CHAMPIONS OF
YOU
Auburn National Bancorporation, Inc.
2019 Annual Report
Champions of You
Auburn National Bancorporation, Inc.
2019 Annual Report
To Our Shareholders and Friends,
I am pleased to report that 2019 was a record year for our Bank. Earnings of $9.7MM produced
earnings per share of $2.72 and a return on average assets of 1.18%. We continue to maintain a
strong capital position along with very stable asset quality.
While we expect a challenging interest rate and competitive environment in 2020, economic
conditions in our markets remain robust, and we are optimistic that credit quality will continue
to be relatively strong in 2020. Regardless of the operating environment, we are confident that
our long-term approach and philosophy of knowing and being champions for our customers,
maintaining exceptional asset quality, and supporting our communities will enable us to
continue to generate value for our shareholders in 2020 and beyond.
I believe the next decade will bring continued technological innovations that will be beneficial
to all of our customers. From an easier and more secure way of transferring funds to the
delivery of new products and services, I’m excited to see where technology takes us. Of course,
security and protection of your information will be our highest priority.
We know that the community and the people who live here are why we exist. That’s been true
for over 100 years. We work tirelessly to be there for whatever financial needs you may have,
and we are honored to be a big part of the well-being and growth of our community. Our main
vision and goal is to be “Champions of You.”
It’s a statement that represents our commitment to you and what our mentality has always
been at AuburnBank, and the mentality we’ll continue to have as we grow together.
This commitment coupled with top-quality service and the protection of your financial data and
information is critical to your success and ours.
Thank you for your continued support as we enter the next decade with excitement and enthusiasm.
Robert W. Dumas
Chairman, President and CEO
AuburnBank and ANBC
Let’s face it. When you’re 113 years old like we are, it’s a good feeling to
wake up in the morning and realize there’s still so much more we can do.
Last year was a record year for AuburnBank, and in 2020, we’ll continue
to focus on better serving you and our growing communities’ needs.
This means better tools, better service, and an even higher level of
engagement. As today’s banking and lending landscape continues to
rapidly evolve, it’s incumbent upon us to stay ahead of the curve. That’s
why giving our customers better tools that extend beyond the walls of
our bank branches is a top priority that allows you more flexibility
to bank when you want and how you want.
2020 will be the year the mortgage application process moves from the banker’s desk to the
kitchen table. Of course, we’re still keeping the desks (and all your favorite loan officers that sit
behind them), but now we’re making it easier for future homeowners to apply for a mortgage
from anywhere they choose by simply visiting AuburnBank.com and applying online.
Also in 2020, we’re working towards a new partnership with the digital payments network,
Zelle, allowing customers to quickly and safely transfer money from person to person using
their mobile devices. Best of all, AuburnBank customers will be able to sign up for the service
directly through our mobile banking app. So whether it’s splitting the check at dinner, or
paying your landscaper for shaping a War Eagle out of your hedges, transferring money will
soon be more convenient.
AuburnBank
AUBURN B ANK
AuburnBank
AUBURNBANK
AuburnBank
AuburnBank
AUBURN BANK
AuburnBank
AUBURNBANK
AuburnBank
AUBURNBANK
Body copy text in this space
It’s not just our technology that’s looking toward the future. Our headquarters are also getting
a major remodel. As part of our continuing investment in downtown Auburn, our home for
the past 113 years, we’ll be breaking ground on a new 96,000 square foot state-of-the-art banking
and mixed-use facility, as well as a five-story parking deck. The new facility will be located at
the corner of East Magnolia and Gay, pulling operations and retail banking under one roof.
With upgraded technological capabilities and a convenient location, we’ll be proud to call this
new facility home for many decades to come.
#1
Deposit Market Share
Position in Lee County
Top 200
Publicly Traded
Community Bank
The Opelika-Auburn News
Bank and Best
Mortgage Lender
Speaking of a fresh coat of paint, AuburnBank is also getting a marketing and brand identity
upgrade. That means an updated logo, an updated tagline, updated brand guidelines, and a
brand new ad campaign on their way soon. Why the update? It’s simple. We wanted to better
reflect our commitment to the growth of our customers and the communities we live in. And
it’s no secret that this region is one of the fastest-growing metropolitan areas in Alabama, with
new residents arriving every day.
You have known us for years as “your partner, your neighbor, your friend.” But what about those
who weren’t familiar with us or were new to the region? Or those looking for a flexible banking
option that was both future-focused and customer-centric?
AuburnBank
One of our best attributes has always been our strong relationship with you, our customer.
We grew up with you. We helped you buy your first house, or your second house when the kids
came along. And then the third when your kids went off to college. Through our relationships
AUBURNBANK
and our products, we’ve always championed our customers’ goals. That’s why we’re excited to
share our new tagline—Champions of You.
AUBURN B ANK
“Champions of You” moves us away from talking about ourselves,
and puts our customers and all their hopes and dreams at the
center of AuburnBank’s universe, right where they’ve always been,
and right where they’ll always be.
AuburnBank
AuburnBank
AuburnBank
AUBURN BANK
AuburnBank
AUBURNBANK
AuburnBank
AUBURNBANK
Body copy text in this space
Lastly, but most importantly, in 2020, we will continue our efforts to be supportive and worthy
neighbors to the people and the communities we serve. For us, giving back and helping others
is not a part of what we do, but is the very core of who we are. You’re just as likely to see us out
in the community volunteering or helping others as you are to see us standing behind a teller
window. Because without our communities, there is no AuburnBank.
So whether it’s an employee-led effort raising tens of thousands of dollars for the United Way of
Lee County, or sponsoring LifeSouth blood drives at which we match donations with dollars to
go to charities like the Food Bank of East Alabama, the communities we serve are filled with our
neighbors. And neighbors look out for one another.
That is why we plan to champion you proudly for the next 113 years.
United Way Leadership
in Business Award
Seated left to right: David E. Housel, Robert W. Dumas, Dr. Patricia Wade
Standing: J. Tutt Barrett, Terry W. Andrus, E. L. Spencer, III, and William F. Ham, Jr.
Not pictured: C. Wayne Alderman and Anne M. May
Auburn National Bancorporation, Inc.
and AuburnBank Board of Directors
C. Wayne Alderman
Secretary to ANBC
Dean and Professor Emeritus,
College of Business,
Auburn University
Terry W. Andrus
Retired, CEO,
East Alabama Medical Center
J. Tutt Barrett
Attorney,
Dean and Barrett
Robert W. Dumas
Chairman, President & CEO,
AuburnBank
Anne M. May
Retired Partner,
Machen McChesney, CPAs
William F. Ham, Jr.
Owner,
Varsity Enterprises
David E. Housel
Director of Athletics Emeritus,
Auburn University
E. L. Spencer, III
Investor
Dr. Patricia Wade
Retired Physician,
Pinnacle Cardiovascular
Associates
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
Opelika Branch Advisory Board
Seated left to right: William H. Brown, C. Eddie Smith, and William G. Dyas
Standing: William P. Johnston and R. Kraig Smith, M.D.
Not pictured: Doug M. Horn, Sherrie M. Stanyard, and Robert G. Young
Valley Branch Advisory Board
Seated left to right: H. David Ennis, Sr., Terrell E. Bishop, and Roy W. McClendon, Jr.
Standing: Claud E. (Skip) McCoy, Jr., Frank P. Norman, and John H. Hood, II.
AuburnBank Officers
Robert W. Dumas
Chairman, President
& Chief Executive Officer
David Hedges
Executive Vice President,
Chief Financial Officer
Terrell E. Bishop
Senior Vice President,
City President, Valley
Branch
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
S. Mark Bridges
Senior Vice President,
Commercial/Consumer
Loans
Bob R. Adkins
Vice President,
Commercial Consumer
Loans
James E. Dulaney
Senior Vice President,
Business Development/
Marketing
Patty Allen
Vice President,
Commercial Consumer
Loans
W. Thomas Johnson
Senior Vice President,
Senior Lender
Marla Kickliter
Senior Vice President,
Compliance & Internal
Auditor
Shannon O’Donnell
Senior Vice President,
Credit Administration,
Chief Risk Officer
Jerry Siegel
Senior Vice President, IT/IS
Chief Technology Officer
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
Christy Fogle
Vice President,
Credit Administration
Karen Bence
Assistant Vice President,
Security, BSA/OFAC Officer
Suzanne Gibson
Assistant Vice President,
Portfolio Management
Officer
Woody Odom
Assistant Vice President
IT/IS
Cindy Royster
Assistant Vice President,
Branch Administation & IRA
Specialist
Joanna Watts
Assistant Vice President,
IT/IS
Rhonda Sanders
Deposit Operations,
Customer Identification
Program Officer
Leigh Ann Thompson
Data Analytics Officer
Latoya Watts
Branch Administrator,
Training Officer
Hope Woods
Assistant BSA Officer,
Assistant Security Officer
Pam Fuller
Senior Vice President,
Operations
April Herring
Vice President,
Mortgage Division Manager
Ginnie Y. Lunsford
Vice President,
Loan Operations
Marcia Otwell
Vice President, Admin/
Shareholder Relations
James R. Pack
Vice President,
Financial Reporting
Greg Pettey
Vice President,
Commercial/Consumer
Loans
Cyndee Redmond
Vice President,
Business Systems Analysis
Jeff Stanfield
Vice President,
Commercial/Consumer
Loans
David Warren
Senior Vice President,
Commercial/Consumer
Loans
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
For the Years Ended December 31,
2019
2018
2017
2016
2015
$26,064
$25,570
$24,526
$22,732
$22,718
<250>
9,741
2.72
1.00
27.57
——
8,834
2.42
0.96
24.44
<300>
7,846
2.15
0.92
23.85
<485>
8,150
2.24
0.90
22.55
200
7,858
2.16
0.88
21.94
3,957,135
3,957,135
3,957,135
3,957,135
3,957,135
Weighted Average Shares Outstanding
3,581,476
3,643,780
3,643,616
3,643,504
3,643,428
Financial Condition
Total Assets
Loans, net of unearned income
Investment Securities
Total Deposits
Long Term Debt
Stockholder’ Equity
Selected Ratios
Return on Average Total Assets
Return on Average Total Equity
Average Stockholders’ Equity
to Average Assets
828,570
460,901
235,902
724,152
——
98,328
1.18%
10.35%
11.39%
Allowance for Loan Losses as a % of Loans
0.95%
Loans to Total Deposits
63.65%
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%
10.35%
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%
Financial Section
Auburn National Bancorporation, Inc. 2019 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 – 21
22 – 30
31
32
33
34
35
36
37
38
39 – 67
68
Inside Back Cover
1
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, foreign, domestic and locally, including seasonality, including as a result of natural
disasters or climate change, such as rising sea and water levels, hurricanes and tornados, coronavirus or other epidemics or
pandemics; (ii) the effects of war or other conflicts, acts of terrorism, or other events that may affect general economic
conditions; (iii) governmental monetary and fiscal policies; (iv) 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; (v) the failure of assumptions and estimates, as well as
differences in, and changes to, economic, market and credit conditions, including changes in borrowers’ credit risks and
payment behaviors from those used in our loan portfolio reviews; (vi) 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; (vii) changes in borrower credit risks
and payment behaviors; (viii) 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; (ix) changes in the prices, values and sales
volumes of residential and commercial real estate; (x) 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; (xi) 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; (xii) the costs of redeveloping our headquarters
and the timing and amount of rental income upon completion of the project; (xiii) 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; (xiv) changes in technology or products that may be more difficult, costly, or less effective
than anticipated; (xv) cyber-attacks and data breaches that may compromise our systems, our vendor systems or customers’
information; (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.
2
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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 our 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.
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3
Management’s Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of our financial condition at December 31, 2019 and 2018 and our results of operations for
the years ended December 31, 2019 and 2018. The purpose of this discussion is to provide information about our financial
The following is a discussion of our financial condition at December 31, 2019 and 2018 and our results of operations for
condition and results of operations which is not otherwise apparent from the consolidated financial statements. The
the years ended December 31, 2019 and 2018. The purpose of this discussion is to provide information about our financial
following discussion and analysis should be read along with our consolidated financial statements and the related notes
condition and results of operations which is not otherwise apparent from the consolidated financial statements. The
included elsewhere herein. In addition, this discussion and analysis contains forward-looking statements, so you should
following discussion and analysis should be read along with our consolidated financial statements and the related notes
refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding Forward-Looking Statements”.
