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What changed in AUBURN NATIONAL BANCORPORATION, INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of AUBURN NATIONAL BANCORPORATION, INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+512 added−498 removedSource: 10-K (2024-03-14) vs 10-K (2023-03-17)

Top changes in AUBURN NATIONAL BANCORPORATION, INC's 2023 10-K

512 paragraphs added · 498 removed · 334 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

121 edited+50 added−34 removed223 unchanged
Biggest changeThe proposed statement reaffirms two key principles from the 2009 statement: (1) financial institutions that implement prudent CRE loan accommodation and workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even if these arrangements result in modified loans that have weaknesses that result in adverse credit classification; and (2) modified loans to borrowers who have the ability to repay their debts according to reasonable terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.
Biggest changeFinancial institutions that implement prudent CRE loan accommodation and workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even if these arrangements result in modified loans that have weaknesses that result in adverse classification.
In the event an FDIC-insured subsidiary becomes subject to a capital restoration plan with its regulators, the parent bank holding company is required to guarantee performance of such plan up to 5% of the bank’s assets, and such guarantee is given priority in bankruptcy of the bank holding company.
In the event an FDIC-insured subsidiary becomes subject to a capital restoration plan with its regulators, the parent bank holding company is required to guarantee performance of such plan up to 5% of the bank’s assets, and such guarantee is given priority in a bankruptcy of the bank holding company.
The federal bank regulators have updated their guidance several times on overdrafts, including overdrafts incurred at automated teller machines and point of sale terminals.
Overdrafts The federal bank regulators have updated their guidance several times on overdrafts, including overdrafts incurred at automated teller machines and point of sale terminals.
Thereafter, permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and enforcement actions: Buffer % Buffer % Limit More than 2.50% None > 1.875% - 2.50% 60.0% > 1.250% - 1.875% 40.0% > 0.625% - 1.250% 20.0% ≤ 0.625 - 0 - On March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer in light of the disruptive effects of the COVID-19 pandemic.
Thereafter, permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and enforcement actions: Capital Conservation Buffer % Buffer % Limit More than 2.50% None > 1.875% - 2.50% 60.0% > 1.250% - 1.875% 40.0% > 0.625% - 1.250% 20.0% ≤ 0.625 - 0 - On March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer in light of the disruptive effects of the COVID-19 pandemic.
Table of Contents 21 The various capital elements and total capital under the Basel III Capital Rules, as fully phased in on January 1, 2019 are: Fully Phased In January 1, 2019 Minimum CET1 4.50% CET1 Conservation Buffer 2.50% Total CET1 7.0% Deductions from CET1 100% Minimum Tier 1 Capital 6.0% Minimum Tier 1 Capital plus conservation buffer 8.5% Minimum Total Capital 8.0% Minimum Total Capital plus conservation buffer 10.5% Changes in Risk-Weightings The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy.
Table of Contents 21 Basel III Capital The various capital elements and total capital under the Basel III Capital Rules, as fully phased in on January 1, 2019 are: Fully Phased In January 1, 2019 Minimum CET1 4.50% CET1 Conservation Buffer 2.50% Total CET1 7.0% Deductions from CET1 100% Minimum Tier 1 Capital 6.0% Minimum Tier 1 Capital plus conservation buffer 8.5% Minimum Total Capital 8.0% Minimum Total Capital plus conservation buffer 10.5% Changes in Risk-Weightings The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy.
The alert listed potential red flags and typologies involving attempted sanctions evasion in the commercial real estate sector, and reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations. Bill H.R. 1164, the OFAC Outreach and Engagement Capabilities and Enhancement Act, was introduced in Congress on February 24, 2023.
The alert listed potential red flags and typologies involving attempted sanctions evasion in the commercial real estate sector, and reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations. H.R. 1164, the OFAC Outreach and Engagement Capabilities and Enhancement Act, was introduced in Congress on February 24, 2023.
The revised rules establish new standards for determining whether an entity meets the statutory definition of “deposit broker,” and identifies a number of business that automatically meet the “primary purpose exception” from a “deposit broker.” The revisions also provide an application process for entities that seek a “primary purpose exception,” but do not meet one of the designated exceptions.” The new rules may provide us greater future flexibility, but we had no brokered deposits at December 31, 2021 or 2022, and historically have not relied on brokered deposits.
The revised rules establish new standards for determining whether an entity meets the statutory definition of “deposit broker,” and identifies a number of businesses that automatically meet the “primary purpose exception” from a “deposit broker.” The revisions also provide an application process for entities that seek a “primary purpose exception,” but do not meet one of the designated exceptions.” The new rules may provide us greater future flexibility, but we had no brokered deposits at December 31, 2021 or 2022, and historically have not relied on brokered deposits.
These standards increase the cost and compliance risks of servicing mortgage loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize from a sale of foreclosed property.
These standards increase the cost and compliance risks of servicing mortgage loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize from the sale of foreclosed property.
The FDIC Notice also stated that Executive Order Promoting Competition in the American Economy (July 9, 2021) (the “Executive Order”), among other things, “instructs U.S. agencies to consider the impact that consolidation may have on maintaining a fair, open, and competitive marketplace, and on the welfare of workers, farmers, small businesses, startups, and consumers.” The FDIC requested comment on all aspects of the bank regulatory framework, including qualitative and quantitative support for such responses.
The FDIC Notice also stated that Executive Order Promoting Competition in the American Economy (July 9, 2021) (the “Executive Order”), among other things, “instructs U.S. agencies to consider the impact that consolidation may have on maintaining a fair, open, and competitive marketplace, and on the welfare of workers, farmers, small businesses, startups, and consumers.” The FDIC requested comments on all aspects of the bank regulatory framework, including qualitative and quantitative support for such responses.
Table of Contents 31 The 2018 Growth Act, which, was enacted on May 24, 2018, amends the Dodd -Frank Act, the BHC Act, the Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas: ● consumer credit and mortgage lending; ● capital requirements; ● Volcker Rule compliance; ● stress testing and enhanced prudential standards; ● increased the asset threshold under the Federal Reserve’s Small BHC Policy from $1 billion to $3 billion; and ● capital formation.
Table of Contents 31 The 2018 Growth Act, which, was enacted on May 24, 2018, amended the Dodd-Frank Act, the BHC Act, the Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas: ● consumer credit and mortgage lending; ● capital requirements; ● Volcker Rule compliance; ● stress testing and enhanced prudential standards; ● increased the asset threshold under the Federal Reserve’s Small BHC Policy from $1 billion to $3 billion; and ● capital formation.
We focus our residential mortgage origination on qualified mortgages and those that meet our investors’ requirements, but we may make loans that do not meet the safe harbor requirements for “qualified mortgages.” Table of Contents 14 The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “2018 Growth Act”) provides that certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated assets automatically are deemed “qualified mortgages.” This relieves smaller institutions from many of the requirements to satisfy the criteria listed above for “qualified mortgages.” Mortgages meeting the “qualified mortgage” safe harbor may not have negative amortization, must follow prepayment penalty limitations included in the Truth in Lending Act, and may not have fees greater than 3% of the total value of the loan.
We focus our residential mortgage origination on qualified mortgages and those that meet our investors’ requirements, but we may make loans that do not meet the safe harbor requirements for “qualified mortgages.” The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “2018 Growth Act”) provides that certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated assets automatically are deemed “qualified mortgages.” This relieves smaller institutions from many of the requirements to satisfy the criteria listed above for “qualified mortgages.” Mortgages meeting the “qualified mortgage” safe harbor may not have negative amortization, must follow prepayment penalty limitations included in the Truth in Lending Act, and may not have fees greater than 3% of the total value of the loan.
The following provisions of the 2018 Growth Act may be especially helpful to banks of our size as regulations adopted in 2019 became effective: ● “qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which meet a “community bank leverage ratio, which is currently 9.0%, may be deemed to have satisfied applicable risk- based capital requirements as well as the capital ratio requirements; ● section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets and liabilities comprising not more than 5.00% of total assets; and ● “reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not exceed the lesser of $5 billion or 20% of the bank’s total liabilities .
The following provisions of the 2018 Growth Act may be especially helpful to banks of our size after regulations were adopted in 2019: ● “qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which meet a “community bank leverage ratio, which is currently 9.0%, may be deemed to have satisfied applicable risk- based capital requirements as well as the capital ratio requirements; ● section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets and liabilities comprising not more than 5.00% of total assets; and ● “reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not exceed the lesser of $5 billion or 20% of the bank’s total liabilities.
The Bank is one of the largest providers of automated teller machine (“ATM”) 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 and can be used anywhere Visa is accepted, including ATMs.
The Bank is one of the largest providers of automated teller machine (“ATM”) services in East Alabama and operates ATM machines in 12 locations in its primary service area. The Bank offers Visa ® Checkcards, which are debit cards with the Visa logo that work like checks and can be used anywhere Visa is accepted, including ATMs.
As a result, we received a federal employee retention tax credit of approximately $1.6 million in 2022. We have a talented group of employees, many of which, have a college or associate degree. We believe the Auburn- Opelika MSA is a desirable place to live and work with excellent schools and quality of life.
As a result, we received a federal employee retention tax credit of approximately $1.6 million in 2022. We have a talented group of employees, many of whom, have a college or associate degree. We believe the Auburn- Opelika MSA is a desirable place to live and work with excellent schools and quality of life.
Prior regulatory approval is required if the total of all dividends declared by a state member bank (such as the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the preceding two calendar years, less any required transfers to surplus.
Prior regulatory approval also is required by statute if the total of all dividends declared by a state member bank (such as the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the preceding two calendar years, less any required transfers to surplus.
Table of Contents 10 The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Financial Institutions Rating System (“UFIRS”), which assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations: C apital Adequacy, A sset Quality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices.
The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Financial Institutions Rating System (“UFIRS”), which assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations: C apital Adequacy, A sset Quality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices.
Table of Contents 25 The CARES Act provided a $2 trillion stimulus package and various measures to provide relief from the COVID-19 pandemic, including: ● The Paycheck Protection Program (“PPP”), which expands eligibility for special new SBA guaranteed loans, forgivable loans and other relief to small businesses affected by COVID-19. ● A new $500 billion federal stimulus program for air carriers and other companies in severely distressed sectors of the American economy.
The CARES Act provided a $2 trillion stimulus package and various measures to provide relief from the COVID-19 pandemic, including: ● The Paycheck Protection Program (“PPP”), which expands eligibility for special new SBA guaranteed loans, forgivable loans and other relief to small businesses affected by COVID-19. ● A new $500 billion federal stimulus program for air carriers and other companies in severely distressed sectors of the American economy.
Table of Contents 20 Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made): ● MSAs, net of associated DTLs; ● DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of any valuation allowances and DTLs; and ● Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.
Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made): ● MSAs, net of associated DTLs; ● DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of any valuation allowances and DTLs; and ● Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10 TDR classifications for a limited period of time to account for the effects of COVID-19.
Table of Contents 15 The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10 TDR classifications for a limited period of time to account for the effects of COVID-19.
The federal bank regulators continue to identify elevated risks in leveraged loans and shared national credits. The Bank did not have any loans at year-end 2022 or 2021 that were leveraged loans subject to the Interagency Guidance on Leveraged Lending or that were shared national credits.
The federal bank regulators continue to identify elevated risks in leveraged loans and shared national credits. The Bank did not have any loans at year-end 2023 or 2022 that were leveraged loans subject to the Interagency Guidance on Leveraged Lending or that were shared national credits.
Although the CFPB does not examine or supervise banks with less than $10 billion in assets, banks of all sizes are affected by the CFPB’s regulations, and the precedents set in CFPB enforcement actions and interpretations. Residential Mortgages CFPB regulations require that lenders determine whether a consumer has the ability to repay a mortgage loan.
Although the CFPB does not examine or supervise banks with less than $10 billion in assets, banks of all sizes are affected by the CFPB’s regulations, and the precedents set in CFPB enforcement actions and interpretations. Table of Contents 14 Residential Mortgages CFPB regulations require that lenders determine whether a consumer has the ability to repay a mortgage loan.
On September 16, 2020, FinCEN issued an advanced notice of proposed rulemaking seeking public comment on a wide range of potential regulatory amendments under the Bank Secrecy Act. The proposal seeks comment on incorporating an “effective and reasonably designed” AML/BSA program component to empower financial institutions to allocate resources more effectively.
Table of Contents 16 On September 16, 2020, FinCEN issued an advanced notice of proposed rulemaking seeking public comment on a wide range of potential regulatory amendments under the Bank Secrecy Act. The proposal seeks comments on incorporating an “effective and reasonably designed” AML/BSA program component to empower financial institutions to allocate resources more effectively.
Federal Reserve policy and the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, require a bank holding company to act as a source of financial and managerial strength to its FDIC-insured subsidiaries and to take measures to preserve and protect such bank subsidiaries in situations where additional investments in a bank subsidiary may not otherwise be warranted.
Table of Contents 9 Federal Reserve policy and the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, require a bank holding company to act as a source of financial and managerial strength to its FDIC-insured subsidiaries and to take measures to preserve and protect such bank subsidiaries in situations where additional investments in a bank subsidiary may not otherwise be warranted.
Table of Contents 15 Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential mortgage loans sold to Fannie Mae to request forbearance to the servicer after affirming that such borrower is experiencing financial hardships during the COVID-19 emergency. Such forbearance will be up to 180 days, subject to up to a 180-day extension.
Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential mortgage loans sold to Fannie Mae to request forbearance to the servicer after affirming that such borrower is experiencing financial hardships during the COVID-19 emergency. Such forbearance will be up to 180 days, subject to up to a 180-day extension.
Tier 1 and Tier 2 capital equals total capital. Table of Contents 19 In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies not subject to the Small BHC Policy, and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to 4%.
Tier 1 and Tier 2 capital equals total capital. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies not subject to the Small BHC Policy, and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to 4%.
Banks also have experienced significant competition for deposits from mutual funds, insurance companies and other investment companies and from money center banks’ offerings of high-yield investments and deposits, including CDs and savings accounts. Certain of these competitors are not subject to the same regulatory restrictions as the Bank.
Table of Contents 6 Banks also have experienced significant competition for deposits from mutual funds, insurance companies and other investment companies and from money center banks’ offerings of high-yield investments and deposits, including CDs and savings accounts. Certain of these competitors are not subject to the same regulatory restrictions as the Bank.
HVCRE In December 2019, the federal banking regulators published a final rule, effective April 1, 2020, to implement the “high volatility commercial real estate,” or “HVCRE” changes in Section 214 of the 2018 Growth Act. Any HVCRE exposure excludes loans made before January 1, 2015.
