Notes to Consolidated Financial Statements
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Auburn National Bancorporation, Inc.
(the Company) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, AuburnBank (the Bank). AuburnBank is a commercial bank located in Auburn, Alabama. The Bank provides a full range of
banking services in its primary market area, Lee County, which includes the Auburn-Opelika Metropolitan Statistical Area.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital
Trust I is an affiliate of the Company and was included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as
of the balance sheet date and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term
include the determination of the allowance for loan losses, fair value measurements, valuation of other real estate owned, and valuation of deferred tax assets.
Reclassifications
Certain amounts reported in the prior
period have been reclassified to conform to the current-period presentation. These reclassifications had no impact on the Companys previously reported net earnings or total stockholders equity.
Accounting Standards Adopted in 2016
In the first
quarter of 2016, the Company adopted new guidance related to the following Accounting Standards Updates (Updates or ASUs):
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ASU 2015-02,
Amendments to the Consolidation Analysis
;
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ASU
2015-03,
Simplifying the Presentation of Debt Issuance Costs; and
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ASU
2015-05,
Customers Accounting for Fees Paid in a Cloud Computing Arrangement.
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Information about these pronouncements is described in more detail below.
ASU
2015-02,
Amendments to the Consolidation Analysis,
affects reporting entities that are required to evaluate
whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest
entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements
and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar
to those in Rule
2a-7
of the Investment Company Act of 1940 for registered money market funds. Adoption of this ASU did not have a material impact on the Companys consolidated financial statements.
ASU
2015-03,
Simplifying the Presentation of Debt Issuance Costs,
requires that debt issuance costs related to
a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, rather than as an asset. Adoption of this ASU did not have a material impact on the Companys consolidated financial statements.
66
ASU
2015-05,
Customers Accounting for Fees Paid in a Cloud
Computing Arrangement
, provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license
element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does
not change the accounting for a customers accounting for service contracts. Adoption of this ASU did not have a material impact on the Companys consolidated financial statements.
Cash Equivalents
Cash equivalents include cash on hand,
cash items in process of collection, amounts due from banks, including interest bearing deposits with other banks, and federal funds sold.
Securities
Securities are classified based on managements intention at the date of purchase. At December 31, 2016, all of the Companys
securities were classified as
available-for-sale.
Securities
available-for-sale
are used
as part of the Companys interest rate risk management strategy, and they may be sold in response to changes in interest rates, changes in prepayment risks or other factors. All securities classified as
available-for-sale
are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income, net of the deferred income tax effects. Interest and dividends on
securities, including the amortization of premiums and accretion of discounts are recognized in interest income over the anticipated life of the security using the effective interest method, taking into consideration prepayment assumptions. Realized
gains and losses from the sale of securities are determined using the specific identification method.
On a quarterly basis, management makes an
assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity securities with an unrealized loss, the Company
considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; and recent events specific to the issuer or industry.
Equity securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses), net.
For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a
debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the
debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between
the debt securitys amortized cost and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment
write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings, as a realized loss in securities gains (losses), and is the
difference between the securitys amortized cost basis and the present value of its expected future cash flows. The remaining difference between the securitys fair value and the present value of future expected cash flows is due to
factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.
Loans held for sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Loan sales are
recognized when the transaction closes, the proceeds are collected, and ownership is transferred. Continuing involvement, through the sales agreement, consists of the right to service the loan for a fee for the life of the loan, if applicable. Gains
on the sale of loans held for sale are recorded net of related costs, such as commissions, and reflected as a component of mortgage lending income in the consolidated statements of earnings.
67
In the course of conducting the Banks mortgage lending activities of originating mortgage loans and selling
those loans in the secondary market, the Bank makes various representations and warranties to the purchaser of the mortgage loans. Every loan closed by the Banks mortgage center is run through a government agency automated underwriting system.
Any exceptions noted during this process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Failure by the Company to comply
with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Company within
the specified period following discovery.
Loans
Loans are reported at their outstanding principal balances, net of any unearned income, charge-offs, and any deferred fees or costs on originated loans.
Interest income is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized in interest income over the contractual life of the loan using the effective interest
method. Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period, which results in a recorded amount that approximates fair value.
The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of
principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-collateralized and in the process of collection. Generally, all interest accrued but not collected for loans that are
placed on nonaccrual status is reversed against current interest income. Interest collections on nonaccrual loans are generally applied as principal reductions. The Company determines past due or delinquency status of a loan based on contractual
payment terms.
A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due according
to the contractual terms of the loan agreement. Individually identified impaired loans are measured based on the present value of expected payments using the loans original effective rate as the discount rate, the loans observable market
price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of the allowance for loan losses.
Changes to the valuation allowance are recorded as a component of the provision for loan losses.
Impaired loans also include troubled debt restructurings
(TDRs). In the normal course of business, management may grant concessions to borrowers who are experiencing financial difficulty. The concessions granted most frequently for TDRs involve reductions or delays in required payments of
principal and interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the
charge-off
of a portion of the loan. In most cases, the conditions of the credit also
warrant nonaccrual status, even after the restructuring occurs. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of
restructuring. TDR loans may be returned to accrual status if there has been at least a
six-month
sustained period of repayment performance by the borrower.
Allowance for Loan Losses
The allowance for loan losses
is maintained at a level that management believes is adequate to absorb probable losses inherent in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance.
Managements determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans,
historical loan loss factors, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires various material estimates that are susceptible to significant
change, including the amounts and timing of future cash flows expected to be received on any impaired loans. In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Companys allowance
for loan losses, and may require the Company to record additions to the allowance based on their judgment about information available to them at the time of their examinations.
Premises and Equipment
Land is carried at cost.
Buildings and equipment are carried at cost, less accumulated depreciation computed on a straight-line method over the useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the
extent that the exercise of such options is reasonably assured.
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Other Real Estate Owned
Other real estate owned (OREO) includes properties acquired through, or in lieu of, loan foreclosure that are held for sale and are initially
recorded at the lower of the loans carrying amount or fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of carrying value amount or fair value less cost to sell. Gains or losses realized upon sale of OREO and additional losses related to subsequent valuation adjustments are determined on a specific property basis and are included
as a component of noninterest expense along with holding costs.
Nonmarketable equity investments
Nonmarketable equity investments include equity securities that are not publicly traded and securities acquired for various purposes. The Bank is required to
maintain certain minimum levels of equity investments with certain regulatory and other entities in which the Bank has an ongoing business relationship based on the Banks common stock and surplus (with regard to the relationship with the
Federal Reserve Bank) or outstanding borrowings (with regard to the relationship with the Federal Home Loan Bank of Atlanta). These securities are accounted for under the cost method and are included in other assets. For cost-method investments, on
a quarterly basis, the Company evaluates whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment. If the Company determines that a decline in
value is other-than-temporary, the Company will recognize the estimated loss in securities gains (losses), net.
Transfers of Financial Assets
Transfers of an entire financial asset (i.e. loan sales), a group of entire financial assets, or a participating interest in an entire financial asset (i.e.
loan participations sold) are accounted for as sales when control over the assets have been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs. The Company determines the fair value of MSRs at the date the
loan is transferred. An estimate of the Companys MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to
service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees.
Subsequent to the date of transfer, the Company has
elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of MSRs is analyzed monthly and is adjusted to
reflect changes in prepayment speeds, as well as other factors. MSRs are evaluated for impairment based on the fair value of those assets. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as
interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established through a charge to earnings. The valuation allowance is adjusted as the fair value changes. MSRs are
included in the other assets category in the accompanying consolidated balance sheets.
Derivative Instruments
In accordance with Accounting Standards Codification (ASC) Topic 815,
Derivatives and Hedging
, all derivative instruments are recorded on
the consolidated balance sheet at their respective fair values. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reason for holding it. If the derivative instrument is not designated as part of a hedging relationship, the gain or loss on the derivative instrument is recognized in earnings in the period of change. None of the derivatives
utilized by the Company have been designated as a hedge.
69
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase generally mature less than one year from the transaction date. Securities sold under agreements to repurchase
are reflected as a secured borrowing in the accompanying consolidated balance sheets at the amount of cash received in connection with each transaction.
Income Taxes
Deferred tax assets and liabilities are
the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to
be realized. The net deferred tax asset is reflected as a component of other assets in the accompanying consolidated balance sheets.
Income tax expense
or benefit for the year is allocated among continuing operations and other comprehensive income (loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss from continuing operations
that occurred during the year, plus or minus income tax effects of (1) changes in certain circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in income tax laws or rates,
and (3) changes in income tax status, subject to certain exceptions. The amount allocated to other comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted for in other
comprehensive income (loss) such as unrealized gains or losses on
available-for-sale
securities.
In accordance with ASC 740,
Income Taxes
, a tax position is recognized as a benefit only if it is more likely than not that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not
meeting the more likely than not test, no tax benefit is recorded. It is the Companys policy to recognize interest and penalties related to income tax matters in income tax expense. The Company and its wholly-owned subsidiaries
file a consolidated income tax return.