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
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
The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after
principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated
it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the Company's
continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its
principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated
business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches
continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its
in Auburn, Opelika, Notasulga and Valley, Alabama. The Bank also operates loan production offices in Auburn and
business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches
Phenix City, Alabama.
in Auburn, Opelika, Notasulga and Valley, Alabama. The Bank also operates loan production offices in Auburn and
Phenix City, Alabama.
Summary of Results of Operations
Summary of Results of Operations
Net interest income (GAAP)
(Dollars in thousands, except per share data)
Net interest income (a)
(Dollars in thousands, except per share data)
Less: tax-equivalent adjustment
Net interest income (a)
Less: tax-equivalent adjustment
Noninterest income
Net interest income (GAAP)
Total revenue
Noninterest income
Provision for loan losses
Total revenue
Noninterest expense
Provision for loan losses
Income tax expense
Noninterest expense
Net earnings
Income tax expense
Basic and diluted net earnings per share
Net earnings
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
Basic and diluted net earnings per share
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
$
$
$
$
$
$
2019
26,621
2019
557
26,621
26,064
557
5,494
26,064
31,558
5,494
(250)
31,558
19,697
(250)
2,370
19,697
9,741
2,370
2.72
9,741
2.72
Year ended December 31
$
2018
Year ended December 31
26,183
$
2018
613
26,183
25,570
613
3,325
25,570
28,895
3,325
—
28,895
17,874
—
2,187
17,874
8,834
2,187
2.42
8,834
2.42
$
$
$
$
Financial Summary
The Company’s net earnings were $9.7 million for the full year 2019, compared to $8.8 million for the full year 2018.
Basic and diluted net earnings per share were $2.72 per share for the full year 2019, compared to $2.42 per share for the full
The Company’s net earnings were $9.7 million for the full year 2019, compared to $8.8 million for the full year 2018.
year 2018.
Basic and diluted net earnings per share were $2.72 per share for the full year 2019, compared to $2.42 per share for the full
year 2018.
Net interest income (tax-equivalent) was $26.6 million in 2019, a 2% increase compared to $26.2 million in 2018. This
increase was primarily due to loan growth and increases in short-term market interest rates. Average loans grew 4% to
Net interest income (tax-equivalent) was $26.6 million in 2019, a 2% increase compared to $26.2 million in 2018. This
$474.3 million in 2019, compared to $456.3 million in 2018. The Company’s net interest margin (tax-equivalent) increased
increase was primarily due to loan growth and increases in short-term market interest rates. Average loans grew 4% to
to 3.43% in 2019, compared to 3.40% in 2018 as yields on earning assets improved.
$474.3 million in 2019, compared to $456.3 million in 2018. The Company’s net interest margin (tax-equivalent) increased
to 3.43% in 2019, compared to 3.40% in 2018 as yields on earning assets improved.
The Company recorded a negative provision for loan losses of $0.3 million in 2019 compared to no provision for loan
losses during 2018. The provision for loan losses is based upon various estimates and judgements, including the absolute
The Company recorded a negative provision for loan losses of $0.3 million in 2019 compared to no provision for loan
level of loans, loan growth, credit quality and the amount of net charge-offs. Annualized net charge-offs as a percent of
losses during 2018. The provision for loan losses is based upon various estimates and judgements, including the absolute
average loans were 0.03% in 2019 compared to annualized net recoveries of 0.01% in 2018.
level of loans, loan growth, credit quality and the amount of net charge-offs. Annualized net charge-offs as a percent of
average loans were 0.03% in 2019 compared to annualized net recoveries of 0.01% in 2018.
Noninterest income was $5.5 million in 2019 compared to $3.3 million in 2018. The increase was primarily due to a $1.7
million payment received by the Company that resulted from the termination of a loan guarantee program operated by the
Noninterest income was $5.5 million in 2019 compared to $3.3 million in 2018. The increase was primarily due to a $1.7
State of Alabama and a $0.3 million pre-tax gain from an insurance recovery received in the first quarter of 2019. Mortgage
million payment received by the Company that resulted from the termination of a loan guarantee program operated by the
lending income also increased $0.2 million, or 32%, as pricing margins improved and lower interest rates for mortgage
State of Alabama and a $0.3 million pre-tax gain from an insurance recovery received in the first quarter of 2019. Mortgage
loans positively affected refinance activity.
lending income also increased $0.2 million, or 32%, as pricing margins improved and lower interest rates for mortgage
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loans positively affected refinance activity.
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4
Noninterest expense was $19.7 million in 2019 compared to $17.9 million in 2018. This increase in noninterest expense
was primarily due to increases in salaries and benefits expense of $1.3 million and $0.5 million of various expenses related
to the planned redevelopment of the Company’s headquarters in downtown Auburn, including professional fees, temporary
relocation costs, and revised depreciation estimates. The Company expects it will incur additional expense in 2020 related
to this redevelopment project.
Income tax expense was $2.4 million in 2019 and $2.2 million in 2018 reflecting an effective tax rate of 19.57% and
19.84%, respectively.
The Company paid cash dividends of $1.00 per share in 2019, an increase of 4.2% from 2018. At December 31, 2019, 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 19.69%, a tier 1 leverage ratio of 11.23% and common equity
tier 1 (“CET1”) of 18.78% at December 31, 2019.
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.
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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, 2019 and 2018, 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, 2019, the Company increased its look-back period to 43 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.
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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 15, 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, 2019. The amount
of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are
reduced.
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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
$
2019
Average
Balance
474,259
178,410
66,628
245,038
20,223
36,869
776,389
Yield/
Rate
4.83%
2.24%
3.99%
2.72%
2.09%
2.16%
3.97%
134,430
218,630
170,835
523,895
1,443
—
525,338
26,621
0.53%
0.44%
1.46%
0.80%
0.49%
0.00%
0.80%
3.43%
Year ended December 31
2018
Average
Balance
457,610
181,485
71,065
252,550
28,689
31,339
770,188
125,533
220,810
184,010
530,353
2,634
1,022
534,009
26,183
Yield/
Rate
4.76%
2.23%
4.11%
2.76%
1.93%
1.81%
3.88%
0.34%
0.39%
1.27%
0.68%
0.68%
4.50%
0.69%
3.40%
$
$
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 $26.6 million in 2019, compared to $26.2 million in 2018. This increase was due
to improvement in the Company’s net interest margin (tax-equivalent) and balance sheet growth.
The tax-equivalent yield on total interest-earning assets increased by 9 basis points in 2019 from 2018 to 3.97%.
Expansion of our earning asset yields was primarily driven by loan growth and 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.
The cost of total interest-bearing liabilities increased 11 basis points in 2019 from 2018 to 0.80%. 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, increased
competition for quality loan opportunities, and possible increases in our costs of funds. Management anticipates the
Company’s net interest income and margin will likely decrease in 2020 compared to 2019 as the Company’s ability to
lower its deposit costs will likely continue to lag the current decrease in earning asset yields.
Provision for Loan Losses
The Company recorded a negative provision for loan losses of $0.3 million in 2019, compared to no provision for loan
losses in 2018. The negative provision was primarily related to a decline in total loans outstanding at December 31, 2019
and more specifically the construction and land development loan portfolio segment.
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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 0.95% at December 31, 2019 from 1.00% at December 31, 2018. 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, 2019. While our policies and procedures used to estimate the allowance for
loan losses, as well as the resultant provision for loan losses charged to operations, are believed adequate by management
and are reviewed from time to time by our regulators, they are based on estimates and judgment and are therefore
approximate and imprecise. Factors beyond our control, such as conditions in the local and national economy, a local real
estate market or particular industry conditions exist which may negatively and materially affect our asset quality and the
adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.
Noninterest Income
(Dollars in thousands)
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Gain from loan guarantee program
Securities losses, net
Other
Total noninterest income
Year ended December 31
2019
717
866
437
1,717
(123)
1,880
5,494
$
$
2018
749
655
435
—
—
1,486
3,325
$
$
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 2019 and 2018.
(Dollars in thousands)
Origination income
Servicing fees, net
Total mortgage lending income
Year ended December 31
2019
545
321
866
$
$
2018
311
344
655
$
$
The increase in mortgage lending income was primarily due to improved pricing margins and an increase in the level of
refinance activity. The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change
and is primarily attributable to the origination and sale of new mortgage loans.
In 2019, the Company recognized a gain of $1.7 million resulting from the termination of a Loan Guarantee Program (the
"Program") operated by the State of Alabama. For more information regarding the Program, please refer to Note 5, Loans
and Allowance for Loan Losses, of the consolidated financial statements that accompany this report.
The increase in other noninterest income was primarily due to a $0.3 million gain from an insurance recovery received in
the first quarter of 2019.
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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
2019
11,931
1,907
1,014
181
4,664
19,697
$
$
2018
10,653
1,465
902
310
4,544
17,874
$
$
The increase in salaries and benefits expense in 2019 over 2018 was due to a variety of factors, including an increase in the
number of employees, routine annual wage increases, incentive accrual increases, an increase in the employer matching
contribution percentage under the Company's 401(k) Plan, and an increase in severance pay.
The increase in net occupancy and equipment expense and professional fees expense was primarily due to $0.5 million of
various expenses related to the planned redevelopment of the Company’s headquarters in downtown Auburn. This amount
includes revised depreciation estimates of $0.2 million. For more information regarding changes in accounting estimates,
please refer to Note 1, Summary of Significant Accounting Policies, of the consolidated financial statements that
accompany this report.
The decrease in FDIC and other regulatory assessments expense was primarily due to the Bank receiving an assessment
credit of approximately $0.2 million to offset future assessments in connection with the FDIC Deposit Insurance Fund
exceeding its target ratio of 1.35% as of September 30, 2018. The Deposit Insurance Fund ratio was 1.36% at December
31, 2018, below the 1.38% threshold required for assessment credits to be applied. The Deposit Insurance Fund ratio was
again below 1.38% at June 30, 2019, so assessment credit were applied against our assessment due for the third and fourth
quarters of 2019. Future expense may continue to be reduced by these assessment credits depending on the level of the
Deposit Insurance Fund, until they are fully utilized.
Income Tax Expense
Income tax expense was $2.4 million in 2019 compared to $2.2 million in 2018. The Company’s effective income tax rate
was 19.57% in 2019, compared to 19.84% in 2018.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $235.9 million at December 31, 2019, a decrease of $3.9 million, or 2%, compared to
$239.8 million as of December 31, 2018. This decline was primarily due to a decrease of $11.7 million in the amortized
cost basis of securities available-for-sale as proceeds from sales, calls, and maturities were not reinvested. This decrease
was offset by an increase in the fair value of securities available-for-sale of $7.8 million. The average tax-equivalent yields
earned on total securities were 2.72% in 2019 and 2.76% in 2018.
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The following table shows the carrying value and weighted average yield of securities available-for-sale as of December
31, 2019 according to contractual maturity. Actual maturities may differ from contractual maturities of residential
mortgage-backed securities (“RMBS”) because the mortgages underlying the securities may be called or prepaid with or
without penalty.
