AUBURN NATIONAL BANCORPORATION, INC. 2018 ANNUAL REPORTStability. Commitment. Opportunity. Corporate Information
CORPORATE HEADQUARTERS
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
Elliott Davis LLC/PLLC
200 East Broad Street
Greenville, SC 29606
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 505000
Louisville, KY 40233
Phone: 1-800-368-5948
For frequently asked questions,
visit theTransfer Agent’s home page at:
www.computershare.com
ANNUAL MEETING
Tuesday, May 14, 2019
3:00 p.m. (Central Time)
AuburnBank Center
132 N. Gay Street
Auburn, AL 36830
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 website at www.auburnbank.com. Requests for
these documents may also be made by emailing Investor
Relations at investorrelations@auburnbank.com or by
contacting Investor Relations by telephone or mail at the
Company’s corporate headquarters.
COMMON STOCK LISTING
Auburn National Bancorporation, Inc.
Common Stock is traded on the Nasdaq
Global Market under the symbol AUBN.
DIVIDEND REINVESTMENT
AND STOCK PURCHASE PLAN
Auburn National Bancorporation, Inc. offers
a Dividend Reinvestment Plan (DRIP) for
automatic reinvestment of dividends in the
stock of the company. Participants in the
DRIP may also purchase additional shares
with optional cash payments. For additional
information or for an authorization form,
please contact Investor Relations.
DIRECT DEPOSIT OF DIVIDENDS
Dividends may be automatically deposited into a share-
holder’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
Telephone: 334-821-9200 Fax: 334-887-2796
Stability. Commitment. Opportunity.
AU B U R N N AT I O N A L B A N C O R P O R AT I O N , I N C .
2 0 1 8 A N N UA L R E P O R T
To Our Shareholders and Friends
I am pleased to report that 2018 was a record year for our Bank.
Earnings of $8.8MM produced earnings per share of $2.42 and a
ROA of 1.08%. Asset quality is strong and our reserves (capital)
are solid.
Competition seems to be everywhere physically and on-line.
Due to the commitment and loyalty of our shareholders,
customers, directors, and staff, we continue to provide a stable
return along with a consistent dividend.
I believe the opportunities for our Bank to meet the challenges
of the future are linked directly to the quality service and
caring culture of our entire Bank Team. We are blessed to live
and work in vibrant communities with stable economies.
We enjoy giving back so that many will experience the joyous
feeling of happiness and hope.
We want to keep your money safe and help you achieve your
financial goals. This is what our founders believed in and we
are fortunate to continue this legacy.
Thank you for your continued support and encouragement as
we look forward to remaining your bank of choice. On behalf of
the entire AuburnBank Team, I hope you have a successful and
productive 2019.
Robert W. Dumas
Chairman, President and CEO
AuburnBank and ANBC
Stability. Commitment. Opportunity.
Dumas chairmanship provides for a stable course, a solid commitment to the
bank’s core values and an opportunity for continued growth
Family photos, community honors and bank artifacts line shelves and
hang on office walls, reflecting Bob Dumas’ life with family, community
and work. Following traditions since the bank was founded, the new
Chairman and CEO of Auburn National Bancorp and AuburnBank
takes the helm with a stellar banking background and service to the
community, stretching back decades in a variety of leadership capacities.
Bob’s family is Auburn through and through
When the war ended, Dub learned about the
going back to 1940 when his father, the late
game of golf while he waited for their ship to
William T. Dumas Jr. (Dub), caught a ride from
return home. He developed a love for the sport
a small town in Washington County to attend
and later taught his sons to play.
Auburn Polytechnic Institute, now Auburn
University. After graduating in 1943, Dub
married his hometown sweetheart, Tee, before
serving in the Army during WWII with the
Corp of Engineers in the Philippines.
After returning to Auburn near the end of 1945,
Dub began working on his master’s degree,
majoring in Agricultural Engineering. He was
hired as a professor at Auburn University, while
Tee worked at Bank of Auburn before Bob
was born at Lee County Hospital, now East
Alabama Medical Center, in 1953.
Growing up on Heard Avenue in Auburn,
Bob had a charmed childhood, beginning to
play golf with his father when he was 5 years
old. Bob and his brother, Trip, rode bikes to
the Tiger Theater, to friends’ homes and were
active in sports. “We were living the dream that
we might one day wear that orange and blue for
Auburn,” remembers Bob.
“For those of us that have known Bob and his family
since we were young, it is no surprise that Bob has and
continues to provide steady and visionary leadership
for not only for AuburnBank, but also for all of our area
communities and county. His valued leadership also
reaches throughout our state and nation with service as
a member of the Auburn University Board of Trustees
and the Federal Reserve. Bob is truly a wonderful servant
leader in so many capacities.”
He played on the first golf team at Auburn
GRANT DAVIS
High School and began to excel at golf. In
both the ninth and tenth grades, he won the
Alabama State High School Championship.
That changed the direction of his sports life.
He reluctantly gave up baseball, football and
basketball to concentrate on golf. “I knew with
golf I could get an education,” he says. “Because
of early successes with golf I felt like I would
receive some college scholarship offers.”
In fact, Auburn University offered him the
first full golf scholarship. “I had several other
opportunities,” Bob adds, “but Auburn was in
my heart.” In his senior year in 1976, Auburn
won the SEC Championship for Men’s Golf for
the very first time. Bob was also inducted into
the Auburn Tiger Trail in 2006 because of his
accomplishments on and off the course.
Bob began dating his wife, Martha Ann Butz,
whose father was also an Auburn professor,
in the ninth grade. They dated through high
school and were students together at Auburn
University.
They married in 1975 and Martha gradu-
ated in December from Auburn University
in Laboratory Technology. She then pursued
her master’s degree in Physiology at Auburn
University’s School of Veterinary Medicine. She
worked in the pathology lab at the Veterinary
School while completing her master’s and
continued working at the Auburn University
Veterinary School until the birth of their first
child in 1981.
Secretary to the Auburn University
Board of Trustees Emeritus
“We could not be more thankful that 35 years ago Bob followed in
his Mother’s footsteps and became an employee of AuburnBank.
And today, it is our great privilege to have Bob as the leader of the
AuburnBank Team. Through Bob’s guidance and with his institutional
knowledge, focus on customers, and compassion, we're confident
AuburnBank will continue to be successful in the years to come.”
ANNE M. MAY
Partner, Machen, McChesney & Chastain
“As a life-long friend of Bob Dumas, I read this somewhere and
this is Bob. ‘A man is what he is, not what men say he is. His
reputation is what he is before men, but his character is what he
is before God. His reputation can be damaged, but his character
cannot. Reputation is for time on earth, character is for eternity.’
Bob Dumas is a man with both a good reputation and character.”
TREY JOHNSTON
Owner, J&M Bookstore
Bob graduated a year after Martha with a degree
in Business Administration and a major in
Finance. He had met many business friends
through golf and decided to enter the banking
business. Banking was appealing to Bob because
of not only assisting businesses and individuals
in achieving financial goals but also by being
able to give back to the community through
worthy organizations.
In 1976, Bob went to work at the Bank of East
Alabama in Opelika. He quickly moved up the
ranks, becoming the manager of a branch office.
“I have done a little bit of everything in bank-
ing,” Bob says. “Lending was my expertise.
Auburn National Bank had a great reputation.
They wanted to increase their lending portfolio.
I am so thankful I joined the Auburn National
Bank Team. Around 1995 when we went public,
we changed our name to AuburnBank.
“It is a great place to work where we care about
each other and each customer. AuburnBank has
a long history and culture of being ingrained
and involved in the community. That is very
important to me.
“I still enjoy working with many customers
today to assist them with their banking needs,”
Bob adds. “They have trust and confidence in
us. We are conservative, have strong reserves
and a strong reputation within the communities
we serve.”
Bob has been involved with the Auburn
Chamber, United Way, Lee County Youth
Development, Achievement Center, Food Bank
of East Alabama, Boys and Girls Clubs and a
number of other organizations. “They are great
organizations that are giving back to the com-
Late in 1983, Chairman Ed Spencer at Auburn
munity and helping those not as fortunate or in a
National Bank had heard good things about
position to help themselves,” he says. “All of these
Bob and that his goal was to remain in his
organizations are heartwarming and make you
hometown. After a meeting with Mr. Spencer,
feel that you are doing the right thing and helping
Bob went to work at Auburn National Bank on
people who otherwise might not have been able
the lending side in January 1984.
to get assistance.” He is also an active member of
“Bob Dumas is a humble man of the highest
integrity. He is my lifelong friend, and I am
very proud to say that he has had a profound
impact on my life and the lives of many
others. If he considers you a friend, you are
indeed fortunate. Bob’s primary motive in
doing all he can do for Auburn is his very
strong commitment to his family.”
BILL HAM, JR.
Auburn Mayor 1998-2018
the Auburn United Methodist Church.
Recently, AuburnBank sponsored a home for
Habitat for Humanity. They not only sponsored
the home but gathered teams to work on the
house. “That was very rewarding and heartwarm-
ing,” says Bob, “to see a family receive a new
home. Building the home was an entire bank
effort, and our employees want to know when we
are going to build another one. That’s just what
we do—give back to our communities.”
He also enjoys assisting the Food Bank. “It is
difficult to think about children and others not
having access to food,” he says. “We had a turkey
“There are certain community leaders we call on again and again
because we can count on their guidance, support and wise counsel,
and Bob Dumas is absolutely one of those. His graceful leadership
and generosity of spirit are a gift to the Auburn community.”
LOLLY STEINER
Executive Director, Auburn Chamber of Commerce
drive one year for the Food Bank. I was over-
whelmed that some brought two or three turkeys
to provide Thanksgiving dinner for those in need.”
Along with the Auburn community,
AuburnBank is also involved in Opelika, Phenix
City, Chambers County and the Valley. “Our
people are engaged in the communities where
we have a bank,” adds Bob. “I think that what
makes us special is that we take pride in our
civic involvement.”
“We take ownership in giving back and being
a good corporate citizen. It has been ingrained
since Shel Toomer started the bank, and every-
one who has been associated with the Bank.”
Bob also serves on the board at the East
Alabama Medical Center. “We are fortunate
to have a great hospital,” he says. “It has been
rewarding to be associated with a well-run
organization that doesn’t turn away anybody for
medical care.”
In 2012, friends approached him about becom-
ing a Trustee at Auburn University. He was nom-
inated for the District 3 Lee County seat and was
selected and confirmed by the Alabama Senate in
2012. “To be able to serve such a great institution
and Lee County is truly humbling,” Bob says.
Bob is also involved in many other organiza-
tions including the Federal Reserve Bank of
Atlanta and the Alabama Bankers Association.
“The relationships I have formed with my bank-
ing peers have been rewarding and special dur-
ing my banking career.”
Bob, Martha and their two daughters, Katie and
Kristi, are all graduates of Auburn City Schools
and Auburn University. Bob served on the
Auburn City School Board for ten years where
he enjoyed forming close friendships with fel-
low board members, administrators, teachers,
coaches and parents during his tenure. “Being
part of a highly successful school system was a
very rewarding experience,” Bob stated.
“Ed Spencer has been a mentor and friend, as
well as a great role model for me both as an
“It has been my great fortune to work and serve alongside Bob for
a number of decades and to know him personally. I have watched
him during tender, trying and tumultuous moments and have seen
character in action regardless of circumstance. Bob epitomizes Micah
6:8—he loves kindness, does justice and walks humbly. Auburn is
fortunate to have him as an impeccable community stalwart and I am
blessed to have him as my cherished friend.”
LAURA COOPER
Executive Director, Lee County Youth Development Center
“Bob is an outstanding
person. He is a thoughtful,
caring person who always
puts others before himself.”
WAYNE ALDERMAN
Dean and Professor Emeritus,
Auburn University
individual and as a leader in the bank as chair-
His parents were a tremendous influence on his
man for 37 years,” Bob adds. “I learned many
life, and he is grateful for being raised in Auburn.
things from him, not only about banking, but
“We were brought up to treat people the way you
how to treat people. I look up to him as an
want to be treated. I think that is a great motto
example as to how it is supposed to be done
to live by, and try to help people when they need
both in business and banking and as a person.
it. I love being here with family and friends. It is
“As far as AuburnBank is concerned, I believe
that the one challenge going forward is stay-
ing on the cutting edge of banking services
a great place to raise your family, to work and for
cultural events, sporting events and education. I
am just proud to be a part of it.
and products that customers need or desire.
