 2013, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements
$
$
$
$
$
$
2014
12,856
68,507
2,140
83,503
267,603
1,974
402,954
(4,836)
398,118
10,807
18,004
534
8,688
789,231
130,160
563,230
693,390
4,681
12,217
3,144
713,432
—
39
3,763
76,193
2,443
(6,639)
75,799
December 31
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
$
789,231
$
751,343
PAGE 36
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:
Taxable
Tax-exempt
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
Gain on sale of premises and equipment
Other
Securities (losses) gains, net:
Realized (losses) gains, net
Total other-than-temporary impairments
Total securities (losses) 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
Year ended December 31
2014
2013
2012
$
19,551
$
20,604
$
21,943
4,627
2,502
137
26,817
4,927
19
418
5,364
21,453
50
21,403
872
1,636
501
—
—
1,454
(197)
(333)
(530)
3,933
8,943
1,431
920
465
(450)
—
3,795
15,104
10,232
2,784
7,448
2.04
$
$
3,912
2,794
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
3,883
3,187
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
$
$
$
$
Weighted average shares outstanding:
Basic and diluted
See accompanying notes to consolidated financial statements
3,643,278
3,643,003
3,642,831
PAGE 37
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net earnings
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on all other securities
Reclassification adjustment for net loss (gain) on securities
recognized in net earnings
Other comprehensive income (loss)
Year ended December 31
2014
2013
2012
$
7,448
$
7,118
$
6,763
6,660
335
6,995
(9,315)
(411)
(9,726)
1,379
(427)
952
Comprehensive income (loss)
$
14,443
$
(2,608)
$
7,715
See accompanying notes to consolidated financial statements
PAGE 38
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Stock
Shares
(Dollars in thousands, except share data)
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
Net earnings
Other comprehensive income
Cash dividends paid ($0.86 per share)
Sale of treasury stock (210 shares)
Balance, December 31, 2014
See accompanying notes to consolidated financial statements
3,957,135 $
—
—
—
—
3,957,135 $
—
—
—
—
3,957,135 $
—
—
—
—
3,957,135 $
Amount
39 $
—
—
—
—
39 $
—
—
—
—
39 $
—
—
—
—
39 $
Additional
paid-in
capital
Accumulated
other
Retained
comprehensive
Treasury
earnings
(loss) income
stock
Total
3,753 $
—
—
—
3
3,756 $
—
—
—
3
3,759 $
—
—
—
4
3,763 $
64,045
6,763
—
(2,987)
—
67,821
7,118
—
(3,060)
—
71,879
7,448
—
(3,134)
—
76,193
$
$
$
$
4,222 $
—
952
—
—
5,174 $
—
(9,726)
—
—
(4,552) $
—
6,995
—
—
2,443 $
(6,643) $
—
—
—
2
(6,641) $
—
—
—
1
(6,640) $
—
—
—
1
(6,639) $
65,416
6,763
952
(2,987)
5
70,149
7,118
(9,726)
(3,060)
4
64,485
7,448
6,995
(3,134)
5
75,799
PAGE 39
Audited Financial Statements
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
Net loss (gain) on securities available for sale
Net gain on sale of loans held for sale
Net (gain) 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
Net (increase) decrease in other assets
Net increase (decrease) 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
(Increase) decrease in loans, net
Net purchases of premises and equipment
Decrease in FHLB stock
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 in interest-bearing deposits
Net increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase
Repayments or retirement of long-term debt
Dividends paid
Net cash provided by (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
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
2014
2013
2012
$
7,448
$
7,118
$
6,763
50
780
1,548
786
530
(1,163)
(458)
—
(57,069)
58,089
—
(501)
—
(27)
518
10,531
37,132
53,767
(78,278)
(20,572)
(744)
235
—
—
4,480
(3,980)
4,420
20,126
1,318
—
(3,134)
22,730
29,281
54,222
83,503
400
827
1,956
1,537
(651)
(2,030)
477
3,028
(94,980)
96,779
(1,018)
(427)
—
1,232
(523)
13,725
40,251
54,737
(123,449)
10,721
(462)
1,153
—
1,148
2,836
(13,065)
7,726
24,301
674
(38,028)
(3,060)
(8,387)
(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
(166)
15,062
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)
(2,987)
(27,654)
6,521
55,428
61,949
$
$
$
$
$
$
$
$
$
$
5,406
1,413
$
6,761
758
$
8,535
1,224
475
$
2,278
$
1,515
$
$
$
$
$
$
$
PAGE 40
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.