(Dollars in thousands)
Agency obligations
Agency RMBS
State and political subdivisions
Total available-for-sale
Weighted average yield:
Agency obligations
Agency RMBS
State and political subdivisions
Total available-for-sale
Loans
(In thousands)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
Less: unearned income
$
$
$
1 year
or less
4,993
—
—
4,993
1.63%
—
—
1.63%
1 to 5
years
27,245
560
1,355
29,160
1.78%
3.42%
4.06%
1.92%
5 to 10
years
18,470
4,510
6,166
29,146
2.26%
2.50%
2.32%
2.31%
2019
56,782
32,841
270,318
92,575
8,866
461,382
(481)
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)
December 31, 2019
After 10
years
—
118,207
54,396
172,603
Total
Fair Value
50,708
123,277
61,917
235,902
—
2.64%
3.07%
2.77%
1.94%
2.63%
3.01%
2.58%
2016
49,850
41,650
220,439
110,855
8,712
431,506
(560)
December 31
2015
52,479
43,694
203,853
116,673
10,220
426,919
(509)
Loans, net of unearned income
$
460,901
476,908
453,651
430,946
426,410
Total loans, net of unearned income, were $460.9 million at December 31, 2019, a decrease of $16.0 million, or 3%, from
$476.9 million at December 31, 2018. Four loan categories represented the majority of the loan portfolio at December 31,
2019: commercial real estate mortgage loans (59%), residential real estate mortgage loans (20%), commercial and industrial
loans (12%) and construction and land development loans (7%). Approximately 23% of the Company’s commercial real
estate loans were classified as owner-occupied at December 31, 2019.
Within its residential real estate mortgage portfolio, the Company had junior lien mortgages of approximately $10.8
million, or 2%, and $12.3 million, or 3%, of total loans, net of unearned income at December 31, 2019 and 2018,
respectively. For residential real estate mortgage loans with a consumer purpose, approximately $0.8 million and $0.5
million required interest-only payments at December 31, 2019 and 2018, respectively. The Company’s residential real
estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-
risk consumer mortgage products.
Purchased loan participations included in the Company’s loan portfolio were approximately $1.4 million and $5.4 million
as of December 31, 2019 and 2018, 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 4.83% in 2019 and 4.76% in 2018.
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Management’s Discussion and Analysis
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 $19.5 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $17.5 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, 2019, the Bank had no
loan relationships exceeding our internal limit.
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, 2019 (and related balances at December 31, 2018).
(In thousands)
Multi-family residential properties
Hotel/motel
Lessors of 1-4 family residential properties
Shopping centers
Office buildings
Allowance for Loan Losses
$
2019
44,839
43,719
43,652
30,407
29,548
$
December 31
2018
40,455
47,936
46,374
35,789
25,421
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, 2019 and 2018, respectively, the
allowance for loan losses was $4.4 million and $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”.
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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, 2019 is presented below.
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period
Charge-offs:
Commercial and industrial
Commercial real estate
Residential real estate
Consumer installment
Total charge-offs
Recoveries:
2019
2018
2017
2016
2015
Year ended December 31
$
4,790
4,757
4,643
4,289
4,836
(364)
—
(6)
(38)
(408)
(52)
(38)
(26)
(52)
(168)
(449)
—
(107)
(40)
(596)
(97)
(194)
(182)
(67)
(540)
(100)
(866)
(89)
(59)
(1,114)
칻
$
4,790
4,386
Net (charge-offs) recoveries
70
—
19
79
33
201
33
2018
—
461
347
—
115
87
1,010
414
2017
(300)
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total recoveries
22
117
29
17
—
1,212
—
1
—
313
109
127
A summary of the changes in the allowance for loan losses and certain asset quality ratios for each of the five years in the
15
27
11
five year period ended December 31, 2019 is presented below.
1,379
367
254
Year ended December 31
(747)
839
(154)
2015
2016
2019
200
(485)
(250)
(Dollars in thousands)
Provision for loan losses
Allowance for loan losses:
Ending balance
Balance at beginning of period
Charge-offs:
0.95 %
as a % of loans
Commercial and industrial
(364)
2,345 %
as a % of nonperforming loans
Commercial real estate
—
Net charge-offs (recoveries) as a % of
Residential real estate
(6)
0.03 %
average loans
Consumer installment
(38)
Total charge-offs
As noted under “Critical Accounting Policies”, management assesses the adequacy of the allowance prior to the end of each
(408)
calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss
Recoveries:
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay
117
22
(including the timing of future payment), the estimated value of any underlying collateral, composition of the loan
17
—
portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation
—
1
is inherently subjective as it requires various material estimates and judgments including the amounts and timing of future
313
109
cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our
15
27
allowance for loan losses to total loans outstanding was 0.95% at December 31, 2019, compared to 1.00% at December 31,
367
254
2018. 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.
(747)
(154)
Provision for loan losses
200
(250)
Net charge-offs were $0.2 million, or 0.03%, of average loans in 2019, compared to net recoveries of $33 thousand, or
Ending balance
4,386
0.01% of average loans, in 2018.
as a % of loans
Our regulators, as an integral part of their examination process, periodically review the Company’s allowance for loan
as a % of nonperforming loans
losses, and may require the Company to make additional provisions to the allowance for loan losses based on their
Net charge-offs (recoveries) as a % of
judgment about information available to them at the time of their examinations.
average loans
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total recoveries
29
1,212
—
127
11
1,379
839
(485)
461
347
—
115
87
1,010
414
(300)
4,836
4,289
1.01
(100)
158
(866)
(89)
0.18
(59)
(1,114)
4,757
4,790
1.00
(52)
2,691
(38)
(26)
(0.01)
(52)
(168)
4,643
4,757
1.05
(449)
160
—
(107)
(0.09)
(40)
(596)
4,289
4,643
1.08
(97)
196
(194)
(182)
(0.19)
(67)
(540)
70
—
19
79
33
201
33
—
Net (charge-offs) recoveries
4,643
1.08
196
0.95 %
2,345 %
4,757
1.05
160
4,790
1.00
2,691
4,289
1.01
158
0.03 %
(0.09)
(0.19)
(0.01)
0.18
칻
Nonperforming Assets
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
At December 31, 2019 the Company had $0.2 million in nonperforming assets compared to $0.4 million at December 31,
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay
2018.
(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 0.95% at December 31, 2019, compared to 1.00% at December 31,
2018. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that
influence our quarterly allowance assessment in their entirety either improve or weaken.
Net charge-offs were $0.2 million, or 0.03%, of average loans in 2019, compared to net recoveries of $33 thousand, or
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0.01% of average loans, in 2018.
13
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.
At December 31, 2019 the Company had $0.2 million in nonperforming assets compared to $0.4 million at December 31,
Nonperforming Assets
2018.
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Management’s Discussion and Analysis
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
$
$
$
2019
2018
2017
2016
2015
December 31
187
—
187
0.04 %
0.02 %
0.04 %
—
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
—
The table below provides information concerning the composition of nonaccrual loans at December 31, 2019 and 2018,
respectively.
(In thousands)
Nonaccrual loans:
Residential real estate
Total nonaccrual loans / nonperforming loans
$
2019
187
187
December 31
2018
178
178
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, 2019 and
2018, respectively, the Company had $0.2 million in loans on nonaccrual.
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, 2019 the Company had no accruing TDRs
compared to $0.2 million in accruing TDRs at December 31, 2018.
At December 31, 2019 and 2018, 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, 2019 and 2018, respectively.
(In thousands)
Other real estate owned:
Residential
Total other real estate owned
Potential Problem Loans
2019
—
—
$
$
December 31
2018
172
172
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 $4.4 million, or 1.0% of total loans at
December 31, 2019, compared to $6.5 million, or 1.4% of total loans at December 31, 2018.
14
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The table below provides information concerning the composition of potential problem loans at December 31, 2019 and
2018, 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
2019
266
1,043
99
2,899
64
4,371
$
$
December 31
2018
522
741
688
4,506
71
6,528
At December 31, 2019, approximately $1.1 million or 26.7% 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, 2019 and 2018, respectively.
(In thousands)
Performing loans past due 30 to 89 days:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total performing loans past due 30 to 89 days
Deposits
(In thousands)
Noninterest bearing demand
NOW
Money market
Savings
Certificates of deposit under $100,000
Certificates of deposit and other time deposits of $100,000 or more
Brokered certificates of deposit
Total deposits
2019
24
456
—
1,608
64
2,152
2019
196,218
138,315
160,934
61,486
59,516
107,683
—
724,152
$
$
$
$
December 31
2018
100
225
—
1,740
41
2,106
December 31
2018
201,648
120,769
161,464
59,075
62,207
108,620
10,410
724,193
Total deposits were $724.2 million at December 31, 2019 and 2018, respectively. Decreases of $5.4 million in noninterest-
bearing deposits were offset by increases in interest-bearing deposits of $5.4 million during 2019. Of the $5.4 million
increase in interest-bearing deposits, $17.5 million was due to increases in NOW accounts and $2.4 million in savings
accounts. These increases were partially offset by decreases of $10.4 million in brokered certificates of deposit and $3.6
million in retail certificates of deposit.
The average rates paid on total interest-bearing deposits were 0.80% in 2019 and 0.68% in 2018. Noninterest bearing
deposits were 27% and 28% of total deposits at December 31, 2019 and 2018, respectively.
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15
Management’s Discussion and Analysis
Other Borrowings
Other borrowings generally consist of short-term borrowings and long-term debt. Short-term borrowings generally consist
of federal funds purchased and securities sold under agreements to repurchase with an original maturity of one year or less.
The Bank had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2019 and 2018,
respectively. Securities sold under agreements to repurchase totaled $1.1 million and $2.3 million at December 31, 2019
and 2018, respectively.
The average rates paid on short-term borrowings was 0.49% and 0.68% in 2019 and 2018, 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, 2019 is included in Note 9 to the accompanying consolidated financial
statements included in this annual report.
The Company had no long-term debt outstanding at December 31, 2019 and 2018, respectively. On April 27, 2018, the
Company formally redeemed all of the issued and outstanding junior subordinated debentures, which were previously
presented as long-term debt. The average rate paid on long-term debt in 2018 was 4.50%.
CAPITAL ADEQUACY
The Company's consolidated stockholders' equity was $98.3 million and $89.1 million as of December 31, 2019 and 2018,
respectively. The change from December 31, 2018 was primarily driven by net earnings of $9.7 million and other
comprehensive gain due to the change in unrealized gains on securities available-for-sale, net of tax, of $5.8 million,
partially offset by cash dividends paid of $3.5 million and stock repurchases of $2.7 million, representing 77,907 shares.
The Bank’s Tier 1 leverage ratio was 11.23%, Common Equity Tier 1 (“CET1”) risk-based capital ratio was 17.28%, Tier 1
risk-based capital ratio was 17.28%, and total risk-based capital ratio was 18.12% at December 31, 2019. 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.”
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.
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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
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, 2019.
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
0.42 %
0.55
0.54
0.32
(1.27)
(1.99)
NM
NM
At December 31, 2019, 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
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17
Management’s Discussion and Analysis
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, 2019.
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
(24.09) %
(16.16)
(9.74)
(3.62)
(1.33)
(4.08)
NM
NM
At December 31, 2019, our EVE model indicated that we were in compliance with the policy guidelines noted above.
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, 2019 and 2018, 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 cost of foregoing alternative higher-yielding investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and
dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory
restrictions.
The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the
Company could also issue common stock or other securities. Primary uses of funds by the Company include dividends paid
to stockholders and stock repurchases.
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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, 2019, the Bank had a remaining available line of credit with the FHLB totaling $246.7 million. As of
December 31, 2019, the Bank also had $41.0 million of federal funds lines, with none outstanding. Primary uses of funds
include repayment of maturing obligations and growing the loan portfolio.
The following table presents additional information about our contractual obligations as of December 31, 2019, which by
their terms had contractual maturity and termination dates subsequent to December 31, 2019:
(Dollars in thousands)
Contractual obligations:
Deposit maturities (1)
Operating lease obligations
Total
Total
724,152
788
724,940
$
$
Payments due by period
1 year
or less
649,693
99
649,792
1 to 3
years
62,075
150
62,225
3 to 5
years
More than
5 years
12,384
153
12,537
—
386
386
(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, 2019, the Bank had outstanding standby letters of credit of $1.9 million and unfunded loan commitments
outstanding of $60.6 million. Because these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to
fund these outstanding commitments, the Bank 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, 2019, the unpaid principal balance of residential mortgage loans, which we have originated and sold,
but retained the servicing rights was $271.5 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.
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19
Management’s Discussion and Analysis
The Company was not required to repurchase any loans during 2019 as a result of representation and warranty provisions
contained in the Company’s sale agreements with Fannie Mae. During 2018, the Company was required to repurchase one
loan with an aggregate principal balance of $53 thousand that was current as to principal and interest at the time of
repurchase. At December 31, 2019, the Company had no pending repurchase or make-whole requests related to
representation and warranty provisions.