Fair Value Measurements
ASC 820,
Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting
principles and expands disclosures about fair value measurements. ASC 820 applies only to fair-value measurements that are already required or permitted by other accounting standards. The definition of fair value focuses on the exit price, i.e., the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to
assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. For more information related to fair value measurements, please refer to Note 17, Fair Value.
Subsequent Events
The Company has evaluated the effects
of events or transactions through the date of this filing that have occurred subsequent to December 31, 2016. The Company does not believe there are any material subsequent events that would require further recognition or disclosure.
70
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the year. Diluted net earnings per
share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Companys common stock. As of December 31, 2016 and 2015, respectively, the Company had no such
securities or other rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.
The
basic and diluted net earnings per share computations for the respective years are presented below.
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Year ended December 31
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(Dollars in thousands, except share and per share data)
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2016
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2015
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Basic and diluted:
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Net earnings
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$
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8,150
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$
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7,858
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Weighted average common shares outstanding
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3,643,504
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3,643,428
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Net earnings per share
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$
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2.24
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$
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2.16
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NOTE 3: VARIABLE INTEREST ENTITIES
Generally, a variable interest entity (VIE) is a corporation, partnership, trust or other legal structure that does not have equity investors with
substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.
At December 31, 2016, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE, discussed below.
Trust Preferred Securities
The Company owns the common
stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust I (the Trust), which issued mandatorily redeemable preferred capital securities (trust preferred securities) in 2003 in the aggregate of
approximately $7.0 million at the time of issuance. The Trust meets the definition of a VIE of which the Company is not the primary beneficiary; the Trusts only assets are junior subordinated debentures issued by the Company, which were
acquired by the Trust using the proceeds from the issuance of the trust preferred securities and common stock.
In October 2016, the Company purchased
$4.0 million par amount of outstanding trust preferred securities issued by the Trust. These securities were sold by the FDIC, as receiver of a failed bank that had held the trust preferred securities. The Company used dividends from the
Bank to purchase these trust preferred securities and has deemed an equivalent amount of the related junior subordinated debentures issued by the Company as no longer outstanding. The Company realized a
pre-tax
gain of $0.8 million on the early extinguishment of debt in this transaction. The remaining junior subordinated debentures of approximately $3.2 million are included in long-term debt and the
Companys equity interest of $0.2 million in the Trust is included in other assets. Interest expense on the junior subordinated debentures is included in interest expense on long-term debt.
The following table summarizes VIEs that are not consolidated by the Company as of December 31, 2016.
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(Dollars in thousands)
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Maximum
Loss
Exposure
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Liability
Recognized
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Classification
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Type:
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Trust preferred issuances
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N/A
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$ 3,217
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Long-term debt
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NOTE 4: RESTRICTED CASH BALANCES
Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount
of their deposits. As of December 31, 2016 and 2015, the Bank did not have a required reserve balance at the Federal Reserve Bank.
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NOTE 5: SECURITIES
At December 31, 2016 and 2015, respectively, all securities within the scope of ASC 320,
Investments Debt and Equity Securities
were
classified as
available-for-sale.
The fair value and amortized cost for securities
available-for-sale
by contractual maturity at December 31, 2016 and 2015, respectively, are presented below.
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1 year
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1 to 5
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5 to 10
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After 10
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Fair
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Gross Unrealized
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Amortized
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(Dollars in thousands)
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or less
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years
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years
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years
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Value
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Gains
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Losses
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Cost
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December 31, 2016
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Agency obligations (a)
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$
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3,047
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22,531
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19,893
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45,471
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331
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|
973
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$
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46,113
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Agency RMBS (a)
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|
972
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16,171
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110,644
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127,787
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551
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1,805
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129,041
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State and political subdivisions
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2,480
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10,210
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57,624
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70,314
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1,509
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734
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69,539
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Total
available-for-sale
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$
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3,047
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25,983
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46,274
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168,268
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243,572
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2,391
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|
3,512
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$
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244,693
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December 31, 2015
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Agency obligations (a)
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$
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5,000
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25,852
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19,463
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9,770
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60,085
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384
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518
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$
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60,219
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Agency RMBS (a)
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1,623
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13,511
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95,820
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110,954
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|
968
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|
|
780
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$
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110,766
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State and political subdivisions
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497
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12,094
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58,057
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70,648
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3,022
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7
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$
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67,633
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Total
available-for-sale
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$
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5,000
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27,972
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45,068
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163,647
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241,687
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4,374
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|
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|
1,305
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$
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238,618
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(a) Includes securities issued by U.S. government
agencies or government sponsored entities.
Securities with aggregate fair values of $137.2 million and $133.3 million at December 31, 2016
and 2015, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, and for other purposes required or permitted by law.
Included in other assets on the accompanying consolidated balance sheets are cost-method investments. The carrying amounts of cost-method investments were
$1.4 million at December 31, 2016 and 2015, respectively. Cost-method investments primarily include
non-marketable
equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank
(FRB) stock.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at December 31, 2016 and 2015, respectively, segregated by those securities that have been in
an unrealized loss position for less than 12 months and 12 months or more are presented below.
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Less than 12 Months
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12 Months or Longer
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Total
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(Dollars in thousands)
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Fair
Value
|
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Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency obligations
|
|
$
|
|
|
20,352
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
20,352
|
|
|
$
|
973
|
|
Agency RMBS
|
|
|
|
|
89,062
|
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
89,062
|
|
|
|
1,805
|
|
State and political subdivisions
|
|
|
|
|
20,444
|
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
20,444
|
|
|
|
734
|
|
|
|
Total
|
|
$
|
|
|
129,858
|
|
|
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
129,858
|
|
|
$
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency obligations
|
|
$
|
|
|
8,157
|
|
|
|
2
|
|
|
|
24,444
|
|
|
|
516
|
|
|
|
32,601
|
|
|
$
|
518
|
|
Agency RMBS
|
|
|
|
|
42,345
|
|
|
|
367
|
|
|
|
18,184
|
|
|
|
413
|
|
|
|
60,529
|
|
|
|
780
|
|
State and political subdivisions
|
|
|
|
|
267
|
|
|
|
1
|
|
|
|
969
|
|
|
|
6
|
|
|
|
1,236
|
|
|
|
7
|
|
|
|
Total
|
|
$
|
|
|
50,769
|
|
|
|
370
|
|
|
|
43,597
|
|
|
|
935
|
|
|
|
94,366
|
|
|
$
|
1,305
|
|
|
|
For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more
likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity. The Company assesses each security for credit impairment. For debt securities, the Company evaluates, where
necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances has
occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.
72
In determining whether a loss is temporary, the Company considers all relevant information including:
|
|
|
the length of time and the extent to which the fair value has been less than the amortized cost basis;
|
|
|
|
adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security,
in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or
changes in the quality of the credit enhancement);
|
|
|
|
the historical and implied volatility of the fair value of the security;
|
|
|
|
the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
|
|
|
|
failure of the issuer of the security to make scheduled interest or principal payments;
|
|
|
|
any changes to the rating of the security by a rating agency; and
|
|
|
|
recoveries or additional declines in fair value subsequent to the balance sheet date.
|
Agency obligations
The unrealized losses associated with agency obligations were primarily driven by changes in interest rates and not due to the credit quality of the
securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.
Agency residential mortgage-backed securities (RMBS)
The unrealized losses associated with agency RMBS were primarily driven by changes in interest rates and not due to the credit quality of the securities.
These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by changes in interest rates and were not due
to the credit quality of the securities. Some of these securities are guaranteed by a bond insurer, but management did not rely on the guarantee in making its investment decision. These securities will continue to be monitored as part of the
Companys quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost basis of these securities.
Cost-method investments
At December 31, 2016,
cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these
cost-method investments.
The carrying values of the Companys investment securities could decline in the future if the financial condition of an
issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the security. As a result, there is a risk that significant other-than-temporary impairment charges may occur in the future.
73
Other-Than-Temporarily Impaired Securities
Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary
impairment and the credit component of the loss is recognized in earnings. At December 31, 2016 and 2015, respectively, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of
credit-impaired debt securities during the years ended December 31, 2016 and 2015, respectively.
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales related to securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross realized gains
|
|
$
|
|
|
166
|
|
|
|
16
|
|
Gross realized losses
|
|
|
|
|
(387
|
)
|
|
|
|
|
|
|
Realized (losses) gains, net
|
|
$
|
|
|
(221
|
)
|
|
|
16
|
|
|
|
NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
49,850
|
|
|
$
|
52,479
|
|
Construction and land development
|
|
|
|
|
41,650
|
|
|
|
43,694
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
49,745
|
|
|
|
46,602
|
|
Multifamily
|
|
|
|
|
46,998
|
|
|
|
45,264
|
|
Other
|
|
|
|
|
123,696
|
|
|
|
111,987
|
|
|
|
Total commercial real estate
|
|
|
|
|
220,439
|
|
|
|
203,853
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgage
|
|
|
|
|
65,564
|
|
|
|
70,009
|
|
Investment property
|
|
|
|
|
45,291
|
|
|
|
46,664
|
|
|
|
Total residential real estate
|
|
|
|
|
110,855
|
|
|
|
116,673
|
|
Consumer installment
|
|
|
|
|
8,712
|
|
|
|
10,220
|
|
|
|
Total loans
|
|
|
|
|
431,506
|
|
|
|
426,919
|
|
Less: unearned income
|
|
|
|
|
(560)
|
|
|
|
(509)
|
|
|
|
Loans, net of unearned income
|
|
$
|
|
|
430,946
|
|
|
$
|
426,410
|
|
|
|
Loans secured by real estate were approximately 86.4% of the total loan portfolio at December 31, 2016. At
December 31, 2016, the Companys geographic loan distribution was concentrated primarily in Lee County, Alabama and surrounding areas.