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These
reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.
Accounting Standards Adopted in 2014
In the first quarter of 2014, the Company adopted new guidance related to the following Accounting Standards
Update (“Update” or “ASU”):
• 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.
Information about this pronouncement is described in more detail below.
ASU 2013-11 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. The changes were effective for the Company during the first quarter of 2014. Adoption of this ASU
had no 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, 2014, 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 income, 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
PAGE 41
Audited Financial Statements
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 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.
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. The Company repurchased one residential
mortgage loan in 2012 and another in 2014, with unpaid principal balances of $0.3 million and $0.4 million, respectively.
Both loans were current as to principal and interest at the time of repurchase. Except for these two loans, during 2014,
2013, and 2012, 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
PAGE 42
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 include 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.
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.
PAGE 43
Audited Financial Statements
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. 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. 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.
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
PAGE 44
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, 2014. The Company does not believe there are any material subsequent events that would
require further recognition or disclosure.
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, 2014, 2013,
and 2012, respectively, the Company had no such securities or other 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
2014
2013
2012
$
$
7,448
3,643,278
2.04
$
$
7,118
3,643,003
1.95
$
$
6,763
3,642,831
1.86
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, 2014, 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, 2014.
(Dollars in thousands)
Type:
Trust preferred issuances
Maximum
Loss
Exposure
Liability
Recognized
Classification
N/A
$
7,217
Long-term debt
PAGE 45
Audited Financial Statements
NOTE 4: RESTRICTED CASH BALANCES
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, 2014 and 2013, the Bank did not
have a required reserve balance at the Federal Reserve Bank.
NOTE 5: SECURITIES
At December 31, 2014 and 2013, 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, 2014 and 2013, respectively, are presented below.
(Dollars in thousands)
December 31, 2014
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
Total available-for-sale
December 31, 2013
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
Total available-for-sale
$
$
$
$
1 year
or less
1 to 5
years
5 to 10
After 10
years
years
Fair
Value
Gross Unrealized Amortized
Gains
Losses
Cost
—
—
—
—
—
—
—
—
30,947
—
502
14,869
14,523
15,520
14,433
120,520
56,289
60,249
135,043
72,311
31,449
44,912
191,242
267,603
—
—
1,735
1,735
23,247
8,306
21,366
52,919
21,275
154,052
41,238
216,565
44,522
162,358
64,339
271,219
375
1,597
3,379
5,351
—
976
1,560
2,536
830 $
616
34
60,704
134,062
68,966
1,480 $ 263,732
4,557 $
49,079
4,733 $ 166,115
63,238
9,749 $ 278,432
459 $
(a) Includes securities issued by U.S. government agencies or government sponsored entities.
Securities with aggregate fair values of $132.2 million and $120.5 million at December 31, 2014 and 2013,
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 $1.6 and $1.8 million at December 31, 2014 and 2013, 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, 2014 and 2013, 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, 2014:
Agency obligations
Agency RMBS
State and political subdivisions
Total
December 31, 2013:
Agency obligations
Agency RMBS
State and political subdivisions
Total
$
$
$
$
Less than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
—
9,078
4,257
13,335
35,932
109,774
9,575
155,281
—
22
34
56
3,181
4,394
459
8,034
24,126
42,744
—
66,870
8,590
7,683
—
16,273
830
594
—
1,424
1,376
339
—
1,715
$
24,126
51,822
4,257
830
616
34
80,205
$
1,480
44,522 $
117,457
9,575
171,554 $
4,557
4,733
459
9,749
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, 2014, cost-method investments with an aggregate cost of $1.6 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 2014, 2013, and 2012, 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
$
$
2014
—
—
—
—
—
Year ended December 31
2012
2013
3,276
1,257
—
(757)
(500)
—
130
(2,149)
—
1,257
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:
Agency RMBS
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
$
$
$
$
$
$
2014
333
—
333
333
—
333
—
333
Realized Gains and Losses
Year ended December 31
2012
2013
—
—
—
—
—
—
—
—
—
130
130
130
130
—
—
130
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
2014
467
(664)
(333)
(530)
$
$
Year ended December 31
2013
745
(94)
—
651
2012
1,005
(196)
(130)
679
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
2014
54,329
37,298
$
December 31
2013
57,780
36,479
52,296
139,710
192,006
66,489
41,152
107,641
12,335
403,609
(655)
402,954
$
56,102
118,818
174,920
57,871
43,835
101,706
12,893
383,778
(439)
383,339
$
$
Loans secured by real estate were approximately 83.5% of the total loan portfolio at December 31, 2014. At
December 31, 2014, 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,
2014 and 2013.
