Item 7. Management’s Discussion and Analysis
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,
2024 and 2023 and our results of operations for
the years ended December 31, 2024 and 2023. The purpose of this discussion
is to provide information about our financial
condition and results of operations which is not otherwise apparent
from the consolidated financial statements. The
following discussion and analysis should be read along with our
consolidated financial statements and the related notes
included elsewhere herein. In addition, this discussion and analysis contains
forward-looking statements, so you should
refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding
Forward-Looking Statements”.
This includes
Table 2 “Selected
Financial Data.”
OVERVIEW
The Company was incorporated in 1990 under the laws of the State of Delaware and
became a bank holding company after
it acquired its Alabama predecessor, which was a bank
holding company established in 1984. The Bank, the Company's
principal subsidiary,
is an Alabama state-chartered bank that is a member of the Federal Reserve System and
has operated
continuously since 1907. Both the Company and the Bank are headquartered
in Auburn, Alabama. The Bank conducts its
business primarily in East Alabama, including Lee County and surrounding
areas. The Bank operates full-service branches
in Auburn, Opelika, Notasulga and Valley,
Alabama.
The Bank also operates a loan production office in
Phenix City,
Alabama.
Summary of Results of Operations
Year ended December 31
(Dollars in thousands, except per share data)
2024
2023
Net interest income (a)
$
27,204
$
26,745
Less: tax-equivalent adjustment
79
417
Net interest income (GAAP)
27,125
26,328
Noninterest income
3,474
(2,981)
Total revenue
30,599
23,347
Provision for credit losses
36
135
Noninterest expense
22,166
22,594
Income tax expense (benefit)
2,000
(777)
Net earnings
$
6,397
$
1,395
Basic and diluted net earnings per share
$
1.83
$
0.40
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
The Company’s net earnings were
$6.4 million for the full year 2024, compared to $1.4 million for the full year 2023.
Basic and diluted net earnings per share were $1.83 per share for the full year 2024,
compared to $0.40 per share for the full
year 2023.
Net earnings for 2023 reflected the sale of $117.6 million
of available-for-sale securities for an after-tax loss of
$(4.7) million, or $(1.35) per share related to the Company’s
balance sheet repositioning strategy in December 2023.
Excluding this non-routine item, net earnings for the full year 2023
would have been $6.1 million, or $1.75 per share.
Net interest income (tax-equivalent) was $27.2 million in 2024, a
2% increase compared to $26.7 million in 2023. This
increase was primarily due to improved net interest margin.
The Company’s net interest margin
(tax-equivalent) was
3.06% in 2024, compared to 2.89% in 2023.
The increase in net interest margin (tax-equivalent) was primarily
due to loan
growth and the December 2023 balance sheet repositioning, which resulted
in a more favorable asset mix and higher yields
on interest-earning assets in 2024.
Average loans for 2024 were $568.7
million, a 9% increase from 2023.
At December 31, 2024, the Company’s
allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to
$6.9 million, or 1.23% of total loans, at December 31, 2023.
Although the balance of the allowance for credit losses was
largely unchanged, the decrease in the allowance for credit
losses as a percentage of total loans was primarily due to
improved economic forecasts.
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59
The Company recorded a provision for credit losses of $36 thousand
in 2024 compared to $135 thousand during 2023.
The
provision for credit losses under CECL is reflective of the Company’s
credit risk profile and the future economic outlook
and forecasts. Our CECL model is largely influenced by economic
factors including, most notably,
the anticipated
unemployment rate.
Noninterest income was $3.5 million in 2024 compared to a loss of $3.0
million in 2023.
Excluding the pre-tax securities
loss of $6.3 million related to the balance sheet repositioning strategy in 2023,
noninterest income would have been $3.3
million for 2023.
Noninterest expense was $22.2 million in 2024 compared to $22.6
million in 2023.
This decrease in noninterest expense
reflects decreases in net occupancy and equipment expenses of $0.4
million, professional fees expense of $0.1
million,
other noninterest expense of $0.2 million.
These decreases were partially offset by increases in salaries and benefits
expense of $0.4
million.
The provision for income taxes expense was $2.0 million for an effective
tax rate of 23.82% for 2024, compared to a tax
benefit of $0.8 million for a negative effective tax rate of (125.73)%
for 2023.
The Company’s effective
income tax rate is
affected principally by tax-exempt earnings from the Company’s
investments in municipal securities, bank-owned life
insurance, and New Markets Tax
Credits.
The effective tax rate increased primarily due to a decrease in the Company’s
investment in municipal securities following the balance sheet restructuring
in the fourth quarter of 2023, and the adoption
of FASB ASU 2023-02
Investments – Equity Method and Joint Ventures
(Topic323) which allows the
proportional
amortization method for our NMTC investments, on January 1, 2024.
With the adoption of this ASU, amortization of
NMTCs are now included in income tax expense rather than noninterest
expense.
Additionally, the provision
for income
tax expense and the effective tax rates for 2024 included discrete tax
items associated with provision to return adjustments
in conjunction with the final 2023 tax return filing and the resolution of state examination
activities, which resulted in
additional tax expense.
The Company paid cash dividends of $1.08 per share in 2024, unchanged
from 2023. At December 31, 2024, 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 15.81%, a tier 1 leverage ratio of
10.49% and common equity tier 1 or
(CET1) of 14.80% at December 31, 2024.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with
U.S. generally accepted accounting
principles and with general practices within the banking industry.
In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our
allowance for credit losses, recurring and
non-recurring fair value measurements, and the valuation of deferred tax assets, were critical
to the determination of our
financial position and results of operations.
Allowance for Credit Losses – Loans
The allowance for credit losses is estimated under the CECL methodology set forth
in FASB ASC 326. The allowance
for
credit losses reflects management’s
estimate of the amount of credit losses expected to be recognized over
the remaining
life of the loans in our portfolio. This evaluation requires significant management
judgment and is based upon relevant
available information related to historical default and loss experience,
current and projected economic conditions, and other
portfolio-specific and environmental risk factors. Losses are predicted
over a reasonable and supportable forecast period,
and at the end of the reasonable and supportable period losses revert to long term historical
averages. The allowance for
credit losses is measured on a collective basis for pools of loans with similar risk characteristics,
and on an individual basis
for loans that do not share similar risk characteristics with the collectively evaluated
pools. There are factors beyond our
control, such as changes in projected economic conditions, real estate markets
or particular industry conditions which may
materially impact asset quality and the adequacy of the allowance for credit
losses and thus the resulting provision for credit
losses. The allowance is adjusted through provision for credit losses and decreased
by charge-offs, net of recoveries of
amounts previously charged-off. See Note
1 - Summary of Significant Accounting Policies and Note 5 - Loans and
Allowance for Credit Losses in the notes to our consolidated financial statements
in this report.
