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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
 
20549
 
 
 
FORM
10-Q
 
(Mark One)
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended
September 30, 2023
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period __________ to __________
Commission File Number:
0-26486
 
Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
63-0885779
(I.R.S. Employer
Identification No.)
100 N. Gay Street
Auburn
,
Alabama
 
36830
 
(
334
)
821-9200
 
(Address and telephone number of principal executive offices)
 
(Former Name, Former Address and Former Fiscal
 
Year,
 
if Changed Since Last Report)
 
Indicate
 
by
 
check
 
mark
 
whether
 
the
 
registrant
 
(1) has
 
filed
 
all
 
reports
 
required
 
to
 
be
 
filed
 
by
 
Section 13
 
or
 
15(d)
 
of
 
the
 
Securities
Exchange Act
 
of 1934
 
during the
 
preceding 12 months
 
(or for
 
such shorter
 
period that
 
the registrant
 
was required
 
to file
 
such reports),
and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
 
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
 
Yes
 
No
Indicate by check
 
mark whether the
 
registrant is a
 
large accelerated filer,
 
an accelerated filer,
 
a non-accelerated filer,
 
a smaller reporting
company
 
or
 
an
 
emerging
 
growth
 
company.
 
See
 
the
 
definitions
 
of
 
“large
 
accelerated
 
filer,”
 
“accelerated
 
filer,”
 
“smaller
 
reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If
 
an
 
emerging
 
growth
 
company,
 
indicate
 
by
 
check
 
mark
 
if
 
the
 
registrant
 
has
 
elected
 
not
 
to
 
use
 
the
 
extended
 
transition
 
period
 
for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
 
No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
AUBN
NASDAQ
 
Global Market
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at November 6, 2023
Common Stock, $0.01 par value per share
3,493,614
 
shares
 
AUBURN NATIONAL BANCORPORATION, INC. AND
 
SUBSIDIARIES
INDEX
 
PAGE
Item 1
3
 
4
5
6
7
8
Item 2
 
28
45
46
47
48
49
50
51
Item 3
52
Item 4
52
Item 1
52
Item 1A
52
Item 2
53
Item 3
53
Item 4
53
Item 5
53
Item 6
54
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
PART
 
1.
 
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
September 30,
December 31,
(Dollars in thousands, except share data)
2023
2022
Assets:
Cash and due from banks
$
16,350
$
11,608
Federal funds sold
416
9,300
Interest-bearing bank deposits
12,845
6,346
Cash and cash equivalents
29,611
27,254
Securities available-for-sale
 
373,286
405,304
Loans
545,610
504,458
Allowance for credit losses
(6,778)
(5,765)
Loans, net
538,832
498,693
Premises and equipment, net
45,666
46,575
Bank-owned life insurance
17,010
19,952
Other assets
26,319
26,110
Total assets
$
1,030,724
$
1,023,888
Liabilities:
Deposits:
Noninterest-bearing
 
$
279,458
$
311,371
Interest-bearing
685,143
638,966
Total deposits
964,601
950,337
Federal funds purchased and securities sold under agreements to repurchase
1,741
2,551
Accrued expenses and other liabilities
2,931
2,959
Total liabilities
969,273
955,847
Stockholders' equity:
Preferred stock of $
.01
 
par value; authorized
200,000
 
shares;
no shares issued
Common stock of $
.01
 
par value; authorized
8,500,000
 
shares;
issued
3,957,135
 
shares
39
39
Additional paid-in capital
3,801
3,797
Retained earnings
118,326
116,600
Accumulated other comprehensive loss, net
(49,013)
(40,920)
Less treasury stock, at cost -
463,521
 
shares and
453,683
 
at September 30, 2023
and December 31, 2022, respectively
(11,702)
(11,475)
Total stockholders’ equity
61,451
68,041
Total liabilities and stockholders’
 
equity
$
1,030,724
$
1,023,888
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended September 30,
Nine months ended September 30,
 