“Our AuburnBank board and employees are
Protecting confidential information through
dedicated people,” Bob adds. “I am excited
cyber security defenses and protecting customer
about being part of a special team. The founda-
information is also critical. Your reputation is
tion and principles that Bank of Auburn was
most important both as an individual and cor-
originally founded on are still applicable today
porate citizen because of the trust factor. I think
and I look forward to continuing to provide the
that is why we are still here, because people
leadership and commitment that has made our
have confidence in us.”
bank an integral part of this community.”
A New Home
Another example of AuburnBank’s
dedication to serving its customers is a
building dedicated to the bank’s wide
range of mortgage products and services.
The home for AuburnBank’s team of local
mortgage loan experts opened in 2018
and is convenient and centrally-located
at 1967 East Samford Avenue in Auburn.
Auburn National Bancorporation, Inc.
and AuburnBank Board of Directors
Seated left to right: Anne M. May, Robert W. Dumas, E.L. Spencer, Jr., David E. Housel,
Dr. Patricia Wade. Standing: William F. Ham, Jr., Amy B. Murphy, C. Wayne Alderman,
Terry W. Andrus, Edward Lee Spencer, III, and J. Tutt Barrett.
Terry W. Andrus
Retired, CEO, East Alabama
Medical Center
C. Wayne Alderman
Secretary to ANBC
Dean and Professor Emeritus,
College of Business,
Auburn University
J. Tutt Barrett
Attorney, Dean and Barrett
Robert W. Dumas
Chairman, President & CEO,
AuburnBank
William F. Ham, Jr.
Owner, Varsity Enterprises
David E. Housel
Director of Athletics Emeritus,
Auburn University
Anne M. May
Retired Partner,
Machen McChesney, CPAs
Amy B. Murphy
Director of Graduate Programs,
Accounting,
Auburn University
E.L. Spencer, Jr.
Chairman Emeritus
Edward Lee Spencer, III
Investor
Dr. Patricia Wade
Physician,
Pinnacle Cardiovascular
Associates
AuburnBank Officers
Robert W. Dumas
Chairman, President & Chief
Executive Officer
Terrell E. Bishop
Senior Vice President,
City President, Valley Branch
S. Mark Bridges
Senior Vice President,
Commercial/Consumer
Loans
James E. Dulaney
Senior Vice President,
Business Development/Marketing
David Hedges
Executive Vice President,
Chief Financial Officer
W. Thomas Johnson
Senior Vice President,
Senior Lender
Marla Kickliter
Senior Vice President,
Compliance/Internal Auditor
Mike King
Senior Vice President,
Mortgage Lending Division
Shannon O’Donnell
Senior Vice President,
Credit Administration/Chief
Risk Officer
Jerry Siegel
Senior Vice President, IT/IS
Chief Technology Officer
C. Eddie Smith
Senior Vice President,
City President,
Opelika Branch
Robert Smith
Senior Vice President,
Chief Lending Officer
James Walker
Senior Vice President,
Chief Accounting Officer
Bob R. Adkins
Vice President,
Commercial/Consumer
Loans
Patty Allen
Vice President,
Commercial/Consumer
Loans
Scottie Arnold
Vice President,
Administration
Deposit Products/Services
Kris Blackmon
Vice President,
Asset/Liability Manager
Chief Investment Officer
Laura Carrington
Vice President,
Human Resource Officer
Bruce Emfinger
Vice President,
Commercial/Consumer
Loans
Jeff Stanfield
Vice President,
Commercial/Consumer
Loans
James Salter
Vice President,
Commercial/Consumer
Loans
Christy A. Fogle
Vice President,
Credit Administration
Pam Fuller
Vice President,
Operations
Ginnie Y. Lunsford
Vice President,
Loan Operations
Marcia Otwell
Vice President,
Administration/Shareholder
Relations
James R. Pack
Vice President,
Financial Reporting
Cyndee Redmond
Vice President, Business
Systems Analysis
David Warren
Vice President,
Commercial/Consumer Loans
Karen Bence
Assistant Vice President
Security, BSA/OFAC Officer
Hope Woods
Assistant BSA Officer,
Assistant Security Officer
Suzanne Gibson
Assistant Vice President,
Portfolio Management Officer
Woody Odom
Assistant Vice President, IT/IS
Joanna Watts
IT/IS Officer
Rhonda Sanders
Deposit Operations,
Customer Identification Program
Officer
Leigh Ann Thompson
Data Analytics Officer
Opelika Branch Advisory Board
Seated left to right: William G. Dyas, C. Eddie Smith, and Sherrie M. Stanyard.
Standing: Doug M. Horn, Robert G. Young, and William P. Johnston.
Not pictured: William H. Brown and R. Kraig Smith, M.D.
Valley Branch Advisory Board
Seated left to right: H. David Ennis, Sr., Terrell E. Bishop, and Roy W. McClendon, Jr.
Standing: John H. Hood, II, Claud E. (Skip) McCoy, Jr., and Frank P. Norman.
William H. Brown
President, Brown Agency, Inc.
William G. Dyas
Realtor, First Realty
Doug M. Horn
Owner, Doug Horn Roofing
& Contracting Co.
William P. Johnston
President, J & M Bookstore
C. Eddie Smith
Senior Vice President,
City President,
Opelika Branch
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
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,
2018
2017
2016
2015
2014
$25,570
——
8,834
2.42
0.96
24.44
$24,526
<300>
7,846
2.15
0.92
23.85
$22,732
<485>
8,150
2.24
0.90
22.55
$22,718
$21,453
200
7,858
2.16
0.88
21.94
50
7,448
2.04
0.86
20.80
3,957,135
3,643,780
3,957,135
3,643,616
3,957,135
3,643,504
3,957,135
3,643,428
3,957,135
3,643,278
818,077
476,908
239,801
724,193
——
89,055
1.08%
10.14%
10.63%
1.00%
65.85%
853,381
453,651
257,697
757,659
3,217
86,906
0.94%
9.17%
10.30%
1.05%
59.88%
831,943
430,946
243,572
739,143
3,217
82,177
0.98%
9.65%
10.14%
1.08%
58.30%
817,189
426,410
241,687
723,627
7,217
79,949
0.98%
9.98%
9.79%
1.01%
58.93%
789,231
402,954
267,603
693,390
12,217
75,799
0.97%
10.53%
9.17%
1.20%
58.11%
Financial Section
Auburn National Bancorporation, Inc. 2018 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 – INTERNAL
CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – FINANCIAL
STATEMENTS
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
TABLE OF CONTENTS
3
4 – 22
23 – 31
32
33 – 34
35
36
37
38
39
40
41 – 72
74
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; (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, including the disruption effects of financial technology and
other competitors who are not subject to the same regulations as the Company and the Bank; (x) the failure of assumptions
and estimates underlying the establishment of allowances for possible loan losses and other asset impairments, losses
valuations of assets and liabilities and other estimates; (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 tests and other
evaluations; (xvi) the risks that our deferred tax assets (“DTAs”), if any, could be reduced if estimates of future taxable
income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock
could trigger a reduction in the amount of net operating loss carry-forwards that we may be able to utilize for income tax
purposes; and (xvii) other factors and risks described under “Risk Factors” herein and in any of our subsequent reports that
we make with the Securities and Exchange Commission (the “Commission” or “SEC”) under the Exchange Act.
All written or oral forward-looking statements that are made by us or are attributable to us are expressly qualified in their
entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are
made.
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 13 locations in its
primary service area. The Bank offers Visa® Checkcards, which are debit cards with the Visa logo that work like checks
but can be used anywhere Visa is accepted, including ATMs. The Bank’s Visa Checkcards can be used internationally
through the Plus® network. The Bank offers online banking, bill payment and other electronic services through its Internet
website, www.auburnbank.com. Our online banking services, bill payment and electronic services are subject to certain
cybersecurity risks. See “Risk Factors – Our information systems may experience interruptions and security breaches.
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. For example, 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 nearby Kia and Hyundai automotive 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, 2018 and 2017 and our results of operations for
the years ended December 31, 2018 and 2017. The purpose of this discussion is to provide information about our financial
condition and results of operations which is not otherwise apparent from the consolidated financial statements. The
following discussion and analysis should be read along with our consolidated financial statements and the related notes
included elsewhere herein. In addition, this discussion and analysis contains forward-looking statements, so you should
refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding Forward-Looking Statements”.
OVERVIEW
The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after
it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the Company's
principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated
continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its
business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches
in Auburn, Opelika, Notasulga and Valley, Alabama. 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 net earnings per share
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
Year ended December 31
2018
26,183
613
25,570
3,325
28,895
—
17,874
2,187
8,834
2.42
$
$
$
2017
25,731
1,205
24,526
3,441
27,967
(300)
16,784
3,637
7,846
2.15
$
$
$
The Company’s net earnings were $8.8 million for the full year 2018, compared to $7.8 million for the full year 2017.
Basic and diluted net earnings per share were $2.42 per share for the full year 2018, compared to $2.15 per share for the full
year 2017.
Net interest income (tax-equivalent) was $26.2 million in 2018, a 2% increase compared to $25.7 million in 2017. This
increase was primarily due to loan growth and recent increases in short-term market interest rates, offset by declines on
yields of tax exempt securities. Average loans were up 3% to $456.3 million in 2018, compared to $441.0 million in 2017.
The Company’s net interest margin (tax-equivalent) increased to 3.40% in 2018, compared to 3.29% in 2017 as yields on
earning assets improved.
The Company recorded no provision for loan losses during 2018 and a negative provision for loan losses of $0.3 million
during the 2017. The provision for loan losses is based upon various estimates and judgements, including the absolute level
of loans, loan growth, credit quality and the amount of net charge-offs. Annualized net recoveries as a percent of average
loans were 0.01% and 0.09% for 2018 and 2017, respectively. The Company recognized a recovery of $0.4 million from
the payoff of two nonperforming commercial loans during 2017.
Noninterest income was $3.3 million in 2018 compared to $3.4 million in 2017. This decrease was primarily due to a $0.1
million decrease in mortgage lending income as production volume declined.
PAGE 4
Noninterest expense was $17.9 million compared to $16.8 million in 2017. This increase in noninterest expense was
primarily due to increases in salaries and benefits expense of $0.6 million and a $0.4 million loss related to
misappropriation of assets, for which the Company filed a claim with its insurance provider. In March 2019, the Company
received a settlement of $0.3 million from its insurance provider related to this claim.
Income tax expense was $2.2 million in 2018 and $3.6 million in 2017 reflecting an effective tax rate of 19.84% and
31.67%, respectively. The decrease in the income tax expense and effective tax rate was primarily due to the 2017 Tax Act
which lowered the Company’s statutory federal tax rate from 34% in 2017 to 21% in 2018 and required the Company to
remeasure the value of its net deferred tax assets by $0.4 million as of December 31, 2017.
The Company paid cash dividends of $0.96 per share in 2018, an increase of 4.3% from 2017. At December 31, 2018, the
Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current
regulatory standards with a total risk-based capital ratio of 17.38%, a tier 1 leverage ratio of 11.33% and common equity
tier 1 (“CET1”) of 16.49% at December 31, 2018.
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, 2018 and 2017, 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. Since the fourth quarter of
2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic
downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant
losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the
year ended December 31, 2018, the Company increased its look-back period to 39 quarters to continue to include losses
incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-
back period to incorporate the effects of at least one economic downturn in its loss history. Other than expanding the look-
back period each quarter, the Company has not made any material changes to its methodology 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 16, 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, 2018. 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
(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
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
$
2018
Average
Balance
457,610
181,485
71,065
252,550
28,689
31,339
770,188
Yield/
Rate
4.76%
2.23%
4.11%
2.76%
1.93%
1.81%
3.88%
125,533
220,810
184,010
530,353
2,634
1,022
534,009
26,183
0.34%
0.39%
1.27%
0.68%
0.68%
4.50%
0.69%
3.40%
Year ended December 31
2017
Average
Balance
442,101
197,108
69,881
266,989
32,342
41,317
782,749
125,935
230,121
198,457
554,513
3,476
3,217
561,206
25,731
Yield/
Rate
4.70%
2.15%
5.07%
2.91%
1.05%
1.04%
3.75%
0.20%
0.37%
1.18%
0.62%
0.52%
3.89%
0.64%
3.29%
$
$
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
Net interest income (tax-equivalent) was $26.2 million in 2018, compared to $25.7 million in 2017. This increase was
primarily due to loan growth and improved yields on interest-earning assets.