(In thousands)
Current
Past Due
90 days
Loans
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
December 31, 2014:
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, 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
$
54,106
36,483
51,832
139,710
191,542
64,713
40,503
105,216
12,290
$ 399,637
$
57,558
34,883
54,214
118,389
172,603
56,191
42,935
99,126
12,789
$ 376,959
168
210
201
—
201
1,736
495
2,231
45
2,855
167
14
861
—
861
745
598
1,343
100
2,485
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
69
—
69
4
73
54,274
36,693
52,033
139,710
191,743
66,449
40,998
107,447
12,335
402,492
57,725
34,897
55,075
118,389
173,464
57,005
43,533
100,538
12,893
379,517
Non-
Accrual
Total
Loans
55
605
263
—
263
40
154
194
—
1,117
$
54,329
37,298
52,296
139,710
192,006
66,489
41,152
107,641
12,335
$ 403,609
55
$
57,780
1,582
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
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 $102 thousand, $270 thousand, and $511 thousand for the years
ended December 31, 2014, 2013, and 2012, respectively.
PAGE 50
Allowance for Loan Losses
The allowance for loan losses as of and for the years ended December 31, 2014, 2013 and 2012, 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
2014
5,268
(808)
326
(482)
50
4,836
$
$
$
$
2013
6,723
(2,020)
165
(1,855)
400
5,268
$
$
2012
6,919
(4,334)
323
(4,011)
3,815
6,723
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,
independent loan review process. The Company’s loan review process assists in determining whether there are loans in the
portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio.
The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers,
and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company
incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all
amounts due according to the contractual terms of a loan.
As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five
segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and
consumer installment loans. The Company analyzes each segment and estimates an allowance allocation for each loan
segment.
The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for
these types of loans. The estimates for these loans are established by category and based on the Company’s internal system
of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of
credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it
does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank
groups. At December 31, 2014 and 2013, 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 2014 and
2013, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture
the effects of the most recent economic cycle on the Company’s loan loss experience. Prior to June 30, 2013, the Company
calculated average losses for all loan segments using a rolling 6 quarter historical period. If the Company continued to
calculate average losses for all loan segments using a rolling 6 quarter historical period, the Company’s calculated
allowance for loan loss allocation would have decreased by approximately $1.1 million at June 30, 2013.
Beginning with the quarter ended June 30, 2013, the Company calculated average losses for all loan segments using a
rolling 8 quarter historical period (except for the commercial real estate loan segment, which used a 6 quarter historical
period) and continued this methodology through March 31, 2014. If the Company continued to calculate average losses for
all loan segments other than commercial real estate using a rolling 8 quarter historical period and for the commercial real
estate segment using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation
would have decreased by approximately $1.0 million at June 30, 2014.
Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a
rolling 20 quarter historical period and continued this methodology through December 31, 2014. Other than the changes
discussed above, the Company has not made any material changes to its calculation of historical loss periods that would
impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the
accompanying consolidated balance sheets and statements of earnings.
The following table details the changes in the allowance for loan losses by portfolio segment for the years ended
December 31, 2014, 2013, and 2012.