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Interest income:
Loans, including fees
$
6,373
$
5,097
$
18,146
$
14,638
Securities:
Taxable
1,783
1,808
5,474
4,691
Tax-exempt
402
441
1,209
1,275
Federal funds sold and interest-bearing bank deposits
85
426
442
767
Total interest income
8,643
7,772
25,271
21,371
Interest expense:
Deposits
2,334
524
4,934
1,661
Short-term borrowings
37
5
68
15
Total interest expense
2,371
529
5,002
1,676
Net interest income
6,272
7,243
20,269
19,695
Provision for credit losses
105
250
(191)
Net interest income after provision for credit
 
losses
6,167
6,993
20,460
19,695
Noninterest income:
Service charges on deposit accounts
148
158
456
446
Mortgage lending
110
126
345
566
Bank-owned life insurance
87
97
311
293
Other
520
427
1,336
1,259
Securities gains, net
44
44
Total noninterest income
865
852
2,448
2,608
Noninterest expense:
Salaries and benefits
2,844
2,975
8,809
8,901
Net occupancy and equipment
755
794
2,341
1,955
Professional fees
261
235
898
704
Other
1,502
1,411
4,743
3,814
Total noninterest expense
5,362
5,415
16,791
15,374
Earnings before income taxes
1,670
2,430
6,117
6,929
Income tax expense
182
432
737
1,049
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Net earnings per share:
Basic and diluted
$
0.43
$
0.57
$
1.54
$
1.67
Weighted average shares
 
outstanding:
Basic and diluted
3,496,411
3,507,318
3,499,518
3,513,068
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
5
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Quarter ended September 30,
Nine months ended September 30,
 
(Dollars in thousands)
2023
2022
2023
2022
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Other comprehensive loss, net of tax:
Unrealized net loss on securities
(9,941)
(17,223)
(8,093)
(46,533)
Reclassification adjustment for net gain on securities
 
recognized in net earnings
(33)
(33)
Other comprehensive loss
(9,941)
(17,256)
(8,093)
(46,566)
Comprehensive loss
$
(8,453)
$
(15,258)
$
(2,713)
$
(40,686)
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Unaudited)
 
Accumulated
Common
Additional
other
Shares
Common
paid-in
Retained
 
comprehensive
Treasury
(Dollars in thousands, except share data)
Outstanding
Stock
capital
earnings
(loss) income
stock
Total
Quarter ended September 30, 2023
Balance, June 30, 2023
3,499,412
$
39
$
3,800
$
117,781
$
(39,072)
$
(11,572)
$
70,976
Net earnings
1,488
1,488
Other comprehensive loss
(9,941)
(9,941)
Cash dividends paid ($
.27
 
per share)
(943)
(943)
Stock repurchases
(5,883)
(130)
(130)
Sale of treasury stock
85
1
1
Balance, September 30, 2023
3,493,614
$
39
$
3,801
$
118,326
$
(49,013)
$
(11,702)
$
61,451
Quarter ended September 30, 2022
Balance, June 30, 2022
3,509,940
$
39
$
3,796
$
111,994
$
(28,419)
$
(11,303)
$
76,107
Net earnings
1,998
1,998
Other comprehensive loss
(17,256)
(17,256)
Cash dividends paid ($
.265
 
per share)
(929)
(929)
Stock repurchases
(4,640)
(128)
(128)
Sale of treasury stock
55
1
1
Balance, September 30, 2022
3,505,355
$
39
$
3,797
$
113,063
$
(45,675)
$
(11,431)
$
59,793
Nine months ended September 30, 2023
Balance, December 31, 2022
3,503,452
$
39
$
3,797
$
116,600
$
(40,920)
$
(11,475)
$
68,041
Cumulative effect of change in accounting
standard
(821)
(821)
Net earnings
5,380
5,380
Other comprehensive loss
(8,093)
(8,093)
Cash dividends paid ($
.81
 
per share)
(2,833)
(2,833)
Stock repurchases
(10,108)
(229)
(229)
Sale of treasury stock
270
4
2
6
Balance, September 30, 2023
3,493,614
$
39
$
3,801
$
118,326
$
(49,013)
$
(11,702)
$
61,451
Nine months ended September 30, 2022
Balance, December 31, 2021
3,520,485
$
39
$
3,794
$
109,974
$
891
$
(10,972)
$
103,726
Net earnings
5,880
5,880
Other comprehensive loss
(46,566)
(46,566)
Cash dividends paid ($
.795
 
per share)
(2,791)
(2,791)
Stock repurchases
(15,280)
(460)
(460)
Sale of treasury stock
150
3
1
4
Balance, September 30, 2022
3,505,355
$
39
$
3,797
$
113,063
$
(45,675)
$
(11,431)
$
59,793
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended September 30,
 