In
accordance with ASC 310,
Receivables
, a portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. As part of the Companys quarterly assessment
of the allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate and consumer installment. Where appropriate,
the Companys loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entitys method for monitoring and
determining credit risk.
74
The following describe the risk characteristics relevant to each of the portfolio segments.
Commercial and industrial (C&I)
includes loans to finance business operations, equipment purchases, or other needs for small and
medium-sized
commercial customers. Also included in this category are loans to finance agricultural production. Generally the primary source of repayment is the cash flow from business operations and
activities of the borrower.
Construction and land development (C&D)
includes both loans and credit lines for the purpose of
purchasing, carrying and developing land into commercial developments or residential subdivisions. Also included are loans and lines for construction of residential, multi-family and commercial buildings. Generally the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate (CRE)
includes loans disaggregated
into three classes: (1) owner occupied (2) multi-family and (3) other.
|
|
|
Owner occupied
includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and
medium-sized
commercial customers. Generally the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property.
|
|
|
|
Multifamily
primarily includes loans to finance income-producing multi-family properties. Loans in this class include loans for 5 or more unit residential property and apartments leased to residents.
Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.
|
|
|
|
Other
primarily includes loans to finance income-producing commercial properties. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail
stores, industrial buildings, and warehouses leased generally to local businesses and residents. Generally the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into
consideration the occupancy and rental rates as well as the financial health of the borrower.
|
Residential real estate (RRE)
includes loans disaggregated into two classes: (1) consumer mortgage and (2) investment property.
|
|
|
Consumer mortgage
primarily includes first or second lien mortgages and home equity lines to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance
with the Banks general loan policies and procedures which require, among other things, proper documentation of each borrowers financial condition, satisfactory credit history and property value.
|
|
|
|
Investment property
primarily includes loans to finance income-producing
1-4
family residential properties. Generally the primary source of repayment is dependent
upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates as well as the financial health of the borrower.
|
Consumer installment
includes loans to individuals both secured by personal property and unsecured. Loans include personal lines of credit,
automobile loans, and other retail loans. These loans are underwritten in accordance with the Banks general loan policies and procedures which require, among other things, proper documentation of each borrowers financial condition,
satisfactory credit history, and if applicable, property value.
75
The following is a summary of current, accruing past due and nonaccrual loans by portfolio class as of
December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Current
|
|
|
Accruing
30-89 Days
Past Due
|
|
|
Accruing
Greater than
90 days
|
|
|
Total
Accruing
Loans
|
|
|
Non-
Accrual
|
|
|
Total
Loans
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
49,747
|
|
|
|
66
|
|
|
|
|
|
|
|
49,813
|
|
|
|
37
|
|
|
$
|
49,850
|
|
Construction and land development
|
|
|
41,223
|
|
|
|
395
|
|
|
|
|
|
|
|
41,618
|
|
|
|
32
|
|
|
|
41,650
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
49,564
|
|
|
|
43
|
|
|
|
|
|
|
|
49,607
|
|
|
|
138
|
|
|
|
49,745
|
|
Multifamily
|
|
|
46,998
|
|
|
|
|
|
|
|
|
|
|
|
46,998
|
|
|
|
|
|
|
|
46,998
|
|
Other
|
|
|
121,608
|
|
|
|
199
|
|
|
|
|
|
|
|
121,807
|
|
|
|
1,889
|
|
|
|
123,696
|
|
|
|
Total commercial real estate
|
|
|
218,170
|
|
|
|
242
|
|
|
|
|
|
|
|
218,412
|
|
|
|
2,027
|
|
|
|
220,439
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgage
|
|
|
64,059
|
|
|
|
1,282
|
|
|
|
|
|
|
|
65,341
|
|
|
|
223
|
|
|
|
65,564
|
|
Investment property
|
|
|
45,243
|
|
|
|
19
|
|
|
|
|
|
|
|
45,262
|
|
|
|
29
|
|
|
|
45,291
|
|
|
|
Total residential real estate
|
|
|
109,302
|
|
|
|
1,301
|
|
|
|
|
|
|
|
110,603
|
|
|
|
252
|
|
|
|
110,855
|
|
Consumer installment
|
|
|
8,652
|
|
|
|
38
|
|
|
|
|
|
|
|
8,690
|
|
|
|
22
|
|
|
|
8,712
|
|
|
|
Total
|
|
$
|
427,094
|
|
|
|
2,042
|
|
|
|
|
|
|
|
429,136
|
|
|
|
2,370
|
|
|
$
|
431,506
|
|
|
|
December 31, 2015:
|
|
Commercial and industrial
|
|
$
|
52,387
|
|
|
|
49
|
|
|
|
|
|
|
|
52,436
|
|
|
|
43
|
|
|
$
|
52,479
|
|
Construction and land development
|
|
|
43,111
|
|
|
|
|
|
|
|
|
|
|
|
43,111
|
|
|
|
583
|
|
|
|
43,694
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
46,372
|
|
|
|
|
|
|
|
|
|
|
|
46,372
|
|
|
|
230
|
|
|
|
46,602
|
|
Multifamily
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
|
45,264
|
|
|
|
|
|
|
|
45,264
|
|
Other
|
|
|
110,467
|
|
|
|
|
|
|
|
|
|
|
|
110,467
|
|
|
|
1,520
|
|
|
|
111,987
|
|
|
|
Total commercial real estate
|
|
|
202,103
|
|
|
|
|
|
|
|
|
|
|
|
202,103
|
|
|
|
1,750
|
|
|
|
203,853
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgage
|
|
|
68,579
|
|
|
|
1,105
|
|
|
|
|
|
|
|
69,684
|
|
|
|
325
|
|
|
|
70,009
|
|
Investment property
|
|
|
46,435
|
|
|
|
229
|
|
|
|
|
|
|
|
46,664
|
|
|
|
|
|
|
|
46,664
|
|
|
|
Total residential real estate
|
|
|
115,014
|
|
|
|
1,334
|
|
|
|
|
|
|
|
116,348
|
|
|
|
325
|
|
|
|
116,673
|
|
Consumer installment
|
|
|
10,179
|
|
|
|
28
|
|
|
|
|
|
|
|
10,207
|
|
|
|
13
|
|
|
|
10,220
|
|
|
|
Total
|
|
$
|
422,794
|
|
|
|
1,411
|
|
|
|
|
|
|
|
424,205
|
|
|
|
2,714
|
|
|
$
|
426,919
|
|
|
|
The gross interest income which would have been recorded under the original terms of those nonaccrual loans had they been
accruing interest, amounted to approximately $107 thousand and $133 thousand for the years ended December 31, 2016 and 2015, respectively.
76
Allowance for Loan Losses
The allowance for loan losses as of and for the years ended December 31, 2016 and 2015, is presented below.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
|
Beginning balance
|
|
$
|
4,289
|
|
|
$
|
4,836
|
|
Charged-off
loans
|
|
|
(540
|
)
|
|
|
(1,114)
|
|
Recovery of previously
charged-off
loans
|
|
|
1,379
|
|
|
|
367
|
|
|
|
Net charge-offs
|
|
|
839
|
|
|
|
(747)
|
|
Provision for loan losses
|
|
|
(485
|
)
|
|
|
200
|
|
|
|
Ending balance
|
|
$
|
4,643
|
|
|
$
|
4,289
|
|
|
|
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the
allowance is based upon managements evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrowers ability to repay
(including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory
recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are
charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially
charged-off
after a confirming event has occurred which
serves to validate that full repayment pursuant to the terms of the loan is unlikely.
The Company deems loans impaired when, based on current information
and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and
principal payments of a loan will be collected as scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is
less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loans effective interest rate, or if
the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs.
The level of
allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries
of amounts previously
charged-off.
In assessing the adequacy of the allowance, the Company also considers the
results of its ongoing internal, independent loan review process. The Companys loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk
characteristics of the entire loan portfolio. The Companys loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of
their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.
As part of the Companys quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial,
construction and land development, commercial real estate, residential real estate, and consumer installment loans. The Company analyzes each segment and estimates an allowance allocation for each loan segment.