Table of Contents 20 HVCRE In December 2019, the federal banking regulators published a final rule, effective April 1, 2020, to implement the “high volatility commercial real estate,” or “HVCRE” changes in Section 214 of the 2018 Growth Act. Any HVCRE exposure excludes loans made before January 1, 2015.
Table of Contents 29 Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act. Section 10D directs the SEC to adopt rules prohibiting a national securities exchange or association from listing a company unless it develops, implements, and discloses a policy regarding the recovery or “claw-back” of executive compensation in certain circumstances.
Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act. Section 10D directs the SEC to adopt rules prohibiting a national securities exchange or association from listing a company unless it develops, implements, and discloses a policy regarding the recovery or “claw-back” of executive compensation in certain circumstances.
In addition, one or more Alabama banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may continue to operate the acquired branches in Alabama. The Dodd-Frank Act permits banks, including Alabama banks, to branch anywhere in the United States.
In addition, one or more Alabama banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may continue to operate the acquired branches in Alabama. The Dodd-Frank Act permits banks, including Alabama banks, to branch anywhere in the United States. See “Bank Regulation”.
These regulations require entities to report information about their beneficial owners and the individuals who created the entity (together, beneficial ownership information or BOI). FinCEN explained that the proposed rule would help protect the U.S. financial system from illicit use by making it more difficult for bad actors to conceal their financial activities through entities with opaque ownership structures.
These regulations require entities to report information about their beneficial owners and the individuals who created the entity (together, “beneficial ownership information” or “BOI”). FinCEN explained that the proposed rule would help protect the U.S. financial system from illicit use by making it more difficult for bad actors to conceal their financial activities through entities with opaque ownership structures.
The Request described the consolidation of the banking industry, the increase in the number of large and systemically important banking organizations and the need to evaluate large mergers’ financial stability and resolution of failing bank risks consistent with the Dodd-Frank Act changes to the BHC Act and the Bank Merger Act, and the effects of banking mergers on competition.
The FDIC Notice described the consolidation of the banking industry, the increase in the number of large and systemically important banking organizations and the need to evaluate large mergers’ financial stability and the resolution of failing bank risks consistent with the Dodd-Frank Act changes to the BHC Act and the Bank Merger Act, and the effects of banking mergers on competition.
Table of Contents 16 On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed rule that would amend the recordkeeping and travel rules under the Bank Secrecy Act, which would lower the applicable threshold from $3,000 to $250 for international transactions and apply these to transactions using convertible virtual currencies and digital assets with legal tender status.
On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed rule that would amend the recordkeeping and travel rules under the Bank Secrecy Act, which would lower the applicable threshold from $3,000 to $250 for international transactions and apply these rules to transactions using convertible virtual currencies and digital assets with legal tender status.
Other Laws and Regulations The Company is also required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and Nasdaq.
Table of Contents 17 Other Laws and Regulations The Company is also required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and Nasdaq.
Community Bank Leverage Ratio Framework Section 201 of the 2018 Growth Act provides that banks and bank holding companies with consolidated assets of less than $10 billion that meet a “community bank leverage ratio,” established by the federal bank regulators as part of the community bank leverage ratio framework (“CBLR”).
Table of Contents 23 Community Bank Leverage Ratio Framework Section 201 of the 2018 Growth Act provides that banks and bank holding companies with consolidated assets of less than $10 billion that meet a “community bank leverage ratio,” established by the federal bank regulators as part of the community bank leverage ratio framework (“CBLR”).
The Corporate Transparency Act (the”CTA”) was adopted as Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. FinCEN adopted a final regulation as 31 C.F.R. 101.380 on September 30, 2022, which is effective on January 1, 2024 to implement the CTA.
The Corporate Transparency Act (the”CTA”) was adopted as Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. FinCEN adopted a final regulation as 31 C.F.R. 101.380 on September 30, 2022 to implement the CTA. This became effective on January 1, 2024.
Many of the major commercial banks or their affiliates operating in the Bank’s service area offer services which are not presently offered directly by the Bank and they typically have substantially higher lending limits than the Bank.
Many of the major commercial banks or their affiliates operating in the Bank’s service area offer services which are not presently offered directly by the Bank, and these other banks typically have substantially higher lending limits than the Bank.
Table of Contents 30 Section 956 of the Dodd-Frank Act prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions, are deemed to be excessive, or that may lead to material losses.
Section 956 of the Dodd-Frank Act prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions, are deemed to be excessive, or that may lead to material losses.
Table of Contents 12 The objectives of the proposed CRA regulations included: ● Update CRA regulations to strengthen the achievement of the core purpose of the statute; ● Adapt to changes in the banking industry, including the expanded role of mobile and online banking; ● Provide greater clarity and consistency in the application of the regulations; ● Tailor performance standards to account for differences in bank size and business models and local conditions; ● Tailor data collection and reporting requirements and use existing data whenever possible; ● Promote transparency and public engagement; ● Confirm that CRA and fair lending responsibilities are mutually reinforcing; and ● Create a consistent regulatory approach that applies to banks regulated by all three agencies.
The objectives of the new CRA regulations include: ● Update CRA regulations to strengthen the achievement of the core purpose of the statute; ● Adapt to changes in the banking industry, including the expanded role of mobile and online banking; ● Provide greater clarity and consistency in the application of the regulations; ● Tailor performance standards to account for differences in bank size and business models and local conditions; ● Tailor data collection and reporting requirements and use existing data whenever possible; ● Promote transparency and public engagement; ● Confirm that CRA and fair lending responsibilities are mutually reinforcing; and ● Create a consistent regulatory approach that applies to banks regulated by all three agencies.
In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses “financial ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets (“Small Banks”).
Table of Contents 26 In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses “financial ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets (“Small Banks”).
Table of Contents 27 The FDIC’s reserve ratio reached 1.36% on September 30, 2018, exceeding the minimum requirement. As a result, deposit insurance surcharges on Large Banks ceased, and smaller banks received credits against their deposit assessments from the FDIC for their portion of assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%.
The reserve ratio reached 1.36% on September 30, 2018, exceeding the minimum requirement. As a result, deposit insurance surcharges on Large Banks ceased, and smaller banks received credits against their deposit assessments from the FDIC for their portion of assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%.
See “Prompt Corrective Action Rules.” Basel III Capital Rules The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These new U.S. capital rules are called the “Basel III Capital Rules,” and generally were fully phased-in on January 1, 2019.
See “Prompt Corrective Action Rules.” Table of Contents 19 Basel III Capital Rules The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These U.S. capital rules are called the “Basel III Capital Rules,” and generally were fully phased-in on January 1, 2019.
Table of Contents 32 On November 30, 2020, the bank regulators issued a statement urging banks to cease entering into new contracts using U.S. dollar LIBOR rates as soon as practicable and in any event by December 31, 2021, to effect orderly, and safe and sound LIBOR transition.
On November 30, 2020, the bank regulators issued a statement urging banks to cease entering into new contracts using U.S. dollar LIBOR rates as soon as practicable and in any event by December 31, 2021, to effect orderly, and safe and sound LIBOR transition.
The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets.
Table of Contents 30 The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets.
Institutions that are “undercapitalized” are subject to growth limitations and are required to submit a capital restoration plan for approval. Table of Contents 23 A depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.
Institutions that are “undercapitalized” are subject to growth limitations and are required to submit a capital restoration plan for approval. A depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.
Our Chairman has served the Bank his entire 39-year career, our President and CEO has been with us 16 years and our Chief Accounting Officer has been with us for 7 years. Our new President and CFO had careers with major national and regional accounting firms and focused on financial services before joining the Bank.
At the time of transition, our Chairman had served the Bank his entire 39-year career, our President and CEO had been with us 16 years and our Chief Accounting Officer had been with us for 7 years. Our new President and CFO had careers with major national and regional accounting firms and focused on financial services before joining the Bank.
If elected by a banking organization, The CBLR leverage ratio will be the sole capital measure, and electing institutions will not have to calculate or use any other capital measure for regulatory purposes. The Company has not adopted the CBLR, although it believes it is eligible to make such election.
If elected by a banking organization, The CBLR leverage ratio will be the sole capital measure, and electing institutions will not have to calculate or use any other capital measure for regulatory purposes. The Company has not adopted the CBLR, although it believes it is eligible to elect to use the CBLR framework.
We also may make loans to other borrowers outside these areas, especially where we have a relationship with the borrower, or its business or owners. Table of Contents 7 Human Capital At December 31, 2022, the Company and its subsidiaries had 150 full-time equivalent employees, including 37 officers. Our average term of service is approximately 10 years.
We also may make loans to other borrowers outside these areas, especially where we have a relationship with the borrower, or its business or owners. Table of Contents 7 Human Capital At December 31, 2023, the Company and its subsidiaries had 149.5 full-time equivalent employees, including 38 officers. Our average term of service is approximately 10 years.
The Department of Justice (the “DOJ”), and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending to provide guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices.
The DoJ, and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending to provide guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices.
Table of Contents 24 Enforcement Policies and Actions The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations, including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws applicable to consumer financial products and services.
Enforcement Policies and Actions The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations, including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws applicable to consumer financial products and services.
The Federal Reserve’s SOMA was $8.4 trillion on February 13, 2023. The Federal Reserve seeks to target longer term inflation of 2% based on annual changes in the personal consumption expenditures.
The Federal Reserve’s SOMA was $7.0 trillion on February 28, 2024 compared to $8.4 trillion on February 13, 2023. The Federal Reserve seeks to target longer term inflation of 2% based on annual changes in the personal consumption expenditures.
In the case of bank holding company applications to acquire a bank or other bank holding company, the Federal Reserve will assess and emphasize CRA records of each subsidiary depository institution of the applicant bank holding company and the target bank in meeting the needs of their entire communities, including LMI neighborhoods, and such records may be the basis for denying the application.
In the case of bank holding company applications to acquire a bank, the Federal Reserve will assess and emphasize CRA records of each subsidiary depository institution of the applicant bank holding company and the target bank in meeting the needs of their entire communities, including low- and moderate-income (“LMI”) neighborhoods, and such records may be the basis for denying the application.
Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder.
The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder.
Any change in applicable law or regulation may have a material effect on the Company’s business. The following discussion is qualified in its entirety by reference to the particular laws and rules referred to below.
Any change in applicable law or regulation may have a material effect on the Company’s business, and our results of operations and financial condition. The following discussion is qualified in its entirety by reference to the particular laws and rules referred to below.
On March 12, 2023, as a result of unrealized securities losses resulting from increased market rates, liquidity issues at two banks with over $100 billion of assets each being closed on March 10 and 12, 2023, the Federal Reserve established a new Bank Term Funding Program (“BTFP”).
On March 12, 2023, as a result of unrealized securities losses resulting from increased market rates, liquidity issues at two banks with over $100 billion of assets which failed, the Federal Reserve established a new Bank Term Funding Program (“BTFP”).
Lending Practices CRE The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending” (the “CRE Guidance”).
Table of Contents 27 Lending Practices CRE The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending” (the “CRE Guidance”).
The other Federal bank regulators as well as the U.S. Department of Justice are also considering the framework for mergers involving banking organizations, including the competitive effects of such combinations.
The other Federal bank regulators as well as the United States Department of Justice (“DoJ”), are also considering the framework for mergers involving banking organizations, including the competitive effects of such combinations.
At the same time, the agencies recognize that, compared to large banks, intermediate banks might not offer as wide a range of retail products and services, have a more limited capacity to conduct community development activities, and may focus on the local communities where their branches are located.” The CRA Proposal reflects “the agencies’ views that banks of this size should have meaningful capacity to conduct community development financing, as they do under the current approach.” The CRA Proposal states that the community development criteria for intermediate banks is unchanged from the current intermediate small bank community development test.
At the same time, the agencies recognize that, compared to large banks, intermediate banks might not offer as wide a range of retail products and services, have a more limited capacity to conduct community development activities, and may focus on the local communities where their branches are located.” The proposal reflected “the agencies’ views that banks of this size should have meaningful capacity to conduct community development financing, as they do under the current approach.
The Company’s assessment of its financial reporting controls as of December 31, 2022 are included in this report with no material weaknesses reported. Payment of Dividends and Repurchases of Capital Instruments The Company is a legal entity separate and distinct from the Bank. The Company’s primary source of cash is dividends from the Bank.
The Company’s assessment of its financial reporting controls as of December 31, 2022 are included in this report with no material weaknesses reported. Bank Dividends The Company is a legal entity separate and distinct from the Bank.
The following table shows the FDIC assessment schedule for Small Banks, such as the Bank, for the first assessment period of 2023 to be billed in June 2023: Established Small Institution CAMELS Composite 1 or 2 3 4 or 5 Initial Base Assessment Rule 5 to 32 basis points 6 to 30 basis points 16 to 30 basis points Unsecured Debt Adjustment.
The following table shows the FDIC assessment schedule for Small Banks, such as the Bank, for the first assessment period of 2023 to be billed in June 2023, which is the latest available: Established Small Institution CAMELS Composite 1 or 2 3 4 or 5 Initial Base Assessment Rule 5 to 18 basis points 8 to 32 basis points 18 to 32 basis points Unsecured Debt Adjustment.
Table of Contents 6 Selected Economic Data The Auburn-Opelika Metropolitan Statistical Area is Lee County, Alabama, including Auburn, Opelika and part of Phenix City, Alabama. The U.S. Census Bureau estimates Lee County’s population was 181,881 in 2022, and has increased approximately 29.7% from 2010 to 2022.
Selected Economic Data The Auburn-Opelika Metropolitan Statistical Area is Lee County, Alabama, including Auburn, Opelika and part of Phenix City, Alabama. The U.S. Census Bureau estimates Lee County’s population was 180,773 in 2022, and has increased approximately 29% from 2010 to 2022.
The BTFP offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.
The BTFP offered loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets were valued at par and the margin was 100% of par.
Federal Reserve Capital Review The Federal Reserve’s Vice Chair for Supervision is considering a holistic review of regulatory capital requirements, which are expected to focus on banking organizations larger than the Company. Recently a Federal Reserve.
Table of Contents 22 Federal Reserve Capital Review The Federal Reserve’s Vice Chair for Supervision has indicated he is considering a holistic review of regulatory capital requirements, which are expected to focus on banking organizations larger than the Company.
Bank mergers are also subject to the approval of the acquiring bank’s primary federal regulator. On March 19, 2022, the FDIC published a “Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions” (the “FDIC Notice”).