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60
Fair Value
Determination
U.S. GAAP requires management to value and disclose certain of
the Company’s assets and liabilities at fair value,
including investments classified as available-for-sale and
derivatives. ASC 820,
Fair Value
Measurements and Disclosures
,
which defines fair value, establishes a framework for measuring fair value
in accordance with U.S. GAAP and expands
disclosures about fair value measurements.
For more information regarding fair value measurements and disclosures,
please refer to Note 1 - Summary of Significant Accounting Policies and Note
13, Fair Value
in the notes to the
consolidated financial statements that accompany this report.
Fair values are based on active market prices of identical assets or liabilities when available.
Comparable assets or
liabilities or a composite of comparable assets in active markets are used when
identical assets or liabilities do not have
readily available active market pricing.
However, some of the Company’s
assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between
willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and
other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s
best estimates for appropriate discount rates, default rates,
prepayments, market volatility and other factors, taking into account
current observable market data and experience.
These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions,
as well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Deferred Tax
Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of
available evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be realized.
The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. At December 31,
2024 we had total deferred tax assets of $10.2 million
included as “other assets”, including $9.9 million resulting from unrealized
losses in our securities portfolio.
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, 2024.
The amount of the deferred tax assets considered realizable, however,
could
be reduced if estimates of future taxable income are reduced.
See Note 1 - Summary of Significant Accounting Policies
and Note 10 – Income Taxes
in the notes to the consolidated financial statements that accompany this report.
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61
Average Balance
Sheet and Interest Rates
Year ended December 31
2024
2023
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
568,733
5.23%
$
523,838
4.76%
Securities - taxable
248,072
2.19%
335,366
2.15%
Securities - tax-exempt (a)
10,084
3.70%
52,122
3.81%
Total securities
258,156
2.25%
387,488
2.37%
Federal funds sold
17,907
5.24%
5,221
4.79%
Interest bearing bank deposits
44,634
5.23%
8,593
4.92%
Total interest-earning
assets
889,430
4.36%
925,140
3.76%
Deposits:
NOW
192,702
1.39%
193,451
0.99%
Savings and money market
251,778
0.86%
289,235
0.74%
Certificates of deposit
195,097
3.46%
175,085
2.25%
Total interest-bearing
deposits
639,577
1.81%
657,771
1.21%
Short-term borrowings
628
0.48%
3,255
2.21%
Total interest-bearing
liabilities
640,205
1.81%
661,026
1.22%
Net interest income and margin (a)
$
27,204
3.06%
$
26,745
2.89%
(a) Tax-equivalent.
See "Table 1 - Explanation
of Non-GAAP Financial Measures".
RESULTS
OF OPERATIONS
Net Interest Income and Margin
Net interest income (tax-equivalent) was $27.2 million in 2024, a
2% increase compared to $26.7 million in 2023. This
increase was primarily due to improved net interest margin.
The Company’s net interest margin
(tax-equivalent) was
3.06% in 2024, compared to 2.89% in 2023.
The increase in net interest margin (tax-equivalent) was primarily
due to loan
growth and the balance sheet repositioning strategy the Company
completed in the fourth quarter of 2023, which resulted in
a more favorable asset mix and higher yields on interest-earning assets in 2024.
This was partially offset by higher market
interest rates, which increased our cost of funds, generally,
and changes in our deposit mix to higher cost interest-bearing
deposits.
The tax-equivalent yield on total interest-earning assets increased by
60 basis points to 4.36% in 2024 compared to 3.76%
in 2023.
Average loans for 2024
were $568.7 million, a 9% increase from 2023.
The cost of total interest-bearing liabilities increased by 59 basis points to 1.81%
in 2024 compared to 1.22% in 2023.
Average interest-bearing
deposits were $639.6 million during 2024, a 3% decrease compared to $657.8 million
during
2023.
As of December 31, 2024, average interest-bearing deposits were 71% of average
total deposits compared to 69% on
December 31, 2023.
Since March 2022, the Federal Reserve increased the target
federal funds rate by 525 basis points
before announcing a 50-basis points rate reduction on September 18, 2024,
its first decrease in rates since its March 2020
COVID rate reduction,
followed by two 25 basis points reduction in October and December 2024.
At year end the target
federal funds rate ranged from 4.25% - 4.50%.
The Company continues to deploy various asset liability management
strategies to manage its risk from interest rate
fluctuations.
Deposit and loan pricing remains competitive in our markets.
We believe
that interest rates, inflation and
monetary policy may continue to fluctuate in 2025 and may be challenging
as a result.
Our ability to compete and manage
our deposits costs until our interest-earning assets reprice and we generate
new fixed rate loans with current market interest
rates will be important to our net interest margin during
2025.
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62
Provision for Credit Losses
The provision for credit losses represents a charge to
earnings necessary to establish an allowance for credit losses that, in
management’s evaluation,
is adequate to provide coverage for all expected credit losses.
The Company recorded a
provision for credit losses of $36 thousand during 2024, compared to $135
thousand for 2023.
Provision for credit losses
expense is affected by growth in our loan portfolio, our
internal assessment of the credit quality of the loan portfolio, our
expectations about future economic conditions and net charge-offs.
Our CECL model is largely influenced by economic
factors including, most notably,
the anticipated unemployment rate, which may be affected by monetary
policy.
Our allowance for credit losses reflects an amount we believe appropriate,
based on our allowance assessment
methodology, to adequately
cover all expected credit losses as of the date the allowance is determined.
At December 31,
2024, the Company’s allowance for
credit losses was $6.9
million, or 1.22% of total loans, compared to $6.9 million, or
1.23% of total loans, at December 31, 2023.
Although the balance of the allowance for credit losses was largely
unchanged, the decrease in the allowance for credit losses as a percentage of total
loans was primarily due to improved
economic forecasts.
Noninterest Income
Year ended December 31
(Dollars in thousands)
2024
2023
Service charges on deposit accounts
$
614
$
603
Mortgage lending
608
430
Bank-owned life insurance
403
411
Securities losses, net
—
(6,295)
Other
1,849
1,870
Total noninterest income
$
3,474
$
(2,981)
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. Origination income, net,
is comprised of gains or losses from the sale
of the mortgage loans originated, origination fees, underwriting fees and other
fees associated with the origination of
mortgage loans, which are netted against the commission expense associated
with these originations. The Company’s
normal practice is to originate mortgage loans for sale in the secondary market
and to either sell or retain the MSRs when
the loan is sold.