The tax-equivalent yield on total interest-earning assets increased by 13 basis points in 2018 from 2017 to 3.88%.
Expansion of our earning asset yields was primarily driven by loan growth and recent increases in short-term market
interest rates, which positively impacted the yields on our short-term assets, including federal funds sold and interest
bearing bank deposits. This expansion was partially offset by a decrease in the tax-equivalent yield on tax-
exempt available-for-sale securities due to a reduction in the Company’s statutory federal tax rate from 34% to 21%.
The cost of total interest-bearing liabilities increased 5 basis points in 2018 from 2017 to 0.69%. The increase in our
funding costs was primarily due to higher prevailing market interest rates.
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 reduced earning asset yields during the
extended period of low interest rates, increased competition for quality loan opportunities, and possible increases in our
costs of funds, if the Federal Reserve continues its gradual increase in interest rates. The Company anticipates that this
challenging, competitive environment will continue in 2019. However, the Company believes our net interest income
should continue to increase in 2019 compared to 2018 primarily due to an increase in average loan balances.
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
Company recorded no provision for loan losses in 2018 and a negative provision for loan losses of $0.3 million for the year
ended December 31, 2017.
Net recoveries were $33 thousand, or 0.01% of average loans and $0.4 million, or 0.09% of average loans, for the years
ended December 31, 2018 and 2017, respectively. The Company recognized a recovery of $0.4 million from the payoff of
two nonperforming commercial loans during 2017.
PAGE 8
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 1.00% at December 31, 2018 from 1.05% at December 31, 2017. 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, 2018. 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
Securities gains, net
Other
Total noninterest income
Year ended December 31
2018
749
655
435
—
1,486
3,325
$
$
2017
746
777
442
51
1,425
3,441
$
$
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 MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation
allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s mortgage lending income for 2018 and 2017.
(Dollars in thousands)
Origination income
Servicing fees, net
Decrease in MSR valuation allowance
Total mortgage lending income
Year ended December 31
$
$
2018
311
344
—
655
$
$
2017
504
272
1
777
The decrease in mortgage lending income was primarily due to a decrease in the volume of mortgage loans originated and
sold as refinance activity declined. The decrease in origination income was partially offset by an increase in servicing fees,
net, as MSR amortization expense decreased.
PAGE 9
MANAGEMENT’S DISCUSSION AND ANALYSIS
Noninterest Expense
(Dollars in thousands)
Salaries and benefits
Net occupancy and equipment
Professional fees
FDIC and other regulatory assessments
Other
Total noninterest expense
Year ended December 31
2018
10,653
1,465
902
310
4,544
17,874
$
$
2017
10,011
1,471
966
346
3,990
16,784
$
$
The increase in salaries and benefits expense reflects an increase in the number of full-time equivalent employees and
routine annual increases.
The increase in other noninterest expense was primarily due to a $0.4 million loss related to a misappropriation of assets for
which the Company filed a claim with its insurance provider. In March 2019, the Company received a settlement of $0.3
million from its insurance provider related to this claim.
Income Tax Expense
Income tax expense was $2.2 million in 2018 compared to $3.6 million in 2017. The Company’s effective income tax rate
was 19.84% in 2018, compared to 31.67% in 2017. The decrease was mainly due to decrease in effect tax rate related to
the 2017 Tax Cuts and Jobs Act which lowered the Company’s statutory federal tax rate from 34% to 21% and required the
Company to remeasure the value of its net deferred tax assets by $0.4 million as of December 31, 2017.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $239.8 million at December 31, 2018, a decrease of $17.9 million, or 7%, compared to
$257.7 million as of December 31, 2017. This decline reflects a decrease in the amortized cost basis of securities available-
for-sale of $13.6 million as proceeds from principal repayments on mortgage-backed securities were not reinvested and a
decrease in the fair value of securities available-for-sale of $4.3 million. The average tax-equivalent yields earned on total
securities were 2.76% in 2018 and 2.91% in 2017.
The following table shows the carrying value and weighted average yield of securities available-for-sale as of December
31, 2018 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
14,437
—
—
14,437
1.96%
—
—
1.96%
1 to 5
years
19,865
—
3,682
23,547
1.71%
—
3.87%
2.05%
5 to 10
years
16,869
8,368
7,726
32,963
2.11%
2.49%
3.02%
2.42%
December 31, 2018
After 10
years
—
110,230
58,624
168,854
Total
Fair Value
51,171
118,598
70,032
239,801
—
2.50%
3.22%
2.75%
1.91%
2.50%
3.23%
2.59%
PAGE 10
Loans
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
Less: unearned income
$
2018
63,467
40,222
261,896
102,597
9,295
477,477
(569)
2017
59,086
39,607
239,033
106,863
9,588
454,177
(526)
2016
49,850
41,650
220,439
110,855
8,712
431,506
(560)
2015
52,479
43,694
203,853
116,673
10,220
426,919
(509)
December 31
2014
54,329
37,298
192,006
107,641
12,335
403,609
(655)
Loans, net of unearned income
$
476,908
453,651
430,946
426,410
402,954
Total loans, net of unearned income, were $476.9 million at December 31, 2018, an increase of $23.3 million, or 5%, from
$453.7 million at December 31, 2017. Four loan categories represented the majority of the loan portfolio at December 31,
2018: commercial real estate mortgage loans (55%), residential real estate mortgage loans (22%), commercial and industrial
loans (13%) and construction and land development loans (8%). Approximately 22% of the Company’s commercial real
estate loans were classified as owner-occupied at December 31, 2018.
Within its residential real estate mortgage portfolio, the Company had junior lien mortgages of approximately $12.3
million, or 3%, and $12.6 million, or 3%, of total loans, net of unearned income at December 31, 2018 and 2017,
respectively. For residential real estate mortgage loans with a consumer purpose, approximately $0.5 million and $2.1
million required interest-only payments at December 31, 2018 and 2017, 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 $5.4 million and $1.4 million
as of December 31, 2018 and 2017, 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 under “Critical Accounting Policies – Allowance for Loan
Losses”.
The average yield earned on loans and loans held for sale was 4.76% in 2018 and 4.70% in 2017.
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 $19.3 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $17.4 million. Our loan policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2018, the Bank had no
loan relationships exceeding our internal limit.
PAGE 11
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, 2018 (and related balances at December 31, 2017).
(In thousands)
Hotel/motel
Lessors of 1-4 family residential properties
Multi-family residential properties
Shopping centers
Office buildings
Allowance for Loan Losses
$
2018
47,936
46,374
40,455
35,789
25,421
$
December 31
2017
22,384
47,323
52,167
39,966
24,483
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, 2018 and 2017, respectively, the
allowance for loan losses was $4.8 million 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, 2018 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 recoveries (charge-offs)
Provision for loan losses
Ending balance
as a % of loans
as a % of nonperforming loans
Net (recoveries) charge-offs as a % of
average loans
2018
2017
2016
2015
2014
Year ended December 31
$
4,757
4,643
4,289
4,836
5,268
(52)
—
(38)
(26)
(52)
(168)
70
—
19
79
33
201
33
—
$
4,790
1.00 %
2,691 %
(449)
—
—
(107)
(40)
(596)
461
347
—
115
87
1,010
414
(300)
4,757
1.05
160
(97)
—
(194)
(182)
(67)
(540)
29
1,212
—
127
11
1,379
839
(485)
4,643
1.08
196
(100)
—
(866)
(89)
(59)
(1,114)
22
17
—
313
15
367
(747)
200
4,289
1.01
158
(46)
(235)
—
(438)
(89)
(808)
71
8
119
112
16
326
(482)
50
4,836
1.20
433
(0.01) %
(0.09)
(0.19)
0.18
0.12
PAGE 12
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 1.00% at December 31, 2018, compared to 1.05% at December 31,
2017. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that
influence our quarterly allowance assessment in their entirety either improve or weaken.
Net recoveries were $33 thousand, or 0.01%, of average loans in 2018, compared to recoveries of $0.4 million, or 0.09%, in
2017. In 2017, the Company recognized a recovery of $0.4 million from the payoff of two nonperforming commercial
loans.
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, 2018 the Company had $0.4 million in nonperforming assets compared to $3.0 million at December 31,
2017. The decrease in nonperforming assets was primarily due to the resolution of two nonperforming commercial real
estate loans with a recorded investment of $2.1 million at December 31, 2017.
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
$
$
$
2018
2017
2016
2015
2014
December 31
178
172
350
0.07 %
0.04 %
0.04 %
—
2,972
—
2,972
0.66
0.35
0.66
—
2,370
152
2,522
0.59
0.30
0.55
—
2,714
252
2,966
0.70
0.36
0.64
—
1,117
534
1,651
0.41
0.21
0.28
—
The table below provides information concerning the composition of nonaccrual loans at December 31, 2018 and 2017,
respectively.
(In thousands)
Nonaccrual loans:
Commercial and industrial
Commercial real estate
Residential real estate
Consumer installment
Total nonaccrual loans / nonperforming loans
2018
—
—
178
—
178
December 31
2017
31
2,188
739
14
2,972
$
$
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, 2018, the
Company had $0.2 million in loans on nonaccrual, compared to $3.0 million at December 31, 2017.
PAGE 13
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, 2018 and 2017, the Company had $0.2 and
$0.5 million, respectively, in accruing TDRs.
At December 31, 2018 and 2017, there were no loans 90 days past due and still accruing interest.
The table below provides information concerning the composition of OREO at December 31, 2018 and 2017, respectively.
(In thousands)
Other real estate owned:
Residential
Total other real estate owned
Potential Problem Loans
2018
172
172
$
$
December 31
2017
—
—
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 $6.5 million, or 1.4% of total loans at
December 31, 2018, compared to $5.7 million, or 1.3% of total loans at December 31, 2017.
The table below provides information concerning the composition of potential problem loans at December 31, 2018 and
2017, 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
2018
522
741
688
4,506
71
6,528
$
$
December 31
2017
119
468
733
4,253
78
5,651
At December 31, 2018, approximately $0.7 million or 10.4% of total potential problem loans were past due at least 30 but
less than 90 days.
The following table is a summary of the Company’s performing loans that were past due at least 30 days but less than
90 days as of December 31, 2018 and 2017, respectively.
(In thousands)
Performing loans past due 30 to 89 days:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total performing loans past due 30 to 89 days
PAGE 14
December 31
2018
2017
$
$
100
225
—
1,740
41
2,106
8
—
—
1,058
57
1,123
Deposits
(In thousands)
Noninterest bearing demand
NOW
Money market
Savings
Certificates of deposit under $100,000
Certificates of deposit and other time deposits of $100,000 or more
Brokered certificates of deposit
Total deposits
2018
201,648
120,769
161,464
59,075
62,207
108,620
10,410
724,193
$
$
December 31
2017
193,917
146,999
173,251
55,421
69,960
107,711
10,400
757,659
Total deposits were $724.2 million and $757.7 million at December 31, 2018 and 2017, respectively. Decreases of
$41.2 million in interest-bearing deposits were partially offset by increases in noninterest-bearing deposits of $7.7 million
during 2018. Of the $41.2 million decrease in interest-bearing deposits, $28.0 million was due to fluctuations in public
depositor account balances.
The average rates paid on total interest-bearing deposits were 0.68% in 2018 and 0.62% in 2017. Noninterest bearing
deposits were 28% and 26% of total deposits at December 31, 2018 and 2017, respectively.
Other Borrowings
Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase with an original maturity of one year or less. The Bank had
available federal fund lines totaling $41.0 million with none outstanding at December 31, 2018 and 2017, respectively.
Securities sold under agreements to repurchase totaled $2.3 million and $2.7 million at December 31, 2018 and 2017,
respectively.
The average rates paid on short-term borrowings was 0.68% and 0.52% in 2018 and 2017, respectively. Information
concerning the average balances, weighted average rates, and maximum amounts outstanding for short-term borrowings
during the two-year period ended December 31, 2018 is included in Note 9 to the accompanying consolidated financial
statements included in this annual report.
Long-term debt includes junior subordinated debentures related to trust preferred securities. The Company had $3.2 million
in junior subordinated debentures related to trust preferred securities outstanding at December 31, 2017. On April 27, 2018,
the Company formally redeemed all of the issued and outstanding junior subordinated debentures, including accrued and
unpaid distributions, and the Trust formally redeemed all of the issued and outstanding trust preferred securities and
common securities at par, including accrued and unpaid distributions. The junior subordinated debentures would have
matured on December 31, 2033 and were redeemable since December 31, 2008.