Table of Contents 10 Bank mergers, which generally accompany holding company mergers, are also subject to the approval of the resulting bank’s primary federal regulator. On March 19, 2022, the FDIC published a “Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions” (the “FDIC Notice”).
The BHC Act and the Bank Merger Act provide various generally similar statutory factors. Under the Alabama Banking Code, with the prior approval of the Alabama Superintendent, an Alabama bank may acquire and operate one or more banks in other states pursuant to a transaction in which the Alabama bank is the surviving bank.
Under the Alabama Banking Code, with the prior approval of the Alabama Superintendent, an Alabama bank may acquire and operate one or more banks in other states pursuant to a transaction in which the Alabama bank is the surviving bank.
For example, insurance activities would be subject to supervision and regulation by state insurance authorities. The BHC Act permits acquisitions of banks by bank holding companies, subject to various restrictions, including that the acquirer is “well capitalized” and “well managed”. Bank mergers are also subject to the approval of the acquiring bank’s primary federal regulator and the Bank Merger Act.
For example, insurance activities would be subject to supervision and regulation by state insurance authorities. The BHC Act permits acquisitions of banks by bank holding companies, subject to various restrictions, including that the acquirer is “well capitalized” and “well managed”.
President Biden has frozen new rulemaking generally, and has rescinded various of his predecessor’s executive orders, including the February 3, 2017 executive order containing “Core Principles for Regulating the United States Financial System” (“Core Principles”).
President Biden froze new rulemaking generally when he became President in January 2021, and rescinded various of his predecessor’s executive orders, including the February 3, 2017 executive order containing “Core Principles for Regulating the United States Financial System” (“Core Principles”).
The target fed funds ranges was 4.50-4.75% on March 17, 2023. The Federal Reserve’s securities holdings in its System Open Market Account (“SOMA”) increased from $4.1 trillion on December 30, 2019 to $9.0 trillion at April 11, 2021, largely as a result of securities purchases as the Federal Reserve injected liquidity as a result of the COVID-19 pandemic.
Table of Contents 25 The Federal Reserve’s securities holdings in its System Open Market Account (“SOMA”) increased from $4.1 trillion on December 30, 2019 to $9.0 trillion at April 11, 2021, largely as a result of securities purchases as the Federal Reserve injected liquidity as a result of the COVID-19 pandemic.
Career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and other training and development opportunities. Our employees are encouraged to be active in our communities as part of our commitment to these communities and our employees. Our Chairman is the current President Pro Tempore of the Auburn University Board of Trustees.
Career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and other training and development opportunities. Our employees are encouraged to be active in our communities as part of our commitment to these communities and our employees.
The CRA Proposal states that “the agencies believe retail lending remains a core part of a bank's affirmative obligation under the CRA to meet the credit needs of their entire communities.
The release proposing these new CRA rules stated that “the agencies believe retail lending remains a core part of a bank's affirmative obligation under the CRA to meet the credit needs of their entire communities.
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 Bank of Atlanta (the “Federal Reserve Bank”) since April 1995. The Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama Superintendent”).
Table of Contents 5 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 Bank of Atlanta (the “Federal Reserve Bank”) since April 1995.
This proposal had not been adopted as of March 1, 2023. Leveraged Lending In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending” highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks to identify their highly leveraged transactions, or HLTs.
Table of Contents 28 Leveraged Lending In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending” highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks to identify their highly leveraged transactions, or HLTs.
Cannot exceed the lesser of 5 basis points or 50% of the bank’s initial FDIC assessment rate -5 to 0 basis points -5 to 0 basis points -5 to 0 basis points Brokered Deposit Adhustment N/A Total Base Assessment Rate 2.5 to 32 basis points 3 to 30 basis points 11 to 30 basis points These assessments are then adjusted based on the bank’s CAMELS rating.
Cannot exceed the lesser of 5 basis points or 50% of the bank’s initial FDIC assessment rate -5 to 0 basis points -5 to 0 basis points -5 to 0 basis points Brokered Deposit Adjustment N/A N/A N/A Total Base Assessment Rate 2.5 to 18 basis points 4 to 32 basis points 13 to 32 basis points As shown above. these assessments are adjusted based on the bank’s CAMELS rating.
During early 2022, the Federal Reserve described inflation as “transitory,” but as inflation continued at increasing rates the Federal Reserve’s policy changed. The Federal Reserve increased the target federal funds range by 25 basis points on March 17, 2022, the first change since March 2020 when the target was set to 0-0.25%.
During 2021 and at the beginning of 2022, the Federal Reserve described inflation as “transitory,” but as inflation continued at increasing rates the Federal Reserve’s policy changed. The Federal Reserve announced a 25 basis point increase in the target federal funds range on March 17, 2022, the first change since March 2020 when the target was set to 0-0.25%.
The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the setting of discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. The Federal Reserve has been paying interest on depository institutions’ required and excess reserve balances since October 2008.
The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the setting of discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits.
This had a limited effect on the Bank since it had only one PPP loan of approximately $0.1 million outstanding on December 31, 2022, and because the Bank never participated in the PPPLF. The Company recorded FDIC insurance premiums expenses of $0.3 million in both 2022 and 2021.
This had a limited effect on the Bank since it had only one PPP loan of approximately $0.1 million outstanding on December 31, 2023, and because the Bank never participated in the PPPLF.
Under the proposed Nasdaq Rule, Nasdaq-listed companies, such as the Company, will be required to recover the amount of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement.
Nasdaq-listed companies, such as the Company, are required to recover the amount of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement, computed without regard to any taxes paid.
Debit Card Interchange Fees The “Durbin Amendment” to the Dodd-Frank Act and implementing Federal Reserve regulations provide that interchanged transaction fees for electronic debit transactions be “reasonable” and proportional to certain costs associated with processing the transactions. The Durbin Amendment and the Federal Reserve rules thereunder are not applicable to banks with assets less than $10 billion.
Debit Card Interchange Fees The “Durbin Amendment” to the Dodd-Frank Act and implementing Federal Reserve regulations provide that interchanged transaction fees for electronic debit transactions be “reasonable” and proportional to certain costs associated with processing the transactions.
The applicable agencies also issued final rules simplifying the Volcker Rule proprietary trading restrictions effective January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying the Volcker Rule’s covered fund provisions effective October 1, 2020.
On June 25, 2020, the agencies adopted a final rule simplifying the Volcker Rule’s covered fund provisions effective October 1, 2020.
Under Rule 10D-1, listed companies must recover from current and former executive officers’ incentive-based compensation received during the three fiscal years preceding the date on which the issuer is required to prepare an accounting restatement to correct a material error.
The Commission approved Nasdaq Listing Rule 5608 (“Rule 5608”) on June 9, 2023. Under Rule 10D-1, listed companies must recover from current and former executive officers’ incentive-based compensation received during the three completed fiscal years preceding the date on which the issuer is required to prepare an accounting restatement.
In December 2015, Congress amended the GLB Act as part of the Fixing America’s Surface Transportation Act. This amendment provided financial institutions that meet certain conditions an exemption to the requirement to deliver an annual privacy notice.
The GLB Act also permits bank subsidiaries to engage in financial activities, which are similar to those permitted to financial holding companies. In December 2015, Congress amended the GLB Act as part of the Fixing America’s Surface Transportation Act. This amendment provided financial institutions, which meet certain conditions, an exemption from the requirement to deliver an annual privacy notice.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeCommercial real estate projects economic assumptions may be adversely affected, and certain projects with short term and/or unhedged variable rate debt may be especially affected by increased interest rates and a slower economy. The CFPB’s mortgage and servicing rules, including TRID rules for closed end credit transactions, enforcement actions, reviews and settlements, affect the mortgage markets and our mortgage operations.
Biggest changeHouse prices have begun to decline in certain markets from their earlier highs. This adversely affects our mortgage loan productions and the value of residential mortgage collateral. Commercial real estate projects’ economic assumptions may be adversely affected, and certain projects with short term and/or unhedged variable rate debt may be especially affected by increased interest rates and a slower economy.
See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various reasons, which may include: ● losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities; ● difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; ● declines in the value of our securities portfolios; ● revisions to the regulations or their application by our regulators that increase our capital requirements; ● reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; ● reductions in the value of our MSRs and DTAs; and other adverse developments; and ● unexpected growth and an inability to increase capital timely.
See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various reasons, which may include: ● losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities; ● difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; ● declines in the value of our securities portfolios or sales of securities for losses; ● revisions to the regulations or their application by our regulators that increase our capital requirements; ● reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; ● reductions in the value of our MSRs and DTAs; and other adverse developments; and ● unexpected growth and an inability to increase capital timely.
COVID-19 continues to have various indirect effects and risks, the most important of which are described herein, including continuing inflation and the Federal Reserve’s change from accommodative monetary policy to a tightening monetary policy to fight inflation following significant fiscal and monetary stimuli provided to reduce the effects of COVID-19 pandemic on the economy, as well significant changes resulting from the pandemic, including supply chain disruptions, a tight labor market, remote work away from the office, population and business shifts within regions of the United States, changes in real estate utilization, and shortages of housing and increases in rents and housing costs in various areas of the country.
COVID-19 continues to have various indirect effects and risks, the most important of which are described herein, including continuing inflation and the Federal Reserve’s change from accommodative monetary policy to a tightening monetary policy to fight inflation following significant fiscal and monetary stimuli provided to reduce the effects of COVID-19 pandemic on the economy, as well significant changes resulting from the pandemic, including supply chain disruptions, a tight labor market, remote work away from the office, population and business shifts within regions of the United States, changes in commercial real estate utilization, and shortages of housing and increases in rents and housing costs in various areas of the country.
This may be offset by decreases in mortgage prepayments and refinancings, and corresponding increases in the duration of our existing MSRs and their values. This net effect could reduce our aggregate income from servicing these types of loans and make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default.
This may be offset partially by decreases in mortgage prepayments and refinancings, and corresponding increases in the duration of our existing MSRs and their values. This net effect could reduce our aggregate income from servicing these types of loans and make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default.
Other sources of liquidity available to the Company or the Bank, if needed, include our ability to acquire additional non- core deposits. We may be able, depending upon market conditions, to otherwise borrow money or issue and sell debt and preferred or common securities in public or private transactions.
Other sources of liquidity available to the Company or the Bank, if needed, include our ability to acquire additional non- core deposits. We may be able, depending upon market conditions, to borrow money or issue and sell debt and preferred or common securities in public or private transactions.
A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could adversely affect customer confidence, and our: ● ability to grow; ● the costs of and availability of funds; ● FDIC deposit insurance premiums; ● ability to raise or replace brokered deposits; ● ability to pay or increase dividends on our capital stock. ● ability to make discretionary bonuses to attract and retain quality personnel; ● ability to make acquisitions or engage in new activities; ● flexibility if we become subject to prompt corrective action restrictions; and ● ability to make payments of principal and interest on any of our capital instruments that may be then outstanding.
A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could adversely affect customer confidence, and our: ● ability to grow; ● the costs of and availability of funds; ● FDIC deposit insurance premiums; ● ability to raise or replace brokered deposits; ● ability to pay or increase dividends on our capital stock. ● Ability to repurchase our common stock ● ability to make discretionary bonuses to attract and retain quality personnel; ● ability to make acquisitions or engage in new activities; ● flexibility if we become subject to prompt corrective action restrictions; and ● ability to make payments of principal and interest on any of our capital instruments that may be then outstanding.
Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in holdings of other obligations of other financial institutions such as the FHLB, could be adversely affected by the actions, financial condition, and profitability of such other financial institutions, including the FHLB and our correspondent banks.
Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in holdings of other obligations of other financial institutions such as the FHLB-Atlanta, could be adversely affected by the actions, financial condition, and profitability of such other financial institutions, including the FHLB-Atlanta and our correspondent banks.
Such personal data could also be compromised via intrusions into our systems or those of our service providers or persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment.
Such personal data could also be compromised via intrusions into our systems or those of our service providers or other persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment.
We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including the continuing effects of the pandemic and fiscal and monetary response to COVID-19 and the shift beginning in March 2022 from an extraordinarily expansionary monetary policies to a tightening monetary policy to fight inflation, loan modifications and deferrals, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains and the war in Ukraine, and changes in borrower behaviors.
We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including the continuing effects of the pandemic and fiscal and monetary response to COVID-19 and the shift beginning in March 2022 from an extraordinarily expansionary monetary policies to a tightening monetary policy to fight inflation, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains and the war in Ukraine, and changes in borrower behaviors.
We are also members of the FHLB and the Federal Reserve Bank, and we can obtain advances collateralized with eligible assets, and maintain uncommitted federal funds lines of credit with other banks.
We are also members of the FHLB-Atlanta and the Federal Reserve Bank of Atlanta, and we can obtain advances collateralized with eligible assets, and maintain uncommitted federal funds lines of credit with other banks.
Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results. We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth.
Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition. We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth.
The Company’s assessment of risks related to COVID-19 and its effects on the Company applicable during the pandemic are discussed in the Company‘s Annual Report on Form 10-K filed with the SEC on March 8, 2022 under the caption “Risk Factors-COVID 19 Risks” and in our Quarterly Reports on Form 10-Qs though September 30, 2022.
The Company’s assessment of risks related to COVID-19 and its effects on the Company applicable during the pandemic are discussed in the Company‘s Annual Report on Form 10-K filed with the SEC on March 8, 2022 under the caption “Risk Factors-COVID 19 Risks” and in our Quarterly Reports on Form 10-Qs though September 30, 2022. ITEM 1B.
We believe the following, among other things, may affect us in 2023: ● The COVID-19 pandemic disrupted the economy beginning late in the first quarter of 2020. Auburn University, government agencies and businesses were limited to remote work and gatherings were limited. Supply chains continue to be disrupted and labor markets remain tight.
We believe the following, among other things, may affect us in 2024: ● The COVID-19 pandemic disrupted the economy beginning late in the first quarter of 2020. Auburn University, government agencies and businesses were limited to remote work and gatherings were limited. Supply chains continue to be disrupted and labor markets remain tight.
Table of Contents 34 Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to adversely affect us. Beginning in March 2022, inflation and the Federal monetary policies to increase interest rates to fight inflation have caused mortgage rates to increase significantly.
Table of Contents 35 Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to adversely affect us. Beginning in March 2022, inflation and the Federal monetary policies to increase interest rates to fight inflation have caused mortgage rates to increase significantly.
The Basel III Rules relating to MSRs may also increase the potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions. Table of Contents 35 The soundness of other financial institutions could adversely affect us.