MSRs are recognized based on the fair value of the servicing right on
the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment quarterly.
Impairment is determined by grouping MSRs by common
predominant characteristics, such as interest rate and loan type.
If the aggregate carrying amount of a particular group of
MSRs exceeds the group’s aggregate
fair value, a valuation allowance for that group is established.
The valuation
allowance is adjusted as the fair value changes.
An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in
a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s
mortgage lending income for 2024 and 2023.
Year ended December 31
(Dollars in thousands)
2024
2023
Origination income
$
261
$
71
Servicing fees, net
347
359
Total mortgage lending
income
$
608
$
430
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.
The increase in mortgage lending income was primarily
related to the Company increasing the number of mortgage loans originated
for sale during 2024 relative to the number of
mortgage loans originated and held for investment during 2023.
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63
Income from bank-owned life insurance was $403 thousand and
$411 thousand for 2024 and 2023 respectively.
Excluding
a $52 thousand non-taxable death benefit received during the first quarter of
2023, income from bank-owned life insurance
would have been $359 thousand for 2023.
Securities losses, net for 2023 were related to the Company selling approximately
$117.6 million of its available-for-sale
securities, resulting in a net loss of approximately $6.3 million as part of its balance
sheet repositioning strategy.
Noninterest Expense
Year ended December 31
(Dollars in thousands)
2024
2023
Salaries and benefits
$
12,534
$
12,101
Net occupancy and equipment
2,508
2,954
Professional fees
1,188
1,299
FDIC and other regulatory assessments
564
631
Other
5,372
5,609
Total noninterest expense
$
22,166
$
22,594
Salaries and benefits increased during 2024 compared to 2023 primarily due
to routine annual increases in salaries and
wages.
The decrease in net occupancy and equipment expense was primarily
due to an increase in leasing income.
The decrease in other noninterest expense was primarily due to the Company’s
adoption of ASU 2023-02 which allows the
proportional amortization method for our NMTC investments, on January
1, 2024.
With the adoption of this ASU,
amortization of NMTCs are now included in income tax expense.
During 2023 other noninterest expense included $0.4
million related to our equity method investment in NMTCs.
This decrease was partially offset by various increases in other
noninterest expense accounts during 2024.
Income Tax
Expense
The provision for income taxes expense was $2.0 million for an effective
tax rate of 23.82% for 2024, compared to a tax
benefit of $0.8 million for a negative effective tax rate of (125.73)%
for 2023.
The Company’s effective
income tax rate is
affected principally by tax-exempt earnings from the Company’s
investments in municipal securities, bank-owned life
insurance, and New Markets Tax
Credits.
The effective tax rate increased primarily due to a decrease in
the Company’s
investment in municipal securities following the balance sheet restructuring
in the fourth quarter of 2023, and the adoption
of FASB ASU 2023-02
Investments – Equity Method and Joint Ventures
(Topic323) which allows the
proportional
amortization method for our NMTC investments, on January 1, 2024.
With the adoption of this ASU, amortization of
NMTCs are now included in income tax expense rather than noninterest
expense.
Additionally, the provision
for income
tax expense and the effective tax rates for 2024 included discrete tax
items associated with provision to return adjustments
in conjunction with the final 2023 tax return filing and the resolution of state examination
activities, which resulted in
additional tax expense.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $243.0 million at December 31, 2024,
compared to $270.9 million at December 31, 2023.
This decrease reflects a decrease in the amortized cost basis of securities available
-for-sale of $27.1 million, and a decrease
of $0.8 million in the fair value of securities available-for-sale.
The decrease in the amortized cost basis of securities
available-for-sale was primarily attributable to normal paydowns and
maturities.
The average annualized tax-equivalent
yields earned on total securities were 2.25%
in 2024 and 2.37% in 2023.
The following table shows the carrying value and weighted average yield
of securities available-for-sale as of December
31, 2024 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 in whole or in part, with or
without penalty.
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64
December 31, 2024
1 year
1 to 5
5 to 10
After 10
Total
(Dollars in thousands)
or less
years
years
years
Fair Value
Agency obligations
$
—
26,655
25,756
—
52,411
Agency MBS
10
19,863
14,904
138,899
173,676
State and political subdivisions
—
966
8,244
7,715
16,925
Total available-for-sale
$
10
47,484
48,904
146,614
243,012
Weighted average yield (1):
Agency obligations
—
1.35%
1.70%
—
1.53%
Agency MBS
3.14%
1.20%
1.95%
2.20%
2.07%
State and political subdivisions
—
2.37%
1.96%
2.38%
2.17%
Total available-for-sale
3.14%
1.31%
1.82%
2.21%
1.96%
(1) Yields are calculated based on amortized cost.
Loans
December 31
(In thousands)
2024
2023
Commercial and industrial
$
63,274
73,374
Construction and land development
82,493
68,329
Commercial real estate
289,992
287,307
Residential real estate
118,627
117,457
Consumer installment
9,631
10,827
Total loans
564,017
557,294
Total loans, net of unearned
income, were $564.0 million at December 31, 2024, and $557.3 million
at December 31, 2023,
an increase of $6.7 million, or 1%.
Four loan categories represented the majority of the loan portfolio at December
31,
2024: commercial real estate (51%), residential real estate (21%), construction
and land development (15%), and
commercial and industrial (11%).
Approximately 19% of the Company’s
commercial real estate loans were classified as
owner-occupied at December 31, 2024.
Within the residential real estate portfolio
segment,
the Company had junior lien mortgages of approximately $11.2
million,
or 2%, and $8.7 million, or 2%, of total loans at December 31, 2024 and 2023,
respectively.
For residential real estate
mortgage loans with a consumer purpose, the Company had no loans
that required interest only payments at December 31,
2024 and 2023. 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 5.23% in 2024
and 4.76% in 2023.
The specific economic and credit risks associated with our loan portfolio include,
but are not limited to, the effects of
current economic conditions, including the levels of market
interest rates, supply chain disruptions, commercial office
occupancy levels, housing supply shortages, and effects of
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.
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.
See “Risk Factors.”
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65
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. 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 $22.7 million. Furthermore, we have an internal limit for
aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $20.4 million. Our loan
policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal
limit. At December 31, 2024, the Bank had one
loan relationship exceeding our internal limit.
We periodically
analyze our commercial loan portfolio to determine if a concentration of
credit risk exists in any one or
more industries. We
use classification systems broadly accepted by the financial services industry
in order to categorize our
commercial borrowers. Loan concentrations to borrowers in the following
classes exceeded 25% of the Bank’s
total risk-
based capital at December 31, 2024 (and related balances at December
31, 2023).