The average rates paid on long-term debt were 4.50% in 2018 and 3.89% in 2017.
CAPITAL ADEQUACY
The Company's consolidated stockholders' equity was $89.1 million and $86.9 million as of December 31, 2018 and 2017,
respectively. The change from December 31, 2017 was primarily driven by net earnings of $8.8 million, partially offset by
cash dividends paid of $3.5 million and an other comprehensive loss due to the change in unrealized losses on securities
available-for-sale, net of tax, of $3.2 million.
The Bank’s Tier 1 leverage ratio was 11.33%, Common Equity Tier 1 (“CET1”) risk-based capital ratio was 16.49%, Tier 1
risk-based capital ratio was 16.49%, and total risk-based capital ratio was 17.38% at December 31, 2018. These ratios
exceed the minimum regulatory capital percentages of 5.0% for Tier 1 leverage ratio, 6.5% for CET1 risk-based capital
ratio, 8.0% for Tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well
capitalized.” Based on current regulatory standards, the Bank is classified as “well capitalized.”
PAGE 15
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within
the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability
Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates 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 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 help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest
income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate
forecast over the next 12 months, policy limits for net interest income variances are as follows:
+/- 20% for a gradual change of 400 basis points
+/- 15% for a gradual change of 300 basis points
+/- 10% for a gradual change of 200 basis points
+/- 5% for a gradual change of 100 basis points
PAGE 16
The following table reports the variance of net interest income over the next 12 months assuming a gradual change in
interest rates up or down when compared to the baseline net interest income forecast at December 31, 2018.
Changes in Interest Rates
400 basis points
300 basis points
200 basis points
100 basis points
(100) basis points
(200) basis points
(300) basis points
(400) basis points
NM=not meaningful
Net Interest Income % Variance
(3.47)%
(2.13)
(1.16)
(0.82)
0.92
0.08
NM
NM
At December 31, 2018, our earnings simulation model indicated that we were in compliance with the policy guidelines
noted above.
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 stated policy guidelines for an instantaneous basis point change in interest rates,
such that our EVE should not decrease from our base case by more than the following:
45% for an instantaneous change of +/- 400 basis points
35% for an instantaneous change of +/- 300 basis points
25% for an instantaneous change of +/- 200 basis points
15% for an instantaneous change of +/- 100 basis points
The following table reports the variance of EVE assuming an immediate change in interest rates up or down when
compared to the baseline EVE at December 31, 2018.
Changes in Interest Rates
400 basis points
300 basis points
200 basis points
100 basis points
(100) basis points
(200) basis points
(300) basis points
(400) basis points
NM=not meaningful
EVE % Variance
(21.50) %
(15.62)
(10.03)
(4.56)
0.45
(5.77)
NM
NM
At December 31, 2018, our EVE model indicated that we were in compliance with the policy guidelines noted above.
PAGE 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates. 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. ALCO reviews each of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the
Company’s established liquidity, loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and
interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing to meet the credit and
deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging
instruments. At December 31, 2018 and 2017, the Company had no derivative contracts to assist in managing interest rate
sensitivity.
Liquidity Risk Management
Liquidity is the Company's ability to convert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the
Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead
to a decline in earnings due to the opportunity cost of foregoing alternative higher-yielding investment opportunities.
Liquidity is managed at two levels: at the Company and at the Bank. The management of liquidity at both levels is
essential, because the Company and the Bank have different funding needs and sources, are separate legal entities, and each
are subject to regulatory guidelines and requirements.
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, 2018, the Bank had a remaining available line of credit with the FHLB totaling $238.6 million. As of
December 31, 2018, the Bank also had $41.0 million of federal funds lines, with none outstanding. Primary uses of funds
include repayment of maturing obligations and growing the loan portfolio.
PAGE 18
The following table presents additional information about our contractual obligations as of December 31, 2018, which by
their terms had contractual maturity and termination dates subsequent to December 31, 2018:
(Dollars in thousands)
Contractual obligations:
Deposit maturities (1)
Operating lease obligations
Total
Total
724,193
718
724,911
$
$
Payments due by period
1 year
or less
651,319
152
651,471
1 to 3
years
45,518
161
45,679
3 to 5
years
More than
5 years
27,356
120
27,476
—
285
285
(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, 2018, the Bank had outstanding standby letters of credit of $7.0 million and unfunded loan commitments
outstanding of $61.9 million. Because these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to
fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale,
or on a short-term basis to borrow and purchase federal funds from other financial institutions.
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, 2018, the unpaid principal balance of residential mortgage loans, which we have originated and sold,
but retained the servicing rights was $290.0 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 2018, as a result of the representation and warranty provisions contained in the Company’s sale agreements with Fannie
Mae, the Company was required to repurchase one loan with an aggregate principal balance of $53 thousand, which was
current as to principal and interest at the time of repurchase. During 2017, the Company was required to repurchase three
loans with an aggregate principal balance of $0.6 million that were current as to principal and interest at the time of
repurchase. At December 31, 2018, the Company had no pending repurchase requests related to representation and
warranty provisions.
PAGE 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to:
(1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any
required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements
governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in
such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the
respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject
to termination if the breach is not cured within a specified period following notice. The standards governing servicing and
the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as
the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected
loan.
Although to date repurchase requests related to representation and warranty provisions, and servicing activities have been
limited, it is possible that requests to repurchase mortgage loans may increase in frequency if investors more aggressively
pursue all means of recovering losses on their purchased loans. As of December 31, 2018, 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 2016-02, Leases;
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments;
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities;
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement; and
ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.
PAGE 20
Information about these pronouncements is described in more detail below.
ASU 2016-02, Leases, requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A
lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying asset for the lease term. In July 2018, the FASB issued ASU
2018-10 and 2018-11, which are designed to make targeted improvements to and clarifications regarding ASU 2016-02.
The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment
should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier
application permitted as of the beginning of an interim or annual reporting period. The Company is currently finalizing its
evaluation of its lease obligations as potential lease assets and liabilities as defined by ASU 2016-02. Based on the
Company’s preliminary analysis of its existing lease contracts, it is estimated that the adoption of ASU 2016-02 will result
in a right-of-use asset and a lease liability of approximately $0.6 million from operating leases, primarily from our
facilities.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): – Measurement of Credit Losses on Financial
Instruments, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt
securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader
range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The
allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to
present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a
manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance
rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are
not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not
excluded from the scope that have the contractual right to receive cash. For public business entities that are SEC filers, the
new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019, and early
adoption is permitted beginning in 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to
retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified
retrospective approach). The Company is planning to adopt the standard in the first quarter of 2020 and is continuing its
implementation efforts through its Company-wide implementation team. This team has assigned roles and responsibilities,
key tasks to complete, and a general timeline to be followed. The team meets periodically to discuss the latest developments
and ensure progress is being made. The team has been working with an advisory consultant and is finalizing the
methodologies that will be utilized, which will be followed by developing and documenting processes, controls, policies
and disclosure requirements in preparation for performing a full parallel run. The Company’s preliminary evaluation
indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in
particular the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential
impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, improves the transparency and
understandability of information conveyed to financial statement users about an entity’s risk management activities by
better aligning the entity’s financial reporting for hedging relationships with those risk management activities and reduces
the complexity of and simplifies the application of hedge accounting by preparers. For public entities, the guidance is
effective for fiscal years beginning after December 15, 2018, and interim periods therein; however, early adoption by all
entities is permitted. The Company is currently evaluating this ASU to determine whether its provisions will enhance the
Company’s ability to employ risk management strategies, while improving the transparency and understanding of those
strategies for financial statement users.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for
Fair Value Measurement, improves the disclosure requirements on fair value measurements by eliminating the
requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;
(ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements.
This ASU also added specific disclosure requirements for fair value measurements for public entities including the
requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income
for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements.
PAGE 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all
interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to
early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their
effective date. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
ASU 2018- 15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract aligns the requirements for
capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that
include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles -
Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to
the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting
arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the
capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element
of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same
manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation
costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be
presented.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within
those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its
consolidated financial statements.
PAGE 22
FINANCIAL TABLES
Table 1 – Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this annual report on Form 10-K includes certain designated net
interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation of
total revenue and the calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-
GAAP financial measures from GAAP to non-GAAP is presented below.
(In thousands)
Net interest income (GAAP)
Tax-equivalent adjustment
Net interest income (Tax-equivalent)
2018
25,570
613
26,183
2017
24,526
1,205
25,731
$
$
Year ended December 31
2016
22,732
1,276
24,008
2015
22,718
1,342
24,060
2014
21,453
1,288
22,741
PAGE 23
FINANCIAL TABLES
Table 2 - Selected Financial Data
(Dollars in thousands, except per share amounts)
Income statement
Tax-equivalent interest income (a)
Total interest expense
Tax equivalent net interest income (a)
Provision for loan losses
Total noninterest income
Total noninterest expense
Net earnings before income taxes and
tax-equivalent adjustment
Tax-equivalent adjustment
Income tax expense
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 (recoveries) charge-offs as a % of average loans
Capital Adequacy:
CET 1 risk-based capital ratio
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
$
$
$
$
$
$
$
$
2018
2017
2016
Year ended December 31
2014
2015
29,859
3,676
26,183
—
3,325
17,874
11,634
613
2,187
8,834
29,325
3,594
25,731
(300)
3,441
16,784
12,688
1,205
3,637
7,846
28,092
4,084
24,008
(485)
3,383
15,348
12,528
1,276
3,102
8,150
28,495
4,435
24,060
200
4,532
16,372
12,020
1,342
2,820
7,858
2.42
0.96
2.15
0.92
2.24
0.90
2.16
0.88
28,105
5,364
22,741
50
3,933
15,104
11,520
1,288
2,784
7,448
2.04
0.86
3,643,780
3,643,868
24.44
3,643,616
3,643,668
23.85
3,643,504
3,643,523
22.55
3,643,428
3,643,478
21.94
3,643,278
3,643,328
20.80
53.50
28.88
31.66
13.08x
130 %
10.14 %
1.08 %
39.67 %
10.63 %
1.00 %
2,691 %
0.07 %
0.04 %
0.04 %
(0.01) %
16.49 %
16.49 %
17.38 %
11.33 %
3.40 %
19.84 %
60.57 %
40.25
30.75
38.90
18.09
163
9.17
0.94
42.79
10.30
1.05
160
0.66
0.35
0.66
(0.09)
16.42
16.98
17.91
10.95
3.29
31.67
57.53
31.31
24.56
31.31
13.98
139
9.65
0.98
40.18
10.14
1.08
196
0.59
0.30
0.55
(0.19)
16.44
17.00
17.95
10.27
3.05
27.57
56.03
30.39
23.15
29.62
13.78
135
9.98
0.98
40.74
9.79
1.01
158
0.70
0.36
0.64
0.18
15.28
16.57
17.44
10.35
3.17
26.41
57.26
25.80
22.10
23.64
11.59
114
10.53
0.97
42.16
9.17
1.20
433
0.41
0.21
0.28
0.12
na
17.45
18.54
10.32
3.15
27.21
56.62
239,801
476,908
4,790
818,077
724,193
—
89,055
257,697
453,651
4,757
853,381
757,659
3,217
86,906
243,572
430,946
4,643
831,943
739,143
3,217
82,177
241,687
426,410
4,289
817,189
723,627
7,217
79,949
267,603
402,954
4,836
789,231
693,390
12,217
75,799
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
PAGE 24
Table 3 - Average Balance and Net Interest Income Analysis
(Dollars in thousands)
Interest-earning assets:
Loans and loans held for sale (1) $
Securities - taxable
Securities - tax-exempt (2)
Total securities
Federal funds sold
Interest bearing bank deposits
Total interest-earning assets
Cash and due from banks
Other assets
Total assets
Interest-bearing liabilities:
Deposits:
NOW
Savings and money market
Certificates of deposits
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
Total liabilities and
and stockholders' equity
$
$
$
2018
Interest
Income/
Expense
Year ended December 31
Yield/
Rate
Average
Balance
21,766
4,051
2,921
6,972
554
567
29,859
4.76% $
2.23%
4.11%
2.76%
1.93%
1.81%
3.88%
$
428
855
2,329
3,612
18
46
3,676
0.34% $
0.39%
1.27%
0.68%
0.68%
4.50%
0.69%
442,101 $
197,108
69,881
266,989
32,342
41,317
782,749
13,386
34,291
830,426
125,935
230,121
198,457
554,513
3,476
3,217
561,206
180,891
2,788
85,541
Average
Balance
457,610 $
181,485
71,065
252,550
28,689
31,339
770,188
13,802
35,539
819,529
125,533
220,810
184,010
530,353
2,634
1,022
534,009
195,924
2,489
87,107
819,529
$
830,426
2017
Interest
Income/
Expense
20,781
4,229
3,545
7,774
341
429
29,325
Yield/
Rate
4.70%
2.15%
5.07%
2.91%
1.05%
1.04%
3.75%
248
852
2,351
3,451
18
125
3,594
0.20%
0.37%
1.18%
0.62%
0.52%
3.89%
0.64%
Net interest income and margin
$
26,183
3.40%
$
25,731
3.29%
(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 21% for 2018 and 34% for prior years.