77
The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent
for these types of loans. The estimates for these loans are established by category and based on the Companys internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Companys
internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss
rates of peer bank groups. At December 31, 2016 and 2015, and for the years then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for managements estimate of probable losses for several
qualitative and environmental factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent
credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in
lending personnel experience, changes in lending policies or procedures and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the
processes noted above, is increased or decreased based on the incremental assessment of these factors.
The Company regularly
re-evaluates
its practices in determining the allowance for loan losses. Beginning with the quarter ended December 31, 2016, the Company implemented certain refinements to its allowance for loan losses
methodology in order to better capture the effects of the most recent economic cycle on the Companys loan loss experience. First, the Company increased its look-back period for calculating average losses for all loan segments to 31 quarters.
Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20 quarter look-back period. The Company will likely continue to increase its look-back period to incorporate the effects of at least one
economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced
significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to
approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company
determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the
Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30,
2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. If the Company did not make the changes
described above, the Companys calculated allowance for loan loss allocation would have decreased by approximately $0.9 million, or 0.21% of total loans, at December 31, 2016. Other than the changes discussed above, the Company has
not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.
78
The following table details the changes in the allowance for loan losses by portfolio segment for the years ended
December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
and industrial
|
|
|
Construction
and land
Development
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
Installment
|
|
|
Total
|
|
|
|
Balance, December 31, 2014
|
|
$
|
639
|
|
|
|
974
|
|
|
|
1,928
|
|
|
|
1,119
|
|
|
|
176
|
|
|
$
|
4,836
|
|
Charge-offs
|
|
|
(100)
|
|
|
|
|
|
|
|
(866
|
)
|
|
|
(89
|
)
|
|
|
(59
|
)
|
|
|
(1,114)
|
|
Recoveries
|
|
|
22
|
|
|
|
17
|
|
|
|
|
|
|
|
313
|
|
|
|
15
|
|
|
|
367
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(78)
|
|
|
|
17
|
|
|
|
(866
|
)
|
|
|
224
|
|
|
|
(44
|
)
|
|
|
(747)
|
|
Provision
|
|
|
(38)
|
|
|
|
(322
|
)
|
|
|
817
|
|
|
|
(284
|
)
|
|
|
27
|
|
|
|
200
|
|
|
|
Balance, December 31, 2015
|
|
$
|
523
|
|
|
|
669
|
|
|
|
1,879
|
|
|
|
1,059
|
|
|
|
159
|
|
|
$
|
4,289
|
|
|
|
Charge-offs
|
|
|
(97)
|
|
|
|
|
|
|
|
(194
|
)
|
|
|
(182
|
)
|
|
|
(67
|
)
|
|
|
(540)
|
|
Recoveries
|
|
|
29
|
|
|
|
1,212
|
|
|
|
|
|
|
|
127
|
|
|
|
11
|
|
|
|
1,379
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(68)
|
|
|
|
1,212
|
|
|
|
(194
|
)
|
|
|
(55
|
)
|
|
|
(56
|
)
|
|
|
839
|
|
Provision
|
|
|
85
|
|
|
|
(1,069
|
)
|
|
|
386
|
|
|
|
103
|
|
|
|
10
|
|
|
|
(485)
|
|
|
|
Balance, December 31, 2016
|
|
$
|
540
|
|
|
|
812
|
|
|
|
2,071
|
|
|
|
1,107
|
|
|
|
113
|
|
|
$
|
4,643
|
|
|
|
The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio
segment and impairment methodology as of December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated (1)
|
|
|
Individually evaluated (2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Allowance
for loan
losses
|
|
|
Recorded
investment
in loans
|
|
|
Allowance
for
loan
losses
|
|
|
Recorded
investment
in loans
|
|
|
Allowance
for
loan
losses
|
|
|
Recorded
investment
in loans
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
540
|
|
|
|
49,835
|
|
|
|
|
|
|
|
15
|
|
|
|
540
|
|
|
|
49,850
|
|
Construction and land development
|
|
|
|
|
812
|
|
|
|
41,618
|
|
|
|
|
|
|
|
32
|
|
|
|
812
|
|
|
|
41,650
|
|
Commercial real estate
|
|
|
|
|
2,040
|
|
|
|
218,356
|
|
|
|
31
|
|
|
|
2,083
|
|
|
|
2,071
|
|
|
|
220,439
|
|
Residential real estate
|
|
|
|
|
1,107
|
|
|
|
110,855
|
|
|
|
|
|
|
|
|
|
|
|
1,107
|
|
|
|
110,855
|
|
Consumer installment
|
|
|
|
|
113
|
|
|
|
8,712
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
8,712
|
|
|
|
Total
|
|
$
|
|
|
4,612
|
|
|
|
429,376
|
|
|
|
31
|
|
|
|
2,130
|
|
|
|
4,643
|
|
|
|
431,506
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
523
|
|
|
|
52,431
|
|
|
|
|
|
|
|
48
|
|
|
|
523
|
|
|
|
52,479
|
|
Construction and land development
|
|
|
|
|
669
|
|
|
|
43,111
|
|
|
|
|
|
|
|
583
|
|
|
|
669
|
|
|
|
43,694
|
|
Commercial real estate
|
|
|
|
|
1,758
|
|
|
|
201,077
|
|
|
|
121
|
|
|
|
2,776
|
|
|
|
1,879
|
|
|
|
203,853
|
|
Residential real estate
|
|
|
|
|
1,059
|
|
|
|
116,673
|
|
|
|
|
|
|
|
|
|
|
|
1,059
|
|
|
|
116,673
|
|
Consumer installment
|
|
|
|
|
159
|
|
|
|
10,220
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
10,220
|
|
|
|
Total
|
|
$
|
|
|
4,168
|
|
|
|
423,512
|
|
|
|
121
|
|
|
|
3,407
|
|
|
|
4,289
|
|
|
|
426,919
|
|
|
|
(1)
|
Represents loans collectively evaluated for impairment in accordance with ASC
450-20,
Loss Contingencies
(formerly FAS 5), and pursuant to amendments by ASU
2010-20
regarding allowance for unimpaired loans.
|
(2)
|
Represents loans individually evaluated for impairment in accordance with ASC
310-30,
Receivables
(formerly FAS 114), and pursuant to amendments by ASU
2010-20
regarding allowance for impaired loans.
|
79
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system
used by the federal banking agencies. The following table presents credit quality indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses
adjusted for qualitative and environmental factors and are defined as follows:
|
|
|
Pass loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
|
|
|
|
Special Mention loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Companys position at some future date. These loans are not adversely
classified and do not expose an institution to sufficient risk to warrant an adverse classification.
|
|
|
|
Substandard Accruing loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility
that the Company may incur a loss in the future if these weaknesses are not corrected.
|
|
|
|
Nonaccrual includes loans where management has determined that full payment of principal and interest is in doubt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
Accruing
|
|
|
Nonaccrual
|
|
|
Total loans
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
49,558
|
|
|
|
22
|
|
|
|
233
|
|
|
|
37
|
|
|
$
|
49,850
|
|
Construction and land development
|
|
|
41,165
|
|
|
|
113
|
|
|
|
340
|
|
|
|
32
|
|
|
|
41,650
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
48,788
|
|
|
|
414
|
|
|
|
405
|
|
|
|
138
|
|
|
|
49,745
|
|
Multifamily
|
|
|
46,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,998
|
|
Other
|
|
|
121,326
|
|
|
|
32
|
|
|
|
449
|
|
|
|
1,889
|
|
|
|
123,696
|
|
|
|
Total commercial real estate
|
|
|
217,112
|
|
|
|
446
|
|
|
|
854
|
|
|
|
2,027
|
|
|
|
220,439
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgage
|
|
|
59,450
|
|
|
|
2,613
|
|
|
|
3,278
|
|
|
|
223
|
|
|
|
65,564
|
|
Investment property
|
|
|
44,109
|
|
|
|
105
|
|
|
|
1,048
|
|
|
|
29
|
|
|
|
45,291
|
|
|
|
Total residential real estate
|
|
|
103,559
|
|
|
|
2,718
|
|
|
|
4,326
|
|
|
|
252
|
|
|
|
110,855
|
|
Consumer installment
|
|
|
8,580
|
|
|
|
20
|
|
|
|
90
|
|
|
|
22
|
|
|
|
8,712
|
|
|
|
Total
|
|
$
|
419,974
|
|
|
|
3,319
|
|
|
|
5,843
|
|
|
|
2,370
|
|
|
$
|
431,506
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
48,038
|
|
|
|
4,075
|
|
|
|
323
|
|
|
|
43
|
|
|
$
|
52,479
|
|
Construction and land development
|
|
|
42,458
|
|
|
|
60
|
|
|
|
593
|
|
|
|
583
|
|
|
|
43,694
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
45,772
|
|
|
|
381
|
|
|
|
219
|
|
|
|
230
|
|
|
|
46,602
|
|
Multifamily
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,264
|
|
Other
|
|
|
110,159
|
|
|
|
36
|
|
|
|
272
|
|
|
|
1,520
|
|
|
|
111,987
|
|
|
|
Total commercial real estate
|
|
|
201,195
|
|
|
|
417
|
|
|
|
491
|
|
|
|
1,750
|
|
|
|
203,853
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgage
|
|
|
64,502
|
|
|
|
1,964
|
|
|
|
3,218
|
|
|
|
325
|
|
|
|
70,009
|
|
Investment property
|
|
|
45,399
|
|
|
|
112
|
|
|
|
1,153
|
|
|
|
|
|
|
|
46,664
|
|
|
|
Total residential real estate
|
|
|
109,901
|
|
|
|
2,076
|
|
|
|
4,371
|
|
|
|
325
|
|
|
|
116,673
|
|
Consumer installment
|
|
|
10,038
|
|
|
|
55
|
|
|
|
114
|
|
|
|
13
|
|
|
|
10,220
|
|
|
|
Total
|
|
$
|
411,630
|
|
|
|
6,683
|
|
|
|
5,892
|
|
|
|
2,714
|
|
|
$
|
426,919
|
|
|
|
80
Impaired loans
The following table presents details related to the Companys impaired loans. Loans which have been fully
charged-off
do not appear in the following table. The related allowance generally represents the following components which correspond to impaired loans:
|
|
|
Individually evaluated impaired loans equal to or greater than $500 thousand secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate).