December 31
(In thousands)
2024
2023
Lessors of 1-4 family residential properties
$
58,228
$
56,912
Multi-family residential properties
43,556
45,841
Shopping centers/strip malls
37,349
27,128
Hotel/motel
35,210
39,131
Office buildings
29,780
30,871
On January 1, 2023, the Company adopted ASC 326 and its CECL methodology,
which required us to estimate all expected
credit losses over the remaining life of our loan portfolio.
The Company maintains the allowance for credit losses at a level
that management believes appropriate to adequately cover the Company’s
estimate of expected losses in the loan portfolio.
The allowance for credit losses was $6.9 million at December 31, 2024 and 2023,
respectively, which management
believed
to be adequate at each of the respective dates.
Our allowance for credit losses as a percentage of total loans was 1.22%
at
December 31, 2024, compared to 1.23% at December 31, 2023.
Our CECL models rely largely on projections of macroeconomic
conditions to estimate future credit losses.
Macroeconomic factors used in the model include the Alabama unemployment
rate, the Alabama home price index, the
national commercial real estate price index and the Alabama gross state product.
Projections of these macroeconomic
factors, obtained from an independent third party,
are utilized to predict quarterly rates of default.
Under the CECL methodology the allowance for credit losses is measured on
a collective basis for pools of loans with
similar risk characteristics, and on an individual basis for loans that do not share similar
risk characteristics with the
collectively evaluated pools.
Losses are predicted over a period of time determined to be reasonable and
supportable, and
at the end of the reasonable and supportable period losses are reverted
to long term historical averages.
At December 31,
2024 and 2023, reasonable and supportable periods of 4 quarters were utilized
followed by an 8 quarter straight line
reversion period to long term averages.
See Note 5 to our Financial Statements.
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66
A summary of the changes in the allowance for credit losses on loans
and certain asset quality ratios for the years ended
December 31, 2024 and 2023 are presented below.
Year ended December 31
(Dollars in thousands)
2024
2023
Allowance for credit losses:
Balance at beginning of period
$
6,863
5,765
Impact of adopting ASC 326
—
1,019
Charge-offs:
Commercial and industrial
(9)
(164)
Residential real estate
(61)
—
Consumer installment
(114)
(105)
Total charge
-offs
(184)
(269)
Recoveries:
Commercial and industrial
144
204
Residential real estate
9
14
Consumer installment
45
5
Total recoveries
198
223
Net recoveries (charge-offs)
14
(46)
(Reversal of) provision for credit losses
(6)
125
Ending balance
$
6,871
6,863
as a % of loans
1.22
%
1.23
as a % of nonperforming loans
1,366
%
753
Net charge-offs as a % of average loans
—
%
0.01
Nonperforming Assets
At December 31, 2024 the Company had $0.5 million in nonperforming
assets compared to $0.9 million at December 31,
2023.
The table below provides information concerning total nonperforming
assets and certain asset quality ratios.
December 31
(Dollars in thousands)
2024
2023
Nonperforming assets:
Nonperforming (nonaccrual) loans
$
503
911
Total nonperforming
assets
$
503
911
as a % of loans and other real estate owned
0.09
%
0.16
as a % of total assets
0.05
%
0.09
Nonperforming loans as a % of total loans
0.09
%
0.16
Accruing loans 90 days or more past due
$
—
—
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67
The table below provides information concerning the composition of
nonaccrual loans at December 31, 2024 and 2023,
respectively.
December 31
(In thousands)
2024
2023
Nonaccrual loans:
Commercial and industrial
$
99
—
Construction and land development
404
—
Commercial real estate
—
783
Residential real estate
—
128
Total nonaccrual
loans
$
503
911
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.
There were no loans 90 days past due and still accruing interest at December 31, 2024
and 2023, respectively.
The Company had no OREO at December 31, 2024 and 2023, respectively.
Deposits
December 31
(In thousands)
2024
2023
Noninterest bearing demand
$
260,874
270,723
NOW
199,883
190,724
Money market
153,916
148,040
Savings
89,904
88,541
Certificates of deposit under $250,000
103,594
100,572
Certificates of deposit and other time deposits of $250,000 or more
87,653
97,643
Total deposits
$
895,824
896,243
Total deposits were stable
and decreased only $0.4 million to $895.8 million at December 31, 2024,
compared to $896.2
million at December 31, 2023.
Noninterest-bearing deposits were $260.9 million, or 29% of total deposits,
at December
31, 2024, compared to $270.7 million, or 30% of total deposits at December 31,
2023.
At December 31, 2024, the
Company had $74.1 million reciprocal deposits sold, compared to $59.0
million at December 31, 2023.
The Company had
no brokered deposits at December 31, 2024 and 2023.
The Company had no FHLB-Atlanta advances or other wholesale
borrowings outstanding at December 31, 2024 and 2023.
The average rates paid on total interest-bearing deposits were 1.81
%
in 2024 and 1.21% in 2023.
At December 31, 2024, estimated uninsured deposits totaled $359.7
million, or 40% of total deposits, compared to $356.3
million, or 40% of total deposits at December 31, 2023.
During 2023, the Bank began participating in the Certificates of
Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep
product (“ICS”), which provide for
reciprocal (“two-way”) transactions among banks facilitated by
IntraFi for the purpose of maximizing FDIC insurance.
The
Company had reciprocal deposits on balance sheet of $6.9 million at December
31, 2024, compared to none at December
31, 2023.
Uninsured amounts are estimated based on the portion of account balances
that exceed FDIC insurance limits.
The Bank’s uninsured deposits at December
31, 2024 and 2023 include approximately $223.1 million and $206.2 million,
respectively, of deposits
of state, county and local governments that are collateralized by securities having
a fair value equal
to such deposits.
Deposits of state, county and local governments were 62% and 53% of our estimated
uninsured deposits
at December 31, 2024 and 2023, respectively.
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68
The estimated uninsured time deposits by maturity as of December
31, 2024 is presented below.
(Dollars in thousands)
December 31, 2024
Maturity of:
3 months or less
$
8,353
Over 3 months through 6 months
23,669
Over 6 months through 12 months
23,939
Over 12 months
2,442
Total estimated uninsured
time deposits
$
58,403
Other Borrowings
The Company had no long-term debt at December 31, 2024 and 2023.
The Bank utilizes short and long-term non-deposit
borrowings from time to time. Short-term borrowings generally consist of
federal funds purchased and securities sold under
agreements to repurchase with an original maturity of one year or less.