(in thousands)
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
Charge-offs
Recoveries
Net recoveries (charge-offs)
Provision
Balance, December 31, 2014
Commercial
and industrial
948
(289)
54
(235)
99
812
(514)
48
(466)
40
386
(46)
71
25
228
639
$
$
$
$
Construction
and land
Development
1,470
(231)
46
(185)
260
1,545
(39)
6
(33)
(1,146)
366
(235)
8
(227)
835
974
Commercial
Real Estate
3,009
(3,184)
71
(3,113)
3,241
3,137
(262)
4
(258)
307
3,186
—
119
119
(1,377)
1,928
Residential
Real Estate
1,363
(545)
134
(411)
174
1,126
(808)
88
(720)
708
1,114
(438)
112
(326)
331
1,119
Consumer
Installment
129
(85)
18
(67)
41
103
(397)
19
(378)
491
216
(89)
16
(73)
33
176
$
$
$
$
Total
6,919
(4,334)
323
(4,011)
3,815
6,723
(2,020)
165
(1,855)
400
5,268
(808)
326
(482)
50
4,836
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, 2014 and 2013.
(In thousands)
December 31, 2014:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
December 31, 2013:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
$
$
$
$
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
losses
in loans
losses
in loans
losses
in loans
639
974
1,734
1,119
176
4,642
386
278
3,014
1,114
216
5,008
54,259
36,693
190,306
106,745
12,335
400,338
57,656
34,897
171,987
100,780
12,893
378,213
—
—
194
—
—
194
—
88
172
—
—
260
70
605
1,700
896
—
3,271
124
1,582
2,933
926
—
5,565
639
974
1,928
1,119
176
4,836
386
366
3,186
1,114
216
5,268
54,329
37,298
192,006
107,641
12,335
403,609
57,780
36,479
174,920
101,706
12,893
383,778
(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, 2014
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, 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
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
$
49,550
35,911
49,900
136,801
186,701
59,646
39,348
98,994
12,200
383,356
53,060
33,616
53,430
117,490
170,920
50,392
40,517
90,909
12,713
361,218
$
$
$
4,348
226
1,905
2,253
4,158
1,912
624
2,536
21
11,289
4,183
180
770
91
861
1,137
1,310
2,447
34
7,705
376
556
228
656
884
4,891
1,026
5,917
114
7,847
482
1,101
875
808
1,683
5,476
1,706
7,182
146
10,594
55
605
263
—
263
40
154
194
—
1,117
55
1,582
1,027
429
1,456
866
302
1,168
—
4,261
$
54,329
37,298
52,296
139,710
192,006
66,489
41,152
107,641
12,335
$ 403,609
$
57,780
36,479
56,102
118,818
174,920
57,871
43,835
101,706
12,893
$ 383,778
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).
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, 2014 and 2013.
(In thousands)
With no allowance recorded:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Total commercial real estate
Residential real estate:
Consumer mortgages
Investment property
Total residential real estate
Total
With allowance recorded:
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Total
Total impaired loans
December 31, 2014
Unpaid
principal
balance (1)
Charge-offs
and payments
applied (2)
Recorded
investment (3)
Related
allowance
$
$
$
$
70
2,822
331
331
934
180
1,114
4,337
846
591
1,437
1,437
5,774
—
(2,217)
(68)
(68)
(192)
(26)
(218)
(2,503)
—
—
—
—
(2,503)
70
605
263
263
742
154
896
1,834
846
591
1,437
1,437
3,271
102
92
194
194
194
$
$
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
applied against the outstanding principal balance.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
any related allowance for loan losses.
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
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
88
110
62
172
260
260
$
$
(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, 2014
Year ended December 31, 2013
Year ended December 31, 2012
Average
Total interest
Average
Total interest
recorded
income
recorded
income
Average
recorded
Total interest
income
investment
recognized
investment
recognized
investment
recognized
$
98
7
$
188
9
$
194
1,032
1,308
872
2,180
731
164
895
4,205
—
40
29
69
43
—
43
119
$
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
13
—
64
—
64
—
—
—
77
(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 restructurings (“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. In determining the appropriate accrual status at the time of restructure, the Company evaluates whether a
restructured loan has adequate collateral protection, among other factors.