The Basel III Rules relating to MSRs may also increase the potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions. Table of Contents 36 The soundness of other financial institutions could adversely affect us.
On March 12, 2023, the Federal Reserve established a new Bank Term Funding Program (“BTFP”), which offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage- backed securities, and other qualifying assets as collateral. These assets will be valued at par.
On March 12, 2023, the Federal Reserve established a new Bank Term Funding Program (“BTFP”), which offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral valued at par.
Table of Contents 40 Financial Risks Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities.
Financial Risks Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities.
The COVID-19 pandemic, trade wars, tariffs, sanctions and similar events and disputes, domestic and international, have adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have changed significantly and suddenly. Federal Reserve target federal funds rates declined to 0-0.25% in March 2020, where these remained until March 2022.
The COVID-19 pandemic, trade wars, tariffs, sanctions and similar events and disputes, domestic and international, have adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have changed significantly and suddenly. The Federal Reserve’s target federal funds rates declined to 0-0.25% in March 2020, where these remained until March 17 2022.
Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Table of Contents 45 Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S.
Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S.
Table of Contents 37 Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services and growing demands for mobile and user-based banking applications.
Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services and growing demands for mobile and user-based banking applications.
Cybercrime risks have increased as electronic and mobile banking activities increased as a result of the COVID-19 pandemic, and may increase as a result of the Russia invasion of Ukraine and tensions with mainland China.
Cybercrime risks have increased as electronic and mobile banking activities increased as a result of the COVID-19 pandemic, and may increase as a result of the Russia invasion of Ukraine and tensions with mainland China and other countries.
Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits. This may adversely affect our net interest income and net income and may also adversely affect our liquidity.
Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits. This may adversely affect our costs of funds, growth, net interest income and net income, and may also adversely affect our liquidity.
Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete with traditional lenders for loans, payments, and other banking services. As a result, our competition from service providers not located in our markets has increased. Operational risks are inherent in our businesses.
Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete with traditional lenders for loans, payments, and other banking services. As a result, our competition from service providers not located in our markets has increased. Table of Contents 39 Operational risks are inherent in our businesses.
We may be unable to attract and retain key people to support our business. Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basis of compensation and benefits, support services and financial position.
Table of Contents 41 We may be unable to attract and retain key people to support our business. Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basis of compensation and benefits, support services and financial position.
Lower interest rates typically increase mortgage originations, decrease MSR values and promote economic growth. Increases in market interest rates tend to decrease mortgage originations, increase MSR values, decrease the value and liquidity of collateral securing loans, and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth.
Increases in market interest rates tend to decrease mortgage originations, increase MSR values, decrease the value and liquidity of collateral securing loans, and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth.
Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders such as the FHLB, which we believe are a cheaper and more stable source of funds than borrowings, generally. Increases in interest rates may cause consumers to shift their funds to more interest-bearing instruments and to increase the competition for and costs of deposits.
Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders such as the FHLB- Atlanta, which we believe are a cheaper and more stable source of funds than borrowings, generally. Increases in interest rates have caused consumers to shift their funds to more interest-bearing instruments and to increase the competition for and costs of deposits.
Table of Contents 44 We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank.
Table of Contents 41 Increases in market interest rates have also caused unrealized losses in our securities portfolio as our available for sale investments are carried at fair value and market prices have declined as market interest rates increase. Although these unrealized losses do not adversely affect our regulatory capital, these do reduce our reported GAAP tangible stockholders’ equity.
Increases in market interest rates have also caused unrealized losses in our securities portfolio as our available for sale investments are carried at fair value and market prices have declined as market interest rates increase. Although these unrealized losses do not adversely affect our regulatory capital, these do reduce our reported GAAP tangible stockholders’ equity.
Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in our markets and nearby. Auto sales and housing sales are cyclical and are affected adversely by higher interest rates. Attractive acquisition opportunities may not be available to us in the future.
Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in our markets and nearby. Auto sales and housing sales are cyclical and generally are affected adversely by higher interest rates. Table of Contents 38 Attractive acquisition opportunities may not be available to us in the future.
The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.
Table of Contents 47 The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.
Table of Contents 42 We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules.
We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules.
The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with respect to potential fraud or improper activities under the PPP loan programs.
Table of Contents 46 The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with respect to potential fraud or improper activities under the PPP loan programs.
Inflation and tightening monetary policies beginning in early 2022 have increased interest spreads, but may change the mix and costs of our deposits over time. The growth in deposits exceeded our loan growth and the difference was invested in high-quality, marketable U.S. government and government agency securities, including agency mortgage-backed securities. Liquidity is essential to our business.
Inflation and tightening monetary policies beginning in early 2022 have increased interest spreads, but may change the mix and costs of our deposits over time. The growth in deposits exceeded our loan growth and the difference was invested in high-quality, marketable U.S. government and government agency securities, including agency mortgage-backed securities.
Fintech and other non-bank competitors also complete for our customers, and may partner with other banks and/or seek to enter the payments system. Failures of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets. Table of Contents 36 Our success depends on local economic conditions.
Fintech and other non-bank competitors also compete for our customers, and may partner with other banks and/or seek to enter the payments system. The failures of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets. Our success depends on local economic conditions.
Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition.
Table of Contents 37 Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition.
Models used by our business, including the new CECL models, are based on assumptions and projections. These models may not operate properly or our inputs and assumptions may be inaccurate, or changes in economic and market conditions, customer behaviors or regulations.
The models used by our business, including the new CECL models, are based on assumptions and projections. These models may not operate properly, or our inputs and assumptions may be inaccurate, or changes in economic and market conditions, customer behaviors or regulations may adversely affect the accuracy or usefulness of the models.
Certain borrowers and their businesses and real estate and commercial projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising from tighter monetary policies. Various businesses will be unable to fully pass on increased costs due to inflation, and their profits may shrink.
Certain borrowers and their businesses and real estate and commercial projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising from tighter monetary policies, and may request or need loan modifications and deferrals. Various businesses will be unable to fully pass on increased costs due to inflation, and their profits may shrink.
Our ability to continue to pay dividends to shareholders in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank.
Table of Contents 44 Our ability to continue to pay dividends to shareholders and repurchase stock in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank.
Table of Contents 38 Potential gaps in our risk management policies and internal audit procedures may leave us exposed unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program is designed to mitigate material risks and loss to us.
Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program is designed to mitigate material risks and losses to us.
The yield curve was inverted at the beginning of March 2023, and this results in a lower spread between our costs of funds and our interest income. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index.
The yield curve continues to remain inverted, and this results in a lower spread between our costs of funds and our interest income. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index.
Table of Contents 33 ● Our ability to assess the creditworthiness of our customers and those we do business with, and the values of our assets and loan collateral may be adversely affected and less predictable as a result of inflation and higher market interest rates We adopted CECL on January 1, 2023 as required by generally accepted accounting principles (“GAAP”).
These could affect our earnings and credit quality. ● Our ability to assess the creditworthiness of our customers and those we do business with, and the values of our assets and loan collateral may be adversely affected and less predictable as a result of inflation and higher market interest rates We adopted CECL on January 1, 2023 as required by generally accepted accounting principles (“GAAP”).
ITEM 1A. RISK FACTORS Any of the following risks could harm our business, results of operations and financial condition and an investment in our stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Operational Risks Market conditions and economic cyclicality may adversely affect our industry.
ITEM 1A. RISK FACTORS Any of the following risks could harm our business, results of operations and financial condition and an investment in our stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Table of Contents 39 Despite our cybersecurity policies and procedures and our Board of Director’s and Management’s efforts to monitor and ensure the integrity of the systems we use, we may not be able to anticipate the rapidly evolving security threats, nor may we be able to implement preventive measures effective against all such threats.
Despite our cybersecurity policies and procedures and our Board of Directors and management’s efforts to monitor and ensure the integrity of the systems we and our third-party service providers use, we may not be able to anticipate the rapidly evolving security threats, nor may we be able to implement preventive measures effective against all such threats.
CECL, a new accounting standard for estimating expected future loan losses, is effective for the Company beginning January 1, 2023, and its effects upon the Company have not yet been determined.
CECL, a new accounting standard for estimating expected future loan losses, is effective for the Company beginning January 1, 2023, and its effects upon the Company in the current environment have not yet been determined fully due to its short existence.
The medical and direct economic effects of COVID-19 diminished over 2022 and are not directly affecting the Company’s business.
The medical and direct economic effects of COVID-19 diminished further in 2023 and are not directly affecting the Company’s business.
Our business continuity plans, including those of our service providers, for back-up and service restoration, may not be effective in the case of widespread outages due to severe weather, natural disasters, pandemics, or power, communications and other failures.
Our business continuity plans, including those of our service providers, for back-up and service restoration, may not be effective in the case of widespread outages due to severe weather, natural disasters, pandemics, or power, communications and other failures. See Item 1C. of this report for more information about cybersecurity and our management and strategies.
Our costs of funds may increase as a result of general economic conditions, increasing interest rates and competitive pressures, and inflation, and anticipated future changes by the Federal Reserve to reduce inflation.
Table of Contents 42 Our cost of funds may increase as a result of general economic conditions, interest rates, inflation and changes in customer behaviors and competitive pressures. Our costs of funds have increased as a result of general economic conditions, increasing interest rates and competitive pressures, and inflation, and anticipated future changes by the Federal Reserve to reduce inflation.
Non-performing assets may adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO and these assets require higher loan administration and other costs, thereby adversely affecting our income.
We do not record interest income on nonaccrual loans or OREO and these assets require higher loan administration and other costs, thereby adversely affecting our income.
Excluding owner occupied commercial real estate, we had 40.4% of our portfolio in CRE loans at year-end 2022 compared to 42.6% at year-end 2021.
Excluding owner occupied commercial real estate, we had 39.6% of our loan por tfolio in CRE loans at year-end 2023 compared to 40.4% and 42.6% at year-end 2022 and 2021, respectively.
We maintain a portfolio of marketable high-quality securities that can be used as a source of liquidity. As market interest rates have risen, however, we have experienced unrealized losses on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory capital.
As market interest rates have risen, however, we have experienced unrealized losses on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory capital.
Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. Most LIBOR reference interest rates used by many financial institutions to price extensions of credit will no longer be quoted beginning June 30, 2023 and their use has been strongly discouraged by regulatory agencies.
Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. Most LIBOR reference interest rates used by many financial institutions to price extensions of credit stopped being quoted June 30, 2023 and their use has been strongly discouraged by regulatory agencies. Most banks did not adopt CECL until January 1, 2023.
Increases in market interest rates, inflation and consumer and business confidence may cause changes in savings and payment behaviors, including potential increases in loan delinquencies and default rates. These could affect our earnings and credit quality.
Increases in market interest rates, inflation and consumer and business confidence may cause changes in customers’ savings and payment behaviors, including potential increases in loan delinquencies and default rates.
The COVID-19 pandemic and increased remote work has accelerated electronic banking activity and the need for increased operational efficiencies. We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective than anticipated.
We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective than anticipated.
We are allowed to carry -back losses for two years for Federal income tax purposes. As of December 31, 2022, we had a net deferred tax asset of $13.8 million with gross deferred tax assets of $15.6 million.
We are allowed to carry -back losses for two years for Federal income tax purposes. As of December 31, 2023, we had a net deferred tax asset of $10.3 million compared to $13.8 million one year earlier.
The CRA requires us to serve our entire communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. Even though we have maintained an “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings.
The CRA requires us to serve our entire communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. The CRA and fair lending responsibilities are related and mutually reinforcing.
Most banks did not adopt CECL until January 1, 2023. These changes, together with any exposures other institutions may have to crypto or digital assets, could cause disruption and unexpected changes in the industry.
These changes, together with any exposures other institutions may have to crypto or digital assets, or cybersecurity and data breaches, could cause disruption and unexpected changes in the industry.
Our internal processes and controls are designed to protect the confidentiality of client information we hold and that is accessible to us and our employees. It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack.
It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack.
General conditions that are not specific to us, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry could adversely affect us. Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of operations.
General conditions that are not specific to us, such as disruptions in the financial markets, failures of other bank, such as Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, or negative views and expectations about the prospects for the financial services industry could adversely affect us.
Although our common stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our trading volume has been limited historically. As a result, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire.
As a result, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire.
The timing and effects of resolution of these government sponsored enterprises cannot be predicted. We may be contractually obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us.
The timing and effects of resolution of these government sponsored enterprises cannot be predicted. We may be contractually obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us. As part of its routine business, the Company originates mortgage loans that it subsequently sells in the secondary market, generally to Fannie Mae, a GSE.
Lower demand for CRE, and reduced availability of, and higher interest rates and costs for, CRE loans could adversely affect our CRE loans and sales of our OREO, and therefore our earnings and financial condition, including our capital and liquidity. Our future success is dependent on our ability to compete effectively in highly competitive markets.
Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced availability of, and higher interest rates and costs for, CRE loans could adversely affect CRE values and liquidity, our CRE loans and sales of OREO, and therefore our earnings and financial condition, including our capital and liquidity.
All of these could adversely affect our financial condition and results of operations. Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations .
Table of Contents 40 Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations . Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information.
Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our customers’ privacy and our customer relationships, generally.
We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our customers’ privacy and our customer relationships, generally.
An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales proceeds from maturing loans and securities, and other sources could have a negative effect on our liquidity. Our funding sources include deposits (primarily core deposits), federal funds purchased, securities sold under repurchase agreements, and short- and long-term debt.
Table of Contents 43 Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales proceeds from maturing loans and securities, and other sources could have a negative effect on our liquidity.
Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition. Our nonperforming loans were 0.54% of total loans as of December 31, 2022, and we had $2.7 million in other real estate owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”).
Our nonperforming loans were 0.16% of total loans as of December 31, 2023, and we had no other real estate owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”). Non-performing assets may adversely affect our net income in various ways.
The nature and timing of any future changes in monetary and fiscal policies and their effect on us cannot be predicted. ● Market developments, including unemployment, price levels, stock and bond market volatility, and changes, including those resulting from Russia’s invasion of Ukraine affect consumer confidence levels, economic activity and inflation.
Table of Contents 34 ● Market developments, including unemployment, price levels, stock and bond market volatility, and changes, including those resulting from Russia’s invasion of Ukraine affect consumer confidence levels, economic activity and inflation.
The East Alabama banking markets which we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. We compete for loans, deposits and other financial services with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and insurance brokerage firms.
Our future success is dependent on our ability to compete effectively in highly competitive markets. The East Alabama banking markets which we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets.
Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions. The Federal banking regulators jointly proposed comprehensive revisions to their CRA regulations on May 5, 2022, and which may be adopted in the first half of 2023.
Even though we have maintained an “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions. The Federal Reserve adopted comprehensive revisions to its CRA regulations on October 24, 2023.
Higher interest rates and the increased level of housing costs as a result of the COVID-19 pandemic, have caused housing starts and sales to slow. House prices have begun to decline in certain markets from their earlier highs. This adversely affects our mortgage loan productions and the value of residential mortgage collateral.
Higher interest rates and the increased level of housing costs as a result of the COVID-19 pandemic, have caused housing starts and sales to slow.
Higher market interest rates and sales of securities held by the Federal Reserve to reduce inflation generally reduce economic activity and may loan demand and growth. The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within the markets we serve, as well as interest rates.
The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within the markets we serve, as well as interest rates. Lower interest rates typically increase mortgage originations, decrease MSR values and promote economic growth.
The continuation or worsening of these conditions may adversely affect our profitability, growth asset quality and financial condition.
We and our customers, and our respective suppliers, vendors and processors may be adversely affected by rising costs and shortages of needed equipment and supplies and tight labor markets. The continuation or worsening of these conditions may adversely affect our profitability, growth asset quality and financial condition.
From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of operations. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements.
These revisions have not been finalized but could have significant effects on our compliance costs and activities. See “Supervision and Regulation - Community Reinvestment Act and Consumer Laws.” COVID-19 Risks The national emergencies related to COVID-19 have been terminated by the President effective May 11, 2023.
See “Supervision and Regulation - Community Reinvestment Act and Consumer Laws.” Table of Contents 48 COVID-19 Risks The national emergencies related to COVID-19 have been terminated by the President effective May 11, 2023 and in February 2024 the Centers for Disease Control likened COVID-19 to the flu, and recommended continued use of booster vaccinations.
The Administration and its appointees propose changes to bank regulation and corporate tax changes that could have an adverse effect on our results of operations and financial conditions. We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.
Table of Contents 45 Legislative and regulatory changes The Biden Administration and its appointees to the various government agencies, including the bank regulators, CFPB and SEC, have proposed, and continue to propose changes to bank regulation, SEC rules and corporate tax changes that could have an adverse effect on our results of operations and financial condition.
Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information. Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems.
Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. Our internal processes, policies and controls are designed to protect the confidentiality of client information we hold and that is accessible to us and our employees.
See “Supervision and Regulation”. A limited trading market exists for our common shares, which could result in price volatility. Your ability to sell or purchase common shares depends upon the existence of an active trading market for our common stock.
Your ability to sell or purchase common shares depends upon the existence of an active trading market for our common stock. Although our common stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our trading volume has been limited historically.
These could have a material adverse effect on our business, financial condition and results of operations. Our information systems may experience interruptions and security breaches. We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business.
These could have a material adverse effect on our business, financial condition and results of operations. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Our information systems may experience interruptions and security brea ches.
The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing the value of investment securities at the discount window.
The BTFP ended March 11, 2024 and we have not used this program. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing the value of investment securities at the discount window.
Changes in economic conditions and factors used in our CECL models may increase the variability of our provisions for loan losses and our earnings. ● Although we had no assets or liabilities that use LIBOR reference rates at the end of 2022, the end of the LIBOR reference rate, scheduled for most tenors by June 30, 2023, could adversely affect our counterparties and financial markets.
Changes in economic conditions and factors used in our CECL models may increase the variability of our provisions for loan losses and our earnings. Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition.
In addition, we may have to implement more extensive and perhaps different risk management policies and procedures as our regulation changes. For example, the Federal Reserve and the OCC are in the initial stages of proposing climate risk management criteria and potential climate risk stress tests. The SEC is expected to require more disclosure on climate risks, also.
In addition, we may have to implement more extensive and perhaps different risk management policies and procedures as our regulation changes. For example, the Federal Reserve and the federal bank regulators issued Principles for Climate- Related Risk for Large Financial Institutions (October 14, 2023). The bank regulators’ guidance applies to banks with over $100 billion in assets.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changePrior to relocation, the Bank’s Opelika Kroger branch was located inside the Kroger supermarket in the Tiger Town retail center in Opelika, Alabama. The Opelika Kroger branch was originally opened in July 2007. The Tiger Town branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 36 vehicles.
Biggest changeHighway 280 and Frederick Road in Opelika, Alabama. The Tiger Town branch, built in 2017, has approximately 5,500 square feet of space. Prior to relocation, the Bank’s Opelika Kroger branch was located inside the Kroger supermarket in the Tiger Town retail center in Opelika, Alabama. The Opelika Kroger branch was originally opened in July 2007.
The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 4 acres and includes the newly constructed AuburnBank Center, which was completed in May 2022 and held its grand opening in June 2022. The AuburnBank Center has approximately 90,000 square feet of space.
Table of Contents 50 The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 4 acres and includes the newly constructed AuburnBank Center, which was completed in May 2022 and had its grand opening in June 2022. The AuburnBank Center has approximately 90,000 square feet of space.
This branch offers the full line of the Bank’s services including safe deposit boxes and a drive-through window and parking for approximately 11 vehicles, including a handicapped ramp. In November 2002, the Bank opened a loan production office in Phenix City, Alabama, about 35 miles south of Auburn, Alabama. In November 2022, the Bank renewed its lease for another year.
This branch offers the full line of the Bank’s services including safe deposit boxes and a drive-through window and parking for approximately 11 vehicles, including a handicapped ramp. In November 2002, the Bank opened a loan production office in a leased space in Phenix City, Alabama, about 35 miles south of Auburn, Alabama.
In February 2009, the Bank opened a branch located on Bent Creek Road in Auburn, Alabama. This branch is owned by the Bank and has approximately 4,000 square feet of space. This branch offers the full line of the Bank’s services and has drive-through windows and a drive-up ATM. This branch offers parking for approximately 29 vehicles.
In November 2022, the Bank renewed its lease for another year. In February 2009, the Bank opened a branch located on Bent Creek Road in Auburn, Alabama. This branch is owned by the Bank and has approximately 4,000 square feet of space. This branch offers the full line of the Bank’s services and has drive-through windows and a drive-up ATM.
In December 2011, the Bank opened a branch located on Fob James Drive in Valley, Alabama, about 30 miles northeast of Auburn, Alabama. This branch is owned by the Bank and has approximately 5,000 square feet of space. This branch offers the full line of the Bank’s services and has drive-through windows and a drive-up ATM.
This branch offers parking for approximately 29 vehicles. In December 2011, the Bank opened a branch located on Fob James Drive in Valley, Alabama, about 30 miles northeast of Auburn, Alabama. This branch is owned by the Bank and has approximately 5,000 square feet of space.
In February 2015, the Bank entered into a new lease agreement for five years with options for two 5-year extensions. In February 2020, the Bank exercised its option to renew the lease for another five years. The Bank leases approximately 1,500 square feet of space for the Corner Village branch.
In February 2015, the Bank relocated its Auburn Kroger branch to a new location within the Corner Village Shopping Center, in Auburn, Alabama. In February 2015, the Bank entered into a new lease agreement for five years with options for two 5-year extensions. In February 2020, the Bank exercised its option to renew the lease for another five years.
In addition to the eight ATMs at various branch locations, mentioned above, the Bank also has five ATMs located at various locations within our primary service area. In September 2018, the Bank opened a loan production office on East Samford Avenue in Auburn, Alabama. The location has approximately 2,500 square feet of space and is leased through 2028.
In September 2018, the Bank opened a loan production office on East Samford Avenue in Auburn, Alabama. The location has approximately 2,500 square feet of space and is leased through 2028. This loan production office was relocated to the newly developed AuburnBank Center in June 2022.
This loan production office was relocated to the newly developed AuburnBank Center in June 2022. The Company has entered into a sublease agreement with a tenant for three years with an option to renew for three additional years.
The Company entered into a three year sublease agreement, during 2022, with a tenant, which has an option to renew that lease for three additional years.
This branch offers parking for approximately 35 vehicles. Prior to December 2011, the Bank had operated a loan production office in Valley, which was originally opened in September 2004. In February 2015, the Bank relocated its Auburn Kroger branch to a new location within the Corner Village Shopping Center, in Auburn, Alabama.
This branch offers the full line of the Bank’s services and has drive-through windows and a drive-up ATM. This branch offers parking for approximately 35 vehicles. Prior to December 2011, the Bank had operated a loan production office in Valley, which was originally opened in September 2004.
Table of Contents 47 In May 2017, the Bank relocated its Opelika Kroger branch to a new location the Bank purchased in August 2016 near the Tiger Town Retail Shopping Center and the intersection of U.S. Highway 280 and Frederick Road in Opelika, Alabama. The Tiger Town branch, built in 2017, has approximately 5,500 square feet of space.
The South Donahue branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 28 vehicles. In May 2017, the Bank relocated its Opelika Kroger branch to a new location the Bank purchased in August 2016 near the Tiger Town Retail Shopping Center and the intersection of U.S.
Prior to relocation, the Bank’s Auburn Kroger branch was located in the Kroger supermarket in the same shopping center since August 1988. The current Corner Village branch offers the full line of the Bank’s deposit and other services including an ATM, except safe deposit boxes.
The current Corner Village branch offers the full line of the Bank’s deposit and other services including an ATM, but does not maintain safe deposit boxes.
The South Donahue branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 28 vehicles.
The Tiger Town branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 36 vehicles. Table of Contents 51 In addition to the eight ATMs at various branch locations, mentioned above, the Bank also has four ATMs located at various locations within our primary service area.
Added
The Bank leases approximately 1,500 square feet of space for the Corner Village branch. Prior to relocation, the Bank’s Auburn Kroger branch was located in the Kroger supermarket in the same shopping center since August 1988.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeITEM 4. MINE SAFETY DISCLOSURES 47 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 47 ITEM 6. SELECTED FINANCIAL DATA 50 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 50 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 82 ITEM 8.
Biggest changeITEM 4. MINE SAFETY DISCLOSURES 51 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 51 ITEM 6. SELECTED FINANCIAL DATA 54 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 54 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 82 ITEM 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe amount of dividends payable by the Bank is limited by law and regulation. The need to maintain adequate capital and liquidity in the Bank also limits dividends that may be paid to the Company.
Biggest changeThe need to maintain adequate capital and liquidity in the Bank also limits the dividends that may be paid to the Company. The Bank and the Company can only pay dividends, repurchase stock and pay discretionary bonuses, if our capital conservation buffer exceeds 2.5% and from our eligible retained income over the last four calendar quarters.
The amount and frequency of cash dividends will be determined in the judgment of the Board based upon a number of factors, including the Company’s earnings, financial condition, liquidity, capital and regulatory requirements and other relevant factors and the availability of dividend payable by the Bank consistent with amounts available therefore, including the Bank’s earnings, financial condition, liquidity, regulatory and capital requirements and other relevant factors.
The amount and frequency of cash dividends is determined in the judgment of the Board based upon a number of factors, including the Company’s earnings, financial condition, liquidity, capital and regulatory requirements and other relevant factors and the availability of dividend payable by the Bank consistent with amounts available therefore, including the Bank’s earnings, financial condition, liquidity, regulatory and capital requirements and other relevant factors.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s Common Stock is listed on the Nasdaq Global Market, under the symbol “AUBN”. As of March 16, 2023, there were approximately 3,500,879 shares of the Company’s Common Stock issued and outstanding, which were held by approximately 359 shareholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s Common Stock is listed on the Nasdaq Global Market, under the symbol “AUBN”. As of March 13, 2024, there were approximately 3,493,674 shares of the Company’s Common Stock issued and outstanding, which were held by approximately 343 shareholders of record.
Closing Cash Price Dividends Per Share (1) Declared High Low 2022 First Quarter $ 34.49 $ 31.75 $ 0.265 Second Quarter 33.57 27.04 0.265 Third Quarter 29.02 23.02 0.265 Fourth Quarter 24.71 22.07 0.265 2021 First Quarter $ 48.00 $ 37.55 $ 0.26 Second Quarter 38.90 34.50 0.26 Third Quarter 35.36 33.25 0.26 Fourth Quarter 34.79 31.32 0.26 (1) The price information represents actual transactions.
Closing Cash Price Dividends Per Share (1) Declared High Low 2023 First Quarter $ 24.50 $ 22.55 $ 0.27 Second Quarter 24.32 18.80 0.27 Third Quarter 22.80 20.85 0.27 Fourth Quarter 21.99 19.72 0.27 2022 First Quarter $ 34.49 $ 31.75 $ 0.265 Second Quarter 33.57 27.04 0.265 Third Quarter 29.02 23.02 0.265 Fourth Quarter 24.71 22.07 0.265 (1) The price information represents actual transactions.
BMI Banks - Southeast Region Index 100.00 82.62 116.45 104.41 149.13 121.30 Table of Contents 50 Issuer Purchases of Equity Securities Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs The Approximate Dollar Value of Shares that May Yet Be Under the Plans or Programs October 1 – October 31, 2022 –– –– –– 4,659,289 November 1 – November 30, 2022 1,903 23.28 1,903 4,614,989 December 1 – December 31, 2022 –– –– –– 4,614,989 Total 1,903 23.28 1,903 4,614,989 On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc.
BMI Banks - Southeast Region Index 100.00 140.94 126.37 180.49 146.81 151.44 Table of Contents 54 Issuer Purchases of Equity Securities Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs The Approximate Dollar Value of Shares that May Yet Be Under the Plans or Programs October 1 – October 31, 2023 –– –– –– 4,386,264 November 1 – November 30, 2023 –– –– –– 4,386,264 December 1 – December 31, 2023 –– –– –– 4,386,264 Total –– –– –– 4,386,264 On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc.
Table of Contents 48 The Company has paid cash dividends on its capital stock since 1985. Prior to this time, the Bank paid cash dividends since its organization in 1907, except during the Depression years of 1932 and 1933.
The Company has paid cash dividends on its capital stock since 1985. Prior to this time, the Bank paid cash dividends since its organization in 1907, except during the Depression years of 1932 and 1933. Holders of Common Stock are entitled to receive such dividends when, as and if may be declared by the Company’s Board of Directors.
The Board currently intends to continue its present dividend policies. Federal Reserve policy could restrict future dividends on our Common Stock, depending on our earnings and capital position and likely needs. See “Supervision and Regulation – Payment of Dividends” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Adequacy”.
Federal Reserve policy could restrict future dividends on our Common Stock, depending on our earnings and capital position, risks and likely needs.