The Bank had available federal funds lines totaling
$65.2 million and $61.0 million, respectively,
at December 31, 2024 and 2023 with no federal funds borrowed.
The
Company had no securities sold under agreements to repurchase, which
are entered into on behalf of certain customers, at
December 31, 2024, compared to $1.5 million at December 31, 2023.
The Bank is eligible to borrow from the FRB’s
discount window, but had
no such borrowings at December 31, 2024 and 2023.
The Bank never borrowed from the Federal
Reserve’s Bank Term
Facility Program (“BTFP”) which ceased making new loans on March 11,
2024.
The Bank is a member of the FHLB-Atlanta and has borrowed from the
FHLB-Atlanta, and in the future may borrow from
time to time under the FHLB-Atlanta’s
advance program.
FHLB-Atlanta advances include both fixed and variable terms,
and provide various maturities, and generally are secured by eligible
assets.
The Bank had no borrowings under FHLB-
Atlanta’s advance program
at December 31, 2024 and 2023, respectively.
At those dates, the Bank had $296.9 million and
$309.1 million, respectively,
of available lines of credit at the FHLB-Atlanta.
The average rates paid on short-term borrowings were 0.48%
and 2.21% in 2024 and 2023, respectively.
CAPITAL ADEQUACY
At December 31, 2024, the Company’s
consolidated stockholders’ equity (book value) was $78.3 million, or
$22.41 per
share, compared to $76.5 million, or $21.9 per share, at December
31, 2023. The increase from December 31, 2023 was
primarily driven by net earnings of $6.4 million. The increase were partially
offset by cash dividends paid of $3.8 million,
other comprehensive loss of $0.6 million related to unrealized gains/losses
on securities available-for-sale, net of tax and
a one-time charge of $0.3 million, net of tax, for the cumulative
effect to adopt the NMTC accounting standard on
January 1, 2024.
Unrealized securities losses do not affect the Bank’s
capital for regulatory capital purposes.
The Company paid cash dividends of $1.08 per share in 2024, unchanged
from the same period in 2023.
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.
A banking organization with a capital conservation buffer
of 2.5% or less is
subject to limitations on “distributions”
from “eligible retained earnings”, including dividend payments,
share repurchases
and certain discretionary bonus payments. At December 31, 2024
and 2023, the Bank had a capital conservation buffer of
7.81% and 7.52%, respectively.
On August 26, 2020, the Federal Reserve and the other federal banking regulators
adopted a final rule that amended the
capital conservation buffer.
The new rule revises the definition of “eligible retained income” for purposes of
the maximum
payout ratio to allow banking organizations to more freely
use their capital buffers to promote lending and other financial
intermediation activities, by making the limitations on capital distributions more
gradual.
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.
Banking organizations were
encouraged to make prudent capital distribution decisions.
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69
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. The Bank’s
tier 1 leverage ratio was 10.49%, CET1 risk-based capital ratio was 14.80%, tier 1
risk-based capital ratio was 14.80%, and total risk-based capital ratio was 15.81
%
at December 31, 2024. 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 7.81% at December 31, 2024.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage
assets and liabilities to provide a satisfactory,
consistent level of profitability within
the framework of established liquidity,
loan, investment, borrowing, and capital policies. The Bank’s
Asset Liability
Management Committee (“ALCO”) is charged with the
responsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two
critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from
fluctuations in interest rates because
assets and liabilities may mature or reprice at different times and
at different rates of change. For example, if liabilities
reprice faster than assets, and interest rates are generally rising, earnings
will initially decline. In addition, assets and
liabilities may reprice at the same time but by different amounts. For
example, when the general level of interest rates is
rising, the Company may increase rates paid on interest bearing demand deposit accounts
and savings deposit accounts by
an amount that is less than the general increase in market interest rates. Also, short
-term and long-term market interest rates
may change by different amounts and at different
levels of interest rates and rates of change.
For example, a flattening
yield curve may reduce the interest spread between new loan yields and funding
costs. The yield curve was inverted until it
began to normalize in September 2024.
An inverted yield curve reduces the net interest margin expansion
that may be
expected otherwise as interest rates rise.
Further, the remaining maturity of various
assets and liabilities may shorten or
lengthen as interest rates change. For example, if long-term mortgage
interest rates decline sharply, mortgage
-backed
securities in the securities portfolio may prepay earlier than anticipated,
which could reduce earnings. Interest rates may
also have a direct or indirect effect on loan demand, loan losses, mortgage
origination volume, the fair value of MSRs and
other items affecting earnings.
ALCO measures and evaluates the interest rate risk so that we can meet customer demands
for various types of loans and
deposits. ALCO determines the most appropriate amounts of on-balance
sheet and off-balance sheet items. Measurements
used to help manage interest rate sensitivity include an earnings simulation
and an economic value of equity model.
Earnings simulation
Management believes that interest rate risk is best estimated by our earnings simulation
modeling. On at least a quarterly
basis, we simulate the following 12-month time period to determine a baseline
net interest income forecast and the
sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an
unchanged or flat interest rate
environment. Forecasted levels of earning assets, interest-bearing
liabilities, and off-balance sheet financial instruments are
combined with ALCO forecasts of market interest rates for the next 12 months
and other factors in order to produce various
earnings simulations and estimates.
To help limit interest
rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest
income from gradual changes in interest rates.
For changes up or down in rates from management’s
flat interest rate
forecast over the next 12 months, policy limits for net interest income variances
are as follows:
+/- 20% for a gradual change of 400 basis points
+/- 15% for a gradual change of 300 basis points
+/- 10% for a gradual change of 200 basis points
+/- 5% for a gradual change of 100 basis points
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70
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, 2024.
Changes in Interest Rates
Net Interest Income % Variance
400 basis points
0.47
%
300 basis points
0.74
200 basis points
0.67
100 basis points
0.35
(100) basis points
(0.92)
(200) basis points
(1.49)
(300) basis points
(1.75)
(400) basis points
(2.20)
At December 31, 2024, our earnings simulation model indicated that
we were in compliance with the policy guidelines
noted above.
Economic Value
of Equity
Economic value of equity (“EVE”) measures the extent that estimated economic
values of our assets, liabilities and off-
balance sheet items will change as a result of interest rate changes. Economic
values are estimated by discounting expected
cash flows from assets, liabilities and off-balance sheet items, to which
establish a base case EVE. In contrast with our
earnings simulation model which evaluates interest rate risk over a 12-month
timeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance
sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding
to or anticipating changes in
interest rates, or market and competitive conditions.