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, 2019, 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 ASUs have been issued by the FASB but are not yet effective.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments;
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.
20
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Information about these pronouncements is described in more detail below.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial
Instruments, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt
securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader
range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The
allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to
present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a
manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance
rather than as a write-down. The new guidance affects entities holding financial assets and 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. The Company has developed an implementation
team that is following a general timeline. The team has been working with an advisory consultant, with whom a third-party
software license has been purchased. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13
are expected to impact the Company’s consolidated financial statements, in particular the level of the reserve for credit
losses. The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and
economic conditions at the time of adoption will be a factor. In November 2019, the FASB issued guidance to defer the
effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying
standards on current expected credit losses. As a result of this delay, the Company’s effective dated for ASU 2016-13 was
delayed to fiscal year beginning after December 15, 2022 including interim periods within those fiscal years.
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.
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 adopted this ASU on January 1, 2020. Adoption of this guidance did not have a material
impact on the 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 adopted this ASU on January 1, 2020. Adoption of this
guidance did not have a material impact on the consolidated financial statements.
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21
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)
2019
26,064
557
26,621
2018
25,570
613
26,183
$
$
Year ended December 31
2017
24,526
1,205
25,731
2016
22,732
1,276
24,008
2015
22,718
1,342
24,060
22
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Table 2 - Selected Financial Data
(Dollars in thousands, except per share amounts)
Income statement
Tax-equivalent interest income (a)
Total interest expense
Tax equivalent net interest income (a)
Provision for loan losses
Total noninterest income
Total noninterest expense
Net earnings before income taxes and
tax-equivalent adjustment
Tax-equivalent adjustment
Income tax expense
Net earnings
Per share data:
Basic and diluted net earnings
Cash dividends declared
Weighted average shares outstanding
Basic and diluted
Shares outstanding
Book value
Common stock price
High
Low
Period-end
To earnings ratio
To book value
Performance ratios:
Return on average equity
Return on average assets
Dividend payout ratio
Average equity to average assets
Asset Quality:
Allowance for loan losses as a % of:
Loans
Nonperforming loans
Nonperforming assets as a % of:
Loans and other real estate owned
Total assets
Nonperforming loans as % of loans
Net charge-offs (recoveries) as a % of average loans
Capital Adequacy (c):
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
$
$
$
$
$
$
$
$
2019
2018
2017
Year ended December 31
2015
2016
30,804
4,183
26,621
(250)
5,494
19,697
12,668
557
2,370
9,741
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
2.72
1.00
2.42
0.96
2.15
0.92
2.24
0.90
28,495
4,435
24,060
200
4,532
16,372
12,020
1,342
2,820
7,858
2.16
0.88
3,581,476
3,566,146
27.57
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
53.90
30.61
53.00
19.49x
192 %
10.35 %
1.18 %
36.76 %
11.39 %
0.95 %
2,345 %
0.04 %
0.02 %
0.04 %
0.03 %
17.28 %
17.28 %
18.12 %
11.23 %
3.43 %
19.57 %
61.33 %
53.50
28.88
31.66
13.08
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
235,902
460,901
4,386
828,570
724,152
—
98,328
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
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
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23
Financial Tables
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
$
$
$
2019
Interest
Income/
Expense
Year ended December 31
Yield/
Rate
Average
Balance
22,930
4,000
2,656
6,656
423
795
30,804
4.83% $
2.24%
3.99%
2.72%
2.09%
2.16%
3.97%
$
710
969
2,497
4,176
7
—
4,183
0.53% $
0.44%
1.46%
0.80%
0.49%
0.00%
0.80%
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
Average
Balance
474,259 $
178,410
66,628
245,038
20,223
36,869
776,389
14,037
36,119
826,545
134,430
218,630
170,835
523,895
1,443
—
525,338
203,828
3,228
94,151
826,545
$
819,529
2018
Interest
Income/
Expense
21,766
4,051
2,921
6,972
554
567
29,859
Yield/
Rate
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%
Net interest income and margin
$
26,621
3.43%
$
26,183
3.40%
(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%.
24
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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, 2019 vs. 2018
Years ended December 31, 2018 vs. 2017
Net
Due to change in
Net
Due to change in
Change
Rate (2)
Volume (2)
Change
Rate (2)
Volume (2)
1,164
(51)
(265)
(316)
(131)
228
945
282
114
168
564
(11)
(46)
507
358
18
(88)
(70)
46
109
443
235
124
361
720
(5)
—
715
806 $
(69)
(177)
(246)
(177)
119
502 $
47 $
(10)
(193)
(156)
(6)
(46)
(208)
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)
Net interest income
$
438
(272)
710 $
452
(59)
511
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income
tax rate of 21% for 2019 and 2018 and 34% for 2017.
(2) Changes that are not solely a result of volume or rate have been allocated to volume.
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25
Financial Tables
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
$
2019
56,782
32,841
270,318
92,575
8,866
461,382
(481)
460,901
(4,386)
Loans, net
$
456,515
2018
63,467
40,222
261,896
102,597
9,295
477,477
(569)
476,908
(4,790)
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
December 31
2015
52,479
43,694
203,853
116,673
10,220
426,919
(509)
426,410
(4,289)
422,121
26
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Table 6 - Loan Maturities and Sensitivities to Changes in Interest Rates
1 year
1 to 5
After 5
Adjustable
Fixed
December 31, 2019
(Dollars in thousands)
Commercial and industrial
$
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total loans
$
or less
18,555
26,102
25,607
8,013
3,304
81,581
years
12,398
6,599
114,382
27,337
4,959
165,675
years
25,829
140
130,329
57,225
603
214,126
Total
56,782
32,841
270,318
92,575
8,866
461,382
Rate
10,552
12,179
7,328
41,652
369
72,080
Rate
46,230
20,662
262,990
50,923
8,497
389,302
Total
56,782
32,841
270,318
92,575
8,866
461,382
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27
Financial Tables
Table 7 - Allowance for Loan Losses and Nonperforming Assets
2019
2018
2017
2016
2015
Year ended December 31
$
4,790
4,757
4,643
4,289
4,836
(364)
—
(6)
(38)
(408)
117
—
1
109
27
254
(154)
(250)
(52)
(38)
(26)
(52)
(168)
70
—
19
79
33
201
33
—
4,386
0.95 %
4,790
1.00
2,345 % 2,691
(0.01)
0.03 %
187
—
187
0.04 %
0.02 %
0.04 %
—
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
—
$
$
$
$
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period
Charge-offs:
Commercial and industrial
Commercial real estate
Residential real estate
Consumer installment
Total charge-offs
Recoveries:
Commercial and industrial
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total recoveries
Net (charge-offs) recoveries
Provision for loan losses
Ending balance
as a % of loans
as a % of nonperforming loans
Net charge-offs (recoveries) 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
28
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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 $
2019
2018
2017
2016
2015
Amount %*
Amount %*
Amount %*
Amount %*
$
577 12.3 $
778
13.3 $
653
13.0 $
540 11.6 $
Amount %*
12.3
523
December 31
569
7.1
2,289 58.6
813 20.1
1.9
138
$
4,386
700
2,218
946
148
4,790
8.4
54.9
21.5
1.9
$
734
2,126
1,071
173
4,757
8.7
52.7
23.5
2.1
$
812
9.7
2,071 51.0
1,107 25.7
2.0
113
4,643
$
10.2
47.8
27.3
2.4
669
1,879
1,059
159
4,289
* Loan balance in each category expressed as a percentage of total loans.
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29
Financial Tables
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
December 31, 2019
$
$
13,910
7,318
39,867
46,588
107,683
30
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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, 2019. 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, 2019 based on the specified criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 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.
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31
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Board of Directors and Stockholders
Auburn National Bancorporation, Inc.
Auburn National Bancorporation, Inc.
Opinion on the Internal Control Over Financial Reporting
Opinion on the Internal Control Over Financial Reporting
We have audited Auburn National Bancorporation, Inc. and its subsidiaries’ (the “Company”) internal control over
We have audited Auburn National Bancorporation, Inc. and its subsidiaries’ (the “Company”) internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated
financial reporting as of December 31, 2019, 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,
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,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
2019, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
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, 2019 and 2018 and the related
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018 and the related
consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows of the Company for the
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 6, 2020
years then ended, and the related notes to the consolidated financial statements and our report dated March 6, 2020
expressed an unqualified opinion.
expressed an unqualified opinion.
Basis for Opinion
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
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
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
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
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
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.
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
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
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
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
circumstances. We believe that our audit provides a reasonable basis for our opinion.
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
Definition and Limitations of Internal Control Over Financial Reporting
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
with generally accepted accounting principles. A company's internal control over financial reporting includes those policies
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
with generally accepted accounting principles. A company's internal control over financial reporting includes those policies
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the consolidated
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
financial statements.
of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the consolidated
financial statements.
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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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 6, 2020
Greenville, South Carolina
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March 6, 2020
32
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Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Board of Directors and Stockholders
Auburn National Bancorporation, Inc.
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
Opinion on the Consolidated Financial Statements
financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated
We have audited the accompanying consolidated balance sheets of Auburn National Bancorporation, Inc. and its
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion,
subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of earnings,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the
2019, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
consolidated financial statements and schedules (collectively, the “financial statements”). In our opinion, the financial
Organizations of the Treadway Commission in 2013.
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018 and the related
generally accepted in the United States of America.
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 6, 2020
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
expressed an unqualified opinion.
(United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
Basis for Opinion
the Treadway Commission in 2013, and our report dated March 6, 2020 expressed an unqualified opinion on the
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
effectiveness of the Company's internal control over financial reporting.
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
Basis for Opinion
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
regulations of the Securities and Exchange Commission and the PCAOB.
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
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
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.
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
Definition and Limitations of Internal Control Over Financial Reporting
also included evaluating the accounting principles used and significant estimates made by management, as well as
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
opinion.
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
We have served as the Company's auditor since 2015.
of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the consolidated
financial statements.