PAGE 25
FINANCIAL TABLES
Table 4 - Volume and Rate Variance Analysis
$
$
$
(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
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Total interest expense
Years ended December 31, 2018 vs. 2017
Years ended December 31, 2017 vs. 2016
Net
Due to change in
Net
Due to change in
Change
Rate (2)
Volume (2)
Change
Rate (2)
Volume (2)
985
(178)
(624)
(802)
213
138
534
180
3
(22)
161
—
(79)
82
247
171
(673)
(502)
284
319
348
181
39
161
381
6
20
407
738 $
(349)
49
(300)
(71)
(181)
186 $
(1) $
(36)
(183)
(220)
(6)
(99)
(325)
328
947
(209)
738
92
75
1,233
(85)
(38)
(267)
(390)
3
(103)
(490)
(138)
298
(279)
19
272
373
526
(93)
(29)
(99)
(221)
—
24
(197)
466
649
70
719
(180)
(298)
707
8
(9)
(168)
(169)
3
(127)
(293)
Net interest income
$
452
(59)
511 $
1,723
723
1,000
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income
tax rate of 21% for 2018 and 34% for prior years.
(2) Changes that are not solely a result of volume or rate have been allocated to volume.
PAGE 26
Table 5 - 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
$
2018
63,467
40,222
261,896
102,597
9,295
477,477
(569)
476,908
(4,790)
Loans, net
$
472,118
2017
59,086
39,607
239,033
106,863
9,588
454,177
(526)
453,651
(4,757)
448,894
2016
49,850
41,650
220,439
110,855
8,712
431,506
(560)
430,946
(4,643)
426,303
2015
52,479
43,694
203,853
116,673
10,220
426,919
(509)
426,410
(4,289)
422,121
December 31
2014
54,329
37,298
192,006
107,641
12,335
403,609
(655)
402,954
(4,836)
398,118
PAGE 27
FINANCIAL TABLES
Table 6 - Loan Maturities and Sensitivities to Changes in Interest Rates
1 year
1 to 5
After 5
Adjustable
Fixed
December 31, 2018
(Dollars in thousands)
$
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
$
or less
37,237
22,910
34,196
9,654
3,359
107,356
years
9,600
16,420
98,083
26,347
5,372
155,822
years
16,630
892
129,617
66,596
564
214,299
Total
63,467
40,222
261,896
102,597
9,295
477,477
Rate
21,505
16,016
11,932
50,992
422
100,867
Rate
41,962
24,206
249,964
51,605
8,873
376,610
Total
63,467
40,222
261,896
102,597
9,295
477,477
PAGE 28
Table 7 - 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 recoveries (charge-offs)
Provision for loan losses
Ending balance
as a % of loans
as a % of nonperforming loans
Net (recoveries) 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
2018
2017
2016
2015
2014
Year ended December 31
$
4,757
4,643
4,289
4,836
5,268
(52)
—
(38)
(26)
(52)
(168)
70
—
19
79
33
201
33
—
$
4,790
1.00 %
2,691 %
(0.01) %
$
$
$
178
172
350
0.07 %
0.04 %
0.04 %
—
(449)
—
—
(107)
(40)
(596)
461
347
—
115
87
1,010
414
(300)
4,757
1.05
160
(0.09)
2,972
—
2,972
0.66
0.35
0.66
—
(97)
—
(194)
(182)
(67)
(540)
29
1,212
—
127
11
1,379
839
(485)
4,643
1.08
196
(0.19)
2,370
152
2,522
0.59
0.30
0.55
—
(100)
—
(866)
(89)
(59)
(1,114)
22
17
—
313
15
367
(747)
200
4,289
1.01
158
0.18
2,714
252
2,966
0.70
0.36
0.64
—
(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
—
PAGE 29
FINANCIAL TABLES
Table 8 - Allocation of Allowance for Loan Losses
(Dollars in thousands)
Commercial and industrial
Construction and
land development
Commercial real estate
Residential real estate
Consumer installment
Total allowance for loan losses $
2018
2017
2016
2015
2014
Amount %*
Amount %*
Amount %*
Amount %*
$
778 13.3 $
653
13.0 $
540
11.6 $
523 12.3 $
Amount %*
13.5
639
December 31
700
8.4
2,218 54.9
946 21.5
1.9
148
$
4,790
734
2,126
1,071
173
4,757
8.7
52.7
23.5
2.1
$
812
2,071
1,107
113
4,643
9.7
51.0
25.7
2.0
$
669 10.2
1,879 47.8
1,059 27.3
2.4
159
4,289
$
9.2
47.5
26.7
3.1
974
1,928
1,119
176
4,836
* Loan balance in each category expressed as a percentage of total loans.
PAGE 30
Table 9 - 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, 2018
$
$
21,837
10,828
39,008
47,357
119,030
PAGE 31
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial
reporting. Internal control is designed to provide reasonable assurance to the Company’s management and board of
directors regarding the preparation of reliable published financial statements. Internal control over financial reporting
includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Because of inherent limitations in any system of internal control, no matter how well designed, misstatements due to error
or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls.
Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over
time.
Management assessed the Company’s internal control over financial reporting as of December 31, 2018. This assessment
was based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based
on this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective
internal control over financial reporting as of December 31, 2018 based on the specified criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by
Elliott Davis, LLC, the independent registered public accounting firm who also has audited the Company’s consolidated
financial statements included in this Annual Report on Form 10-K. Elliott Davis, LLC’s attestation report on the
Company’s internal control over financial reporting appears on the following page and is incorporated by reference herein.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has not been any change in the Company’s internal controls over financial
reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
PAGE 32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Auburn National Bancorporation, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Auburn National Bancorporation, Inc. and its subsidiaries’ (the “Company”) internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017 and the
related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows of the
Company for the years then ended, and the related notes to the consolidated financial statements and our report
dated March 12, 2019 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company's assets that could have a material effect on the consolidated financial statements.
PAGE 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Greenville, South Carolina
March 12, 2019
PAGE 34
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Auburn National Bancorporation, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Auburn National Bancorporation, Inc. and its
subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of earnings,
comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the
consolidated financial statements and schedules (collectively, the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013, and our report dated March 12, 2019 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2015.
Greenville, South Carolina
March 12, 2019
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 assets
Total assets
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Long-term debt
Accrued expenses and other liabilities
Total liabilities
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
issued shares - none
Common stock of $.01 par value; authorized 8,500,000 shares;
issued 3,957,135 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Less treasury stock, at cost - 313,267 shares and 313,467 shares
at December 31, 2018 and 2017, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements
$
$
$
$
2018
13,043
26,918
25,115
65,076
239,801
383
476,908
(4,790)
472,118
13,596
18,765
8,338
818,077
$
$
201,648
522,545
724,193
2,300
—
2,529
729,022
—
39
3,779
95,635
(3,763)
(6,635)
89,055
December 31
2017
12,942
41,540
51,046
105,528
257,697
1,922
453,651
(4,757)
448,894
13,791
18,330
7,219
853,381
193,917
563,742
757,659
2,658
3,217
2,941
766,475
—
39
3,771
90,299
(566)
(6,637)
86,906
$
818,077
$
853,381
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
Other
Securities gains, net
Total noninterest income
Noninterest expense:
Salaries and benefits
Net occupancy and equipment
Professional fees
FDIC and other regulatory assessments
Other
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Net earnings per share:
Basic and diluted
Year ended December 31
2018
2017
$
21,766
$
20,781
4,051
2,308
1,121
29,246
3,612
18
46
3,676
25,570
—
25,570
749
655
435
1,486
—
3,325
10,653
1,465
902
310
4,544
17,874
11,021
2,187
8,834
2.42
$
$
4,229
2,340
770
28,120
3,451
18
125
3,594
24,526
(300)
24,826
746
777
442
1,425
51
3,441
10,011
1,471
966
346
3,990
16,784
11,483
3,637
7,846
2.15
$
$
Weighted average shares outstanding:
Basic and diluted
See accompanying notes to consolidated financial statements
3,643,780
3,643,616
PAGE 37
AUDITED FINANCIAL STATEMENTS
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net earnings
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on all other securities
Reclassification adjustment for net gain on securities
recognized in net earnings
Other comprehensive (loss) income
Comprehensive income
See accompanying notes to consolidated financial statements
Year ended December 31
2018
8,834 $
(3,197)
—
(3,197)
2017
7,846
263
(32)
231
5,637 $
8,077
$
$
PAGE 38
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Stock
Shares
3,957,135 $
Amount
(Dollars in thousands, except share data)
Balance, December 31, 2016
Net earnings
Other comprehensive income
Reclassification of certain tax effects
Cash dividends paid ($0.92 per share)
Sale of treasury stock (145 shares)
Balance, December 31, 2017
Net earnings
Other comprehensive loss
Cash dividends paid ($0.96 per share)
Sale of treasury stock (200 shares)
Balance, December 31, 2018
—
—
—
—
—
—
—
—
—
3,957,135 $
See accompanying notes to consolidated financial statements
3,957,135 $
Additional
paid-in
capital
39
—
—
—
—
—
39 $
—
—
—
—
39 $
3,767
—
—
—
—
4
3,771 $
—
—
—
8
3,779 $
Accumulated
other
Retained
comprehensive Treasury
earnings
85,716
7,846
—
89
(3,352)
—
90,299
8,834
—
(3,498)
—
95,635
$
$
loss
stock
Total
(708)
—
231
(89)
—
—
(566) $
—
(3,197)
—
—
(3,763) $
(6,637) $
—
—
—
—
—
(6,637) $
—
—
—
2
(6,635) $
82,177
7,846
231
—
(3,352)
4
86,906
8,834
(3,197)
(3,498)
10
89,055
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 gain on securities available for sale
Net gain on sale of loans held for sale
Net gain on other real estate owned
Loans originated for sale
Proceeds from sale of loans
Increase in cash surrender value of bank owned life insurance
Net (increase) decrease in other assets
Net 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 in loans, net
Net purchases of premises and equipment
Increase in FHLB stock
Proceeds from sale of other real estate owned
Net cash used in investing activities
Cash flows from financing activities:
Net increase in noninterest-bearing deposits
Net (decrease) increase in interest-bearing deposits
Net decrease in federal funds purchased and securities sold
under agreements to repurchase
Repayments or retirement of long-term debt
Dividends paid
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure
See accompanying notes to consolidated financial statements
Year ended December 31
2018
2017
$
8,834
$
7,846
—
938
2,025
71
—
(311)
—
(27,681)
29,323
(435)
(221)
(402)
12,141
8,770
22,673
(19,841)
(24,749)
(240)
(20)
1,353
(12,054)
7,731
(41,197)
(358)
(3,217)
(3,498)
(40,539)
(40,452)
105,528
65,076
3,616
2,688
1,525
$
$
$
$
$
$
$
(300)
1,016
2,133
356
(51)
(504)
(5)
(29,796)
29,651
(442)
592
(1,095)
9,401
10,374
32,945
(59,160)
(22,291)
(1,618)
(13)
157
(39,606)
12,027
6,489
(708)
—
(3,352)
14,456
(15,749)
121,277
105,528
3,624
3,289
—
$
$
$
$
$
$
$
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 was an affiliate of the Company and was included in these consolidated financial
statements pursuant to the equity method of accounting. On April 27, 2018, the Trust was dissolved. 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.
Accounting Standards Adopted in 2018
In 2018, the Company adopted new guidance related to the following Accounting Standards Update (“Update” or “ASU”):
ASU 2014-09, Revenue from Contracts with Customers;
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities;
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments; and
ASU 2016-18, Restricted Cash.