To help limit interest
rate risk, we have stated policy guidelines for an instantaneous basis point change
in interest rates,
such that our EVE should not decrease from our base case by more than the following:
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, 2024.
Changes in Interest Rates
EVE % Variance
400 basis points
0.43
%
300 basis points
1.69
200 basis points
2.05
100 basis points
1.41
(100) basis points
(2.61)
(200) basis points
(8.19)
(300) basis points
(17.50)
(400) basis points
(30.86)
At December 31, 2024, our EVE model indicated that we were in compliance
with the policy guidelines noted above.
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71
Each of the above analyses may not, on its own, be an accurate indicator of how our
net interest income will be affected by
changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates.
In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest
rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types
of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable-rate
mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
Prepayment and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of
certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest
rates or economic stress, which may
differ across industries and economic sectors. ALCO reviews each
of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory,
consistent levels of profitability within the framework of the
Company’s established liquidity,
loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve
the balance between interest-sensitive assets and
interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing
to meet the credit and
deposit needs of our customers. From time to time, the Company may
enter into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify
as derivatives, but are not designated as hedging
instruments. At December 31, 2024 and 2023, the Company had
no derivative contracts to assist in managing interest rate
sensitivity.
Liquidity Risk Management
Liquidity is the Company’s ability to
convert assets into cash equivalents in order to meet daily cash flow
requirements,
primarily for deposit withdrawals, loan demand and maturing obligations.
Without proper management of its liquidity,
the
Company could experience higher costs of obtaining funds due to insufficient
liquidity, while excessive liquidity
can lead
to a decline in earnings due to the cost of foregoing alternative higher-yielding
investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the Company.
The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and
the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject
to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating
expenses, debt obligations and
dividends. The Bank’s payment of
dividends depends on its earnings, liquidity,
capital and the absence of any regulatory
restrictions.
The primary source of funding and liquidity for the Company has been dividends
received from the Bank. 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.
Primary sources of funding for the Bank include customer deposits, other
borrowings, interest payments on earning assets,
repayment and maturity of securities and loans, sales of securities, and the
sale of loans, particularly residential mortgage
loans. Primary uses of funds include repayment of maturing obligations
and growing the loan portfolio.
The Bank has access to federal funds lines from various banks and borrowings
from the Federal Reserve discount window,
although it was not used by the Bank.
In addition to these sources, the Bank is eligible to participate in the FHLB-Atlanta’s
advance program to obtain funding for growth and liquidity.
Advances include both fixed and variable terms and may
be
taken out with varying maturities. At December 31, 2024, the Bank
had no FHLB-Atlanta advances outstanding and
available credit from the FHLB-Atlanta of $296.9 million. At December
31, 2024, the Bank also had $65.2 million of
available federal funds lines with no borrowings outstanding.
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72
The following table presents additional information about our contractual
obligations as of December 31, 2024, which by
their terms had contractual maturity and termination dates subsequent
to December 31, 2024:
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)
$
895,824
879,185
14,239
2,400
—
Operating lease obligations
246
81
120
45
—
Total
$
896,070
879,266
14,359
2,445
—
(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented
in the "1 year or less" column
Management believes that the Company and the Bank have adequate
sources of liquidity to meet all known contractual
obligations and unfunded commitments, including loan commitments and reasonable
borrower, depositor,
and creditor
requirements over the next 12 months.
Off-Balance Sheet Arrangements
At December 31, 2024, the Bank had outstanding standby letters of credit
of $0.7 million and unfunded loan commitments
outstanding of $84.7 million. Because these commitments generally
have fixed expiration dates and may expire without
being drawn upon, the total commitment level does not necessarily represent
future cash requirements. If needed to fund
these outstanding commitments, the Bank could use its cash and cash
equivalents, deposits with other banks, liquidate
federal funds sold or a portion of its securities available-for-sale, or draw on its available
credit facilities or raise deposits.
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. Although the representations and warranties vary
among investors, they typically cover ownership of the
loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against
the property securing the loan,
compliance with loan criteria set forth in the applicable agreement, compliance
with applicable federal, state, and local
laws, among other matters.
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.
As a result, the Bank is not
obligated to make any advances to Fannie Mae on principal and interest
on such mortgage loans where the borrower is
entitled to forbearance.
As of December 31, 2024, the unpaid principal balance of residential mortgage
loans, which we have originated and sold,
but retained the servicing rights (MSRs) totaled $204.4 million. Although
these loans are generally sold on a non-recourse
basis, except for breaches of customary seller representations and warranties,
we may have to repurchase residential
mortgage loans in cases where we breach such representations or warranties
or the other terms of the sale, such as where we
fail to deliver required documents or the documents we deliver are defective.
Investors also may require the repurchase of a
mortgage loan when an early payment default underwriting review reveals
significant underwriting deficiencies, even if the
mortgage loan has subsequently been brought current. Repurchase demands
are typically reviewed on an individual loan by
loan basis to validate the claims made by the investor and to determine if a contractually
required repurchase event has
occurred. We
seek to reduce and manage the risks of potential repurchases or other claims by
mortgage loan investors
through our underwriting, quality assurance and servicing practices, including
good communications with our residential
mortgage investors.
We service all residential
mortgage loans originated and sold by us to Fannie Mae. As servicer,
our primary duties are to:
(1) collect payments due from borrowers; (2) advance certain delinquent
payments of principal and interest; (3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating
to the mortgage loans; (4) maintain any
required escrow accounts for payment of taxes and insurance and
administer escrow payments; and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to
investors consistent with the agreements
governing our rights and duties as servicer.
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73
The agreement under which we act as servicer generally specifies our
standards of responsibility for actions taken by us in
such capacity and provides protection against expenses and liabilities incurred
by us when acting in compliance with the
respective servicing agreements. However,
if we commit a material breach of our obligations as servicer,
we may be subject
to termination if the breach is not cured within a specified period following notice.
The standards governing servicing and
the possible remedies for violations of such standards are determined
by servicing guides issued by Fannie Mae as well as
our contracts with Fannie Mae. Remedies could include repurchase of an affected
loan.
Although to date repurchase requests related to representation and warranty provisions,
and servicing activities have been
limited, it is possible that requests to repurchase mortgage loans may increase
in frequency if investors more aggressively
pursue all means of recovering losses on their purchased loans. As of December
31, 2024, we believe that this exposure is
not material due to the historical level of repurchase requests and loss trends,
the results of our quality control reviews, and
the fact that 99% of our residential mortgage loans serviced for Fannie
Mae were current as of such date. We
maintain
ongoing communications with our investors and will continue to evaluate
this exposure by monitoring the level and number
of repurchase requests as well as the delinquency rates in our investor portfolios.