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, 2014
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, 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
TDRs
Accruing
Nonaccrual
Total
Related
Allowance
$
$
$
$
70
—
846
591
1,437
742
—
742
2,249
124
—
875
602
1,477
—
—
—
1,601
—
605
263
—
263
—
154
154
1,022
—
1,582
285
429
714
754
172
926
3,222
70
605
1,109
591
1,700
742
154
896
3,271
124
1,582
1,160
1,031
2,191
754
172
926
4,823
$
$
$
$
—
—
102
92
194
—
—
—
194
—
88
110
62
172
—
—
—
260
At December 31, 2014, 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, 2014
Commercial real estate:
Other
Total commercial real estate
Residential real estate:
Consumer mortgages
Total residential real estate
Total
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
Pre-
modification
outstanding
recorded
investment
Post-
modification
outstanding
recorded
investment
Number of
contracts
1
1
1
1
2
1
1
2
3
3
1
4
8
4
4
2
6
2
2
4
14
$
$
$
$
$
$
590
590
712
712
1,302
390
882
1,037
1,919
849
172
1,021
3,330
5,419
3,167
1,803
4,970
863
567
1,430
11,819
592
592
712
712
1,304
387
882
1,041
1,923
844
172
1,016
3,326
4,305
2,225
1,657
3,882
858
563
1,421
9,608
The majority of the loans modified in a TDR during the years ended December 31, 2014, 2013, and 2012,
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 $0.9 million for the year ended December 31, 2012.
PAGE 58
The following table summarizes the recorded investment in loans modified in a TDR within the previous twelve
months for which there was a payment default (defined as 90 days or more past due) during the respective years.
($ in thousands)
December 31, 2014
Commercial real estate:
Owner occupied
Total commercial real estate
Total
December 31, 2013
Construction and land development
Commercial real estate:
Other
Total commercial real estate
Total
December 31, 2012
Construction and land development
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, 2014 and 2013 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
1
1
1
2
1
1
$
$
$
$
$
$
272
272
272
1,197
425
425
1,622
2,386
2,386
2014
5,916
8,606
3,214
17,736
(6,929)
10,807
$
$
December 31
2013
5,288
8,539
3,164
16,991
(6,549)
10,442
Depreciation expense was approximately $380 thousand, $418 thousand, and $366 thousand for the years ended
December 31, 2014, 2013 and 2012, 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 evaluates MSRs for impairment on a quarterly basis.
Impairment is determined by stratifying MSRs
into groupings based on predominant risk characteristics, such as interest rate and loan type.
If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted
as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage
lending income.
PAGE 59
Audited Financial Statements
The following table details the changes in amortized MSRs and the related valuation allowance for the years ended
December 31, 2014, 2013, and 2012.
(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
$
$
$
$
2014
2,350
465
(374)
(53)
2,388
—
53
3,452
3,238
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
Data and assumptions used in the fair value calculation related to MSRs at December 31, 2014 and 2013,
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)
2014
360,956
$
9.6 %
10.0 %
3.9 %
267
25.0
December 31
2013
356,334
7.5
10.0
3.9
268
25.0
At December 31, 2014, the weighted average amortization period for MSRs was 6.6 years. Estimated amortization
expense for each of the next five years is presented below.
$
December 31, 2014
353
301
265
224
194
(Dollars in thousands)
2015
2016
2017
2018
2019
PAGE 60
NOTE 9: DEPOSITS
At December 31, 2014, the scheduled maturities of certificates of deposit and other time deposits are presented
below.
(Dollars in thousands)
2015
2016
2017
2018
2019
Thereafter
Total certificates of deposit and other time deposits
$
December 31, 2014
123,329
40,783
32,886
19,225
32,733
170
249,126
$
Additionally, at December 31, 2014 and 2013, approximately $152.2 and $156.2 million, respectively, of certificates
of deposit and other time deposits were issued in denominations of $100,000 or greater.
At December 31, 2014 and 2013, 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, 2014, 2013, and 2012, the composition of short-term borrowings is presented below.
(Dollars in thousands)
Federal funds purchased:
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
$
2014
2013
2012
Amount
Weighted
Avg. Rate
Amount
Weighted
Avg. Rate
Amount
Weighted
Avg. Rate
—
16
—
4,681
3,797
4,681
—
0.90 %
0.50 %
0.50 %
$
$
—
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 %
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. The
Bank had available federal fund lines totaling $38.0 million with none outstanding at December 31, 2014.
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 $6.7
million and $6.9 million at December 31, 2014 and 2013, respectively, were pledged to secure securities sold under
agreements to repurchase.
PAGE 61
Audited Financial Statements
NOTE 11: LONG-TERM DEBT
At December 31, 2014 and 2013, the composition of long-term debt is presented below.