(Dollars in thousands)
2023
2022
Cash flows from operating activities:
Net earnings
$
5,380
$
5,880
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
(191)
Depreciation and amortization
1,278
1,098
Premium amortization and discount accretion, net
1,834
2,450
Net gain on securities available-for-sale
(44)
Net gain on sale of loans held for sale
(81)
(315)
Net gain on other real estate owned
(162)
Loans originated for sale
(3,417)
(8,711)
Proceeds from sale of loans
3,482
10,292
Increase in cash surrender value of bank-owned life insurance
(259)
(294)
Income recognized from death benefit on bank-owned life insurance
(52)
Net decrease (increase) in other assets
47
(15,570)
Net increase in accrued expenses and other liabilities
2,672
14,102
Net cash provided by operating activities
10,693
8,726
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
19,377
38,871
Purchase of securities available-for-sale
(93,106)
Increase in loans, net
(41,025)
(15,644)
Net purchases of premises and equipment
(170)
(5,540)
Proceeds from bank-owned life insurance death benefit
216
Proceeds from surrender of bank-owned life insurance
3,037
Increase in FHLB stock
(164)
(74)
Proceeds from sale of other real estate owned
536
Net cash used in investing activities
(18,729)
(74,957)
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
(32,717)
5,570
Net increase (decrease) in interest-bearing deposits
46,982
(21,875)
Net decrease in federal funds purchased and securities sold
 
under agreements to repurchase
(810)
(835)
Stock repurchases
(229)
(460)
Dividends paid
(2,833)
(2,791)
Net cash provided by (used in) financing activities
10,393
(20,391)
Net change in cash and cash equivalents
2,357
(86,622)
Cash and cash equivalents at beginning of period
27,254
156,259
Cash and cash equivalents at end of period
$
29,611
$
69,637
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
4,384
$
1,705
Income taxes
800
1,031
See accompanying notes to consolidated financial statements
8
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
 
POLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services
 
to individuals and
commercial customers in Lee County,
 
Alabama and surrounding areas through its wholly owned subsidiary,
 
AuburnBank
(the “Bank”). The Company does not have any segments other than banking that are considered
 
material.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have been prepared
 
in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information.
 
Accordingly, these financial statements
 
do not
include all of the information and footnotes required by U.S. GAAP for complete financial
 
statements.
 
The unaudited
consolidated financial statements include, in the opinion of management, all adjustments
 
necessary to present a fair
statement of the financial position and the results of operations for all periods
 
presented. All such adjustments are of a
normal recurring nature. The results of operations in the interim statements are not necessarily
 
indicative of the results of
operations that the Company and its subsidiaries may achieve for future interim periods
 
or the entire year. For further
information, refer to the consolidated financial statements and footnotes included in the Company's
 
Annual Report on Form
10-K for the year ended December 31, 2022.
The unaudited consolidated financial statements include the accounts of the
 
Company and its wholly-owned subsidiaries.
 
Significant intercompany transactions and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires
 
management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures
 
of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the reporting period.
 
Actual results could
differ from those estimates.
 
Material estimates that are particularly susceptible to significant change in the near term
include the determination of allowance for credit losses on investment securities
 
and loans, fair value of financial
instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update
 
(“ASU”
 
or “updates”) 2014-09,
 
Revenue
from Contracts with Customers
, codified at
 
Accounting Standards Codification
 
(“ASC”)
606. The Company adopted ASC
606 using the modified retrospective transition method.
 
The majority of the Company’s revenue stream
 
is generated from
interest income on loans and securities 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, 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
(i) transaction-based, for which the performance obligations are satisfied
 
when the individual transaction is
processed, or (ii) 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 OREO
 
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer.
 