Greenville, South Carolina
March 6, 2020
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 6, 2020
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33
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
Accrued expenses and other liabilities
Total liabilities
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
issued shares - none
Common stock of $.01 par value; authorized 8,500,000 shares;
issued 3,957,135 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net
Less treasury stock, at cost - 390,989 shares and 313,267 shares
at December 31, 2019 and 2018, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements
$
$
$
$
2019
15,172
25,944
51,327
92,443
235,902
2,202
460,901
(4,386)
456,515
14,743
19,202
6,872
827,879
$
$
196,218
527,934
724,152
1,069
4,330
729,551
—
39
3,784
101,801
2,059
(9,355)
98,328
December 31
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
$
827,879
$
818,077
34
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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars in thousands, except share and per share data)
Interest income:
Loans, including fees
Securities:
Taxable
Tax-exempt
Federal funds sold and interest bearing bank deposits
Total interest income
Interest expense:
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Gain from loan guarantee program
Other
Securities losses, 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
2019
2018
$
22,930
$
21,766
4,000
2,099
1,218
30,247
4,176
7
—
4,183
26,064
(250)
26,314
717
866
437
1,717
1,880
(123)
5,494
11,931
1,907
1,014
181
4,664
19,697
12,111
2,370
9,741
2.72
$
$
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
$
$
Weighted average shares outstanding:
Basic and diluted
See accompanying notes to consolidated financial statements
3,581,476
3,643,780
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35
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Year ended December 31
(Dollars in thousands)
Net earnings
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities
Reclassification adjustment for net loss on securities
recognized in net earnings
Other comprehensive income (loss)
2019
$
9,741 $
5,730
92
5,822
Comprehensive income
$
15,563 $
See accompanying notes to consolidated financial statements
2018
8,834
(3,197)
—
(3,197)
5,637
36
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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common
Additional
Accumulated
other
Shares
Common
paid-in
Retained
comprehensive Treasury
3,643,668 $
—
—
—
200
(Dollars in thousands, except share data) Outstanding
Balance, December 31, 2017
Net earnings
Other comprehensive loss
Cash dividends paid ($0.96 per share)
Sale of treasury stock
Balance, December 31, 2018
Net earnings
Other comprehensive income
Cash dividends paid ($1.00 per share)
Stock repurchases
Sale of treasury stock
3,566,146 $
Balance, December 31, 2019
See accompanying notes to consolidated financial statements
—
—
—
(77,907)
185
3,643,868 $
Stock
39
—
—
—
—
39 $
—
—
—
—
—
39 $
capital
3,771
—
—
—
8
3,779 $
earnings
90,299
8,834
—
(3,498)
—
95,635
9,741
—
(3,575)
—
—
3,784 $ 101,801
—
—
—
—
5
income (loss)
stock
Total
(566)
—
(3,197)
—
—
(3,763) $
—
5,822
—
—
—
2,059 $
(6,637) $
—
—
—
2
(6,635) $
—
—
—
(2,721)
1
(9,355) $
86,906
8,834
(3,197)
(3,498)
10
89,055
9,741
5,822
(3,575)
(2,721)
6
98,328
$
$
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37
Audited Financial Statements
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31
2019
2018
$
9,741
$
8,834
(250)
1,157
1,853
(153)
123
(545)
(59)
(30,407)
28,892
(437)
(872)
1,807
10,850
36,462
55,078
(81,843)
15,771
(1,809)
32
394
24,085
(5,430)
5,389
(1,231)
—
(2,721)
(3,575)
(7,568)
27,367
65,076
92,443
4,092
2,295
(1,717)
891
889
82
$
$
$
$
$
$
$
—
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
—
n/a
n/a
1,525
$
$
$
$
$
$
$
(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 (benefit) expense
Net loss 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 in other assets
Net increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Purchase of securities available-for-sale
Decrease (increase) in loans, net
Net purchases of premises and equipment
Decrease (increase) in FHLB stock
Proceeds from sale of other real estate owned
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
Net increase (decrease) in interest-bearing deposits
Net decrease in federal funds purchased and securities sold
under agreements to repurchase
Repayments or retirement of long-term debt
Stock repurchases
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
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest
Income taxes
Gain from loan guarantee program
Supplemental disclosure of non-cash transactions:
Initial recognition of operating lease right of use assets
Initial recognition of operating lease liabilities
Real estate acquired through foreclosure
See accompanying notes to consolidated financial statements
38
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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.
Revenue Recognition
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. 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 ASC 606 include service charges on deposits, investment
services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of
noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606:
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either
transaction-based, for which the performance obligations are satisfied when the individual transaction is processed,
or set periodic service charges, for which the performance obligations are 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 – A gain on sale should be recognized when a contract for sale exists and control
of the asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for
sale exists, including a determination that the institution will collect substantially all of the consideration to which
it is entitled. In addition to the loan-to-value, the analysis is based on various other factors, including the credit
quality of the borrower, the structure of the loan, and any other factors that may affect collectability.
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.
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39
Audited Financial Statements
Change in Accounting Estimate
During the fourth quarter of 2019, the Company reassessed its estimate of the useful lives of certain fixed assets. The
Company revised its original useful life estimate for certain land improvements, buildings and improvements and furniture,
fixtures and equipment, with a carrying value of $0.5 million at December 31, 2019, to correspond with estimated
demolition dates planned as part of the redevelopment project for our main campus. This is considered a change in
accounting estimate, per ASC 250-10, where adjustments should be made prospectively. The effects of this change in
accounting estimate on the 2019 consolidated financial statements was a decrease in net earnings of $0.2 million, or $0.04
per share.
Reclassifications
Certain amounts reported in the prior period have been reclassified to conform to the current-period presentation. These
reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.
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, 2019. The Company does not believe there are any material subsequent events that would
require further recognition or disclosure.
Accounting Standards Adopted in 2019
In 2019, the Company adopted new guidance related to the following Accounting Standards Update (“Update” or “ASU”):
ASU 2016-02, Leases; and
ASU 2017-02, Targeted Improvements to Accounting for Hedging Activities.
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 Company adopted ASU No. 2016-02 on January 1, 2019. ASU No. 2016-02 did not have a material impact on the
Company’s consolidated financial statements due to the fact the Company does not have any material leases.
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. The Company adopted ASU No. 2017-
12 on January 1, 2019. ASU No. 2017-12 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.
40
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Securities
Securities are classified based on management’s intention at the date of purchase. At December 31, 2019, 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 estimated life of the security using the effective interest method. 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 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.
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.
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41
Audited Financial Statements
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. Land improvements, buildings and improvements, and furniture, fixtures, 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.
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.
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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.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase generally mature less than one year from the transaction date. Securities
sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated balance sheets
at the amount of cash received in connection with each transaction.
Income Taxes
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized. The net deferred tax asset is reflected as a component of other
assets in the accompanying consolidated balance sheets.
Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income
(loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss
from continuing operations that occurred during the year, plus or minus income tax effects of (1) changes in certain
circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in
income tax laws or rates, and (3) changes in income tax status, subject to certain exceptions. The amount allocated to other
comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted
for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.
In accordance with ASC 740, 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 15, Fair Value.
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43
Audited Financial Statements
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, 2019 and 2018, 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
NOTE 3: RESTRICTED CASH BALANCES
Year ended December 31
2019
2018
$
$
9,741
3,581,476
2.72
$
$
8,834
3,643,780
2.42
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, 2019 and 2018, the Bank did not have a
required reserve balance at the Federal Reserve Bank.
NOTE 4: SECURITIES
At December 31, 2019 and 2018, 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, 2019 and 2018, 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, 2019
Agency obligations (a)
Agency RMBS (a)
State and political subdivisions
$
$
4,993
—
—
27,245
560
1,355
18,470
4,510
6,166
—
118,207
54,396
50,708
123,277
61,917
215
798
2,104
98 $
261
9
50,591
122,740
59,822
368 $ 233,153
4,993
29,146
29,160
Total available-for-sale
December 31, 2018
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. Expected maturities of
$ 14,437
—
—
$ 14,437
1,200 $
52,346
3,738 $ 122,271
70,206
5,630 $ 244,823
—
110,230
58,624
168,854
51,171
118,598
70,032
239,801
16,869
8,368
7,726
32,963
19,865
—
3,682
23,547
25
65
518
608
235,902
172,603
692 $
3,117
these securities may differ from contractual maturities because issues may have the right to call or repay obligations
with or without prepayment penalties.
Securities with aggregate fair values of $147.8 million and $133.1 million at December 31, 2019 and 2018, 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, 2019 and 2018, respectively.
Nonmarketable equity investments include FHLB of Atlanta stock, Federal Reserve Bank (“FRB”) stock, and stock in a
privately held financial institution.
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Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at December 31, 2019 and 2018, 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, 2019:
Agency obligations
Agency RMBS
State and political subdivisions
Total
$
$
December 31, 2018:
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
24,734
40,126
2,741
67,601
4,724
12,325
14,840
31,889
97
98
9
204
28
238
181
447
4,993
21,477
—
26,470
44,307
99,184
14,384
157,875
1
163
—
164
29,727 $
61,603
2,741
94,071 $
1,172
3,500
511
5,183
49,031 $
111,509
29,224
189,764 $
98
261
9
368
1,200
3,738
692
5,630
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.
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45
Audited Financial Statements
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, 2019 and 2018, 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, 2019 and
2018, respectively.
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
Gross realized losses
Realized losses, 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
$
$
2019
120
(243)
(123)
2018
—
—
—
2019
56,782
32,841
$
December 31
2018
63,467
40,222
60,893
44,839
164,586
270,318
48,923
43,652
92,575
8,866
461,382
(481)
460,901
$
56,413
40,455
165,028
261,896
56,223
46,374
102,597
9,295
477,477
(569)
476,908
$
$
Loans secured by real estate were approximately 85.8% of the total loan portfolio at December 31, 2019. At December 31,
2019, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama and surrounding
areas.
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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.
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.
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47
Audited Financial Statements
The following is a summary of current, accruing past due and nonaccrual loans by portfolio class as of December 31, 2019
The following is a summary of current, accruing past due and nonaccrual loans by portfolio class as of December 31, 2019
and 2018.
and 2018.
(In thousands)
(In thousands)
December 31, 2019:
December 31, 2019:
Commercial and industrial
Commercial and industrial
Construction and land development
Construction and land development
Commercial real estate:
Commercial real estate:
Owner occupied
Owner occupied
Multifamily
Multifamily
Other
Other
Total commercial real estate
Total commercial real estate
Residential real estate:
Residential real estate:
Consumer mortgage
Consumer mortgage
Investment property
Investment property
Total residential real estate
Total residential real estate
Consumer installment
Consumer installment
Total
Total
December 31, 2018:
December 31, 2018:
Commercial and industrial
Commercial and industrial
Construction and land development
Construction and land development
Commercial real estate:
Commercial real estate:
Owner occupied
Owner occupied
Multifamily
Multifamily
Other
Other
Total commercial real estate
Total commercial real estate
Residential real estate:
Residential real estate:
Consumer mortgage
Consumer mortgage
Investment property
Investment property
Total residential real estate
Total residential real estate
Consumer installment
Consumer installment
Total
Total
Accruing
Accruing
Accruing
Accruing
30-89 Days Greater than
30-89 Days Greater than
Past Due
Past Due
90 days
90 days
Total
Total
Accruing
Accruing
Loans
Loans
Non-
Non-
Accrual
Accrual
24
24
456
456
—
—
—
—
—
—
—
—
1,585
1,585
23
23
1,608
1,608
64
64
2,152
2,152
100
100
225
225
—
—
—
—
—
—
—
—
1,599
1,599
141
141
1,740
1,740
41
41
2,106
2,106
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
56,782
56,782
32,841
32,841
60,893
60,893
44,839
44,839
164,586
164,586
270,318
270,318
48,736
48,736
43,652
43,652
92,388
92,388
8,866
8,866
461,195
461,195
63,467
63,467
40,222
40,222
56,413
56,413
40,455
40,455
165,028
165,028
261,896
261,896
56,045
56,045
46,374
46,374
102,419
102,419
9,295
9,295
477,299
477,299
$
$
—
—
—
—
—
—
—
—
—
—
—
—
187
187
—
—
187
187
—
—
187 $
187 $
$
$
—
—
—
—
—
—
—
—
—
—
—
—
178
178
—
—
178
178
—
—
178 $
178 $
Current
Current
56,758
56,758
32,385
32,385
60,893
60,893
44,839
44,839
164,586
164,586
270,318
270,318
47,151
47,151
43,629
43,629
90,780
90,780
8,802
8,802
459,043
459,043
63,367
63,367
39,997
39,997
56,413
56,413
40,455
40,455
165,028
165,028
261,896
261,896
54,446
54,446
46,233
46,233
100,679
100,679
9,254
9,254
475,193
475,193
$
$
$
$
$
$
$
$
Total
Total
Loans
Loans
56,782
56,782
32,841
32,841
60,893
60,893
44,839
44,839
164,586
164,586
270,318
270,318
48,923
48,923
43,652
43,652
92,575
92,575
8,866
8,866
461,382
461,382
63,467
63,467
40,222
40,222
56,413
56,413
40,455
40,455
165,028
165,028
261,896
261,896
56,223
56,223
46,374
46,374
102,597
102,597
9,295
9,295
477,477
477,477
The gross interest income which would have been recorded under the original terms of those nonaccrual loans had they
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 $9 thousand and $12 thousand for the years ended December 31, 2019
been accruing interest, amounted to approximately $9 thousand and $12 thousand for the years ended December 31, 2019
and 2018, respectively.
and 2018, respectively.
Allowance for Loan Losses
Allowance for Loan Losses
The allowance for loan losses as of and for the years ended December 31, 2019 and 2018, is presented below.
The allowance for loan losses as of and for the years ended December 31, 2019 and 2018, is presented below.