The Company was not required to repurchase any loans during 2024 and 2023 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, 2024.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in
accordance with GAAP and practices within the banking industry which
require the measurement of financial position and
operating results in terms of historical dollars without considering
the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution’s performance
than the effects of general levels of inflation.
Inflation can increase our noninterest expenses. It also can affect
our customers’ behaviors, the mix of deposits between
interest and noninterest bearing, the levels of interest rates we have to pay on
our deposits and other borrowings, and the
interest rates we earn on our earning assets. The difference between
our interest expense and interest income is also affected
by the shape of the yield curve and the speeds and amounts at which our various assets and
liabilities, respectively, reprice
in response to interest rate changes. The yield curve was inverted during
most of 2024, until September, when it began
to
normalize.
An inverted yield curve which means shorter term interest rates are higher than longer
term interest rates. 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. Higher market interest rates and reductions
in the securities held by the Federal Reserve to
reduce inflation generally reduce economic activity and may reduce loan demand
and growth, and may adversely affect
unemployment rates. Inflation and related changes in market interest rates,
as the Federal Reserve maintains interest rates to
meet its longer-term inflation goal of 2%, also can adversely affect
the values and liquidity of our loans and securities, the
value of collateral securing loans to our borrowers, and the success of our borrowers
and such borrowers’ available cash to
pay interest on and principal of our loans to them.
Beginning in September 2024, in light of inflation moderating, the FOMC had three
reductions in its target federal funds
rate range totaling 100 basis points to 4.25% to 4.50%. While the FOMC reaffirmed
its target inflation rate of 2% over the
longer run, it indicated it was “recalibrating” its policy based on decreasing
inflation rates and the risks of increasing
unemployment, but would act on incoming data, the evolving outlook
and the balance of the risks of inflation and
unemployment levels. In the future, the Federal Reserve could further
decrease target interest rates, or could increase such
target rates, depending on the data and its outlook.
See “Supervision and Regulation – Fiscal and Monetary Policies” and
“- Recent Developments – New Administration.”
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74
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB
but is not yet effective.
●
ASU 2023-09,
Income Taxes
(Topic 740):
Improvements to Income Tax
Disclosures.
Information about this pronouncement is described in more detail below.
ASU 2023-09,
Income Taxes
(Topic 740):
Improvements to Income Tax
Disclosures
, the amendments in this Update
enhance the transparency and decision usefulness of income tax disclosures.
For public business entities, the new standard
is effective for annual periods beginning after December
15, 2024.
The Company does not expect the new standard to have
a material impact on the Company’s
consolidated financial statements.
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75
Table 1
– Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP,
this annual report on Form 10-K includes certain designated net
interest income amounts presented on a tax-equivalent basis, a non-GAAP financial
measure, including the presentation of
total revenue and the calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent
basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability
within the industry. Although
the
Company believes these non-GAAP financial measures enhance investors’
understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative
to GAAP.
The reconciliation of these non-
GAAP financial measures from GAAP to non-GAAP is presented below.
Year ended December 31
(In thousands)
2024
2023
2022
2021
2020
Net interest income (GAAP)
$
27,125
26,328
27,166
23,990
24,338
Tax-equivalent adjustment
79
417
456
470
492
Net interest income (Tax-equivalent)
$
27,204
26,745
27,622
24,460
24,830
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76
Table 2
- Selected Financial Data
Year ended December 31
(Dollars in thousands, except per share amounts)
2024
2023
2022
2021
2020
Income statement
Tax-equivalent interest income (a)
$
38,811
34,791
30,001
26,977
28,686
Total interest expense
11,607
8,046
2,379
2,517
3,856
Tax equivalent net interest income (a)
27,204
26,745
27,622
24,460
24,830
Provision for credit losses
36
135
1,000
(600)
1,100
Total noninterest income
3,474
(2,981)
6,506
4,288
5,375
Total noninterest expense
22,166
22,594
19,823
19,433
19,554
Net earnings before income taxes and
tax-equivalent adjustment
8,476
1,035
13,305
9,915
9,551
Tax-equivalent adjustment
79
417
456
470
492
Income tax expense
2,000
(777)
2,503
1,406
1,605
Net earnings
$
6,397
1,395
10,346
8,039
7,454
Per share data:
Basic and diluted net earnings
$
1.83
0.40
2.95
2.27
2.09
Cash dividends declared
$
1.08
1.08
1.06
1.04
1.02
Weighted average shares outstanding
Basic and diluted
3,493,690
3,498,030
3,510,869
3,545,310
3,566,207
Shares outstanding
3,493,699
3,493,614
3,503,452
3,520,485
3,566,276
Stockholders' equity (book value)
$
22.41
21.90
19.42
29.46
30.20
Common stock price
High
$
24.57
24.50
34.49
48.00
63.40
Low
16.63
18.80
22.07
31.32
24.11
Period-end
$
23.49
21.28
23.00
32.30
42.29
To earnings ratio (d)
12.84
x
53.20
7.80
14.23
20.23
To book value
105
%
97
118
110
140
Performance ratios:
Return on average equity
8.21
%
2.05
12.48
7.54
7.12
Return on average assets
0.65
%
0.14
0.96
0.78
0.83
Dividend payout ratio
59.02
%
270.00
35.93
45.81
48.80
Average equity to average assets
7.93
%
6.66
7.72
10.39
11.63
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.22
%
1.23
1.14
1.08
1.22
Nonperforming loans
1,366
%
753
211
1,112
1,052
Nonperforming assets as a % of:
Loans and other real estate owned
0.09
%
0.16
0.54
0.18
0.12
Total assets
0.05
%
0.09
0.27
0.07
0.06
Nonperforming loans as % of loans
0.09
%
0.16
0.54
0.10
0.12
Net charge-offs (recoveries) as a % of average loans
—
%
0.01
0.04
0.02
(0.03)
Capital Adequacy (c):
CET 1 risk-based capital ratio
14.80
%
14.52
15.39
16.23
17.27
Tier 1 risk-based capital ratio
14.80
%
14.52
15.39
16.23
17.27
Total risk-based capital ratio
15.81
%
15.52
16.25
17.06
18.31
Tier 1 leverage ratio
10.49
%
9.72
10.01
9.35
10.32
Other financial data:
Net interest margin (a)
3.06
%
2.89
2.81
2.55
2.92
Effective income tax rate
23.82
%
(125.73)
19.48
14.89
17.72
Efficiency ratio (b)
72.25
%
95.08
58.08
67.60
64.74
Selected period end balances:
Securities
$
243,012
270,910
405,304
421,891
335,177
Loans, net of unearned income
564,017
557,294
504,458
458,364
461,700
Allowance for credit losses
6,871
6,863
5,765
4,939
5,618
Total assets
977,324
975,255
1,023,888
1,105,150
956,597
Total deposits
895,824
896,243
950,337
994,243
839,792
Total stockholders’ equity
78,292
76,507
68,041
103,726
107,689
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures".