(Dollars in thousands)
FHLB advances, due 2018
Subordinated debentures, due 2033
Total long-term debt
2014
2013
Amount
5,000
7,217
12,217
$
$
Weighted
Avg. Rate
3.59%
3.38
3.47%
Amount
5,000
7,217
12,217
$
$
Weighted
Avg. Rate
3.59%
3.38
3.47%
The Bank had $5.0 million of FHLB advances with original maturities greater than one year at both December 31,
2014 and 2013. Certain qualifying residential mortgage loans with an aggregate carrying value of $35.4 million at
December 31, 2014, were pledged to secure long-term FHLB advances. Securities with an aggregate carrying value of $1.0
million and certain qualifying residential mortgage loans with an aggregate carrying value of $ $42.1 million at December
31, 2013, were pledged to secure long-term FHLB advances.
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
2015
—
—
—
$
$
2016
—
—
—
2017
—
—
—
2018
5,000
—
5,000
2019
—
—
—
Thereafter
—
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, 2014, 2013, and 2012, is presented below.
(In thousands)
2014:
Unrealized net holding gain on all other securities
Reclassification adjustment for net loss on securities recognized in net earnings
Other comprehensive income
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
Pre-tax
amount
Tax (expense)
Net of
benefit
tax amount
$
$
$
$
$
$
10,553
530
11,083
(14,761)
(651)
(15,412)
2,188
(679)
1,509
(3,893)
(195)
(4,088)
5,446
240
5,686
(809)
252
(557)
6,660
335
6,995
(9,315)
(411)
(9,726)
1,379
(427)
952
PAGE 62
NOTE 13: INCOME TAXES
For the years ended December 31, 2014, 2013, and 2012 the components of income tax expense from continuing
operations are presented below.
(Dollars in thousands)
Current income tax expense:
Federal
State
Total current income tax expense
Deferred income tax expense:
Federal
State
Total deferred income tax expense
Total income tax expense
$
2014
1,601
397
1,998
731
55
786
$
2,784
Year ended December 31
2013
594
159
753
1,330
207
1,537
2,290
2012
737
58
795
472
152
624
1,419
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, 2014, 2013,
and 2012, is presented below.
(Dollars in thousands)
Earnings before income taxes
Amount
10,232
$
Income taxes at statutory rate
Tax-exempt interest
State income taxes, net of
federal tax effect
Bank owned life insurance
Change in valuation allowance
Other
3,479
(803)
295
(170)
—
(17)
2014
2013
2012
Percent of
pre-tax
earnings
34.0 %
(7.8)
2.9
(1.7)
—
(0.2)
Percent of
pre-tax
earnings
34.0 %
(9.4)
2.6
(1.5)
—
(1.3)
Amount
9,408
3,199
(884)
242
(145)
—
(122)
Percent of
pre-tax
earnings
34.0 %
(12.2)
2.2
(1.8)
(6.2)
1.4
Amount
8,182
2,782
(997)
179
(151)
(505)
111
Total income tax expense
$
2,784
27.2 %
2,290
24.4 %
1,419
17.4 %
PAGE 63
Audited Financial Statements
The Company had net deferred tax assets of $0.5 million and $5.4 million at December 31, 2014 and 2013,
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, 2014 and 2013 are
presented below:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
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
2014
2013
$
$
1,784
—
20
816
480
3,100
69
1,427
881
204
2,581
519
1,944
2,661
282
1,137
531
6,555
90
—
867
205
1,162
5,393
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, 2014. 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, 2014, 2013, and 2012, is presented below.
(Dollars in thousands)
Net deferred tax asset:
Balance, beginning of year
Deferred tax expense related to continuing operations
Stockholders' equity, for accumulated other comprehensive (income) loss
Balance, end of year
Year ended December 31
2014
2013
2012
$
$
5,393
(786)
(4,088)
519
1,244
(1,537)
5,686
5,393
2,425
(624)
(557)
1,244
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, 2014, 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 2015 relative to any tax positions taken prior to December
31, 2014. As of December 31, 2014, 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, 2011 through 2014.
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 $122 thousand, $115
thousand, and $115 thousand for the years ended December 31, 2014, 2013, and 2012, 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, 2014 and December 31, 2013, 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, 2014 and 2013 is
presented below.