ASC 606 lists several criteria required to conclude that a contract for sale
exists, including a determination that the institution will collect substantially all of the consideration
 
to which it is
entitled.
 
In addition to the loan-to-value ratio, where the seller provides
 
the purchaser with financing, the analysis
is based on various other factors,
 
including the credit quality of the purchaser,
 
the structure of the loan, and any
other factors that we believe may affect collectability.
9
 
Subsequent Events
 
The Company has evaluated the effects of events and transactions through
 
the date of this filing that have occurred
subsequent to September 30, 2023.
 
The Company does not believe there were any material subsequent events during
 
this
period that would have required further recognition or disclosure in the unaudited
 
consolidated financial statements
included in this report.
 
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current
 
-period presentation. These
reclassifications had no material effect on the Company’s
 
previously reported net earnings or total stockholders’ equity.
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit
 
Losses (Topic 326):
 
Measurement
of Credit Losses on Financial Instruments (ASC 326). This standard replaced
 
the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit loss (“CECL”)
 
methodology. CECL requires
 
an
estimate of credit losses for the remaining estimated life of the financial asset using
 
historical experience, current
conditions, and reasonable and supportable forecasts and generally applies to
 
financial assets measured at amortized cost,
including loan receivables and held-to-maturity debt securities, and some off
 
-balance sheet credit exposures such as
unfunded commitments to extend credit. Financial assets measured at amortized
 
cost will be presented at the net amount
expected to be collected by using an allowance for credit losses.
 
In addition, CECL made changes to the accounting for available for sale debt
 
securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt
 
securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required
 
to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto
 
effective January 1, 2023 using the
modified retrospective approach for all financial assets measured at amortized
 
cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of CECL on January 1, 2023 included
 
an increase in the allowance for credit
losses on loans of $
1.0
 
million, which is presented as a reduction to net loans outstanding, and an increase in the allowance
for credit losses on unfunded loan commitments of $
0.1
 
million, which is recorded within other liabilities. The Company
recorded a net decrease to retained earnings of $
0.8
 
million as of January 1, 2023 for the cumulative effect of adopting
CECL, which reflects the transition adjustments noted above, net of the applicable deferred
 
tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior
 
period amounts continue to be
reported in accordance with previously applicable accounting standards.
The Company adopted ASC 326 using the prospective transition approach for debt
 
securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023.
 
As of December 31, 2022, the Company did not have
any other-than-temporarily impaired investment securities. Therefore,
 
upon adoption of ASC 326, the Company determined
that an allowance for credit losses on available for sale securities was not deemed
 
material.
 
The Company elected not to measure an allowance for credit losses for accrued interest receivable
 
and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status,
 
which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company
 
has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic
 
326): Troubled Debt
Restructurings and Vintage Disclosures”
 
on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements
 
for certain loan
refinancings and restructurings by creditors when a borrower is experiencing
 
financial difficulty.
 
Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity
 
must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new loan or a
 
continuation of an existing loan. Additionally,
 
ASU
2022-02 requires an entity to disclose current-period gross write-offs
 
by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at
 
Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated
 
financial statements.
10
Loans
Loans that management has the intent and ability to hold for the foreseeable
 
future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums
 
and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded
 
in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees,
 
net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a
 
level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and
 
is not well collateralized and in
the process of collection, or when management believes, after considering economic and
 
business conditions and collection
efforts, that the principal or interest will not be collectible in the normal
 
course of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has
 
not been received 30 days
after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual
 
status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual.
 
Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero.
 
Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there is a
 
sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized
 
cost basis to present the net
amount expected to be collected on the loans. Loans are charged off
 
against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate
 
of amounts previously
charged-off and expected to be charged-off.
 
Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s
 
estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management using relevant
 
available information, from
both internal and external sources, relating to past events, current conditions, and reasonable and
 
supportable forecasts.
 
The Company’s loan loss estimation process
 
includes procedures to appropriately consider the unique characteristics of
 
its
respective loan segments (commercial and industrial, construction and land development,
 
commercial real estate,
residential real estate, and consumer loans).
 
These segments are further disaggregated into loan classes, the level at
 
which
credit quality is monitored.
 