(b) Efficiency ratio is the result of noninterest expense divided by
the sum of noninterest income and tax-equivalent net interest income.
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
(d) Calculated by dividing period end share price by
earnings per share for the previous four quarters.
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77
Table 3
- Average
Balance and Net Interest Income Analysis
Year ended December 31
2024
2023
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)
$
568,733
$
29,735
5.23%
$
523,838
$
24,925
4.76%
Securities - taxable
248,072
5,430
2.19%
335,366
7,208
2.15%
Securities - tax-exempt (2)
10,084
373
3.70%
52,122
1,985
3.81%
Total securities
258,156
5,803
2.25%
387,488
9,193
2.37%
Federal funds sold
17,907
939
5.24%
5,221
250
4.79%
Interest bearing bank deposits
44,634
2,334
5.23%
8,593
423
4.92%
Total interest-earning
assets
889,430
38,811
4.36%
925,140
34,791
3.76%
Cash and due from banks
17,779
15,230
Other assets
75,059
81,438
Total assets
$
982,268
$
1,021,808
Interest-bearing liabilities:
Deposits:
NOW
$
192,702
2,680
1.39%
$
193,451
1,907
0.99%
Savings and money market
251,778
2,168
0.86%
289,235
2,132
0.74%
Certificates of deposit
195,097
6,756
3.46%
175,085
3,935
2.25%
Total interest-bearing
deposits
639,577
11,604
1.81%
657,771
7,974
1.21%
Short-term borrowings
628
3
0.48%
3,255
72
2.21%
Total interest-bearing
liabilities
640,205
11,607
1.81%
661,026
8,046
1.22%
Noninterest-bearing deposits
262,224
289,019
Other liabilities
1,918
3,697
Stockholders' equity
77,921
68,066
Total liabilities and
and stockholders' equity
$
982,268
$
1,021,808
Net interest income and margin
$
27,204
3.06%
$
26,745
2.89%
(1) Average loan
balances are shown net of unearned income and loans on nonaccrual status have
been included
in the computation of average balances.
(2) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using an income tax rate
of 21%.
See Table 1 - Explanation of Non-GAAP
Financial Measures."
Table of Contents
78
Table 4
- Volume
and Rate Variance
Analysis
Year ended December 31, 2024 vs. 2023
Year ended December 31, 2023 vs. 2022
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
$
4,810
2,463
2,347
$
4,684
1,390
3,294
Securities - taxable
(1,778)
133
(1,911)
632
1,247
(615)
Securities - tax-exempt (1)
(1,612)
(57)
(1,555)
(187)
174
(361)
Total securities
(3,390)
76
(3,466)
445
1,421
(976)
Federal funds sold
689
24
665
(185)
1,661
(1,846)
Interest bearing bank deposits
1,911
26
1,885
(154)
2,285
(2,439)
Total interest income
$
4,020
2,589
1,431
$
4,790
6,757
(1,967)
Interest expense:
Deposits:
NOW
$
773
783
(10)
$
1,537
1,574
(37)
Savings and money market
36
359
(323)
1,483
1,762
(279)
Certificates of deposit
2,821
2,128
693
2,635
2,167
468
Total interest-bearing
deposits
3,630
3,270
360
5,655
5,503
152
Short-term borrowings
(69)
(56)
(13)
12
40
(28)
Total interest expense
3,561
3,214
347
5,667
5,543
124
Net interest income
$
459
(625)
1,084
$
(877)
1,214
(2,091)
(1) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using an income
tax rate of 21%.
See "Table 1 - Explanation
of Non-GAAP Financial Measures."
(2) Changes that are not solely a result of volume or rate have been allocated
to volume.
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79
Table 5
- Net Charge-Offs (Recoveries) to Average
Loans
2024
2023
Net
Net
Net
(recovery)
Net
charge-off
(recoveries)
Average
charge-off
charge-offs
Average
(recovery)
(Dollars in thousands)
charge-off
Loans
ratio
(recoveries)
Loans
ratio
Commercial and industrial
$
135
71,279
0.19
%
$
(40)
64,565
(0.06)
%
Construction and land development
—
70,342
—
—
66,492
—
Commercial real estate
—
297,140
—
—
274,779
—
Residential real estate
(52)
118,856
(0.04)
(14)
108,891
(0.01)
Consumer installment
(69)
10,381
(0.66)
100
9,638
1.04
Total
$
14
567,998
—
%
$
46
524,365
0.01
%
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80
Table 6
- Loan Maturities
December 31, 2024
1 year
1 to 5
5 to 15
After 15
(Dollars in thousands)
or less
years
years
years
Total
Commercial and industrial
$
17,599
13,999
30,093
1,583
63,274
Construction and land development
54,818
25,016
2,659
—
82,493
Commercial real estate
23,022
127,619
135,592
3,759
289,992
Residential real estate
9,105
25,768
34,294
49,460
118,627
Consumer installment
2,979
5,528
1,124
—
9,631
Total loans
$
107,523
197,930
203,762
54,802
564,017
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81
Table 7
- Sensitivities to Changes in Interest Rates on Loans Maturing in More
Than One Year
December 31, 2024
Variable
Fixed
(Dollars in thousands)
Rate
Rate
Total
Commercial and industrial
$
63
45,612
45,675
Construction and land development
16,383
11,292
27,675
Commercial real estate
148
266,822
266,970
Residential real estate
49,368
60,154
109,522
Consumer installment
76
6,576
6,652
Total loans
$
66,038
390,456
456,494
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82
Table 8
- Allocation of Allowance for Credit Losses
2024
2023
(Dollars in thousands)
Amount
%*
Amount
%*
Commercial and industrial
$
1,244
11.2
$
1,288
13.2
Construction and land development
1,059
14.6
960
12.3
Commercial real estate
3,842
51.5
3,921
51.5
Residential real estate
588
21.0
546
21.1
Consumer installment
138
1.7
148
1.9
Total allowance for
credit losses
$
6,871
$
6,863
* Loan balance in each category expressed as a percentage of total loans.
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83
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 7A is set forth in ITEM 7 under the
caption “Market and Liquidity Risk Management”
and is incorporated herein by reference.