(In thousands)
(In thousands)
Beginning balance
Beginning balance
Charged-off loans
Charged-off loans
Recovery of previously charged-off loans
Recovery of previously charged-off loans
Net (charge-offs) recoveries
Net (charge-offs) recoveries
Provision for loan losses
Provision for loan losses
Ending balance
Ending balance
48
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$
$
$
$
Year ended December 31
Year ended December 31
2018
2018
2019
2019
4,790
4,790
(408)
(408)
254
254
(154)
(154)
(250)
(250)
4,386
4,386
$
$
$
$
4,757
4,757
(168)
(168)
201
201
33
33
—
—
4,790
4,790
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, 2019 and 2018, 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.
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49
Audited Financial Statements
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
The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of
downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks
2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic
inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant
downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks
losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the
inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant
year ended December 31, 2019, the Company increased its look-back period to 43 quarters to continue to include losses
losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the
incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-
year ended December 31, 2019, the Company increased its look-back period to 43 quarters to continue to include losses
back period to incorporate the effects of at least one economic downturn in its loss history. Other than expanding the look-
incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-
back period each quarter, the Company has not made any material changes to its methodology that would impact the
back period to incorporate the effects of at least one economic downturn in its loss history. Other than expanding the look-
calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying
back period each quarter, the Company has not made any material changes to its methodology that would impact the
consolidated balance sheets and statements of earnings.
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, 2019 and 2018.
The following table details the changes in the allowance for loan losses by portfolio segment for the years ended December
31, 2019 and 2018.
Total
$
$
Residential
Real Estate
Residential
Real Estate
Consumer
Installment
Consumer
Installment
(in thousands)
Balance, December 31, 2017
(in thousands)
Charge-offs
Balance, December 31, 2017
Recoveries
Charge-offs
Net recoveries (charge-offs)
Recoveries
Provision
Net recoveries (charge-offs)
Balance, December 31, 2018
Provision
Balance, December 31, 2018
Charge-offs
Recoveries
Charge-offs
Net (charge-offs) recoveries
Recoveries
Provision
Net (charge-offs) recoveries
Balance, December 31, 2019
Provision
Balance, December 31, 2019
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, 2019 and 2018.
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, 2019 and 2018.
173 $
(52)
173 $
33
(52)
(19)
33
(6)
(19)
148 $
(6)
148 $
(38)
27
(38)
(11)
27
1
(11)
138 $
1
138 $
Commercial
and industrial
Commercial
653
and industrial
(52)
653
70
(52)
18
70
107
18
778
107
778
(364)
117
(364)
(247)
117
46
(247)
577
46
577
Commercial
Real Estate
Commercial
2,126
Real Estate
(38)
2,126
19
(38)
(19)
19
111
(19)
2,218
111
2,218
—
1
—
1
1
70
1
2,289
70
2,289
Construction
and land
Construction
Development
and land
734
Development
—
734
—
—
—
—
(34)
—
700
(34)
700
—
—
—
—
—
(131)
—
569
(131)
569
1,071
(26)
1,071
79
(26)
53
79
(178)
53
946
(178)
946
(6)
109
(6)
103
109
(236)
103
813
(236)
813
4,757
(168)
4,757
201
(168)
33
201
—
33
4,790
—
4,790
(408)
254
(408)
(154)
254
(250)
(154)
4,386
(250)
4,386
$
$
$
$
Total
Collectively evaluated (1)
Individually evaluated (2)
Total
(In thousands)
December 31, 2019:
(In thousands)
Commercial and industrial
December 31, 2019:
Construction and land development
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Commercial real estate
Consumer installment
Residential real estate
Consumer installment
December 31, 2018:
Commercial and industrial
December 31, 2018:
Construction and land development
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Commercial real estate
Consumer installment
Residential real estate
Consumer installment
Total
Total
$
$
$
$
$
$
Allowance
Recorded
Collectively evaluated (1)
Allowance
Recorded
Individually evaluated (2)
Allowance
Total
Recorded
Allowance
for loan
investment
Recorded
Allowance
for loan
investment
Recorded
Allowance
for loan
investment
Recorded
losses
for loan
in loans
investment
losses
for loan
in loans
investment
losses
for loan
in loans
investment
losses
in loans
losses
in loans
losses
in loans
577
569
577
2,289
569
813
2,289
138
813
138
4,386
4,386
778
700
778
2,218
700
946
2,218
148
946
148
4,790
4,790
56,683
32,841
56,683
270,318
32,841
92,575
270,318
8,866
92,575
8,866
461,283
461,283
63,467
40,222
63,467
261,739
40,222
102,597
261,739
9,295
102,597
9,295
477,320
477,320
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
99
99
—
—
—
—
—
—
—
—
99
99
—
—
—
157
—
—
157
—
—
—
157
157
577
569
577
2,289
569
813
2,289
138
813
138
4,386
4,386
778
700
778
2,218
700
946
2,218
148
946
148
4,790
4,790
56,782
32,841
56,782
270,318
32,841
92,575
270,318
8,866
92,575
8,866
461,382
461,382
63,467
40,222
63,467
261,896
40,222
102,597
261,896
9,295
102,597
9,295
477,477
477,477
Total
Total
(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.
(1) Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies
(2) Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly
(formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans.
FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
(2) Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly
$
$
50
FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
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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, 2019
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, 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
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
$
54,340
31,798
59,898
44,839
163,716
268,453
45,247
42,331
87,578
8,742
450,911
61,568
39,481
55,942
40,455
163,449
259,846
50,903
45,463
96,366
9,149
466,410
$
$
$
2,176
—
917
—
849
1,766
962
949
1,911
60
5,913
1,377
—
154
—
1,208
1,362
1,374
173
1,547
75
4,361
266
1,043
78
—
21
99
2,527
372
2,899
64
4,371
522
741
317
—
371
688
3,768
738
4,506
71
6,528
$
56,782
32,841
—
—
—
—
—
—
187
—
187
—
187
—
—
—
—
—
—
$
$
178
—
178
—
178
$
60,893
44,839
164,586
270,318
48,923
43,652
92,575
8,866
461,382
63,467
40,222
56,413
40,455
165,028
261,896
56,223
46,374
102,597
9,295
477,477
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51
Audited Financial Statements
During the fourth quarter of 2019, the Company recognized a gain of $1.7 million resulting from the termination of a Loan
Guarantee Program (the “Program”) operated by the State of Alabama. The payment of $1.7 million received by the
Company in October 2019 was recorded as a gain and included in noninterest income on the accompanying consolidated
statements of earnings. The Program required a 1% fee on the commitment balance at origination and in return the
Company received a guarantee of up to 50% of losses in the event of the borrower's default. As of December 31, 2019, the
Company had 5 loans outstanding totaling $10.2 million that were enrolled in the Program prior to its termination by the
State of Alabama. Despite being enrolled in the Program, these loans would have met the Company's normal loan
underwriting criteria at origination. At December 31, 2019, all of these loans were categorized as Pass within the
Company's credit quality asset classification.
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, 2019 and 2018.
(In thousands)
With no allowance recorded:
Commercial and industrial
Total impaired loans
December 31, 2019
Unpaid
principal
balance (1)
Charge-offs
and payments
applied (2)
Recorded
investment (3)
Related
allowance
$
$
335
335
(236) $
(236) $
99
—
99 $
—
(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:
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.
52
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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
Commercial real estate:
Owner occupied
Other
Total commercial real estate
Total
Troubled Debt Restructurings
Year ended December 31, 2019
Year ended December 31, 2018
Average
Total interest
Average
Total interest
recorded
income
recorded
income
investment
recognized
investment
recognized
$
$
8
24
—
24
32
—
$
9
9
—
9
9
$
166
1,145
1,311
1,320
—
9
—
9
9
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.
At December 31, 2019 the Company had no TDRs. The following is a summary of accruing and nonaccrual TDRs and the
related loan losses, by portfolio segment and class at December 31, 2018.
(In thousands)
December 31, 2018
Commercial real estate:
Owner occupied
Total commercial real estate
Total
TDRs
Accruing
Nonaccrual
Total
Related
Allowance
$
$
157
157
157
—
—
—
157
157
157
$
$
—
—
—
At December 31, 2019, there were no significant outstanding commitments to advance additional funds to customers whose
loans had been restructured.
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53
Audited Financial Statements
There were no loans modified in a TDR during the year ended December 31, 2019. The following table summarizes loans
modified in a TDR during the year ended December 31, 2018 both before and after modification.
There were no loans modified in a TDR during the year ended December 31, 2019. The following table summarizes loans
modified in a TDR during the year ended December 31, 2018 both before and after modification.
($ in thousands)
December 31, 2018
($ in thousands)
Commercial real estate:
December 31, 2018
Other
Commercial real estate:
Other
Total commercial real estate
Total commercial real estate
Total
Total
Pre-
Post-
modification
Pre-
outstanding
modification
recorded
outstanding
investment
recorded
investment
modification
Post-
outstanding
modification
recorded
outstanding
investment
recorded
investment
Number of
contracts
Number of
contracts
2
2
2
2
2
2
$
$
$
$
1,447
1,447
1,447
1,447
1,447
1,447
1,447
1,447
1,447
1,447
1,447
1,447
Two loans were modified in a TDR during the year ended December 31, 2018. The only concessions granted by the
Company were related to either a delay in the required payment of principal and/or interest or the interest rate at renewal
Two loans were modified in a TDR during the year ended December 31, 2018. The only concessions granted by the
was considered to be less than a market rate.
Company were related to either a delay in the required payment of principal and/or interest or the interest rate at renewal
was considered to be less than a market rate.
During the year ended December 31, 2019, the Company had no loans modified in a TDR within the previous 12 months
for which there was a payment default. The following table summarizes the recorded investment in loans modified in a
During the year ended December 31, 2019, the Company had no loans modified in a TDR within the previous 12 months
TDR within the previous twelve months for which there was a payment default (defined as 90 days or more past due)
for which there was a payment default. The following table summarizes the recorded investment in loans modified in a
during the year ended December 31, 2018.
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.
($ in thousands)
December 31, 2018
($ in thousands)
Commercial real estate:
December 31, 2018
Other
Commercial real estate:
Other
Total commercial real estate
Total commercial real estate
Total
Total
(1) Amount as of applicable month end during the respective year for which there was a payment default.
(1) Amount as of applicable month end during the respective year for which there was a payment default.
NOTE 6: PREMISES AND EQUIPMENT
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2019 and 2018 is presented below.
Premises and equipment at December 31, 2019 and 2018 is presented below.
(Dollars in thousands)
Land and improvements
(Dollars in thousands)
Buildings and improvements
Land and improvements
Furniture, fixtures, and equipment
Buildings and improvements
Total premises and equipment
Furniture, fixtures, and equipment
Less: accumulated depreciation
Total premises and equipment
Less: accumulated depreciation
Premises and equipment, net
Premises and equipment, net
Number of
Contracts
Number of
Contracts
Recorded
investment (1)
Recorded
investment (1)
1
1
1
1
1
1
$
$
$
$
1,259
1,259
1,259
1,259
1,259
1,259
$
$
$
$
2019
9,874
2019
10,094
9,874
3,109
10,094
23,077
3,109
(8,334)
23,077
(8,334)
14,743
14,743
December 31
2018
December 31
8,444
2018
9,871
8,444
2,953
9,871
21,268
2,953
(7,672)
21,268
(7,672)
13,596
13,596
Depreciation expense was approximately $662 thousand and $435 thousand for the years ended December 31, 2019 and
2018, respectively, and is a component of net occupancy and equipment expense in the consolidated statements of earnings.
Depreciation expense was approximately $662 thousand and $435 thousand for the years ended December 31, 2019 and
2018, respectively, and is a component of net occupancy and equipment expense in the consolidated statements of earnings.
NOTE 7: MORTGAGE SERVICING RIGHTS, NET
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
MSRs are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold.
future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow
An estimate of the Company’s MSRs is determined using assumptions that market participants would use in estimating
account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the
future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow
Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are
account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the
amortized in proportion to, and over the period of, estimated net servicing income. Servicing fee income is recorded net of
Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are
related amortization expense and recognized in earnings as part of mortgage lending income.
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.
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54
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, 2019 and 2018.
(Dollars in thousands)
Beginning balance
Additions, net
Amortization expense
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
$
$
$
$
2019
1,441
241 .