See Note 5, Loans and Allowance for Credit Losses, for additional information about our
 
loan
portfolio.
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model
 
for each loan segment,
 
except consumer
loans.
 
The weighted average remaining life method is used to estimate credit loss assumptions
 
for consumer loans.
 
The DCF model calculates an expected life-of-loan loss percentage by considering the
 
forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic
 
factors, and LGD, which is the estimate
of the amount of net loss in the event of default.
 
This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis.
 
The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial, construction
 
and land development,
commercial real estate,
 
and residential real estate loans.
 
In addition, forecasted changes in the Alabama home price index
is considered in the model for construction and land development and residential real
 
estate loans; forecasted changes in the
national commercial real estate (“CRE”) price index is considered
 
in the model for commercial real estate and multifamily
loans; and forecasted changes in the Alabama gross state product is considered
 
in the model for multifamily loans.
 
Projections of these macroeconomic factors, obtained from an independent third
 
party, are utilized to predict
 
quarterly rates
of default based on the statistical PD models.
 
Expected credit losses are estimated over the contractual term of the loan, adjusted
 
for expected prepayments and principal
payments (“curtailments”) when appropriate. Management's
 
determination of the contract term excludes expected
extensions, renewals, and modifications unless the extension or
 
renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company.
 
To the extent the lives of the
 
loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be
 
made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion
 
period.
11
The weighted average remaining life method was deemed most appropriate
 
for the consumer loan segment because
consumer loans contain many different payment structures,
 
payment streams and collateral.
 
The weighted average
remaining life method uses an annual charge-off rate over several vintages
 
to estimate credit losses.
 
The average annual
charge-off rate is applied to the contractual term adjusted for
 
prepayments.
Additionally, the allowance
 
for credit losses calculation includes subjective adjustments for qualitative risk
 
factors that are
believed likely to cause estimated credit losses to differ from
 
historical experience. These qualitative adjustments may
increase reserve levels and include adjustments for lending management experience and
 
risk tolerance, loan review and
audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,
 
trends in underlying
collateral, external factors and economic conditions not already captured.
Loans secured by real estate with balances equal to or greater than $500 thousand and loans not secured
 
by real estate with
balances equal to or greater than $250 thousand that do not share risk characteristics
 
are evaluated on an individual basis.
When management determines that foreclosure is probable and the borrower
 
is experiencing financial difficulty,
 
the
expected credit losses are based on the estimated fair value of collateral held at the reporting
 
date, adjusted for selling costs
as appropriate.
 
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments,
 
such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s
 
exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off-balance sheet
 
loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are
 
recorded when they are funded.
The Company records an allowance for credit losses on off-balance
 
sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge to provision
 
for credit losses in the Company’s consolidated
statements of earnings.
 
The allowance for credit losses on off-balance sheet credit exposures
 
is estimated by loan segment
at each balance sheet date under the current expected credit loss model using the same
 
methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party
 
guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s
 
consolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of
 
$77 thousand upon the adoption of
ASC 326.
 
At September 30, 2023,
 
the liability for credit losses on off-balance-sheet credit exposures included in other
liabilities was $
0.2
 
million.
 
Provision for Credit Losses
The composition of the provision for (recoveries of) credit losses for the respective periods
 
is presented below.
 
 
 
 
 
 
 
 
 
 
 
Quarter ended September 30,
Nine months ended September 30,
 
(Dollars in thousands)
2023
2022
2023
2022
Provision for credit losses:
Loans
$
158
 
$
250
 
$
(133)
 
$
 
Reserve for unfunded commitments (1)
(53)
 
70
 
(58)
 
35
 
Total provision for credit
 
losses
$
105
 
$
320
 
$
(191)
 
$
35
 
(1)
Reserve requirements for unfunded commitments were reported as a component of other
 
noninterest expense prior
to the adoption of ASC 326.
 
 
 
 
12
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average
 
common shares outstanding for
the respective period.
 
Diluted net earnings per share reflect the potential dilution that could occur
 
upon exercise of
securities or other rights for, or convertible into, shares of the
 
Company’s common stock.
 