(Dollars in thousands)
December 31, 2014:
Pay fixed / receive variable
Pay variable / receive fixed
Total interest rate swap agreements
December 31, 2013:
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)
—
634
634
—
844
844
634
—
634
844
—
844
$
$
$
$
210
(210)
—
366
(366)
—
Notional
4,667
4,667
9,334
5,017
5,017
10,034
$
$
$
$
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, 2014 and 2013, 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
2014
49,824
8,337
$
2013
38,870
8,562
$
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 $72 thousand and $78 thousand at December 31, 2014 and 2013, respectively.
Other Commitments
Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to
December 31, 2014, are as follows: 2015, $256 thousand; 2016, $178 thousand; 2017, $100 thousand; 2018, $30 thousand;
2019, $29 thousand.
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, 2014, 2013, and 2012,
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, 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, 2014 and 2013, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
(Dollars in thousands)
December 31, 2014:
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, 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
Amount
60,249
135,043
72,311
267,603
634
268,237
634
634
44,522
162,358
64,339
271,219
844
272,063
844
844
$
$
$
$
$
$
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
60,249
135,043
72,311
267,603
634
268,237
634
634
44,522
162,358
64,339
271,219
844
272,063
844
844
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(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, 2014 and 2013, respectively, by caption, on the accompanying consolidated balance sheets and by ASC
820 valuation hierarchy (as described above):
(Dollars in thousands)
December 31, 2014:
Loans held for sale
Loans, net(1)
Other real estate owned
Other assets (2)
Total assets at fair value
December 31, 2013:
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)
$
$
$
$
1,974
3,077
534
2,388
7,973
2,296
5,305
3,884
2,350
13,835
—
—
—
—
—
—
—
—
—
—
1,974
—
—
—
1,974
2,296
—
—
—
2,296
—
3,077
534
2,388
5,999
—
5,305
3,884
2,350
11,539
(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
$
$
2014
—
$
—
—
—
—
—
$
Year ended December 31
2013
652
$
2012
1,986
(87)
41
(606)
—
—
$
(6)
146
(974)
(500)
652
The Company had no Level 3 assets measured at fair value on a recurring basis at December 31, 2014. For Level 3
assets measured at fair value on a non-recurring basis as of December 31, 2014, the significant unobservable inputs used in
the fair value measurements are presented below.
Carrying
Amount
Valuation Technique
Significant Unobservable Input
(Dollars in thousands)
Nonrecurring:
Impaired loans
$
3,077 Appraisal
Other real estate owned
534 Appraisal
Mortgage servicing rights, net
2,388 Discounted cash flow
Appraisal discounts (%)
Appraisal discounts (%)
Prepayment speed or CPR (%)
Discount rate (%)
Weighted
Average
of Input
16.7%
26.0%
9.6%
10.0%
Fair Value of Financial Instruments
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or
not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in
the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices
are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the
fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of its financial
instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at
which similar loans would be made for the same remaining maturities. This method of estimating fair value does not
incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an
exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for
estimated prepayments.
Loans held for sale
Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans.
PAGE 70
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on
rates currently offered for deposits with similar remaining maturities.
Long-term debt
The fair value of the Company’s fixed rate long-term debt is estimated using discounted cash flows based on
estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s
variable rate long-term debt approximates its fair value.
The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial
instruments at December 31, 2014 and 2013 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, 2014:
Financial Assets:
Loans, net (1)
Loans held for sale
Financial Liabilities:
Time Deposits
Long-term debt
December 31, 2013:
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
$
$
$
$
398,118
1,974
249,126
12,217
378,071
2,296
261,199
12,217
$
$
$
$
407,839
2,044
251,365
12,558
387,180
2,310
263,985
12,569
$
$
$
$
—
—
—
—
—
—
—
—
$
$
$
$
—
2,044
251,365
12,558
—
2,310
263,985
12,569
$
$
$
$
407,839
—
—
—
387,180
—
—
—
(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 2014 to
renovate a limited portion of the Bank’s operations center and to build out the leasehold improvements for the relocation of
a bank branch. In 2012, the Company contracted with the same construction company for the construction of a new drive-
through banking facility and completion of other site work on the Bank’s main office campus. Total payments made to the
construction company under the terms of these contracts were $0.1 million, $0.4 million and $1.2 million for the years
ended December 31, 2014, 2013, and 2012, 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 for the year ended December 31, 2012.