|
|
|
|
Individually evaluated impaired loans equal to or greater than $250 thousand not secured by real estate (nonaccrual commercial and industrial and consumer loans).
|
The following table sets forth certain information regarding the Companys impaired loans that were individually evaluated for impairment at
December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(In thousands)
|
|
|
|
Unpaid
principal
balance (1)
|
|
|
Charge-offs
and payments
applied (2)
|
|
|
Recorded
investment (3)
|
|
|
|
|
Related
allowance
|
|
|
|
|
|
|
|
|
|
With no allowance recorded:
|
|
Commercial and industrial
|
|
$
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
140
|
|
|
|
(108
|
)
|
|
|
32
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
2,874
|
|
|
|
(984
|
)
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
2,874
|
|
|
|
(984
|
)
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
3,029
|
|
|
|
(1,092
|
)
|
|
|
1,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance recorded:
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
$
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
|
|
3,222
|
|
|
|
(1,092
|
)
|
|
|
2,130
|
|
|
$
|
|
|
31
|
|
|
|
|
|
|
|
|
|
(1)
|
Unpaid principal balance represents the contractual obligation due from the customer.
|
(2)
|
Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance.
|
(3)
|
Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Unpaid
principal
balance (1)
|
|
|
Charge-offs
and payments
applied (2)
|
|
|
Recorded
investment (3)
|
|
|
|
|
Related
allowance
|
|
|
|
|
|
|
|
|
|
With no allowance recorded:
|
|
Commercial and industrial
|
|
$
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
2,582
|
|
|
|
(1,999
|
)
|
|
|
583
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
308
|
|
|
|
(78
|
)
|
|
|
230
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
2,136
|
|
|
|
(617
|
)
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
2,444
|
|
|
|
(695
|
)
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
5,074
|
|
|
|
(2,694
|
)
|
|
|
2,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance recorded:
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
|
|
1,027
|
|
|
|
|
|
|
|
1,027
|
|
|
$
|
|
|
121
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
1,027
|
|
|
|
|
|
|
|
1,027
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
1,027
|
|
|
|
|
|
|
|
1,027
|
|
|
$
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
|
|
6,101
|
|
|
|
(2,694
|
)
|
|
|
3,407
|
|
|
$
|
|
|
121
|
|
|
|
|
|
|
|
|
|
(1)
|
Unpaid principal balance represents the contractual obligation due from the customer.
|
(2)
|
Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance.
|
(3)
|
Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.
|
The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment
by portfolio segment and class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Average
recorded
investment
|
|
|
Total interest
income
recognized
|
|
|
Average
recorded
investment
|
|
|
Total interest
income
recognized
|
|
|
|
Impaired loans:
|
|
Commercial and industrial
|
|
$
|
31
|
|
|
|
2
|
|
|
$
|
60
|
|
|
|
4
|
|
Construction and land development
|
|
|
94
|
|
|
|
|
|
|
|
603
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
699
|
|
|
|
31
|
|
|
|
1,328
|
|
|
|
62
|
|
Other
|
|
|
1,687
|
|
|
|
|
|
|
|
911
|
|
|
|
18
|
|
|
|
Total commercial real estate
|
|
|
2,386
|
|
|
|
31
|
|
|
|
2,239
|
|
|
|
80
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgages
|
|
|
|
|
|
|
|
|
|
|
349
|
|
|
|
173
|
|
Investment property
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
76
|
|
|
|
Total residential real estate
|
|
|
|
|
|
|
|
|
|
|
419
|
|
|
|
249
|
|
|
|
Total
|
|
$
|
2,511
|
|
|
|
33
|
|
|
$
|
3,321
|
|
|
|
333
|
|
|
|
Interest income recognized for 2015 included interest recoveries of $225 thousand related to two impaired residential
real estate loans that paid off in June 2015. Excluding the interest recoveries on these two loans, interest income recognized on impaired loans for 2015 would have been $108 thousand.
82
Troubled Debt Restructurings
Impaired loans also include troubled debt restructurings (TDRs). In the normal course of business, management may grant concessions to borrowers
who are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued
interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts due, including interest at
the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In determining whether a loan modification is
a TDR, the Company considers the individual facts and circumstances surrounding each modification. In determining the appropriate accrual status at the time of restructure, the Company evaluates whether a restructured loan has adequate collateral
protection, among other factors.
Similar to other impaired loans, TDRs are measured for impairment based on the present value of
expected payments using the loans original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of
fair value, impairment is recognized by establishing a valuation allowance as part of the allowance for loan losses or a
charge-off
to the allowance for loan losses. In periods subsequent to the modification,
all TDRs are evaluated individually, including those that have payment defaults, for possible impairment.
The following is a summary of accruing and
nonaccrual TDRs and the related loan losses, by portfolio segment and class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs
|
|
|
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
|
Total
|
|
|
|
|
|
|
Related
Allowance
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
|
$
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
31
|
|
Other
|
|
|
|
|
|
|
|
|
1,818
|
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
193
|
|
|
|
1,818
|
|
|
|
2,011
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
208
|
|
|
|
1,850
|
|
|
|
2,058
|
|
|
|
|
$
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
|
|
|
$
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
582
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
1,027
|
|
|
|
230
|
|
|
|
1,257
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
1,027
|
|
|
|
230
|
|
|
|
1,257
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
1,075
|
|
|
|
812
|
|
|
|
1,887
|
|
|
|
|
$
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, there were no significant outstanding commitments to advance additional funds to customers whose
loans had been restructured.
83
The following table summarizes loans modified in a TDR during the respective years both before and after
modification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Number of
contracts
|
|
|
|
|
|
Pre-
modification
outstanding
recorded
investment
|
|
|
|
|
|
Post-
modification
outstanding
recorded
investment
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3
|
|
|
$
|
|
|
|
|
3,147
|
|
|
|
|
|
|
|
3,137
|
|
|
|
Total commercial real estate
|
|
|
3
|
|
|
|
|
|
|
|
3,147
|
|
|
|
|
|
|
|
3,137
|
|
|
|
Total
|
|
|
3
|
|
|
$
|
|
|
|
|
3,147
|
|
|
|
|
|
|
|
3,137
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
$
|
|
|
|
|
61
|
|
|
|
|
|
|
|
66
|
|
Construction and land development
|
|
|
1
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
113
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
218
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
592
|
|
|
|
|
|
|
|
592
|
|
|
|
Total commercial real estate
|
|
|
2
|
|
|
|
|
|
|
|
808
|
|
|
|
|
|
|
|
810
|
|
|
|
Total
|
|
|
4
|
|
|
$
|
|
|
|
|
985
|
|
|
|
|
|
|
|
989
|
|
|
|
The majority of the loans modified in a TDR during the years ended December 31, 2016 and 2015, respectively, included
delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was not considered to be a market rate.
The Company had no TDRs with a payment default during 2016. The following table summarizes the recorded investment in loans modified in a TDR within the
previous twelve months for which there was a payment default (defined as 90 days or more past due) during 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Number of
Contracts
|
|
|
|
|
|
Recorded
investment (1)
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1
|
|
|
$
|
|
|
|
|
262
|
|
|
|
Total commercial real estate
|
|
|
1
|
|
|
|
|
|
|
|
262
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment property
|
|
|
1
|
|
|
|
|
|
|
|
150
|
|
|
|
Total residential real estate
|
|
|
1
|
|
|
|
|
|
|
|
150
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
|
|
|
|
412
|
|
|
|
(1)
|
Amount as of applicable month end during the respective year for which there was a payment default.
|
NOTE
7: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2016 and 2015 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Land
|
|
$
|
|
|
|
|
7,231
|
|
|
|
6,106
|
|
Buildings and improvements
|
|
|
|
|
|
|
9,478
|
|
|
|
9,448
|
|
Furniture, fixtures, and equipment
|
|
|
|
|
|
|
3,210
|
|
|
|
3,159
|
|
|
|
Total premises and equipment
|
|
|
|
|
|
|
19,919
|
|
|
|
18,713
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(7,317)
|
|
|
|
(6,847)
|
|
|
|
Premises and equipment, net
|
|
$
|
|
|
|
|
12,602
|
|
|
|
11,866
|
|
|
|
Depreciation expense was approximately $470 thousand and $475 thousand for the years ended December 31, 2016
and 2015, respectively, and is a component of net occupancy and equipment expense in the consolidated statements of earnings.