At September 30, 2023 and
2022, respectively, the Company
 
had no such securities or rights issued or outstanding, and therefore, no dilutive effect
 
to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods are
 
presented below
 
 
 
 
 
 
 
 
 
Quarter ended September 30,
Nine months ended September 30,
 
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Basic and diluted:
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Weighted average common
 
shares outstanding
3,496,411
3,507,318
3,499,518
3,513,068
Net earnings per share
$
0.43
$
0.57
$
1.54
$
1.67
NOTE 3: VARIABLE
 
INTEREST ENTITIES
Generally, a variable interest entity (“VIE”)
 
is a corporation, partnership, trust or other legal structure that does not have
equity investors with substantive or proportional voting rights or has equity investors
 
that do not provide sufficient financial
resources for the entity to support its activities.
 
At September 30, 2023, the Company did not have any consolidated VIEs to
 
disclose but did have one nonconsolidated
VIE, discussed below.
New Markets Tax
 
Credit Investment
The New Markets Tax Credit
 
(“NMTC”) program provides federal tax incentives to investors to make investments
 
in
distressed communities and promotes economic improvement through the development
 
of successful businesses in these
communities.
 
The NMTC is available to investors over seven years and is subject to recapture if certain events occur
during such period.
 
At September 30, 2023 and December 31, 2022, respectively,
 
the Company had one such investment in
the amounts of $1.8 million and $2.1 million, respectively,
 
which was included in other assets in the consolidated balance
sheets.
 
The Company’s equity investment in the
 
NMTC entity meets the definition of a VIE. While the Company’s
investment exceeds 50% of the outstanding equity interests, the Company does not consolidate
 
the VIE because it does not
meet the characteristics of a primary beneficiary since the Company lacks the power to direct
 
the activities of the VIE.
 
 
 
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
1,807
$
1,807
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
13
NOTE 4: SECURITIES
At September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December
 
31, 2022, respectively, are
 
presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
 
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
September 30, 2023
Agency obligations (a)
$
15,063
49,036
58,651
122,750
17,152
$
139,902
Agency MBS (a)
10,095
26,845
155,517
192,457
39,581
232,038
State and political subdivisions
300
981
15,488
41,310
58,079
8,717
66,796
Total available-for-sale
$
15,363
60,112
100,984
196,827
373,286
65,450
$
438,736
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2022
Agency obligations (a)
$
4,935
50,746
69,936
125,617
15,826
$
141,443
Agency MBS (a)
7,130
27,153
183,877
218,160
33,146
251,306
State and political subdivisions
300
642
15,130
45,455
61,527
11
5,681
67,197
Total available-for-sale
$
5,235
58,518
112,219
229,332
405,304
11
54,653
$
459,946
(a) Includes securities issued by U.S. government agencies or government-sponsored
 
entities.
 
Securities with aggregate fair values of $
224.6
 
million and $
208.3
 
million at September 30, 2023 and December 31, 2022,
respectively, were pledged to
 
secure public deposits, securities sold under agreements to repurchase, Federal Home
 
Loan
Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required
 
or permitted by law.
 
Other assets on the accompanying consolidated balance sheets include non-marketable
 
equity investments.
 
The carrying
amounts of non-marketable equity investments were $
1.4
 
million at September 30, 2023 and $
1.2
 
million at December 31,
2022.
 
Non-marketable equity investments include FHLB of Atlanta tock, Federal Reserve
 
Bank of Atlanta (“FRB”) stock,
and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at September 30,
 
2023 and December 31, 2022, respectively,
segregated by those securities that have been in an unrealized
 
loss position for less than 12 months and 12 months or
longer, are presented below.
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
September 30, 2023:
Agency obligations
 
$
122,750
17,152
$
122,750
17,152
Agency MBS
84
3
192,373
39,578
192,457
39,581
State and political subdivisions
12,726
755
44,313
7,962
57,039
8,717
Total
 
$
12,810
758
359,436
64,692
$
372,246
65,450
 
 
 
 
 
December 31, 2022:
Agency obligations
 
$
55,931
4,161
69,686
11,665
$
125,617
15,826
Agency MBS
70,293
5,842
147,867
27,304
218,160
33,146
State and political subdivisions
44,777
2,176
13,043
3,505
57,820
5,681
Total
 
$
171,001
12,179
230,596
42,474
$
401,597
54,653
 
 
 
 
14
For the securities in the previous table, the Company assesses whether or not it intends to
 
sell or is more likely than not that
the Company will be required to sell the securities before recovery of the amortized
 
cost basis, which may be maturity.
 