Table of Contents 49 Performance Graph The following performance graph compares the cumulative, total return on the Company’s Common Stock from December 31, 2017 to December 31, 2022, with that of the Nasdaq Composite Index and S&P U.S. BMI Banks – Southeast Region Index (assuming a $100 investment on December 31, 2017).
BMI Banks – Southeast Region Index (assuming a $100 investment on December 31, 2018). Cumulative total return represents the change in stock price and the amount of dividends received over the indicated period, assuming the reinvestment of dividends.
Removed
Holders of Common Stock are entitled to receive such dividends when, as and if may be declared by the Company’s Board of Directors.
Added
The Board currently intends to continue its present dividend policies. Table of Contents 52 The amount of dividends payable by the Bank is limited by law and regulation. The Company relies upon dividends from the Bank to pay Company expenses and to pay dividends on Company common stock.
Removed
Cumulative total return represents the change in stock price and the amount of dividends received over the indicated period, assuming the reinvestment of dividends. Period Ending Index 12/31/2017 12/31/2018 12/31/2019 12/30/2020 12/31/2021 12/31/2022 Auburn National Bancorporation, Inc. 100.00 83.35 143.34 115.20 91.76 67.91 NASDAQ Composite Index 100.00 97.16 132.81 192.47 235.15 158.65 S&P U.S.
Added
Eligible retained income equals the greater of: ● net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income; or ● the average net income over the preceding four quarters.
Added
See “Supervision and Regulation – Payment of Dividends” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Adequacy” and “Risk Factors - Our ability to continue to pay dividends to shareholders and repurchase stock in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends.” Table of Contents 53 Performance Graph The following performance graph compares the cumulative, total return on the Company’s Common Stock from December 31, 2018 to December 31, 2023, with that of the Nasdaq Composite Index and S&P U.S.
Added
Period Ending Index 12/31/2018 12/31/2019 12/30/2020 12/30/2021 12/31/2022 12/31/2023 Auburn National Bancorporation, Inc. 100.00 171.98 138.22 110.10 81.48 79.19 NASDAQ Composite Index 100.00 136.69 198.10 242.03 163.28 236.17 S&P U.S.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeYear ended December 31 (In thousands) 2022 2021 2020 2019 2018 Net interest income (GAAP) $ 27,166 23,990 24,338 26,064 25,570 Tax-equivalent adjustment 456 470 492 557 613 Net interest income (Tax-equivalent) $ 27,622 24,460 24,830 26,621 26,183 Table of Contents 74 Table 2 - Selected Financial Data Year ended December 31 (Dollars in thousands, except per share amounts) 2022 2021 2020 2019 2018 Income statement Tax-equivalent interest income (a) $ 30,001 26,977 28,686 30,804 29,859 Total interest expense 2,379 2,517 3,856 4,183 3,676 Tax equivalent net interest income (a) 27,622 24,460 24,830 26,621 26,183 Provision for loan losses 1,000 (600) 1,100 (250) — Total noninterest income 6,506 4,288 5,375 5,494 3,325 Total noninterest expense 19,823 19,433 19,554 19,697 17,874 Net earnings before income taxes and tax-equivalent adjustment 13,305 9,915 9,551 12,668 11,634 Tax-equivalent adjustment 456 470 492 557 613 Income tax expense 2,503 1,406 1,605 2,370 2,187 Net earnings $ 10,346 8,039 7,454 9,741 8,834 Per share data: Basic and diluted net earnings $ 2.95 2.27 2.09 2.72 2.42 Cash dividends declared $ 1.06 1.04 1.02 1.00 0.96 Weighted average shares outstanding Basic and diluted 3,510,869 3,545,310 3,566,207 3,581,476 3,643,780 Shares outstanding 3,503,452 3,520,485 3,566,276 3,566,146 3,643,868 Book value $ 19.42 29.46 30.20 27.57 24.44 Common stock price High $ 34.49 48.00 63.40 53.90 53.50 Low 22.07 31.32 24.11 30.61 28.88 Period-end $ 23.00 32.30 42.29 53.00 31.66 To earnings ratio 7.80 x 14.23 20.23 19.49 13.08 To book value 118 % 110 140 192 130 Performance ratios: Return on average equity 12.48 % 7.54 7.12 10.35 10.14 Return on average assets 0.96 % 0.78 0.83 1.18 1.08 Dividend payout ratio 35.93 % 45.81 48.80 36.76 39.67 Average equity to average assets 7.72 % 10.39 11.63 11.39 10.63 Asset Quality: Allowance for loan losses as a % of: Loans 1.14 % 1.08 1.22 0.95 1.00 Nonperforming loans 211 % 1,112 1,052 2,345 2,691 Nonperforming assets as a % of: Loans and other real estate owned 0.54 % 0.18 0.12 0.04 0.07 Total assets 0.27 % 0.07 0.06 0.02 0.04 Nonperforming loans as % of loans 0.54 % 0.10 0.12 0.04 0.04 Net charge-offs (recoveries) as a % of average loans 0.04 % 0.02 (0.03) 0.03 (0.01) Capital Adequacy (c): CET 1 risk-based capital ratio 15.39 % 16.23 17.27 17.28 16.49 Tier 1 risk-based capital ratio 15.39 % 16.23 17.27 17.28 16.49 Total risk-based capital ratio 16.25 % 17.06 18.31 18.12 17.38 Tier 1 leverage ratio 10.01 % 9.35 10.32 11.23 11.33 Other financial data: Net interest margin (a) 2.81 % 2.55 2.92 3.43 3.40 Effective income tax rate 19.48 % 14.89 17.72 19.57 19.84 Efficiency ratio (b) 58.08 % 67.60 64.74 61.33 60.57 Selected period end balances: Securities $ 405,304 421,891 335,177 235,902 239,801 Loans, net of unearned income 504,458 458,364 461,700 460,901 476,908 Allowance for loan losses 5,765 4,939 5,618 4,386 4,790 Total assets 1,023,888 1,105,150 956,597 828,570 818,077 Total deposits 950,337 994,243 839,792 724,152 724,193 Total stockholders’ equity 68,041 103,726 107,689 98,328 89,055 (a) Tax-equivalent.
Biggest changeYear ended December 31 (In thousands) 2023 2022 2021 2020 2019 Net interest income (GAAP) $ 26,328 27,166 23,990 24,338 26,064 Tax-equivalent adjustment 417 456 470 492 557 Net interest income (Tax-equivalent) $ 26,745 27,622 24,460 24,830 26,621 Table of Contents 74 Table 2 - Selected Financial Data Year ended December 31 (Dollars in thousands, except per share amounts) 2023 2022 2021 2020 2019 Income statement Tax-equivalent interest income (a) $ 34,791 30,001 26,977 28,686 30,804 Total interest expense 8,046 2,379 2,517 3,856 4,183 Tax equivalent net interest income (a) 26,745 27,622 24,460 24,830 26,621 Provision for credit losses 135 1,000 (600) 1,100 (250) Total noninterest income (2,981) 6,506 4,288 5,375 5,494 Total noninterest expense 22,594 19,823 19,433 19,554 19,697 Net earnings before income taxes and tax-equivalent adjustment 1,035 13,305 9,915 9,551 12,668 Tax-equivalent adjustment 417 456 470 492 557 Income tax expense (777) 2,503 1,406 1,605 2,370 Net earnings $ 1,395 10,346 8,039 7,454 9,741 Per share data: Basic and diluted net earnings $ 0.40 2.95 2.27 2.09 2.72 Cash dividends declared $ 1.08 1.06 1.04 1.02 1.00 Weighted average shares outstanding Basic and diluted 3,498,030 3,510,869 3,545,310 3,566,207 3,581,476 Shares outstanding 3,493,614 3,503,452 3,520,485 3,566,276 3,566,146 Stockholders' equity (book value) $ 21.90 19.42 29.46 30.20 27.57 Common stock price High $ 24.50 34.49 48.00 63.40 53.90 Low 18.80 22.07 31.32 24.11 30.61 Period-end $ 21.28 23.00 32.30 42.29 53.00 To earnings ratio 53.20 x 7.80 14.23 20.23 19.49 To book value 97 % 118 110 140 192 Performance ratios: Return on average equity 2.05 % 12.48 7.54 7.12 10.35 Return on average assets 0.14 % 0.96 0.78 0.83 1.18 Dividend payout ratio 270.00 % 35.93 45.81 48.80 36.76 Average equity to average assets 6.66 % 7.72 10.39 11.63 11.39 Asset Quality: Allowance for credit losses as a % of: Loans 1.23 % 1.14 1.08 1.22 0.95 Nonperforming loans 753 % 211 1,112 1,052 2,345 Nonperforming assets as a % of: Loans and other real estate owned 0.16 % 0.54 0.18 0.12 0.04 Total assets 0.09 % 0.27 0.07 0.06 0.02 Nonperforming loans as % of loans 0.16 % 0.54 0.10 0.12 0.04 Net charge-offs (recoveries) as a % of average loans 0.01 % 0.04 0.02 (0.03) 0.03 Capital Adequacy (c): CET 1 risk-based capital ratio 14.52 % 15.39 16.23 17.27 17.28 Tier 1 risk-based capital ratio 14.52 % 15.39 16.23 17.27 17.28 Total risk-based capital ratio 15.52 % 16.25 17.06 18.31 18.12 Tier 1 leverage ratio 9.72 % 10.01 9.35 10.32 11.23 Other financial data: Net interest margin (a) 2.89 % 2.81 2.55 2.92 3.43 Effective income tax rate (125.73) % 19.48 14.89 17.72 19.57 Efficiency ratio (b) 95.08 % 58.08 67.60 64.74 61.33 Selected period end balances: Securities $ 270,910 405,304 421,891 335,177 235,902 Loans, net of unearned income 557,294 504,458 458,364 461,700 460,901 Allowance for credit losses 6,863 5,765 4,939 5,618 4,386 Total assets 975,255 1,023,888 1,105,150 956,597 828,570 Total deposits 896,243 950,337 994,243 839,792 724,152 Total stockholders’ equity 76,507 68,041 103,726 107,689 98,328 (a) Tax-equivalent.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including inflation and the continuing increases in market interest rates, remaining COVID-19 pandemic effects including supply chain disruptions, commercial office occupancy levels, housing supply shortages and inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in making loans and evaluating collateral, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, 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 specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including inflation and the continuing higher levels of market interest rates, remaining COVID-19 pandemic effects including supply chain disruptions, commercial office occupancy levels, housing supply shortages and inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in making loans and evaluating collateral, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, 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.
If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold, obtain FHLB advances, raise deposits or sell securities available-for-sale, or to purchase federal funds from other financial institutions on a short-term basis while it obtains the other longer term funding.
If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold , obtain FHLB-Atlanta advances, raise deposits, sell securities available-for-sale, or purchase federal funds from other financial institutions on a short-term basis while it obtains the other longer-term funding.
The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures.
The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, our lending policies and procedures.
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, 2022 and 2021, the Company had no derivative contracts to assist in managing interest rate sensitivity.
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, 2023 and 2022, the Company had no derivative contracts to assist in managing interest rate sensitivity.
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, 2022.
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, 2023.
The following table shows the carrying value and weighted average yield of securities available-for-sale as of December 31, 2022 according to contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities (“MBS”) because the mortgages underlying the securities may be called or prepaid with or without penalty.
The following table shows the carrying value and weighted average yield of securities available -for-sale as of December 31, 2023 according to contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed securities (“MBS”) because the mortgages underlying the securities may be called or prepaid with or without penalty.
As of December 31, 2022, 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.
As of December 31, 2023, 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.
The Company depends upon dividends from the Bank for liquidity to pay its operating expense, debt obligations, if any, and cash dividends on, and repurchases of, Company common stock. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory restrictions. If needed, the Company could also issue common stock or other securities.
The Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations, if any, and cash dividends on, and repurchases of, Company common stock. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory restrictions. If needed, the Company could also issue common stock or other securities.
Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $22.6 million.
Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $22.2 million.
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.
Table of Contents 72 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.
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. Table of Contents 59 The Company evaluates MSRs for impairment quarterly. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type.
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 quarterly. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type.
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 2022 and 2021.
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 2023 and 2022.
ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements used to help manage interest rate sensitivity include an earnings simulation and an economic value of equity model. Earnings simulation Management believes that interest rate risk is best estimated by our earnings simulation modeling.
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. Table of Contents 68 Earnings simulation Management believes that interest rate risk is best estimated by our earnings simulation modeling.
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 Table of Contents 68 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, 2022.
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, 2023.
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.
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. Table of Contents 70 Liquidity is managed at two levels. The first is the liquidity of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of our financial condition at December 31, 2022 and 2021 and our results of operations for the years ended December 31, 2022 and 2021.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of our financial condition at December 31, 2023 and 2022 and our results of operations for the years ended December 31, 2023 and 2022.
Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk- based capital at December 31, 2022 (and related balances at December 31, 2021).
Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk- based capital at December 31, 2023 (and related balances at December 31, 2022).
Table of Contents 69 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.
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.
Table of Contents 57 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.
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.
To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following: 45% for an instantaneous change of +/- 400 basis points 35% for an instantaneous change of +/- 300 basis points 25% for an instantaneous change of +/- 200 basis points 15% for an instantaneous change of +/- 100 basis points The following table reports the variance of EVE assuming an immediate change in interest rates up or down when compared to the baseline EVE at December 31, 2022.
Table of Contents 69 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: 35% for an instantaneous change of +/- 400 basis points 30% for an instantaneous change of +/- 300 basis points 25% for an instantaneous change of +/- 200 basis points 15% for an instantaneous change of +/- 100 basis points The following table reports the variance of EVE assuming an immediate change in interest rates up or down when compared to the baseline EVE at December 31, 2023.
Origination income decreased as market interest rates on mortgage loans increased. The decrease in origination income was partially offset by an increase in servicing fees, net of related amortization expense as prepayment speeds slowed, resulting in decreased amortization expense.
Origination income decreased as market interest rates on mortgage loans increased and mortgage loan volumes also decreased. The decrease in origination income was partially offset by an increase in mortgage servicing fees, net of related amortization expense as mortgage prepayment speeds slowed, resulting in decreased amortization expense.
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.” The Bank’s capital conservation buffer was 8.25% at December 31, 2022.
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.” The Bank’s capital conservation buffer was 7.52% at December 31, 2023.
Various projects financed earlier that were based on lower interest rate assumptions than currently in effect may not be as profitable or successful at higher interest rate currently in effect and currently expected in the future.