Information about these pronouncements is described in more detail below.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), was developed as a joint project with the International
Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for
addressing revenue issues. The ASU’s core principle is that an entity should recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in
exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date by
one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption was permitted, but
not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The
ASU may be adopted using either a modified retrospective method or a full retrospective method. The Company adopted
the ASU during the first quarter of 2018, as required, using a modified retrospective approach. The majority of the
Company’s revenue stream is generated from interest income on loans and deposits, which are outside the scope of Topic
606. The Company’s sources of income that fall within the scope of Topic 606 include service charges on deposits,
investment services, interchange fees and gains and losses on sales of other real estate, all of which are presented as
components of noninterest income. The Company has evaluated the effect of Topic 606 on these fee-based income streams
and concluded that adoption of the standard did not materially impact its financial statements. The following is a summary
of the implementation considerations for the revenue streams that fall within the scope of Topic 606:
PAGE 41
AUDITED FINANCIAL STATEMENTS
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either
transaction-based, for which the performance obligations are satisfied when the individual transaction is processed,
or set periodic service charges, for which the performance obligations are satisfied over the period the service is
provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service
charges are recognized over the service period. The adoption of Topic 606 had no impact on the Company’s
revenue recognition practice for these services.
Gains on sales of other real estate – ASU 2014-09 creates Topic 610-20, under which a gain on sale should be
recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists
several criteria required to conclude that a contract for sale exists, including a determination that the institution
will collect substantially all of the consideration to which it is entitled. This presents a key difference between the
prior and new guidance related to the recognition of the gain when the institution finances the sale of the property.
Rather than basing recognition on the amount of the buyer’s initial investment, which was the primary
consideration under prior guidance, the analysis is now based on various factors including not only the loan to
value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect
collectability. While these differences may affect the decision to recognize or defer gains on sales of other real
estate in circumstances where the Company has financed the sale, the effects would not be material to its
consolidated financial statements.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities, enhances the reporting model for financial instruments to provide users of financial statements with
more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. Some of the amendments include the following: (1) Require equity investments (except
those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be
measured at fair value with changes in fair value recognized in net income; (2) Simplify the impairment assessment of
equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment;
(3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; (4) Require an entity to present separately in other comprehensive income the portion of the total
change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has
elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are
effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
adoption of this ASU on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial
Statements. In accordance with (3) above, the Company measured the fair value of its loan portfolio as of December 31,
2018 using an exit price notion and will continue to do so going forward. See Note 16, Fair Value.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides
guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on
classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal
years beginning after December 15, 2017. The Company adopted ASU No. 2016-15 on January 1, 2018. ASU No. 2016-15
did not have a material impact on the Company’s Consolidated Financial Statements.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, amends guidance on how the statement of cash
flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Under the new guidance, amounts generally described as restricted cash and
restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-
of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition
of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for annual and
interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-18 on
January 1, 2018. ASU No. 2016-18 did not have a material impact on the Company’s Consolidated Financial Statements.
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.
PAGE 42
Securities
Securities are classified based on management’s intention at the date of purchase. At December 31, 2018, 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 (loss), net of the deferred income tax effects. Interest and
dividends on securities, including the amortization of premiums and accretion of discounts are recognized in interest
income over the anticipated life of the security using the effective interest method, taking into consideration prepayment
assumptions. Realized gains and losses from the sale of securities are determined using the specific identification method.
On a quarterly basis, management makes an assessment to determine whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity
securities with an unrealized loss, the Company considers many factors including the severity and duration of the
impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value;
and recent events specific to the issuer or industry. Equity securities on which there is an unrealized loss that is deemed to
be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains
(losses), net.
For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the
Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the
debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized
cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that 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.
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.
PAGE 43
AUDITED FINANCIAL STATEMENTS
The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the
borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past
due, unless the loan is both well-collateralized and in the process of collection. Generally, all interest accrued but not
collected for loans that are placed on nonaccrual status is reversed against current interest income. Interest collections on
nonaccrual loans are generally applied as principal reductions. The Company determines past due or delinquency status of a
loan based on contractual payment terms.
A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments
due according to the contractual terms of the loan agreement. Individually identified impaired loans are measured based on
the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable
market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired
loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for loan losses.
Changes to the valuation allowance are recorded as a component of the provision for loan losses.
Impaired loans also 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.
PAGE 44
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 nonmarketable equity securities are accounted for at cost which equals par
or redemption value. These securities do not have a readily determinable fair value as their ownership is restricted and there
is no market for these securities. These securities can only be redeemed or sold at their par value and only to the respective
issuing government supported institution or to another member institution. The Company records these nonmarketable
equity securities as a component of other assets, which are periodically evaluated for impairment. Management considers
these nonmarketable equity securities to be long-term investments. Accordingly, when evaluating these securities for
impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary
declines in value.
Transfers of Financial Assets
Transfers of an entire financial asset (i.e. loan sales), a group of entire financial assets, or a participating interest in an entire
financial asset (i.e. loan participations sold) are accounted for as sales when control over the assets have been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company,
(2) the transferee obtains the right (free of conditions that constrain it from taking that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs. The Company
determines the fair value of MSRs at the date the loan is transferred. 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 Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, all derivative
instruments are recorded on the consolidated balance sheet at their respective fair values. The accounting for changes in
fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of
a hedging relationship and, if so, on the reason for holding it. If the derivative instrument is not designated as part of a
hedging relationship, the gain or loss on the derivative instrument is recognized in earnings in the period of change. None
of the derivatives utilized by the Company have been designated as a hedge.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase generally mature less than one year from the transaction date. Securities
sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated balance sheets
at the amount of cash received in connection with each transaction.
PAGE 45
AUDITED FINANCIAL STATEMENTS
Income Taxes
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized. The net deferred tax asset is reflected as a component of other
assets in the accompanying consolidated balance sheets.
Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income
(loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss
from continuing operations that occurred during the year, plus or minus income tax effects of (1) changes in certain
circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in
income tax laws or rates, and (3) changes in income tax status, subject to certain exceptions. The amount allocated to other
comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted
for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.
In accordance with ASC 740, Income Taxes, 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, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in U.S.
generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies only to
fair-value measurements that are already required or permitted by other accounting standards. The definition of fair value
focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to
acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a
market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be
determined based on the assumptions that market participants would use in pricing the asset or liability. For more
information related to fair value measurements, please refer to Note 16, 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, 2018. The Company does not believe there are any material subsequent events that would
require further recognition or disclosure.
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for
the 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, 2018 and 2017, respectively,
the Company had no such securities or other rights issued or outstanding, and therefore, no dilutive effect to consider for
the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective years are presented below.
(Dollars in thousands, except share and per share data)
Basic and diluted:
Net earnings
Weighted average common shares outstanding
Net earnings per share
Year ended December 31
2018
2017
$
$
8,834
3,643,780
2.42
$
$
7,846
3,643,616
2.15
PAGE 46
NOTE 3: 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, 2018 and 2017, the Bank did not have a
required reserve balance at the Federal Reserve Bank.
NOTE 4: SECURITIES
At December 31, 2018 and 2017, respectively, all securities within the scope of ASC 320, Investments – Debt and Equity
Securities were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by
contractual maturity at December 31, 2018 and 2017, respectively, are presented below.
1 year
or less
1 to 5
years
5 to 10
After 10
years
years
Fair
Value
Gross Unrealized Amortized
Gains
Losses
Cost
(Dollars in thousands)
December 31, 2018
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
$
$
14,437
—
—
19,865
—
3,682
16,869
8,368
7,726
—
110,230
58,624
51,171
118,598
70,032
32,963
23,547
14,437
Total available-for-sale
December 31, 2017
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
Total available-for-sale
$
(a) Includes securities issued by U.S. government agencies or government sponsored entities.
53,062
133,072
71,563
257,697
—
121,871
59,000
180,871
29,253
—
2,564
31,817
23,809
11,201
9,999
45,009
—
—
—
—
239,801
168,854
$
79
330
1,616
2,025
25
65
518
608
1,200 $
3,738
692
52,346
122,271
70,206
5,630 $ 244,823
904 $
53,887
1,639 $ 134,381
70,184
2,780 $ 258,452
237 $
Securities with aggregate fair values of $133.1 million and $149.4 million at December 31, 2018 and 2017, 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 nonmarketable equity investments. The
carrying amounts of nonmarketable equity investments were $1.4 million at December 31, 2018 and 2017, respectively.
Nonmarketable equity investments include FHLB of Atlanta stock, Federal Reserve Bank (“FRB”) stock, and stock in a
privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at December 31, 2018 and 2017, 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, 2018:
Agency obligations
Agency RMBS
State and political subdivisions
Total
December 31, 2017:
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
4,724
12,325
14,840
31,889
14,381
53,440
2,009
69,830
28
238
181
447
99
363
22
484
44,307
99,184
14,384
157,875
20,353
50,729
10,155
81,237
1,172
3,500
511
5,183
49,031 $
111,509
29,224
189,764 $
805
1,276
215
2,296
34,734 $
104,169
12,164
151,067 $
1,200
3,738
692
5,630
904
1,639
237
2,780
PAGE 47
AUDITED FINANCIAL STATEMENTS
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. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company
evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to
the securities’ amortized cost basis.
In determining whether a loss is temporary, the Company considers all relevant information including:
the length of time and the extent to which the fair value has been less than the amortized cost basis;
adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in
the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial
condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of
the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or
changes in the quality of the credit enhancement);
the historical and implied volatility of the 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.
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 other-than-temporary impairment charges may occur in the future.
Other-Than-Temporarily Impaired Securities
Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a
security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At
December 31, 2018 and 2017, respectively, the Company had no credit-impaired debt securities and there were no additions
or reductions in the credit loss component of credit-impaired debt securities during the years ended December 31, 2018 and
2017, respectively.
PAGE 48
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales related to securities.
(Dollars in thousands)
Gross realized gains
Realized gains, net
NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Multifamily
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
Year ended December 31
$
$
2018
—
—
2017
51
51
2018
63,467
40,222
$
December 31
2017
59,086
39,607
56,413
40,455
165,028
261,896
56,223
46,374
102,597
9,295
477,477
(569)
476,908
$
44,192
52,167
142,674
239,033
59,540
47,323
106,863
9,588
454,177
(526)
453,651
$
$
Loans secured by real estate were approximately 84.9% of the total loan portfolio at December 31, 2018. At December 31,
2018, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama and surrounding
areas.
In accordance with ASC 310, Receivables, 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.
PAGE 49
AUDITED FINANCIAL STATEMENTS
Commercial real estate (“CRE”) — includes loans disaggregated into three classes: (1) owner occupied (2) multi-family
and (3) 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.
Multifamily – primarily includes loans to finance income-producing multi-family properties. Loans in this class
include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary
source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these
loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.
Other – primarily includes loans to finance income-producing commercial properties. Loans in this class include
loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial
buildings, and warehouses 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.
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.
PAGE 50
The following is a summary of current, accruing past due and nonaccrual loans by portfolio class as of December 31, 2018
and 2017.
(In thousands)
Current
Past Due
90 days
Loans
Accrual
Accruing
Accruing
Total
30-89 Days Greater than
Accruing
Non-
$
$
$
December 31, 2018:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Multifamily
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
December 31, 2017:
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Multifamily
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
$
63,367
39,997
56,413
40,455
165,028
261,896
54,446
46,233
100,679
9,254
475,193
59,047
39,607
44,192
52,167
140,486
236,845
58,195
46,871
105,066
9,517
450,082
100
225
—
—
—
—
1,599
141
1,740
41
2,106
8
—
—
—
—
—
746
312
1,058
57
1,123
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
63,467
40,222
56,413
40,455
165,028
261,896
56,045
46,374
102,419
9,295
477,299
59,055
39,607
44,192
52,167
140,486
236,845
58,941
47,183
106,124
9,574
451,205
Total
Loans
63,467
40,222
56,413
40,455
165,028
261,896
56,223
46,374
102,597
9,295
477,477
$
—
—
—
—
—
—
178
—
178
—
178 $
31 $
—
59,086
39,607
—
—
2,188
2,188
599
140
739
14
2,972 $
44,192
52,167
142,674
239,033
59,540
47,323
106,863
9,588
454,177
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 $12 thousand and $140 thousand for the years ended December 31, 2018
and 2017, respectively.
Allowance for Loan Losses
The allowance for loan losses as of and for the years ended December 31, 2018 and 2017, is presented below.