Because the Company currently does not intend to sell those securities that have an
 
unrealized loss at September 30, 2023
and it is not more-likely-than-not that the Company will be required to sell the security before
 
recovery of their amortized
cost bases, which may be maturity,
 
the Company has determined that no provision for credit loss is necessary.
 
In addition,
the Company evaluates whether any portion of the decline in fair value of available-for-sale
 
securities is the result of credit
deterioration, which would require the recognition of a provision to increase
 
the allowance for credit losses. Such
evaluations consider the extent to which the amortized cost of the security exceeds its
 
fair value, changes in credit ratings
and any other known adverse conditions related to the specific security.
 
The unrealized losses associated with available-for-
sale securities at September 30, 2023 are driven by changes in market interest rates and
 
are not due to the credit quality of
the securities, and accordingly,
 
no allowance for credit losses is considered necessary for available-for-sale
 
securities at
September 30, 2023. These securities will continue to be monitored as a part
 
of the Company's ongoing evaluation of credit
quality. Management evaluates
 
the financial performance of the issuers on a quarterly basis to determine if it is probable
that the issuers can make all contractual principal and interest payments.
 
 
 
 
 
 
 
 
 
 
 
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
Quarter ended September 30,
Nine months ended September 30,
 
(Dollars in thousands)
2023
2022
2023
2022
Gross realized gains
$
44
$
44
Realized gains, net
$
44
$
44
NOTE 5: LOANS AND ALLOWANCE
 
FOR CREDIT LOSSES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
December 31,
(Dollars in thousands)
2023
2022
Commercial and industrial
$
66,014
$
66,212
Construction and land development
70,129
66,479
Commercial real estate:
Owner occupied
66,237
61,125
Hotel/motel
36,992
33,378
Multi-family
47,634
41,084
Other
131,101
128,986
Total commercial real estate
281,964
264,573
Residential real estate:
Consumer mortgage
60,024
45,370
Investment property
57,126
52,278
Total residential real estate
117,150
97,648
Consumer installment
10,353
9,546
Total Loans
$
545,610
$
504,458
Loans secured by real estate were approximately 86.0% of the Company’s
 
total loan portfolio at September 30, 2023.
 
At
September 30, 2023, the Company’s
 
geographic loan distribution was concentrated primarily in Lee County,
 
Alabama, and
surrounding areas.
The loan portfolio segment is defined as the level at which an entity develops and documents a
 
systematic method for
determining its allowance for credit losses. As part of the Company’s
 
quarterly assessment of the allowance, the loan
portfolio included 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.
15
The following describes
 
the risk characteristics relevant to each of the portfolio segments
 
and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or
 
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 credit
lines for construction of residential, multi-family,
 
and commercial buildings. Generally,
 
the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate
 
(“CRE”) —
includes loans in these classes:
 
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.
Hotel/motel
– includes loans for hotels and motels.
 
Generally, the primary source of repayment
 
is dependent upon
income generated from the hotel/motel securing the loan.
 
The underwriting of these loans takes into consideration
the occupancy and rental rates, as well as the financial health of the borrower.
Multi-family
 
– primarily includes loans to finance income-producing multi-family properties
 
.
 
These include loans
for 5 or more unit residential properties 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 respective borrowers.
 
Other
 
– primarily includes loans to finance income-producing commercial properties
 
other than hotels/motels and
multi-family properties, and which
 
are not owner occupied.
 
Loans in this class include loans for neighborhood
retail centers, medical and professional offices, single retail stores,
 
industrial buildings, and warehouses leased to
local and other businesses.
 
Generally,
 
the primary source of repayment is dependent upon income generated
 
from
the real estate collateral. The underwriting of these loans takes into consideration
 
the occupancy and rental rates,
as well as the financial health of the borrower.
 