Various projects financed earlier that were based on lower interest rate assumptions than currently in effect may not be as profitable or successful at the higher interest rates currently in effect and which may exist in the future.
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.
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. Inflation can affect our noninterest expenses.
December 31 (In thousands) 2022 2021 Nonaccrual loans: Commercial and industrial $ 443 — Commercial real estate 2,116 187 Residential real estate 172 257 Total nonaccrual loans / nonperforming loans $ 2,731 444 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.
December 31 (In thousands) 2023 2022 Nonaccrual loans: Commercial and industrial $ — 443 Commercial real estate 783 2,116 Residential real estate 128 172 Total nonaccrual loans $ 911 2,731 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.
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. The yield curve has been inverted at various times in 2022 and in the first months of 2023.
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. The yield curve has been inverted during 2023 and in the first months of 2024.
The Company’s effective income tax rate is principally impacted by tax- exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New Markets Tax Credits. BALANCE SHEET ANALYSIS Securities Securities available-for-sale were $405.3 million at December 31, 2022, compared to $421.9 million at December 31, 2021.
The Company’s effective income tax rate otherwise is principally affected by tax-exempt earnings from the Company’s investments in municipal securities, bank- owned life insurance, and New Markets Tax Credits. BALANCE SHEET ANALYSIS Securities Securities available-for-sale were $270.9 million at December 31, 2023, compared to $405.3 million at December 31, 2022.
See "Table 1 - Explanation of Non-GAAP Financial Measures". Financial Summary The Company’s net earnings were $10.3 million for the full year 2022, compared to $8.0 million for the full year 2021. Basic and diluted net earnings per share were $2.95 per share for the full year 2022, compared to $2.27 per share for the full year 2021.
See "Table 1 - Explanation of Non-GAAP Financial Measures". Financial Summary The Company’s net earnings were $1.4 million for the full year 2023, compared to $10.3 million for the full year 2022. Basic and diluted net earnings per share were $0.40 per share for the full year 2023, compared to $2.95 per share for the full year 2022.
The Company’s effective income tax rate is principally impacted by tax- exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New Markets Tax Credits. The Company paid cash dividends of $1.06 per share in 2022, an increase of 2% from 2021.
The Company’s effective income tax rate otherwise is principally affected by tax-exempt earnings from the Company’s investments in municipal securities, bank- owned life insurance, and New Markets Tax Credits. The Company paid cash dividends of $1.08 per share in 2023, an increase of 2% from 2022.
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.
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 credit losses, our determination of credit losses for investment securities, 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.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $20.3 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, 2022, the Bank had no relationships exceeding these limits.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $20.0 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, 2023, the Bank had one loan relationship exceeding our internal limit.
The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The new standard is not expected to have a material impact on the Company’s consolidated financial statements.
The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company does not expect the new standard to have a material impact on the Company’s consolidated financial statements.
Four loan categories represented the majority of the loan portfolio at December 31, 2022: commercial real estate (53%), residential real estate (19%), construction and land development (13%), and commercial and industrial (13%). Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at December 31, 2022.
Four loan categories represented the majority of the loan portfolio at December 31, 2023: commercial real estate (52%), residential real estate (21%), construction and land development (12%), and commercial and industrial (13%). Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at December 31, 2023.
The allowance for loan losses was $5.8 million at December 31, 2022 compared to $4.9 million at December 31, 2021, which management believed to be adequate at each of the respective dates.
The allowance for credit losses was $6.9 million at December 31, 2023 compared to $5.8 million at December 31, 2022, which management believed to be adequate at each of the respective dates.
This decrease reflects net outflows to higher yield investment alternatives in a rising interest rate environment and a decline in balances in existing accounts due to increased customer spending. Noninterest-bearing deposits were $311.4 million, or 33% of total deposits, at December 31, 2022, compared to $316.1 million, or 32% of total deposits at December 31, 2021.
Noninterest-bearing deposits were $270.7 million, or 30% of total deposits, at December 31, 2023, compared to $311.4 million, or 33% of total deposits at December 31, 2022. The decrease reflects net outflows to higher yield investment alternatives in a rising interest rate environment and a decline in balances in existing accounts due to increased customer spending.
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.
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. We service all residential mortgage loans originated and sold by us to Fannie Mae.
December 31 (Dollars in thousands) 2022 2021 Nonperforming assets: Nonperforming (nonaccrual) loans $ 2,731 444 Other real estate owned — 374 Total nonperforming assets $ 2,731 818 as a % of loans and other real estate owned 0.54 % 0.18 as a % of total assets 0.27 % 0.07 Nonperforming loans as a % of total loans 0.54 % 0.10 Accruing loans 90 days or more past due $ — — The table below provides information concerning the composition of nonaccrual loans at December 31, 2022 and 2021, respectively.
December 31 (Dollars in thousands) 2023 2022 Nonperforming assets: Nonperforming (nonaccrual) loans $ 911 2,731 Total nonperforming assets $ 911 2,731 as a % of loans and other real estate owned 0.16 % 0.54 as a % of total assets 0.09 % 0.27 Nonperforming loans as a % of total loans 0.16 % 0.54 Accruing loans 90 days or more past due $ — — The table below provides information concerning the composition of nonaccrual loans at December 31, 2023 and 2022, respectively.
Noninterest Income Year ended December 31 (Dollars in thousands) 2022 2021 Service charges on deposit accounts $ 598 $ 566 Mortgage lending 650 1,547 Bank-owned life insurance 317 403 Gain on sale of premises and equipment 3,234 — Securities gains, net 12 15 Other 1,695 1,757 Total noninterest income $ 6,506 $ 4,288 The Company’s noninterest income from mortgage lending is primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans.
Noninterest Income Year ended December 31 (Dollars in thousands) 2023 2022 Service charges on deposit accounts $ 603 $ 598 Mortgage lending 430 650 Bank-owned life insurance 411 317 Gain on sale of premises and equipment — 3,234 Securities (losses) gains, net (6,295) 12 Other 1,870 1,695 Total noninterest income $ (2,981) $ 6,506 The Company’s noninterest income from mortgage lending is primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans.
At December 31, 2022, 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 16.25 %, a tier 1 leverage ratio of 10.01% and common equity tier 1 (“CET1”) of 15.39% at December 31, 2022.
At December 31, 2023, 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 15.52%, a tier 1 leverage ratio of 9.72% and common equity tier 1 (“CET1”) of 14.52% at December 31, 2023.
At December 31, 2022 we had total deferred tax assets of $15.6 million included as “other assets”, including $13.7 million resulting from unrealized losses in our securities portfolio.
At December 31, 2023 we had total deferred tax assets of $12.5 million included as “other assets”, including $9.7 million resulting from unrealized losses in our securities portfolio.
Year ended December 31 (Dollars in thousands) 2022 2021 Origination income $ 309 $ 1,417 Servicing fees, net 341 130 Total mortgage lending income $ 650 $ 1,547 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.
Year ended December 31 (Dollars in thousands) 2023 2022 Origination income $ 71 $ 309 Servicing fees, net 359 341 Total mortgage lending income $ 430 $ 650 Table of Contents 61 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.
At December 31, 2022, the Company’s allowance for loan losses was $5.8 million, or 1.14% of total loans, compared to $4.9 million, or 1.08% of total loans, at December 31, 2021.
At December 31, 2023, the Company’s allowance for credit losses was $6.9 million, or 1.23% of total loans, compared to $5.8 million, or 1.14% of total loans, at December 31, 2022.
Table of Contents 71 As of December 31, 2022, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights (MSRs) totaled $232.7 million.
As of December 31, 2023, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights (MSRs) totaled $215.5 million.
The Company was not required to repurchase any loans during 2022 and 2021 as a result of representation and warranty provisions contained in the Company’s sale agre ements with Fannie Mae, and had no pending repurchase or make-whole requests at December 31, 2022. We service all residential mortgage loans originated and sold by us to Fannie Mae.
The Company was not required to repurchase any loans during 2023 and 2022 as a result of representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or make-whole requests at December 31, 2023.
These non- marketable 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. The Company records these non-marketable equity securities as a component of other assets, which are periodically evaluated for impairment.
These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities. The Company records these non-marketable equity securities as a component of other assets, which are periodically evaluated for impairment. Management considers these non-marketable equity securities to be long-term investments.
Our deposit costs may increase as the Federal Reserve increases its target federal funds rate, market interest rates increase, and as customer savings behaviors change as a result of inflation and higher market interest rates on deposits and other alternative investments. The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations.
Our deposit costs may increase as the Federal Reserve increases its target federal funds rate, market interest rates increase, and as customer savings behaviors change as a result of inflation and customers seek higher market interest rates on deposits and other alternative investments.
See "Table 1 - Explanation of Non-GAAP Financial Measures". RESULTS OF OPERATIONS Net Interest Income and Margin Net interest income (tax-equivalent) was $27.6 million in 2022, compared to $24.5 million in 2021. This increase was due to improvements in the Company’s net interest margin (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 $26.7 million in 2023, compared to $27.6 million in 2022.
Table of Contents 67 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 Basel III endgame regulatory proposals are not applicable to the Company or the Bank. 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.
Changes in Interest Rates Net Interest Income % Variance 400 basis points (3.81) % 300 basis points (2.62) 200 basis points (1.50) 100 basis points (0.58) (100) basis points (0.59) (200) basis points (1.50) (300) basis points (2.29) (400) basis points (2.92) At December 31, 2022, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.
Changes in Interest Rates Net Interest Income % Variance 400 basis points (5.45) % 300 basis points (3.85) 200 basis points (2.32) 100 basis points (1.03) (100) basis points (0.57) (200) basis points (1.33) (300) basis points (2.12) (400) basis points (2.95) At December 31, 2023, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.
The interim final rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital distribution decisions. The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries.
The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s Small Bank Holding Company Policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries.
Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer. The interim final rule was adopted as a final rule on August 26, 2020.
Table of Contents 67 On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted a final rule that amended the capital conservation buffer.
The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters.
The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters. This rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital distribution decisions.
ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , eliminates the accounting guidance for troubled debt restructurings (“TDRs”), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.
On January 1, 2023, we adopted FASB ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) which significantly changes our methodology for determining our allowance for credit losses, and ASU 2022-02 , Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures which 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.
Table of Contents 51 Summary of Results of Operations Year ended December 31 (Dollars in thousands, except per share data) 2022 2021 Net interest income (a) $ 27,622 $ 24,460 Less: tax-equivalent adjustment 456 470 Net interest income (GAAP) 27,166 23,990 Noninterest income 6,506 4,288 Total revenue 33,672 28,278 Provision for loan losses 1,000 (600) Noninterest expense 19,823 19,433 Income tax expense 2,503 1,406 Net earnings $ 10,346 $ 8,039 Basic and diluted net earnings per share $ 2.95 $ 2.27 (a) Tax-equivalent.
Table of Contents 55 Summary of Results of Operations Year ended December 31 (Dollars in thousands, except per share data) 2023 2022 Net interest income (a) $ 26,745 $ 27,622 Less: tax-equivalent adjustment 417 456 Net interest income (GAAP) 26,328 27,166 Noninterest income (2,981) 6,506 Total revenue 23,347 33,672 Provision for credit losses 135 1,000 Noninterest expense 22,594 19,823 Income tax (benefit) expense (777) 2,503 Net earnings $ 1,395 $ 10,346 Basic and diluted net earnings per share $ 0.40 $ 2.95 (a) Tax-equivalent.
Table of Contents 70 The following table presents additional information about our contractual obligations as of December 31, 2022, which by their terms had contractual maturity and termination dates subsequent to December 31, 2022: Payments due by period 1 year 1 to 3 3 to 5 More than (Dollars in thousands) Total or less years years 5 years Contractual obligations: Deposit maturities (1) $ 950,337 894,523 38,266 17,357 191 Operating lease obligations 674 123 237 192 122 Total $ 951,011 894,646 38,503 17,549 313 (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 from deposits, FHLB advances, sales of securities under agreement to repurchase and federal funds lines, as well as possible sales of securities, to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next 12 months.
The following table presents additional information about our contractual obligations as of December 31, 2023, which by their terms had contractual maturity and termination dates subsequent to December 31, 2023: Payments due by period 1 year 1 to 3 3 to 5 More than (Dollars in thousands) Total or less years years 5 years Contractual obligations: Deposit maturities (1) $ 896,243 864,461 16,866 14,916 — Operating lease obligations 551 123 210 177 41 Total $ 896,794 864,584 17,076 15,093 41 (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.
The decrease in the fair value of securities was primarily due to an increase in long-term market interest rates, which resulted in $13.7 million of deferred tax assets included in our other assets. The average annualized tax-equivalent yields earned on total securities were 2.06% in 2022 and 1.66% in 2021.
The increase in the fair value of securities was primarily due to a decrease in long-term market interest rates at the end of 2023. The average annualized tax-equivalent yields earned on total securities were 2.37 % in 2023 and 2.06% in 2022.
Table of Contents 77 Table 5 - Net Charge-Offs (Recoveries) to Average Loans 2022 2021 Net Net Net charge-off Net charge-off charge-offs Average (recovery) charge-offs Average (recovery) (Dollars in thousands) (recoveries) Loans (2) ratio (recoveries) Loans (2) ratio Commercial and industrial (1) $ 215 69,973 0.31 % $ (140) 64,618 (0.22) % Construction and land development — 44,177 — — 33,945 — Commercial real estate (3) 247,374 — 254 253,113 0.10 Residential real estate (26) 85,223 (0.03) (52) 81,526 (0.06) Consumer installment 8 7,915 0.10 17 6,975 0.24 Total $ 194 454,662 0.04 % $ 79 440,177 0.02 % (1) Excludes PPP loans, which are guaranteed by the SBA.
Table of Contents 77 Table 5 - Net Charge-Offs (Recoveries) to Average Loans 2023 2022 Net Net Net (recovery) Net charge-off (recoveries) Average charge-off charge-offs Average (recovery) (Dollars in thousands) charge-off Loans (2) ratio (recoveries) Loans (2) ratio Commercial and industrial (1) $ (40) 64,565 (0.06) % $ 215 69,973 0.31 % Construction and land development — 66,492 — — 44,177 — Commercial real estate — 274,779 — (23) 247,374 (0.01) Residential real estate (14) 108,891 (0.01) (26) 85,223 (0.03) Consumer installment 100 9,638 1.04 8 7,915 0.10 Total $ 46 524,365 0.01 % $ 174 454,662 0.04 % (1) Excludes PPP loans, which are guaranteed by the SBA.