(In thousands)
Beginning balance
Charged-off loans
Recovery of previously charged-off loans
Net recoveries
Provision for loan losses
Ending balance
Year ended December 31
2018
2017
4,757
(168)
201
33
—
4,790
$
$
4,643
(596)
1,010
414
(300)
4,757
$
$
PAGE 51
AUDITED FINANCIAL STATEMENTS
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, 2018 and 2017, 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.
PAGE 52
The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of
2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic
downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant
losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the
year ended December 31, 2018, the Company increased its look-back period to 39 quarters to continue to include losses
incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-
back period to incorporate the effects of at least one economic downturn in its loss history. Other than expanding the look-
back period each quarter, the Company has not made any material changes to its methodology 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, 2018 and 2017.
(in thousands)
Balance, December 31, 2016
Charge-offs
Recoveries
Net recoveries
Provision
Balance, December 31, 2017
Charge-offs
Recoveries
Net recoveries
Provision
Balance, December 31, 2018
Commercial
and industrial
540
(449)
461
12
101
653
(52)
70
18
107
778
$
$
$
Construction
and land
Development
Commercial
Real Estate
Residential
Real Estate
Consumer
Installment
Total
812
—
347
347
(425)
734
—
—
—
(34)
700
2,071
—
—
—
55
2,126
(38)
19
(19)
111
2,218
1,107
(107)
115
8
(44)
1,071
(26)
79
53
(178)
946
113 $
(40)
87
47
13
173 $
(52)
33
(19)
(6)
148 $
4,643
(596)
1,010
414
(300)
4,757
(168)
201
33
—
4,790
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, 2018 and 2017.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
(In thousands)
December 31, 2018:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
December 31, 2017:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
$
$
$
$
for loan
investment
for loan
investment
for loan
investment
losses
in loans
losses
in loans
losses
in loans
778
700
2,218
946
148
4,790
622
734
2,115
1,071
173
4,715
63,467
40,222
261,739
102,597
9,295
477,320
59,055
39,607
236,322
106,863
9,588
451,435
—
—
—
—
—
—
31
—
11
—
—
42
—
—
157
—
—
157
31
—
2,711
—
—
2,742
778
700
2,218
946
148
4,790
653
734
2,126
1,071
173
4,757
63,467
40,222
261,896
102,597
9,295
477,477
59,086
39,607
239,033
106,863
9,588
454,177
(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, 2018
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Multifamily
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
December 31, 2017
Commercial and industrial
Construction and land development
Commercial real estate:
Owner occupied
Multifamily
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
$
61,568
39,481
55,942
40,455
163,449
259,846
50,903
45,463
96,366
9,149
466,410
58,842
39,049
43,615
52,167
139,695
235,477
54,101
46,463
100,564
9,430
443,362
$
$
$
1,377
—
154
—
1,208
1,362
1,374
173
1,547
75
4,361
94
90
240
—
395
635
1,254
53
1,307
66
2,192
522
741
317
—
371
688
3,768
738
4,506
71
6,528
119
468
337
—
396
733
3,586
667
4,253
78
5,651
—
—
—
—
—
—
178
—
178
—
178
31
—
—
—
2,188
2,188
599
140
739
14
2,972
$
63,467
40,222
56,413
40,455
165,028
261,896
56,223
46,374
102,597
9,295
477,477
59,086
39,607
44,192
52,167
142,674
239,033
59,540
47,323
106,863
9,588
454,177
$
$
$
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 thousand 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 thousand 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, 2018 and 2017.
(In thousands)
With no allowance recorded:
Commercial real estate:
Owner occupied
Total commercial real estate
Total impaired loans
December 31, 2018
Unpaid
principal
balance (1)
Charge-offs
and payments
applied (2)
Recorded
investment (3)
Related
allowance
$
$
157
157
157
—
—
—
157
157
157 $
—
(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.
(In thousands)
With no allowance recorded:
Commercial real estate:
Other
Total commercial real estate
Total
With allowance recorded:
Commercial and industrial
Commercial real estate:
Owner occupied
Total commercial real estate
Total
Total impaired loans
December 31, 2017
Unpaid
principal
balance (1)
Charge-offs
and payments
applied (2)
Recorded
investment (3)
Related
allowance
$
$
$
$
$
3,630
3,630
3,630
52
175
175
227
(1,094)
(1,094)
(1,094)
(21)
—
—
(21)
2,536
2,536
2,536
31
$
175
175
206
$
3,857
(1,115)
2,742 $
31
11
11
42
42
(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
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.
(In thousands)
Impaired loans:
Commercial and industrial
Construction and land
development
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Total
Troubled Debt Restructurings
Year ended December 31, 2018
Year ended December 31, 2017
Average
Total interest
Average
Total interest
recorded
income
recorded
income
investment
recognized
investment
recognized
$
$
9
—
166
1,145
1,311
1,320
—
—
9
—
9
9
$
$
50
11
184
2,096
2,280
2,341
—
—
10
1
11
11
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.
TDRs
Accruing
Nonaccrual
Total
Related
Allowance
$
$
$
$
157
157
157
—
175
287
462
462
—
—
—
31
—
1,431
1,431
1,462
157
157
157
31
175
1,718
1,893
1,924
$
$
$
$
—
—
—
31
11
—
11
42
(In thousands)
December 31, 2018
Commercial real estate:
Owner occupied
Total commercial real estate
Total
December 31, 2017
Commercial and industrial
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Total
PAGE 56
At December 31, 2018, there were no significant outstanding commitments to advance additional funds to customers whose
loans had been restructured.
The following table summarizes loans modified in a TDR during the respective years both before and after modification.
($ in thousands)
December 31, 2018
Commercial real estate:
Other
Total commercial real estate
Total
December 31, 2017
Commercial and industrial
Commercial real estate:
Other
Total commercial real estate
Total
Pre-
Post-
modification
outstanding
recorded
investment
modification
outstanding
recorded
investment
Number of
contracts
2
2
2
1
1
1
2
$
$
$
$
$
1,447
1,447
1,447
34
1,275
1,275
1,309
1,447
1,447
1,447
34
1,266
1,266
1,300
The majority of the loans modified in a TDR during the years ended December 31, 2018 and 2017, 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.
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 year ended December 31, 2018.
During the year ended December 31, 2017, the Company had no loans modified in a TDR within the previous 12 months
for which there was a payment default.
($ in thousands)
December 31, 2018
Commercial real estate:
Other
Total commercial real estate
Total
(1) Amount as of applicable month end during the respective year for which there was a payment default.
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2018 and 2017 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
$
$
1,259
1,259
1,259
$
$
2018
7,473
10,438
3,357
21,268
(7,672)
13,596
December 31
2017
7,473
10,394
3,161
21,028
(7,237)
13,791
Depreciation expense was approximately $435 thousand and $428 thousand for the years ended December 31, 2018 and
2017, respectively, and is a component of net occupancy and equipment expense in the consolidated statements of earnings.
PAGE 57
AUDITED FINANCIAL STATEMENTS
NOTE 7: MORTGAGE SERVICING RIGHTS, NET
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.
The following table details the changes in amortized MSRs and the related valuation allowance for the years ended
December 31, 2018 and 2017.
(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
$
$
$
$
2018
1,644
208
(411)
—
1,441
—
—
2,528
2,697
2017
1,952
224
(533)
1
1,644
1
—
2,678
2,528
Data and assumptions used in the fair value calculation related to MSRs at December 31, 2018 and 2017, 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)
$
2018
289,981
8.3 %
10.0 %
3.9 %
250
25.0
December 31
2017
312,318
10.2
10.0
3.8
253
25.0
PAGE 58
At December 31, 2018, the weighted average amortization period for MSRs was 6.7 years. Estimated amortization expense
for each of the next five years is presented below.
(Dollars in thousands)
2019
2020
2021
2022
2023
NOTE 8: DEPOSITS
$
December 31, 2018
198
174
152
131
115
At December 31, 2018, the scheduled maturities of certificates of deposit and other time deposits are presented below.
(Dollars in thousands)
2019
2020
2021
2022
2023
Total certificates of deposit and other time deposits
December 31, 2018
108,363
$
28,888
16,630
20,966
6,390
181,237
$
Additionally, at December 31, 2018 and 2017, approximately $59.4 million and $55.2 million, respectively, of certificates
of deposit and other time deposits were issued in denominations of $250 thousand or greater.
At December 31, 2018 and 2017, the amount of deposit accounts in overdraft status that were reclassified to loans on the
accompanying consolidated balance sheets was not material.
NOTE 9: SHORT-TERM BORROWINGS
At December 31, 2018 and 2017, 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
2018
2017
Weighted
Weighted
Amount
Avg. Rate
Amount
Avg. Rate
$
—
2
—
2,300
2,632
3,241
$
—
2.50 %
$
0.50 %
0.50 %
$
—
9
—
2,658
3,467
4,152
—
2.01 %
0.50 %
0.52 %
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. The Bank
had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2018.
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 $5.6
million and $5.8 million at December 31, 2018 and 2017, respectively, were pledged to secure securities sold under
agreements to repurchase.
PAGE 59
AUDITED FINANCIAL STATEMENTS
NOTE 10: LONG-TERM DEBT
At December 31, 2018 and 2017, the composition of long-term debt is presented below.
(Dollars in thousands)
Subordinated debentures, due 2033
Total long-term debt
2018
2017
Amount
—
Weighted
Avg. Rate
— %
—
— %
Amount
Weighted
Avg. Rate
3,217
4.63%
3,217
4.63%
$
$
$
$
The Company formed Auburn National Bancorporation Capital Trust I (the “Trust”), 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 held, were used to purchase junior 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 would
have matured on December 31, 2033 and had been redeemable since December 31, 2008.
On April 27, 2018, the Trust formally redeemed all of its issued and outstanding trust preferred securities at par. The
Company had repurchased $4.0 million par amount of trust preferred securities issued by the Trust in October 2016, at a
discount. The additional amount paid on April 27, 2018 for trust preferred securities not previously purchased by the
Company was approximately $3.0 million, including accrued and unpaid distributions. All junior subordinated debentures
related to the Trust were redeemed and retired as a result of the action.
The Company now has no outstanding trust preferred securities or junior subordinated debentures, and the Trust has been
dissolved.
NOTE 11: 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 (loss) income. Other comprehensive (loss) income for the years ended
December 31, 2018 and 2017, is presented below.
(In thousands)
2018:
Unrealized net holding loss on all other securities
Other comprehensive loss
Pre-tax
Tax benefit
Net of
amount
(expense)
tax amount
$
$
(4,269)
(4,269)
1,072
1,072
(3,197)
(3,197)
2017:
Unrealized net holding gain on all other securities
Reclassification adjustment for net gain on securities recognized in net earnings
Other comprehensive income
$
$
417
(51)
366
(154)
19
(135)
263
(32)
231
PAGE 60
NOTE 12: INCOME TAXES
For the years ended December 31, 2018 and 2017 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 (benefit):
Federal
State
Total deferred income tax expense
Total income tax expense
Year ended December 31
$
2018
1,685
431
2,116
56
15
71
$
2,187
2017
2,782
499
3,281
384
(28)
356
3,637
Total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 21% and
34% for the years ended December 31, 2018 and 2017, respectively, to earnings before income taxes. A reconciliation of
the differences for the years ended December 31, 2018 and 2017, is presented below.
(Dollars in thousands)
Earnings before income taxes
Income taxes at statutory rate
Tax-exempt interest
State income taxes, net of
federal tax effect
Bank-owned life insurance
Federal tax reform impact
Other
Total income tax expense
$
2018
2017
Percent of
pre-tax
earnings
21.0 %
(4.7)
3.3
(0.8)
—
1.0
Amount
11,021
2,315
(515)
361
(92)
—
118
Percent of
pre-tax
earnings
34.0 %
(7.0)
2.8
(1.3)
3.2
—
Amount
11,483
3,904
(813)
325
(150)
370
1
$
2,187
19.8 %
3,637
31.7 %
The Tax Cuts and Jobs Act was signed into law on December 22, 2017. The net tax expense recognized as a result of the
remeasurement of deferred taxes is presented as Federal tax reform impact in the above table.
PAGE 61
AUDITED FINANCIAL STATEMENTS
The Company had net deferred tax assets of $1.8 million and $0.8 million at December 31, 2018 and 2017, 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, 2018 and 2017 are presented
below:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Unrealized loss on securities
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Originated mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax asset
$
2018
1,203
1,262
135
2,600
280
362
168
810
$
1,790
December 31
2017
1,195
190
216
1,601
241
413
158
812
789
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, 2018. 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, 2018 and 2017, 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 loss (income)
Balance, end of year
$
$
2018
789
(71)
1,072
1,790
2017
1,280
(356)
(135)
789
Year ended December 31
ASC 740, Income Taxes, 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, 2018, 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 2019 relative to any tax positions taken prior to
December 31, 2018. As of December 31, 2018, 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, 2015 through 2018.