84
NOTE 8: MORTGAGE SERVICING RIGHTS, NET
Mortgage servicing rights (MSRs) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are
sold. An estimate of the Companys MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service,
escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are
amortized in proportion to, and over the period of, estimated net servicing income. Servicing fee income is recorded net of related amortization expense and recognized in earnings as part of mortgage lending income.
The Company has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells conforming, fixed-rate,
closed-end,
residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk
characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the
valuation allowance are recognized in earnings as a component of mortgage lending income.
The following table details the changes in amortized MSRs and
the related valuation allowance for the years ended December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Beginning balance
|
|
$
|
|
|
2,316
|
|
|
|
2,388
|
|
Additions, net
|
|
|
|
|
324
|
|
|
|
529
|
|
Amortization expense
|
|
|
|
|
(687)
|
|
|
|
(654)
|
|
Change in valuation allowance
|
|
|
|
|
(1)
|
|
|
|
53
|
|
|
|
Ending balance
|
|
$
|
|
|
1,952
|
|
|
|
2,316
|
|
|
|
|
|
|
|
Valuation allowance included in MSRs, net:
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
|
|
|
|
|
|
53
|
|
End of period
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of amortized MSRs:
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
|
|
3,086
|
|
|
|
3,238
|
|
End of period
|
|
|
|
|
2,678
|
|
|
|
3,086
|
|
|
|
Data and assumptions used in the fair value calculation related to MSRs at December 31, 2016 and 2015, respectively, are
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Unpaid principal balance
|
|
$
|
|
|
338,434
|
|
|
|
358,928
|
|
Weighted average prepayment speed (CPR)
|
|
|
|
|
10.9
|
%
|
|
|
10.0
|
|
Discount rate (annual percentage)
|
|
|
|
|
10.0
|
%
|
|
|
10.0
|
|
Weighted average coupon interest rate
|
|
|
|
|
3.8
|
%
|
|
|
3.9
|
|
Weighted average remaining maturity (months)
|
|
|
|
|
257
|
|
|
|
266
|
|
Weighted average servicing fee (basis points)
|
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
85
At December 31, 2016, the weighted average amortization period for MSRs was 5.9 years. Estimated
amortization expense for each of the next five years is presented below.
|
|
|
(Dollars in thousands)
|
|
December 31, 2016
|
|
2017
|
|
$ 424
|
2018
|
|
356
|
2019
|
|
301
|
2020
|
|
255
|
2021
|
|
215
|
|
NOTE 9: DEPOSITS
At
December 31, 2016, the scheduled maturities of certificates of deposit and other time deposits are presented below.
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2016
|
|
|
|
2017
|
|
$
|
110,428
|
|
2018
|
|
|
43,311
|
|
2019
|
|
|
37,817
|
|
2020
|
|
|
9,347
|
|
2021
|
|
|
7,234
|
|
|
|
Total certificates of deposit and other time deposits
|
|
$
|
208,137
|
|
|
|
Additionally, at December 31, 2016 and 2015, approximately $59.5 million and $59.6 million, respectively, of
certificates of deposit and other time deposits were issued in denominations of $250 thousand or greater.
At December 31, 2016 and 2015, the
amount of deposit accounts in overdraft status that were reclassified to loans on the accompanying consolidated balance sheets was not material.
NOTE
10: SHORT-TERM BORROWINGS
At December 31, 2016 and 2015, the composition of short-term borrowings is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Avg. Rate
|
|
|
Amount
|
|
|
Avg. Rate
|
|
|
|
Federal funds purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Average during the year
|
|
|
14
|
|
|
|
1.21
|
%
|
|
|
16
|
|
|
|
0.90
|
%
|
Maximum outstanding at any
month-end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
$
|
3,366
|
|
|
|
0.50
|
%
|
|
$
|
2,951
|
|
|
|
0.50
|
%
|
Average during the year
|
|
|
2,969
|
|
|
|
0.50
|
%
|
|
|
3,585
|
|
|
|
0.50
|
%
|
Maximum outstanding at any
month-end
|
|
|
3,507
|
|
|
|
|
|
|
|
4,806
|
|
|
|
|
|
|
|
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. The Bank had
available federal fund lines totaling $41.0 million with none outstanding at December 31, 2016.
Securities sold under agreements to repurchase
represent short-term borrowings with maturities less than one year collateralized by a portion of the Companys securities portfolio. Securities with an aggregate carrying value of $6.0 million and $6.3 million at December 31,
2016 and 2015, respectively, were pledged to secure securities sold under agreements to repurchase.
86
NOTE 11: LONG-TERM DEBT
At December 31, 2016 and 2015, the composition of long-term debt is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Avg. Rate
|
|
|
Amount
|
|
|
Avg. Rate
|
|
|
|
Subordinated debentures, due 2033
|
|
$
|
3,217
|
|
|
|
3.88
|
%
|
|
$
|
7,217
|
|
|
|
3.63%
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,217
|
|
|
|
3.88
|
%
|
|
$
|
7,217
|
|
|
|
3.63%
|
|
|
|
The Company formed Auburn National Bancorporation Capital Trust I (the Trust), a wholly-owned statutory business
trust, in 2003. The Trust issued $7.0 million of trust preferred securities that were sold to third parties. The proceeds from the sale of the trust preferred securities and trust common securities that we hold, were used to purchase junior
subordinated debentures of $7.2 million from the Company, which are presented as long-term debt in the consolidated balance sheets and qualify for inclusion in Tier 1 capital for regulatory capital purposes, subject to certain limitations. The
debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.
In October 2016, the Company purchased
$4.0 million par amount of outstanding trust preferred securities issued by the Trust. These securities were sold by the FDIC, as receiver of a failed bank that held the trust preferred securities. The Company used dividends from the Bank to
purchase these trust preferred securities and has deemed an equivalent amount of the related subordinated debentures issued by the company as no longer outstanding. The Company realized a
pre-tax
gain of
$0.8 million on the early extinguishment of debt in this transaction. Following the transaction, the Company had $3.2 million in junior subordinated debentures related to $3.0 million of trust preferred securities
outstanding. The amount related to the trust preferred securities remains included in the Companys Tier 1 capital for regulatory purposes.
The
following is a schedule of contractual maturities of long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
Subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,217
|
|
|
|
3,217
|
|
|
|
Total long-term debt
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,217
|
|
|
|
3,217
|
|
|
|
NOTE 12: OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it includes net earnings and other
comprehensive income (loss). Other comprehensive income (loss) for the years ended December 31, 2016 and 2015, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
|
Tax benefit
|
|
|
Net of
|
|
|
|
|
|
(In thousands)
|
|
amount
|
|
|
(expense)
|
|
|
tax amount
|
|
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding loss on all other securities
|
|
$
|
(4,412)
|
|
|
|
1,628
|
|
|
|
(2,784)
|
|
Reclassification adjustment for net loss on securities recognized in net earnings
|
|
|
221
|
|
|
|
(82)
|
|
|
|
139
|
|
|
|
Other comprehensive loss
|
|
$
|
(4,191)
|
|
|
|
1,546
|
|
|
|
(2,645)
|
|
|
|
2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding loss on all other securities
|
|
$
|
(785)
|
|
|
|
289
|
|
|
|
(496)
|
|
Reclassification adjustment for net gain on securities recognized in net earnings
|
|
|
(16)
|
|
|
|
6
|
|
|
|
(10)
|
|
|
|
Other comprehensive loss
|
|
$
|
(801)
|
|
|
|
295
|
|
|
|
(506)
|
|
|
|
87
NOTE 13: INCOME TAXES
For the years ended December 31, 2016 and 2015 the components of income tax expense from continuing operations are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
2,143
|
|
|
|
1,805
|
|
State
|
|
|
|
|
498
|
|
|
|
395
|
|
|
|
Total current income tax expense
|
|
|
|
|
2,641
|
|
|
|
2,200
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
464
|
|
|
|
586
|
|
State
|
|
|
|
|
(3
|
)
|
|
|
34
|
|
|
|
Total deferred income tax expense
|
|
|
|
|
461
|
|
|
|
620
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
|
|
3,102
|
|
|
|
2,820
|
|
|
|
Total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 34% to
earnings before income taxes. A reconciliation of the differences for the years ended December 31, 2016 and 2015, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pre-tax
|
|
|
|
|
|
pre-tax
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Amount
|
|
|
earnings
|
|
|
Amount
|
|
|
earnings
|
|
|
|
Earnings before income taxes
|
|
$
|
|
|
11,252
|
|
|
|
|
|
|
|
10,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at statutory rate
|
|
|
|
|
3,826
|
|
|
|
34.0 %
|
|
|
|
3,631
|
|
|
|
34.0 %
|
|
Tax-exempt
interest
|
|
|
|
|
(857)
|
|
|
|
(7.6)
|
|
|
|
(873)
|
|
|
|
(8.1)
|
|
State income taxes, net of federal tax effect
|
|
|
|
|
325
|
|
|
|
2.9
|
|
|
|
280
|
|
|
|
2.6
|
|
Bank-owned life insurance
|
|
|
|
|
(155)
|
|
|
|
(1.4)
|
|
|
|
(254)
|
|
|
|
(2.4)
|
|
Other
|
|
|
|
|
(37)
|
|
|
|
(0.3)
|
|
|
|
36
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
|
|
3,102
|
|
|
|
27.6 %
|
|
|
|
2,820
|
|
|
|
26.4 %
|
|
|
|
88
The Company had net deferred tax assets of $1.3 million and $0.2 million at December 31, 2016 and
2015, respectively, included in other assets on the consolidated balance sheets. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and
2015 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
|
|
1,713
|
|
|
|
1,583
|
|
Unrealized loss on securities
|
|
|
|
|
414
|
|
|
|
|
|
Write-downs on other real estate owned
|
|
|
|
|
|
|
|
|
20
|
|
Tax credit carry-forwards
|
|
|
|
|
|
|
|
|
484
|
|
Other
|
|
|
|
|
316
|
|
|
|
519
|
|
|
|
Total deferred tax assets
|
|
|
|
|
2,443
|
|
|
|
2,606
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
|
|
205
|
|
|
|
219
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
1,132
|
|
Originated mortgage servicing rights
|
|
|
|
|
721
|
|
|
|
855
|
|
Other
|
|
|
|
|
237
|
|
|
|
205
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
1,163
|
|
|
|
2,411
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
1,280
|
|
|
|
195
|
|
|
|
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is
more-likely-than-not
that some portion of the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the remaining deferred tax assets are deductible, management believes it is
more-likely-than-not
that the Company will realize the benefits of these deductible differences at December 31, 2016. The amount of the deferred tax assets considered realizable, however, could be reduced
in the near term if estimates of future taxable income are reduced.