Residential real estate (“RRE”) —
includes loans in these two classes:
Consumer mortgage
 
– primarily includes first or second lien mortgages and home equity lines of credit
 
to
consumers that are secured by a primary residence or second home. These loans are underwritten in
 
accordance
with the Bank’s general loan 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 and
 
property values, as
well as the financial health of the borrowers.
 
Consumer installment —
includes loans to individuals,
 
which may be secured by personal property or are 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 values.
 
 
 
 
16
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio
 
segment and class as of
September 30, 2023 and December 31, 2022.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
 
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
September 30, 2023:
Commercial and industrial
$
65,813
39
65,852
162
$
66,014
Construction and land development
70,129
70,129
70,129
Commercial real estate:
Owner occupied
65,230
206
65,436
801
66,237
Hotel/motel
36,992
36,992
36,992
Multi-family
47,634
47,634
47,634
Other
131,101
131,101
131,101
Total commercial real estate
280,957
206
281,163
801
281,964
Residential real estate:
Consumer mortgage
59,799
59,799
225
60,024
Investment property
57,087
14
57,101
25
57,126
Total residential real estate
116,886
14
116,900
250
117,150
Consumer installment
10,297
56
10,353
10,353
Total
$
544,082
315
544,397
1,213
$
545,610
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2022:
Commercial and industrial
$
65,764
5
65,769
443
$
66,212
Construction and land development
66,479
66,479
66,479
Commercial real estate:
Owner occupied
61,125
61,125
61,125
Hotel/motel
33,378
33,378
33,378
Multi-family
41,084
41,084
41,084
Other
126,870
126,870
2,116
128,986
Total commercial real estate
262,457
262,457
2,116
264,573
Residential real estate:
Consumer mortgage
45,160
38
45,198
172
45,370
Investment property
52,278
52,278
52,278
Total residential real estate
97,438
38
97,476
172
97,648
Consumer installment
9,506
40
9,546
9,546
Total
$
501,644
83
501,727
2,731
$
504,458
17
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 by year of origination as of September
 
30, 2023.
 
These categories are
utilized to develop the associated allowance for credit 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 not
expected.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
 
Loans
September 30, 2023:
 
Commercial and industrial
Pass
$
8,403
15,220
14,164
5,760
7,447
8,138
6,283
$
65,415
Special mention
348
348
Substandard
56
27
6
89
Nonaccrual
162
162
Total commercial and industrial
8,459
15,220
14,191
5,760
7,615
8,138
6,631
66,014
Current period gross charge-offs
Construction and land development
Pass
34,977
30,923
1,735
1,562
131
162
639
70,129
Special mention
Substandard
Nonaccrual
Total construction and land development
34,977
30,923
1,735
1,562
131
162
639
70,129
Current period gross charge-offs
Commercial real estate:
Owner occupied
Pass
10,489
7,476
18,785
10,639
4,359
9,965
3,408
65,121
Special mention
263
263
Substandard
52
52
Nonaccrual
801
801
Total owner occupied
10,752
7,476
18,785
10,639
5,212
9,965
3,408
66,237
Current period gross charge-offs
Hotel/motel
Pass
6,437
9,981
3,234
1,539
3,952
11,849
36,992
Special mention
Substandard
Nonaccrual
Total hotel/motel
6,437
9,981
3,234
1,539
3,952
11,849
36,992
Current period gross charge-offs
18
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
 
Loans
September 30, 2023:
 
Multi-family
Pass
12,436
18,185
1,972
6,163
3,825
3,126
1,927
47,634
Special mention
Substandard
Nonaccrual
Total multi-family
12,436
18,185
1,972
6,163
3,825
3,126
1,927
47,634
Current period gross charge-offs
Other
Pass
16,532
36,560
32,107
14,053
10,902
19,004
914
130,072
Special mention
873
873
Substandard
156
156
Nonaccrual
Total other
16,532
36,560
32,107
15,082
10,902
19,004
914
131,101
Current period gross charge-offs
Residential real estate:
Consumer mortgage
Pass
18,918
20,284
2,731
2,694
1,492
12,771
79
58,969
Special mention
250