PAGE 62
NOTE 13: 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 $131 thousand and $127
thousand for the years ended December 31, 2018 and 2017, respectively, and are included in salaries and benefits expense.
NOTE 14: 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,
2018 and December 31, 2017, 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.
The Company had no interest rate swaps as of December 31, 2018. A summary of the Company’s interest rate swaps as of
and for the year ended December 31, 2017 is presented below.
(Dollars in thousands)
December 31, 2017:
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)
—
52
52
52
—
52
$
$
189
(189)
—
Notional
$
$
3,617
3,617
7,234
NOTE 15: 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, 2018 and 2017, the following financial instruments were outstanding whose contract amount represents
credit risk:
(Dollars in thousands)
Commitments to extend credit
Standby letters of credit
$
2018
61,889
7,026
$
December 31
2017
57,014
7,390
PAGE 63
AUDITED FINANCIAL STATEMENTS
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 $73
thousand and $79 thousand at December 31, 2018 and 2017, respectively.
Other Commitments
Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to December
31, 2018, are as follows: 2019, $152 thousand; 2020, $94 thousand; 2021, $67 thousand; 2022, $60 thousand; 2023, $60
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 effect upon the consolidated financial condition or results of operations of the Company and the
Bank.
NOTE 16: 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, 2018 and 2017, 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
PAGE 64
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.
The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of
December 31, 2018 and 2017, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
(Dollars in thousands)
December 31, 2018:
Securities available-for-sale:
Agency obligations
Agency RMBS
State and political subdivisions
Total securities available-for-sale
Total assets at fair value
December 31, 2017:
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
51,171
118,598
70,032
239,801
239,801
53,062
133,072
71,563
257,697
52
257,749
52
52
$
$
$
$
$
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
—
—
—
—
51,171
118,598
70,032
239,801
239,801
53,062
133,072
71,563
257,697
52
257,749
52
52
—
—
—
—
—
—
—
—
—
—
—
—
—
(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.
PAGE 65
AUDITED FINANCIAL STATEMENTS
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
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.
PAGE 66
The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of
December 31, 2018 and 2017, respectively, by caption, on the accompanying consolidated balance sheets and by ASC 820
valuation hierarchy (as described above):
(Dollars in thousands)
December 31, 2018:
Loans held for sale
Loans, net(1)
Other real estate owned
Other assets (2)
Total assets at fair value
December 31, 2017:
Loans held for sale
Loans, net(1)
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)
$
$
$
$
383
157
172
1,441
2,153
1,922
2,700
1,644
6,266
—
—
—
—
—
—
—
—
—
383
—
—
—
383
1,922
—
—
1,922
—
157
172
1,441
1,770
—
2,700
1,644
4,344
(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.
At December 31, 2018 and 2017 and for the years then ended, the Company had no Level 3 assets measured at fair value on
a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2018, the
significant unobservable inputs used in the fair value measurements are presented below.
(Dollars in thousands)
Nonrecurring:
Impaired loans
Carrying
Amount
Valuation Technique
Significant Unobservable Input
$
157 Appraisal
Appraisal discounts (%)
Other real estate owned
172 Appraisal
Appraisal discounts (%)
Mortgage servicing rights, net
1,441 Discounted cash flow
Prepayment speed or CPR (%)
Discount rate (%)
Weighted
Average
of Input
10.0%
10.0%
8.3%
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.
PAGE 67
AUDITED FINANCIAL STATEMENTS
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar
loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments. In accordance with the prospective adoption of ASU No. 2016-01, the fair
value of loans as of December 31, 2018 was measured using an exit price notion. The fair value of loans as of December
31, 2017 was measured using an entry price notion.
Loans held for sale
Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently
offered for deposits with similar remaining maturities.
Long-term debt
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, 2018 and 2017 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, 2018:
Financial Assets:
Loans, net (1)
Loans held for sale
Financial Liabilities:
Time Deposits
December 31, 2017:
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
$
472,118
383
$
465,456
397
$
$
181,237
$
181,168 $
$
$
448,894
1,922
$
447,468
1,950
$
188,071
3,217
$
185,564 $
3,217
$
$
$
$
—
—
—
—
—
—
—
$
—
397
465,456
—
181,168
$
—
—
1,950
$
447,468
—
185,564
3,217
$
—
—
(1) Represents loans, net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASU No. 2016-01, the
fair value of loans as of December 31, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured
using an entry price notion.
PAGE 68
NOTE 17: RELATED PARTY TRANSACTIONS
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, 2017
New loans/advances
Repayments
Loans outstanding at December 31, 2018
Amount
3,068
5,871
(732)
8,207
$
$
During 2018 and 2017, 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, 2018 and
2017 amounted to $19.8 million and $17.8 million, respectively.
NOTE 18: REGULATORY RESTRICTIONS AND CAPITAL RATIOS
As required by the Economic Growth, Regulatory Relief, and Consumer Protection Act in August 2018, the Federal
Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy
statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total
consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant
nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount
of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if
warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management
believes the Company meets the conditions of the Federal Reserve’s small bank holding company policy statement and is
therefore excluded from consolidated capital requirements at December 31, 2018.
The Bank remains subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
As of December 31, 2018, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To
be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier 1, total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the table. Management has not received any notification from the Bank's
regulators that changes the Bank’s regulatory capital status.
PAGE 69
AUDITED FINANCIAL STATEMENTS
The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2018 and 2017 are presented
below.
(Dollars in thousands)
At December 31, 2018:
Tier 1 Leverage Capital
AuburnBank
Common Equity Tier 1 Capital
AuburnBank
Tier 1 Risk-Based Capital
AuburnBank
Total Risk-Based Capital
AuburnBank
Actual
Minimum for capital
adequacy purposes
Minimum to be
well capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
$
$
91,719
11.33 % $
32,368
4.00 % $
40,461
5.00 %
91,719
16.49 % $
25,031
4.50 % $
36,156
6.50 %
91,719
16.49 % $
33,375
6.00 % $
44,500
8.00 %
96,661
17.38 % $
44,500
8.00 % $
55,625
10.00 %
At December 31, 2017:
Tier 1 Leverage Capital
Auburn National Bancorporation $
AuburnBank
Common Equity Tier 1 Capital
Auburn National Bancorporation $
AuburnBank
Tier 1 Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
Total Risk-Based Capital
Auburn National Bancorporation $
AuburnBank
90,382
89,217
10.95 % $
10.82
33,012
32,978
4.00 %
4.00
$
N/A
41,222
87,382
89,217
16.42 % $
16.74
23,949
23,987
4.50 %
4.50
$
N/A
34,648
90,382
89,217
16.98 % $
16.74
31,932
31,983
6.00 %
6.00
$
N/A
42,644
N/A
5.00 %
N/A
6.50 %
N/A
8.00 %
95,300
94,135
17.91 % $
17.66
42,576
42,644
8.00 %
8.00
$
N/A
53,305
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, 2018, the Bank could have declared
additional dividends of approximately $8.0 million without prior approval of regulatory authorities. As a result of this
limitation, approximately $79.9 million of the Company’s investment in the Bank was restricted from transfer in the form
of dividends.
PAGE 70
NOTE 19: 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 and equity
in undistributed earnings of bank subsidiary
Income tax benefit
Earnings before equity in undistributed earnings
of bank subsidiary
Equity in undistributed earnings of bank subsidiary
Net earnings
December 31
2018
2017
1,941
87,956
626
90,523
1,468
—
1,468
89,055
90,523
1,170
88,741
1,760
91,671
1,548
3,217
4,765
86,906
91,671
Year ended December 31
2018
6,533
149
6,682
51
237
288
6,394
(28)
6,422
2,412
8,834
2017
3,471
141
3,612
125
225
350
3,262
(58)
3,320
4,526
7,846
$
$
$
$
$
$
PAGE 71
AUDITED FINANCIAL STATEMENTS
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:
Net decrease (increase) in other assets
Net decrease in other liabilities
Equity in undistributed earnings of bank subsidiary
Net cash provided by operating activities
Cash flows from financing activities:
Repayments or retirement of long-term debt
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
NOTE 20: REVENUE RECOGNITION
Year ended December 31
2018
2017
$
8,834
7,846
1,134
(70)
(2,412)
7,486
(3,217)
(3,498)
(6,715)
771
1,170
1,941
(879)
(109)
(4,526)
2,332
—
(3,352)
(3,352)
(1,020)
2,190
1,170
$
On January 1, 2018, the Company implemented ASU 2014-09, Revenue from Contracts with Customers, codified
at ASC 606. The Company adopted ASC 606 using the modified retrospective transition method. As of December 31, 2017,
the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made to the
Company’s accumulated deficit during the year ended December 31, 2018. Results for reporting periods beginning January
1, 2018 are presented under ASC 606, while prior period amounts continue to be reported under legacy U.S. GAAP.
The majority of the Company’s revenue stream is generated from interest income on loans and deposits which are outside
the scope of ASC 606.
The Company’s sources of income that fall within the scope of Topic 606 include service charges on deposits, investment
services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of
noninterest income. The following is a summary of the revenue streams that fall within the scope of Topic 606:
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either
transaction-based, for which the performance obligations are satisfied when the individual transaction is processed,
or set periodic service charges, for which the performance obligations are satisfied over the period the service is
provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service
charges are recognized over the service period.
Gains on sales of other real estate – ASU 2014-09 creates Topic 610-20, under which a gain on sale should be
recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists
several criteria required to conclude that a contract for sale exists, including a determination that the institution
will collect substantially all of the consideration to which it is entitled. This presents a key difference between the
prior and new guidance related to the recognition of the gain when the institution finances the sale of the property.
Rather than basing recognition on the amount of the buyer’s initial investment, which was the primary
consideration under prior guidance, the analysis is now based on various factors including not only the loan to
value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect
collectability.
PAGE 72
THIS PAGE IS INTENTIONALLY LEFT BLANK
PAGE 73
STOCK PERFORMANCE GRAPH
Stock Performance Graph
The following performance graph compares the cumulative, total return on the Company’s Common Stock from
December 31, 2013 to December 31, 2018, with that of the Nasdaq Composite Index and SNL Southeast Bank Index
(assuming a $100 investment on December 31, 2013). 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 Index
SNL Southeast Bank Index
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
Auburn National Bancorporation, Inc.
NASDAQ Composite
SNL Southeast Bank
12/31/13
100.00
100.00
100.00
12/31/14
97.93
114.75
112.63
12/31/15
126.92
122.74
110.87
12/31/16
138.44
133.62
147.18
12/31/17
176.60
173.22
182.06
12/31/18
147.15
168.30
150.42
Period Ending
PAGE 74
Corporate Information
CORPORATE HEADQUARTERS
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
Elliott Davis LLC/PLLC
200 East Broad Street
Greenville, SC 29606
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 505000
Louisville, KY 40233
Phone: 1-800-368-5948
For frequently asked questions,
visit theTransfer Agent’s home page at:
www.computershare.com
ANNUAL MEETING
Tuesday, May 14, 2019
3:00 p.m. (Central Time)
AuburnBank Center
132 N. Gay Street
Auburn, AL 36830
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 website at www.auburnbank.com. Requests for
these documents may also be made by emailing Investor
Relations at investorrelations@auburnbank.com or by
contacting Investor Relations by telephone or mail at the
Company’s corporate headquarters.
COMMON STOCK LISTING
Auburn National Bancorporation, Inc.
Common Stock is traded on the Nasdaq
Global Market under the symbol AUBN.
DIVIDEND REINVESTMENT
AND STOCK PURCHASE PLAN
Auburn National Bancorporation, Inc. offers
a Dividend Reinvestment Plan (DRIP) for
automatic reinvestment of dividends in the
stock of the company. Participants in the
DRIP may also purchase additional shares
with optional cash payments. For additional
information or for an authorization form,
please contact Investor Relations.
DIRECT DEPOSIT OF DIVIDENDS
Dividends may be automatically deposited into a share-
holder’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
Telephone: 334-821-9200 Fax: 334-887-2796
AUBURN NATIONAL BANCORPORATION, INC. 2018 ANNUAL REPORTStability. Commitment. Opportunity.