The change in the net deferred tax asset for the years ended December 31, 2016
and 2015, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Net deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
|
|
195
|
|
|
|
519
|
|
Deferred tax expense related to continuing operations
|
|
|
|
|
(461)
|
|
|
|
(620)
|
|
Stockholders equity, for accumulated other comprehensive loss
|
|
|
|
|
1,546
|
|
|
|
296
|
|
|
|
Balance, end of year
|
|
$
|
|
|
1,280
|
|
|
|
195
|
|
|
|
ASC 740,
Income Taxes,
defines the threshold for recognizing the benefits of tax return positions in the financial
statements as
more-likely-than-not
to be sustained by the taxing authority. This section also provides guidance on the
de-recognition,
measurement, and
classification of income tax uncertainties in interim periods. As of December 31, 2016, the Company had no unrecognized tax benefits related to federal or state income tax matters. The Company does not anticipate any material increase or
decrease in unrecognized tax benefits during 2017 relative to any tax positions taken prior to December 31, 2016. As of December 31, 2016, the Company has accrued no interest and no penalties related to uncertain tax positions. It is the
Companys policy to recognize interest and penalties related to income tax matters in income tax expense.
The Company and its subsidiaries file
consolidated U.S. federal and State of Alabama income tax returns. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the State of Alabama for the years ended December 31, 2013 through
2016.
89
NOTE 14: EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan that covers substantially all employees. Participants may contribute up to 10% of eligible compensation subject to certain
limits based on federal tax laws. The Companys matching contributions to the Plan are determined by the board of directors. Participants become 20% vested in their accounts after two years of service and 100% vested after six years of service.
Company matching contributions to the Plan were $124 thousand and $116 thousand for the years ended December 31, 2016 and 2015, respectively, and are included in salaries and benefits expense.
NOTE 15: DERIVATIVE INSTRUMENTS
Financial derivatives
are reported at fair value in other assets or other liabilities on the accompanying consolidated balance sheets. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a
hedging relationship. For derivatives not designated as part of a hedging relationship, the gain or loss is recognized in current earnings within other noninterest income on the accompanying consolidated statements of earnings. From time to time,
the Company may enter into interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company enters into offsetting positions in order to minimize the risk to the
Company. These swaps qualify as derivatives, but are not designated as hedging instruments. At December 31, 2016 and December 31, 2015, the Company had no derivative contracts to assist in managing its own interest rate sensitivity.
Interest rate swap agreements involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative
instrument is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or
counterparty and therefore, has no credit risk.
A summary of the Companys interest rate swaps as of and for the years ended December 31, 2016
and 2015 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Other
|
|
|
Other
|
|
|
noninterest
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
income
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Gains
|
|
(Dollars in thousands)
|
|
Notional
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed / receive variable
|
|
$
|
3,967
|
|
|
|
|
|
|
|
241
|
|
|
$
|
199
|
|
Pay variable / receive fixed
|
|
|
3,967
|
|
|
|
241
|
|
|
|
|
|
|
|
(199)
|
|
|
|
Total interest rate swap agreements
|
|
$
|
7,934
|
|
|
|
241
|
|
|
|
241
|
|
|
$
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed / receive variable
|
|
$
|
4,317
|
|
|
|
|
|
|
|
440
|
|
|
$
|
194
|
|
Pay variable / receive fixed
|
|
|
4,317
|
|
|
|
440
|
|
|
|
|
|
|
|
(194)
|
|
|
|
Total interest rate swap agreements
|
|
$
|
8,634
|
|
|
|
440
|
|
|
|
440
|
|
|
$
|
|
|
|
|
NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES
Credit-Related Financial Instruments
The Company
is party to credit related financial instruments with
off-balance
sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in
making commitments as it does for
on-balance
sheet instruments.
90
At December 31, 2016 and 2015, the following financial instruments were outstanding whose contract amount
represents credit risk:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
Commitments to extend credit
|
|
$
|
45,979
|
|
|
$
|
52,230
|
|
Standby letters of credit
|
|
|
7,432
|
|
|
|
8,221
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, total commitment
amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on managements credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral, including accounts receivable, inventory, equipment, marketable securities, and
property to support those commitments for which collateral is deemed necessary. The Company has recorded a liability for the estimated fair value of these standby letters of credit in the amount of $84 thousand and $69 thousand at
December 31, 2016 and 2015, respectively.
Other Commitments
Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to December 31, 2016, are as follows: 2017,
$155 thousand; 2018, $51 thousand; 2019, $36 thousand; 2020, $3 thousand; 2021, none.
Contingent Liabilities
The Company and the Bank are involved in various legal proceedings, arising in connection with their business. In the opinion of management, based upon
consultation with legal counsel, the ultimate resolution of these proceeding will not have a material adverse effect upon the consolidated financial condition or results of operations of the Company and the Bank.
NOTE 17: FAIR VALUE
Fair Value Hierarchy
Fair value is defined by ASC 820,
Fair Value Measurements and Disclosures
, as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.
Level 2inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly.
Level 3inputs to the valuation methodology are unobservable and reflect the Companys own assumptions about the inputs market
participants would use in pricing the asset or liability.
91
Level changes in fair value measurements
Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation
techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Companys financial assets and liabilities generally is such that transfers in and out of
any level are expected to be infrequent. For the years ended December 31, 2016 and 2015, there were no transfers between levels and no changes in valuation techniques for the Companys financial assets and liabilities.
Assets and liabilities measured at fair value on a recurring basis
Securities
available-for-sale
Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company obtains pricing from third
party pricing services. These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, market consensus prepayment speeds, benchmark yields, reported trades for similar securities,
credit information and the securities terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review,
management may obtain
non-binding
third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to
another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used
with management.
Interest rate swap agreements
The
carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap agreements were based on
information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value
measurements for our interest rate swap agreements. The Company classified these derivative assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as hedging instruments.
92
The following table presents the balances of the assets and liabilities measured at fair value on a recurring
basis as of December 31, 2016 and 2015, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Quoted Prices in
Active Markets
for
Identical Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency obligations
|
|
$
|
45,471
|
|
|
|
|
|
|
|
45,471
|
|
|
|
|
|
Agency RMBS
|
|
|
127,787
|
|
|
|
|
|
|
|
127,787
|
|
|
|
|
|
State and political subdivisions
|
|
|
70,314
|
|
|
|
|
|
|
|
70,314
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
|
243,572
|
|
|
|
|
|
|
|
243,572
|
|
|
|
|
|
Other assets
(1)
|
|
|
241
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
243,813
|
|
|
|
|
|
|
|
243,813
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
(1)
|
|
|
241
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
241
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency obligations
|
|
$
|
60,085
|
|
|
|
|
|
|
|
60,085
|
|
|
|
|
|
Agency RMBS
|
|
|
110,954
|
|
|
|
|
|
|
|
110,954
|
|
|
|
|
|
State and political subdivisions
|
|
|
70,648
|
|
|
|
|
|
|
|
70,648
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
|
241,687
|
|
|
|
|
|
|
|
241,687
|
|
|
|
|
|
Other assets
(1)
|
|
|
440
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
242,127
|
|
|
|
|
|
|
|
242,127
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
(1)
|
|
|
440
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
440
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
(1)
Represents the fair value of interest
rate swap agreements.