(383)
1,299
—
—
2,697
2,111
2018
1,644
208
(411)
1,441
—
—
2,528
2,697
Data and assumptions used in the fair value calculation related to MSRs at December 31, 2019 and 2018, 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)
$
2019
274,227
11.6 %
10.0 %
3.9 %
255
25.0
December 31
2018
289,981
8.3
10.0
3.9
250
25.0
At December 31, 2019, the weighted average amortization period for MSRs was 5.5 years. Estimated amortization expense
for each of the next five years is presented below.
(Dollars in thousands)
2020
2021
2022
2023
2024
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$
December 31, 2019
220
182
151
126
105
55
Audited Financial Statements
NOTE 8: DEPOSITS
At December 31, 2019, the scheduled maturities of certificates of deposit and other time deposits are presented below.
(Dollars in thousands)
2020
2021
2022
2023
2024
Total certificates of deposit and other time deposits
December 31, 2019
92,740
$
25,432
36,643
5,812
6,572
167,199
$
Additionally, at December 31, 2019 and 2018, approximately $57.4 million and $59.4 million, respectively, of certificates
of deposit and other time deposits were issued in denominations greater than $250 thousand.
At December 31, 2019 and 2018, 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, 2019 and 2018, 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
2019
2018
Weighted
Weighted
Amount
Avg. Rate
Amount
Avg. Rate
$
$
—
1
—
1,069
1,442
2,261
—
2.58 %
$
0.50 %
0.50 %
$
—
2
—
2,300
2,632
3,241
—
2.50 %
0.50 %
0.50 %
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. The Bank
had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2019.
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 $2.6
million and $5.6 million at December 31, 2019 and 2018, respectively, were pledged to secure securities sold under
agreements to repurchase.
NOTE 10: LEASE COMMITMENTS
We lease certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled
$0.2 million for both the years ended December 31, 2019 and 2018. On January 1, 2019, we adopted a new accounting
standard which required the recognition of certain operating leases on our balance sheet as lease right of use assets
(reported as component of other assets) and related lease liabilities (reported as a component of accrued expenses and other
liabilities). At December 31, 2019, aggregate lease right of use assets and lease liabilities amounted to $785 thousand and
$788 thousand, respectively. Rent expense includes amounts related to items that are not included in the determination of
lease right of use assets including expenses related to short-term leases totaling $0.1 million for the year ended December
31, 2019.
56
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$
$
$
$
$
$
$
$
Total undiscounted operating lease liabilities
Total undiscounted operating lease liabilities
Total undiscounted operating lease liabilities
Total operating lease liabilities included in the accompanying balance sheet
Total undiscounted operating lease liabilities
Total operating lease liabilities included in the accompanying balance sheet
Total operating lease liabilities included in the accompanying balance sheet
Total operating lease liabilities included in the accompanying balance sheet
Lease payments under operating leases that were applied to our operating lease liability totaled $129 thousand during the
Lease payments under operating leases that were applied to our operating lease liability totaled $129 thousand during the
year ended December 31, 2019. The following table reconciles future undiscounted lease payments due under non-
Lease payments under operating leases that were applied to our operating lease liability totaled $129 thousand during the
year ended December 31, 2019. The following table reconciles future undiscounted lease payments due under non-
cancelable operating leases (those amounts subject to recognition) to the aggregate operating lease liability as of December
year ended December 31, 2019. The following table reconciles future undiscounted lease payments due under non-
Lease payments under operating leases that were applied to our operating lease liability totaled $129 thousand during the
cancelable operating leases (those amounts subject to recognition) to the aggregate operating lease liability as of December
31, 2019:
cancelable operating leases (those amounts subject to recognition) to the aggregate operating lease liability as of December
year ended December 31, 2019. The following table reconciles future undiscounted lease payments due under non-
31, 2019:
31, 2019:
cancelable operating leases (those amounts subject to recognition) to the aggregate operating lease liability as of December
Remaining lease
31, 2019:
Remaining lease
payments
(Dollars in thousands)
Remaining lease
payments
(Dollars in thousands)
106
$
2020
payments
(Dollars in thousands)
Remaining lease
$
2020
106
93
2021
payments
$
106
2020
(Dollars in thousands)
93
2021
93
2022
106
$
2020
93
2021
93
2022
93
2023
93
2021
93
2022
93
2023
93
2024
93
2022
93
2023
93
2024
416
Thereafter
93
2023
93
2024
416
Thereafter
894
93
2024
416
Thereafter
894
106
Imputed interest
416
Thereafter
894
106
Imputed interest
788
894
106
Imputed interest
788
Weighted-average lease terms in years
8.89
106
Imputed interest
788
Weighted-average lease terms in years
8.89
3.40 %
Weighted-average discount rate
788
8.89
Weighted-average lease terms in years
3.40 %
Weighted-average discount rate
Weighted-average lease terms in years
8.89
3.40 %
Weighted-average discount rate
NOTE 11: OTHER COMPREHENSIVE INCOME (LOSS)
3.40 %
Weighted-average discount rate
NOTE 11: OTHER COMPREHENSIVE INCOME (LOSS)
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
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 income (loss). Other comprehensive income (loss) for the years ended
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it
includes net earnings and other comprehensive income (loss). Other comprehensive income (loss) for the years ended
December 31, 2019 and 2018, is presented below.
includes net earnings and other comprehensive income (loss). Other comprehensive income (loss) for the years ended
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it
December 31, 2019 and 2018, is presented below.
December 31, 2019 and 2018, is presented below.
includes net earnings and other comprehensive income (loss). Other comprehensive income (loss) for the years ended
December 31, 2019 and 2018, is presented below.
(Dollars in thousands)
(Dollars in thousands)
2019:
(Dollars in thousands)
2019:
Unrealized net holding gain on securities
2019:
(Dollars in thousands)
Unrealized net holding gain on securities
Reclassification adjustment for net loss on securities recognized in net earnings
Unrealized net holding gain on securities
2019:
Reclassification adjustment for net loss on securities recognized in net earnings
Other comprehensive income
Unrealized net holding gain on securities
Reclassification adjustment for net loss on securities recognized in net earnings
Other comprehensive income
2018:
Reclassification adjustment for net loss on securities recognized in net earnings
Other comprehensive income
2018:
Unrealized net holding loss on securities
Other comprehensive income
2018:
Unrealized net holding loss on securities
Other comprehensive loss
Unrealized net holding loss on securities
2018:
Other comprehensive loss
Unrealized net holding loss on securities
Other comprehensive loss
NOTE 12: INCOME TAXES
Other comprehensive loss
NOTE 12: INCOME TAXES
NOTE 12: INCOME TAXES
For the years ended December 31, 2019 and 2018 the components of income tax expense from continuing operations are
NOTE 12: INCOME TAXES
For the years ended December 31, 2019 and 2018 the components of income tax expense from continuing operations are
presented below.
For the years ended December 31, 2019 and 2018 the components of income tax expense from continuing operations are
presented below.
presented below.
For the years ended December 31, 2019 and 2018 the components of income tax expense from continuing operations are
presented below.
(Dollars in thousands)
(Dollars in thousands)
Current income tax expense:
(Dollars in thousands)
Current income tax expense:
Federal
Current income tax expense:
(Dollars in thousands)
Federal
State
Federal
Current income tax expense:
State
State
Federal
Deferred income tax (benefit) expense:
State
Deferred income tax (benefit) expense:
Federal
Deferred income tax (benefit) expense:
Federal
State
Federal
Deferred income tax (benefit) expense:
State
State
Federal
State
Net of
Net of
tax amount
Net of
tax amount
tax amount
Net of
5,730
tax amount
5,730
92
5,730
92
5,822
5,730
92
5,822
92
5,822
(3,197)
5,822
(3,197)
(3,197)
(3,197)
(3,197)
(3,197)
(3,197)
(3,197)
Tax benefit
Tax benefit
(expense)
Tax benefit
(expense)
(expense)
Tax benefit
(1,921)
(1,921)
(31)
(1,921)
(31)
(1,952)
(1,921)
(31)
(1,952)
(31)
(1,952)
1,072
(1,952)
1,072
1,072
1,072
1,072
1,072
1,072
1,072
Total current income tax expense
Total current income tax expense
Total current income tax expense
Total current income tax expense
7,651
7,651
123
7,651
123
7,774
7,651
123
7,774
123
7,774
(4,269)
7,774
(4,269)
(4,269)
(4,269)
(4,269)
(4,269)
(4,269)
(4,269)
Year ended December 31
Year ended December 31
2018
Year ended December 31
2018
2018
Year ended December 31
1,685
2018
1,685
431
1,685
431
2,116
431
1,685
2,116
2,116
431
56
2,116
56
15
56
15
71
15
56
71
71
15
2,187
2,187
71
2,187
2,187
2019
2019
2019
1,939
2019
1,939
584
1,939
584
2,523
584
1,939
2,523
2,523
584
(136)
2,523
(136)
(17)
(136)
(17)
(153)
(17)
(136)
(153)
(153)
(17)
2,370
2,370
(153)
2,370
2,370
Total deferred income tax (benefit) expense
Total deferred income tax (benefit) expense
Total deferred income tax (benefit) expense
Total deferred income tax (benefit) expense
Total income tax expense
Total income tax expense
Total income tax expense
Total income tax expense
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Pre-tax
Pre-tax
amount
Pre-tax
amount
amount
Pre-tax
(expense)
amount
$
$
$
$
$
$
$
$
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57
Audited Financial Statements
Total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 21% to
earnings before income taxes. A reconciliation of the differences for the years ended December 31, 2019 and 2018, 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
Other
Total income tax expense
$
2019
2018
Percent of
pre-tax
earnings
21.0 %
(4.1)
3.6
(0.8)
(0.1)
Amount
12,111
2,543
(508)
440
(92)
(13)
Percent of
pre-tax
earnings
21.0 %
(4.7)
3.3
(0.8)
1.0
Amount
11,021
2,315
(515)
361
(92)
118
$
2,370
19.6 %
2,187
19.8 %
The Company had a net deferred tax liability of $9 thousand included in other liabilities and a net deferred tax asset of $1.8
million included in other assets on the consolidated balance sheets at December 31, 2019 and 2018, respectively. The tax
effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2019 and 2018 are presented below:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Unrealized loss on securities
Accrued bonus
Right of use liability
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Unrealized gain on securities
Originated mortgage servicing rights
Right of use asset
Other
Total deferred tax liabilities
Net deferred tax (liability) asset
2019
1,102
—
296
198
88
1,684
315
690
326
197
165
1,693
(9)
December 31
2018
1,203
1,262
8
—
127
2,600
280
—
362
—
168
810
1,790
$
$
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, 2019. 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.
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The change in the net deferred tax asset for the years ended December 31, 2019 and 2018, is presented below.
The change in the net deferred tax asset for the years ended December 31, 2019 and 2018, is presented below.
(Dollars in thousands)
(Dollars in thousands)
Net deferred tax (liability) asset:
Net deferred tax (liability) asset:
Balance, beginning of year
Balance, beginning of year
Deferred tax benefit (expense) related to continuing operations
Deferred tax benefit (expense) related to continuing operations
Stockholders' equity, for accumulated other comprehensive (income) loss
Stockholders' equity, for accumulated other comprehensive (income) loss
Balance, end of year
Balance, end of year
Year ended December 31
Year ended December 31
2019
2019
$
$
$
$
1,790
1,790
153
153
(1,952)
(1,952)
(9)
(9)
2018
2018
789
789
(71)
(71)
1,072
1,072
1,790
1,790
ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements
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-
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, 2019, the
recognition, measurement, and classification of income tax uncertainties in interim periods. As of December 31, 2019, the
Company had no unrecognized tax benefits related to federal or state income tax matters. The Company does not anticipate
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 2020 relative to any tax positions taken prior to
any material increase or decrease in unrecognized tax benefits during 2020 relative to any tax positions taken prior to
December 31, 2019. As of December 31, 2019, the Company has accrued no interest and no penalties related to uncertain
December 31, 2019. As of December 31, 2019, 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
tax positions. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax
expense.
expense.
The Company and its subsidiaries file consolidated U.S. federal and State of Alabama income tax returns. The Company is
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
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, 2016 through 2019.
years ended December 31, 2016 through 2019.