Residential mortgage lending and servicing activities We primarily sell conforming residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans (MSRs). 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.
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.
This increase was primarily due to changes in our asset mix and higher market interest rates on interest earning assets, while our cost of funds decreased 4 basis points to 0.35%.
This increase was primarily due to changes in our asset mix and higher market interest rates on interest earning assets. The cost of total interest-bearing liabilities increased by 87 basis points to 1.22% in 2023 compared to 0.35% in 2022.
Table of Contents 76 Table 4 - Volume and Rate Variance Analysis Year ended December 31, 2022 vs. 2021 Year ended December 31, 2021 vs. 2020 Net Due to change in Net Due to change in (Dollars in thousands) Change Rate (2) Volume (2) Change Rate (2) Volume (2) Interest income: Loans and loans held for sale $ (232) (5) (227) $ (1,582) (1,333) (249) Securities - taxable 2,469 1,687 782 175 (933) 1,108 Securities - tax-exempt (1) (70) (30) (40) (101) (91) (10) Total securities 2,399 1,657 742 74 (1,024) 1,098 Federal funds sold 380 329 51 (70) (81) 11 Interest bearing bank deposits 477 666 (189) (131) (159) 28 Total interest income $ 3,024 2,647 377 $ (1,709) (2,597) 888 Interest expense: Deposits: NOW $ 158 122 36 $ (311) (340) 29 Savings and money market (6) (66) 60 (416) (537) 121 Certificates of deposits (333) (292) (41) (620) (560) (60) Total interest-bearing deposits (181) (236) 55 (1,347) (1,437) 90 Short-term borrowings 43 8 35 8 — 8 Total interest expense (138) (228) 90 (1,339) (1,437) 98 Net interest income $ 3,162 2,875 287 $ (370) (1,160) 790 (1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 21%.
Table of Contents 76 Table 4 - Volume and Rate Variance Analysis Year ended December 31, 2023 vs. 2022 Year ended December 31, 2022 vs. 2021 Net Due to change in Net Due to change in (Dollars in thousands) Change Rate (2) Volume (2) Change Rate (2) Volume (2) Interest income: Loans and loans held for sale $ 4,684 1,390 3,294 $ (232) (5) (227) Securities - taxable 632 1,247 (615) 2,469 1,687 782 Securities - tax-exempt (1) (187) 174 (361) (70) (30) (40) Total securities 445 1,421 (976) 2,399 1,657 742 Federal funds sold (185) 1,661 (1,846) 380 329 51 Interest bearing bank deposits (154) 2,285 (2,439) 477 666 (189) Total interest income $ 4,790 6,757 (1,967) $ 3,024 2,647 377 Interest expense: Deposits: NOW $ 1,537 1,574 (37) $ 158 122 36 Savings and money market 1,483 1,762 (279) (6) (66) 60 Certificates of deposits 2,635 2,167 468 (333) (292) (41) Total interest-bearing deposits 5,655 5,503 152 (181) (236) 55 Short-term borrowings 12 40 (28) 43 8 35 Total interest expense 5,667 5,543 124 (138) (228) 90 Net interest income $ (877) 1,214 (2,091) $ 3,162 2,875 287 (1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 21%.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $7.4 million, or 1%, and $7.2 million, or 2%, of total loans, net of unearned income at December 31, 2022 and 2021, respectively.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $8.7 million, or 2%, and $7.4 million, or 1%, of total loans at December 31, 2023 and 2022, respectively. For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at December 31, 2023 and 2022.
The Bank’s tier 1 leverage ratio was 10.01%, CET1 risk-based capital ratio was 15.39%, tier 1 risk-based capital ratio was 15.39%, and total risk-based capital ratio was 16.25% at December 31, 2022.
The Bank’s tier 1 leverage ratio was 9.72%, CET1 risk-based capital ratio was 14.52%, tier 1 risk-based capital ratio was 14.52%, and total risk-based capital ratio was 15.52% at December 31, 2023.
Table of Contents 81 Table 9 - Estimated Uninsured Time Deposits by Maturity (Dollars in thousands) December 31, 2022 Maturity of: 3 months or less $ 774 Over 3 months through 6 months 173 Over 6 months through 12 months 26,220 Over 12 months 14,941 Total estimated uninsured time deposits $ 42,108 Table of Contents 82
Table of Contents 81 Table 9 - Estimated Uninsured Time Deposits by Maturity (Dollars in thousands) December 31, 2023 Maturity of: 3 months or less $ 12,503 Over 3 months through 6 months 21,940 Over 6 months through 12 months 50,384 Over 12 months 12,816 Total estimated uninsured time deposits $ 97,643 Table of Contents 82
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.
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 uncollectability of a loan balance is confirmed.
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.
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.
Changes in Interest Rates EVE % Variance 400 basis points (3.87) % 300 basis points (1.11) 200 basis points 0.58 100 basis points 1.16 (100) basis points (5.12) (200) basis points (15.06) (300) basis points (28.96) (400) basis points (31.85) At December 31, 2022, our EVE model indicated that we were in compliance with the policy guidelines noted above.
Changes in Interest Rates EVE % Variance 400 basis points (20.15) % 300 basis points (12.94) 200 basis points (6.79) 100 basis points (2.76) (100) basis points (0.13) (200) basis points (3.45) (300) basis points (10.88) (400) basis points (12.07) At December 31, 2023, our EVE model indicated that we were in compliance with the policy guidelines noted above.
The rules included the implementation of a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer was fully phased-in on January 1, 2019 at 2.5%.
On January 1, 2015, the Company and Bank became subject to the Basel III regulatory capital framework. The rules included the implementation of a capital conservation buffer of CET1 capital of 2.5% that is added to the minimum requirements for capital adequacy purposes.
Management considers these non-marketable 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. Fair Value Determination U.S.
Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary declines in value. 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.
At December 31, 2022 and 2021, respectively, the Company had $2.7 million and $0.4 million in nonaccrual loans. There were no loans 90 days past due and still accruing interest at December 31, 2022 and 2021, respectively. The table below provides information concerning the composition of OREO at December 31, 2022 and 2021, respectively.
There were no loans 90 days past due and still accruing interest at December 31, 2023 and 2022, respectively. The Company had no OREO at December 31, 2023 and 2022, respectively.
Table of Contents 75 Table 3 - Average Balance and Net Interest Income Analysis Year ended December 31 2022 2021 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Interest-earning assets: Loans and loans held for sale (1) $ 454,604 $ 20,241 4.45% $ 459,712 $ 20,473 4.45% Securities - taxable 364,029 6,576 1.81% 320,766 4,107 1.28% Securities - tax-exempt (2) 61,591 2,172 3.53% 62,736 2,242 3.57% Total securities 425,620 8,748 2.06% 383,502 6,349 1.66% Federal funds sold 43,766 435 1.00% 38,659 55 0.15% Interest bearing bank deposits 58,141 577 0.99% 77,220 100 0.13% Total interest-earning assets 982,131 30,001 3.05% 959,093 26,977 2.81% Cash and due from banks 15,108 14,591 Other assets 77,496 51,664 Total assets $ 1,074,735 $ 1,025,348 Interest-bearing liabilities: Deposits: NOW $ 197,177 370 0.19% $ 178,197 212 0.12% Savings and money market 327,139 649 0.20% 296,708 655 0.22% Certificates of deposits 154,273 1,300 0.84% 159,111 1,633 1.03% Total interest-bearing deposits 678,589 2,319 0.34% 634,016 2,500 0.39% Short-term borrowings 4,516 60 1.33% 3,349 17 0.51% Total interest-bearing liabilities 683,105 2,379 0.35% 637,365 2,517 0.39% Noninterest-bearing deposits 306,772 278,013 Other liabilities 1,933 3,392 Stockholders' equity 82,925 106,578 Total liabilities and and stockholders' equity $ 1,074,735 $ 1,025,348 Net interest income and margin $ 27,622 2.81% $ 24,460 2.55% (1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
Table of Contents 75 Table 3 - Average Balance and Net Interest Income Analysis Year ended December 31 2023 2022 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Interest-earning assets: Loans and loans held for sale (1) $ 523,838 $ 24,925 4.76% $ 454,604 $ 20,241 4.45% Securities - taxable 335,366 7,208 2.15% 364,006 6,576 1.81% Securities - tax-exempt (2) 52,122 1,985 3.81% 61,614 2,172 3.53% Total securities 387,488 9,193 2.37% 425,620 8,748 2.06% Federal funds sold 5,221 250 4.79% 43,766 435 1.00% Interest bearing bank deposits 8,593 423 4.92% 58,141 577 0.99% Total interest-earning assets 925,140 34,791 3.76% 982,131 30,001 3.05% Cash and due from banks 15,230 15,108 Other assets 81,438 77,496 Total assets $ 1,021,808 $ 1,074,735 Interest-bearing liabilities: Deposits: NOW $ 193,451 1,907 0.99% $ 197,177 370 0.19% Savings and money market 289,235 2,132 0.74% 327,139 649 0.20% Certificates of deposits 175,085 3,935 2.25% 154,273 1,300 0.84% Total interest-bearing deposits 657,771 7,974 1.21% 678,589 2,319 0.34% Short-term borrowings 3,255 72 2.21% 4,516 60 1.33% Total interest-bearing liabilities 661,026 8,046 1.22% 683,105 2,379 0.35% Noninterest-bearing deposits 289,019 306,772 Other liabilities 3,697 1,933 Stockholders' equity 68,066 82,925 Total liabilities and and stockholders' equity $ 1,021,808 $ 1,074,735 Net interest income and margin $ 26,745 2.89% $ 27,622 2.81% (1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
This amount includes depreciation expense and one- time costs associated with the opening of the Company’s new headquarters. The Company relocated its main office branch and bank operations into its newly constructed headquarters during May 2022.
The increase in net occupancy and equipment expense was primarily due to increased expenses related to the Company’s new headquarters in downtown Auburn. This amount includes depreciation expense and costs associated with ope rating of the new headquarters. The Company relocated its main office branch and bank operations into its newly constructed headquarters during June 2022.
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.
Off-Balance Sheet Arrangements At December 31, 2023, the Bank had outstanding standby letters of credit of $0.6 million and unfunded loan commitments outstanding of $73.6 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.
The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.” Table of Contents 63 A summary of the changes in the allowance for loan losses and certain asset quality ratios for the years ended December 31, 2022 and 2021 are presented below.
A summary of the changes in the allowance for credit losses and certain asset quality ratios for the years ended December 31, 2023 and 2022 are presented below.
Average Balance Sheet and Interest Rates Year ended December 31 2022 2021 Average Yield/ Average Yield/ (Dollars in thousands) Balance Rate Balance Rate Loans and loans held for sale $ 454,604 4.45% $ 459,712 4.45% Securities - taxable 364,029 1.81% 320,766 1.28% Securities - tax-exempt (a) 61,591 3.53% 62,736 3.57% Total securities 425,620 2.06% 383,502 1.66% Federal funds sold 43,766 1.00% 38,659 0.15% Interest bearing bank deposits 58,141 0.99% 77,220 0.13% Total interest-earning assets 982,131 3.05% 959,093 2.81% Deposits: NOW 197,177 0.19% 178,197 0.12% Savings and money market 327,139 0.20% 296,708 0.22% Certificates of deposits 154,273 0.84% 159,111 1.03% Total interest-bearing deposits 678,589 0.34% 634,016 0.39% Short-term borrowings 4,516 1.33% 3,349 0.51% Total interest-bearing liabilities 683,105 0.35% 637,365 0.39% Net interest income and margin (a) $ 27,622 2.81% $ 24,460 2.55% (a) Tax-equivalent.
Table of Contents 59 Average Balance Sheet and Interest Rates Year ended December 31 2023 2022 Average Yield/ Average Yield/ (Dollars in thousands) Balance Rate Balance Rate Loans and loans held for sale $ 523,838 4.76% $ 454,604 4.45% Securities - taxable 335,366 2.15% 364,006 1.81% Securities - tax-exempt (a) 52,122 3.81% 61,614 3.53% Total securities 387,488 2.37% 425,620 2.06% Federal funds sold 5,221 4.79% 43,766 1.00% Interest bearing bank deposits 8,593 4.92% 58,141 0.99% Total interest-earning assets 925,140 3.76% 982,131 3.05% Deposits: NOW 193,451 0.99% 197,177 0.19% Savings and money market 289,235 0.74% 327,139 0.20% Certificates of deposits 175,085 2.25% 154,273 0.84% Total interest-bearing deposits 657,771 1.21% 678,589 0.34% Short-term borrowings 3,255 2.21% 4,516 1.33% Total interest-bearing liabilities 661,026 1.22% 683,105 0.35% Net interest income and margin (a) $ 26,745 2.89% $ 27,622 2.81% (a) Tax-equivalent.
For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at December 31, 2022 and 2021. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other consumer mortgage products which are generally viewed as high risk.
The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other consumer mortgage products which are generally viewed as high risk. The average yield earned on loans and loans held for sale was 4.76% in 2023 and 4.45% in 2022.
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.
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.
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.
Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.
The increase in noninterest expense was primarily due to increases in net occupancy and equipment expense of $1.0 million related to the Company’s new headquarters, which opened in June 2022, an increase in salaries and benefits expense of $0.6 million, and increases in other noninterest expense of $0.4 million.
This increase in noninterest expense reflects increases in net occupancy and equipment expenses of $0.2 million related to the Company’s new headquarters, which opened in June 2022, professional fees expense of $0. 3 million, other real estate owned expense of $0.1 million, FDIC and other regulatory assessments expenses of $0.2 million and other noninterest expense of $0.5 million, partially offset by decreases in salaries and benefits expense of $0.2 million.
Noninterest Expense Year ended December 31 (Dollars in thousands) 2022 2021 Salaries and benefits $ 12,307 $ 11,710 Employee retention credit (1,569) — Net occupancy and equipment 2,742 1,743 Professional fees 975 995 FDIC and other regulatory assessments 404 426 Other 4,964 4,559 Total noninterest expense $ 19,823 $ 19,433 The increase in salaries and benefits was primarily due to a decrease in deferred costs related to the PPP loan program, and routine annual wage and benefit increases.
Noninterest Expense Year ended December 31 (Dollars in thousands) 2023 2022 Salaries and benefits $ 12,101 $ 12,307 Employee retention credit — (1,569) Net occupancy and equipment 2,954 2,742 Professional fees 1,299 975 FDIC and other regulatory assessments 631 404 Other 5,609 4,964 Total noninterest expense $ 22,594 $ 19,823 Salaries and benefits decreased during 2023 compared to 2022.

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