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, 2013
New loans/advances
Repayments
Loans outstanding at December 31, 2014
Amount
4,261
1,685
(1,105)
4,841
$
$
During 2014 and 2013, 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, 2014
and 2013 amounted to $22.0 million and $20.3 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, 2014, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2014, 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, 2014 and 2013 are
presented below.
(Dollars in thousands)
At December 31, 2014:
Tier 1 Leverage Capital
Actual
Minimum for capital
adequacy purposes
Minimum to be
well capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Auburn National Bancorporation $
AuburnBank
80,356
78,968
10.32 % $
10.16
31,133
31,099
Tier 1 Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
80,356
78,968
17.45 % $
17.11
18,419
18,463
Total Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
85,356
83,968
18.54 % $
18.19
36,839
36,927
At December 31, 2013:
Tier 1 Leverage Capital
Auburn National Bancorporation $
AuburnBank
76,037
74,716
10.10 % $
9.94
30,119
30,069
Tier 1 Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
76,037
74,716
17.19 % $
16.84
17,696
17,742
Total Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
81,385
80,064
18.40 % $
18.05
35,392
35,485
4.00 %
4.00
4.00 %
4.00
8.00 %
8.00
4.00 %
4.00
4.00 %
4.00
8.00 %
8.00
$
$
$
$
$
$
N/A
38,873
N/A
27,695
N/A
46,158
N/A
37,587
N/A
26,614
N/A
44,356
N/A
5.00 %
N/A
6.00 %
N/A
10.00 %
N/A
5.00 %
N/A
6.00 %
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, 2014, the Bank could have declared
additional dividends of approximately $11.4 million without prior approval of regulatory authorities. As a result of this
limitation, approximately $64.4 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
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) expense and equity
in undistributed earnings of bank subsidiary
Income tax (benefit) expense
Earnings before equity in undistributed earnings
of bank subsidiary
Equity in undistributed earnings of bank subsidiary
Net earnings
December 31
2014
2013
$
$
$
$
2,311
81,410
846
84,567
1,551
7,217
8,768
75,799
84,567
2,408
70,164
846
73,418
1,716
7,217
8,933
64,485
73,418
Year ended December 31
2014
3,377
147
3,524
236
206
442
3,082
(114)
3,196
4,252
7,448
$
$
2013
3,304
1,284
4,588
236
302
538
4,050
275
3,775
3,343
7,118
2012
3,231
288
3,519
236
318
554
2,965
(45)
3,010
3,753
6,763
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
Net cash provided by (used in) investing activities
Cash flows from financing activities:
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
2014
2013
2012
$
7,448
7,118
6,763
—
—
—
(159)
(4,252)
3,037
—
—
—
(3,134)
(3,134)
(97)
2,408
2,311
$
28
(1,018)
316
(97)
(3,343)
3,004
—
1,148
1,148
(3,060)
(3,060)
1,092
1,316
2,408
29
—
16
(104)
(3,753)
2,951
(17)
—
(17)
(2,987)
(2,987)
(53)
1,369
1,316
PAGE 75
Stock Performance Graph
STOCK PERFORMANCE GRAPH
The following performance graph compares the cumulative, total return on the Company’s Common Stock from
December 31, 2009 to December 31, 2014, with that of the Nasdaq Composite Index and SNL Southeast Bank Index
(assuming a $100 investment on December 31, 2009). 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
250
225
200
175
150
125
100
75
50
e
u
l
a
V
x
e
d
n
I
25
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
Index
Auburn National Bancorporation, Inc.
NASDAQ Composite
SNL Southeast Bank
12/31/09
100.00
100.00
100.00
12/31/10
106.05
118.15
97.10
Period Ending
12/31/12
118.99
138.02
94.37
12/31/11
101.95
117.22
56.81
12/31/13
147.96
193.47
127.88
12/31/14
144.90
222.16
144.03
PAGE 76
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 releases are available
free of charge through a link on our internet web-
site 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
Wachovia 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:
Computershare
P. O. Box 30170
College Station, TX 77842-3170
Phone: 1-800-368-5948
For frequently asked questions,
visit the Transfer Agent’s home page at:
www.computershare.com
Annual Meeting
Tuesday, May 12, 2015
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