NOTE 13: EMPLOYEE BENEFIT PLAN
NOTE 13: EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified defined contribution retirement plan, the Auburn National Bancorporation, Inc. 401(k)
The Company sponsors a qualified defined contribution retirement plan, the Auburn National Bancorporation, Inc. 401(k)
Plan (the "Plan"). Effective January 1, 2019, the Plan was amended and restated. As part of this amendment and
Plan (the "Plan"). Effective January 1, 2019, the Plan was amended and restated. As part of this amendment and
restatement, eligible employees may contribute up to 100% of eligible compensation, subject to statutory limits upon
restatement, eligible employees may contribute up to 100% of eligible compensation, subject to statutory limits upon
completion of 2 months of service. Furthermore, the Company now allows employer Safe Harbor contributions.
completion of 2 months of service. Furthermore, the Company now allows employer Safe Harbor contributions.
Participants are immediately vested in employer Safe Harbor contributions. Effective January 1, 2019, the Company's
Participants are immediately vested in employer Safe Harbor contributions. Effective January 1, 2019, the Company's
matching contributions on behalf of participants were equal to $1.00 for each $1.00 contributed by participants, up to 3% of
matching contributions on behalf of participants were equal to $1.00 for each $1.00 contributed by participants, up to 3% of
the participants' eligible compensation, and $0.50 for every $1.00 contributed by participants, up to 5% of the participants'
the participants' eligible compensation, and $0.50 for every $1.00 contributed by participants, up to 5% of the participants'
eligible compensation, for a maximum matching contribution of 4% of the participants' eligible compensation. Prior to
eligible compensation, for a maximum matching contribution of 4% of the participants' eligible compensation. Prior to
January 1, 2019, the Company made matching contributions on behalf of participants equal to $0.50 for each $1.00
January 1, 2019, the Company made matching contributions on behalf of participants equal to $0.50 for each $1.00
contributed by participants, up to 6% of the participant's eligible compensation, for a maximum matching contribution of
contributed by participants, up to 6% of the participant's eligible compensation, for a maximum matching contribution of
3% of the participants' eligible compensation. Company matching contributions to the Plan were $264 thousand and $131
3% of the participants' eligible compensation. Company matching contributions to the Plan were $264 thousand and $131
thousand for the years ended December 31, 2019 and 2018, respectively, and are included in salaries and benefits expense.
thousand for the years ended December 31, 2019 and 2018, respectively, and are included in salaries and benefits expense.
NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES
NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES
Credit-Related Financial Instruments
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
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
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
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.
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
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.
follows the same credit policies in making commitments as it does for on-balance sheet instruments.
At December 31, 2019 and 2018, the following financial instruments were outstanding whose contract amount represents
At December 31, 2019 and 2018, the following financial instruments were outstanding whose contract amount represents
credit risk:
credit risk:
(Dollars in thousands)
(Dollars in thousands)
Commitments to extend credit
Commitments to extend credit
Standby letters of credit
Standby letters of credit
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$
$
2019
2019
60,564
60,564
1,921
1,921
December 31
December 31
2018
2018
61,889
61,889
7,026
7,026
$
$
59
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 $39
thousand and $73 thousand at December 31, 2019 and 2018, respectively.
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 15: 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, 2019 and 2018, there
were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.
60
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Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company
obtains pricing from third party pricing services. These third party pricing services consider observable data that may
include broker/dealer quotes, market spreads, cash flows, market consensus prepayment speeds, benchmark yields, reported
trades for similar securities, credit information and the securities’ terms and conditions. On a quarterly basis, management
reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As
part of its review, management may obtain non-binding third party broker quotes to validate the fair value measurements.
In addition, management will periodically submit pricing provided by the third party pricing services to another
independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the
third-party pricing service with its own price and will review the significant assumptions and valuation methodologies used
with management.
The following table presents the balances of the assets and liabilities measured at fair value on a recurring as of December
31, 2019 and 2018, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation
hierarchy (as described above).
(Dollars in thousands)
December 31, 2019:
Securities available-for-sale:
Agency obligations
Agency RMBS
State and political subdivisions
Total securities available-for-sale
Total assets at fair value
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
Amount
50,708
123,277
61,917
235,902
235,902
51,171
118,598
70,032
239,801
239,801
$
$
$
$
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
—
50,708
123,277
61,917
235,902
235,902
51,171
118,598
70,032
239,801
239,801
—
—
—
—
—
—
—
—
—
—
Assets and liabilities measured at fair value on a nonrecurring basis
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined using
quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value
hierarchy.
Impaired Loans
Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and
events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected
payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of
the collateral less selling costs if the loan is collateral dependent.
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61
Audited Financial Statements
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.
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The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of
December 31, 2019 and 2018, respectively, by caption, on the accompanying consolidated balance sheets and by ASC 820
valuation hierarchy (as described above):
(Dollars in thousands)
December 31, 2019:
Loans held for sale
Loans, net(1)
Other assets (2)
Total assets at fair value
December 31, 2018:
Loans held for sale
Loans, net(1)
Other real estate owned
Other assets (2)
Total assets at fair value
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Amount
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
$
$
$
$
2,202
99
1,299
3,600
383
157
172
1,441
2,153
—
—
—
—
—
—
—
—
—
2,202
—
—
2,202
383
—
—
—
383
—
99
1,299
1,398
—
157
172
1,441
1,770
(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 other real estate owned and MSRs, net, both of which are carried at lower of cost or estimated fair value.
At December 31, 2019 and 2018 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, 2019, the
significant unobservable inputs used in the fair value measurements are presented below.
(Dollars in thousands)
December 31, 2019:
Nonrecurring:
Carrying
Amount
Valuation Technique
Significant Unobservable Input
of Input
Weighted
Average
Impaired loans
$
99 Appraisal
Appraisal discounts (%)
Mortgage servicing rights, net
1,299 Discounted cash flow
Prepayment speed or CPR (%)
Discount rate (%)
December 31, 2018:
Nonrecurring:
Impaired loans
Other real estate owned
Mortgage servicing rights, net
$
157 Appraisal
172 Appraisal
1,441 Discounted cash flow
Appraisal discounts (%)
Appraisal discounts (%)
Prepayment speed or CPR (%)
Discount rate (%)
10.0%
11.6%
10.0%
10.0%
10.0%
8.3%
10.0%
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63
Audited Financial Statements
Fair Value of Financial Instruments
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not
recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the
fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar
loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion.
Loans held for sale
Fair values of loans held for sale are determined using quoted 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.
(Dollars in thousands)
December 31, 2019:
Financial Assets:
Loans, net (1)
Loans held for sale
Financial Liabilities:
Time Deposits
December 31, 2018:
Financial Assets:
Loans, net (1)
Loans held for sale
Financial Liabilities:
Time Deposits
Carrying
amount
Estimated
fair value
Level 1
inputs
Level 2
inputs
Level 3
Inputs
Fair Value Hierarchy
$
456,515
2,202
$
453,705
2,251
$
$
167,199
$
168,316 $
$
472,118
383
$
465,456
397
$
$
181,237
$
181,168 $
—
—
—
—
—
—
$
$
$
$
—
2,251
$
453,705
—
168,316
$
—
$
—
397
465,456
—
181,168
$
—
(1) Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit price notion.
64
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NOTE 16: 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, 2018
New loans/advances
Repayments
Loans outstanding at December 31, 2019
Amount
8,207
1,559
(6,617)
3,149
$
$
During 2019 and 2018, 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, 2019 and
2018 amounted to $19.1 million and $19.8 million, respectively.
NOTE 17: 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, 2019.
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, 2019, 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.
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65
Audited Financial Statements
The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2019 and 2018 are presented
below.
(Dollars in thousands)
At December 31, 2019:
Tier 1 Leverage Capital
Common Equity Tier 1 Capital
Tier 1 Risk-Based Capital
Total Risk-Based Capital
At December 31, 2018:
Tier 1 Leverage Capital
Common Equity Tier 1 Capital
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Actual
Minimum for capital
adequacy purposes
Minimum to be
well capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
$
$
$
$
$
$
92,778
92,778
92,778
97,291
91,719
91,719
91,719
96,661
11.23 % $
17.28 % $
17.28 % $
18.12 % $
11.33 % $
16.49 % $
16.49 % $
17.38 % $
33,043
24,162
32,216
42,955
32,368
25,031
33,375
44,500
4.00 % $
4.50 % $
6.00 % $
8.00 % $
4.00 % $
4.50 % $
6.00 % $
8.00 % $
41,303
34,901
42,955
53,693
40,461
36,156
44,500
55,625
5.00 %
6.50 %
8.00 %
10.00 %
5.00 %
6.50 %
8.00 %
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, 2019, 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 $86.8 million of the Company’s investment in the Bank was restricted from transfer in the form
of dividends.
NOTE 18: 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
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
66
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December 31
2019
2018
$
$
$
$
4,119
94,837
625
99,581
1,253
1,253
98,328
99,581
1,941
87,956
626
90,523
1,468
1,468
89,055
90,523
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 expense (benefit) and equity
in undistributed earnings of bank subsidiary
Income tax expense (benefit)
Earnings before equity in undistributed earnings
of bank subsidiary
Equity in undistributed earnings of bank subsidiary
Net earnings
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 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
Stock repurchases
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year ended December 31
2019
8,574
346
8,920
—
212
212
8,708
26
8,682
1,059
9,741
$
$
2018
6,533
149
6,682
51
237
288
6,394
(28)
6,422
2,412
8,834
Year ended December 31
2019
2018
$
9,741
8,834
7
(215)
(1,059)
8,474
—
(3,575)
(2,721)
(6,296)
2,178
1,941
4,119
1,134
(70)
(2,412)
7,486
(3,217)
(3,498)
—
(6,715)
771
1,170
1,941
$
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67
Stock Performance Graph
Stock Performance Graph
The following performance graph compares the cumulative, total return on the Company’s Common Stock from
December 31, 2014 to December 31, 2019, with that of the Nasdaq Composite Index and SNL Southeast Bank Index
(assuming a $100 investment on December 31, 2014). 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
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Index
Auburn National Bancorporation, Inc.
NASDAQ Composite Index
SNL Southeast Bank Index
12/31/14
100.00
100.00
100.00
12/31/15
129.59
106.96
98.44
12/31/16
141.36
116.45
130.68
12/31/17
180.33
150.96
161.65
12/31/18
150.26
146.67
133.56
12/31/19
258.45
200.49
188.08
Period Ending
68
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Auburn National Bancorporation, Inc.
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
200 East Broad Street, Suite 500
Greenville, SC 29601
Shareholder Services
Shareholders desiring to change the name,
address or ownership of Auburn National
Bancorporation, Inc. common stock or to
Transfer Agent:
Computershare
P.O. Box 505000
Louisville, KY 40233
Phone: 1-800-368-5948
For frequently asked questions,
visit the Transfer Agent’s home page at:
www.computershare.com
Annual Meeting
Tuesday, May 12, 2020
3:00 p.m. (Central Time)
The Hotel at Auburn University
and Dixon Conference Center
241 S. College Street
Auburn, AL 36830
A copy of the Company’s annual report on
Exchange Commission (SEC), as well as
releases are available free of charge through
a link on our 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 headquarters.
Common Stock Listing
Auburn National Bancorporation, Inc.
Common Stock is traded on the Nasdaq
Global Market under the symbol AUBN.
Dividend Reinvestment
and Stock Purchase Plan
Auburn National Bancorporation, Inc. offers
a Dividend Reinvestment Plan (DRIP) for
automatic reinvestment of dividends in the
stock of the company. Participants in the
DRIP may also purchase additional shares
with optional cash payments. For additional
information or for an authorization form,
please contact Investor Relations.
Direct Deposit of Dividends
Dividends may be automatically deposited
into a shareholder’s checking or savings
account free of charge. For more information,
contact Investor Relations.
100 N. Gay Street, P.O. Box 3110, Auburn, AL 36831-3110
Telephone: 334-821-9200 Fax: 334-887-2796
auburnbank.com
Member FDIC