Assets and liabilities measured at fair value on a nonrecurring basis
Loans held for sale
Loans held for sale are carried at
the lower of cost or fair value. Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value hierarchy.
Impaired Loans
Loans considered impaired under ASC
310-10-35,
Receivables
, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and
interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loans original effective rate as the discount rate, the loans
observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.
93
The fair value of impaired loans were primarily measured based on the value of the collateral securing these
loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral
based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted
for costs to sell and may be discounted further based on managements historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or managements expertise and knowledge of the customer and the
customers business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and
adjusted accordingly, based on the same factors discussed above.
Other real estate owned
Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the
loans carrying amount or the fair value less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally
based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on managements historical knowledge, and/or changes in market conditions
from the date of the most recent appraisal, and/or managements expertise and knowledge of the customer and the customers business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where
the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense.
Mortgage servicing rights, net
Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair
value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third partys valuation model calculates the present value of
estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow account earnings,
contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include
prepayment speeds or the constant prepayment rate (CPR) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Companys MSRs are classified within
Level 3 of the valuation hierarchy.
94
The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring
basis as of December 31, 2016 and 2015, respectively, by caption, on the accompanying consolidated balance sheets and by ASC 820 valuation hierarchy (as described above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
|
|
|
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
1,497
|
|
|
|
|
|
|
|
1,497
|
|
|
|
|
|
Loans, net
(1)
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
|
2,099
|
|
Other real estate owned
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
Other assets
(2)
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
|
1,952
|
|
|
|
Total assets at fair value
|
|
$
|
5,700
|
|
|
|
|
|
|
|
1,497
|
|
|
|
4,203
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
1,540
|
|
|
|
|
|
|
|
1,540
|
|
|
|
|
|
Loans, net
(1)
|
|
|
3,286
|
|
|
|
|
|
|
|
|
|
|
|
3,286
|
|
Other real estate owned
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
252
|
|
Other assets
(2)
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
2,316
|
|
|
|
Total assets at fair value
|
|
$
|
7,394
|
|
|
|
|
|
|
|
1,540
|
|
|
|
5,854
|
|
|
|
(1)
Loans considered impaired under ASC
310-10-35
Receivables. This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses.
(2)
Represents MSRs, net, carried at lower of cost or estimated fair
value.
At December 31, 2016 and 2015 and for the years then ended, the Company had no Level 3 assets measured at fair value on a recurring
basis. For Level 3 assets measured at fair value on a
non-recurring
basis as of December 31, 2016, the significant unobservable inputs used in the fair value measurements are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Carrying
Amount
|
|
|
|
|
|
Valuation Technique
|
|
|
|
Significant Unobservable Input
|
|
|
|
Weighted
Average
of Input
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
$
|
|
|
|
2,099
|
|
|
|
|
|
|
Appraisal
|
|
|
|
Appraisal discounts (%)
|
|
|
|
|
45.2%
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
Appraisal
|
|
|
|
Appraisal discounts (%)
|
|
|
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights, net
|
|
|
|
|
|
|
1,952
|
|
|
|
|
|
|
Discounted cash flow
|
|
|
|
Prepayment speed or CPR (%)
|
|
|
|
|
10.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate (%)
|
|
|
|
|
10.0%
|
|
|
|
Fair Value of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the
balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Companys financial instruments are explained below. Where quoted market prices are not available, fair values
are based on estimates using discounted cash flow analyses. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be
substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Companys financial instruments, but rather are a good-faith estimate of the fair value of financial instruments held
by the Company. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.
95
The following methods and assumptions were used by the Company in estimating the fair value of its financial
instruments:
Loans, net
Fair values for
loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of
fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Loans held for sale
Fair values of loans held
for sale are determined using quoted market secondary market prices for similar loans.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar
remaining maturities.
Long-term debt
The
fair value of the Companys fixed rate long-term debt is estimated using discounted cash flows based on estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Companys variable rate
long-term debt approximates its fair value.
The carrying value, related estimated fair value, and placement in the fair value hierarchy of the
Companys financial instruments at December 31, 2016 and 2015 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying
value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand, interest-bearing demand, and savings deposits due to these products having no stated maturity. In
addition, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy
|
|
(Dollars in thousands)
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
|
Level 1
inputs
|
|
|
Level 2
inputs
|
|
|
Level 3
Inputs
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net (1)
|
|
$
|
426,303
|
|
|
$
|
428,446
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
428,446
|
|
Loans held for sale
|
|
|
1,497
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
$
|
208,137
|
|
|
$
|
207,791
|
|
|
$
|
|
|
|
|
|
$
|
207,791
|
|
|
$
|
|
|
Long-term debt
|
|
|
3,217
|
|
|
|
3,217
|
|
|
|
|
|
|
|
|
|
3,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net (1)
|
|
$
|
422,121
|
|
|
$
|
427,340
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
427,340
|
|
Loans held for sale
|
|
|
1,540
|
|
|
|
1,574
|
|
|
|
|
|
|
|
|
|
1,574
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
$
|
219,598
|
|
|
$
|
220,093
|
|
|
$
|
|
|
|
|
|
$
|
220,093
|
|
|
$
|
|
|
Long-term debt
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
|
|
|
|
|
|
7,217
|
|
|
|
|
|
|
|
(1) Represents loans, net of unearned income and the allowance for loan losses.
96
NOTE 18: RELATED PARTY TRANSACTIONS
A former director who retired from the Companys board of directors in October 2015, was an officer in a construction company that the Company contracted
with in 2015 for the build out of leasehold improvements in connection with a relocation of a bank branch and for construction of a new branch facility located in Auburn, Alabama. Total payments made to the construction company under the terms of
these contracts were $1.2 million for the year ended December 31, 2015. There were no payments made related to these contracts for the year ended December 31, 2016.
The Bank has made, and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company,
the Bank, and their affiliates. In managements opinion, these loans were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements, and do not represent more than normal credit risk. An
analysis of such outstanding loans is presented below.
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
|
Loans outstanding at December 31, 2015
|
|
$
|
3,715
|
|
New loans/advances
|
|
|
1,071
|
|
Repayments
|
|
|
(866)
|
|
Changes in directors and executive officers
|
|
|
24
|
|
|
|
Loans outstanding at December 31, 2016
|
|
$
|
3,944
|
|
|
|
During 2016 and 2015, certain executive officers and directors of the Company and the Bank, including companies with which
they are affiliated, were deposit customers of the bank. Total deposits for these persons at December 31, 2016 and 2015 amounted to $17.8 million and $18.1 million, respectively.
NOTE 19: REGULATORY RESTRICTIONS AND CAPITAL RATIOS
The
Company and the Bank are subject to various regulatory capital requirements and policies administered by federal and State of Alabama banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys and Banks assets, liabilities, and certain offbalance sheet items as calculated under regulatory accounting practices.
The Companys and Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors, including anticipated capital needs. Supervisory assessments of
capital adequacy may differ significantly from conclusions based solely upon risk-based capital ratios. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) common equity Tier 1 ratio, Tier 1 leverage ratio, Tier 1 risk-based ratio and total risk-based ratio. Management believes, as of December 31, 2016, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2016, the Bank is well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. Management has not received any
notification from the Companys or the Banks regulators that changes the Banks regulatory capital status.
97
The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2016 and 2015 are
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum for capital
|
|
|
Minimum to be
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
well capitalized
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
85,480
|
|
|
|
10.27 %
|
|
|
$
|
33,293
|
|
|
|
4.00 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
84,287
|
|
|
|
10.14
|
|
|
|
33,259
|
|
|
|
4.00
|
|
|
$
|
41,574
|
|
|
|
5.00 %
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
82,642
|
|
|
|
16.44 %
|
|
|
$
|
22,621
|
|
|
|
4.50 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
84,287
|
|
|
|
16.74
|
|
|
|
22,663
|
|
|
|
4.50
|
|
|
$
|
32,736
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
85,480
|
|
|
|
17.00 %
|
|
|
$
|
30,162
|
|
|
|
6.00 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
84,287
|
|
|
|
16.74
|
|
|
|
30,218
|
|
|
|
6.00
|
|
|
$
|
40,290
|
|
|
|
8.00 %
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
90,254
|
|
|
|
17.95 %
|
|
|
$
|
40,216
|
|
|
|
8.00 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
89,061
|
|
|
|
17.68
|
|
|
|
40,290
|
|
|
|
8.00
|
|
|
$
|
50,363
|
|
|
|
10.00 %
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
84,268
|
|
|
|
10.35 %
|
|
|
$
|
32,553
|
|
|
|
4.00 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
82,848
|
|
|
|
10.19
|
|
|
|
32,519
|
|
|
|
4.00
|
|
|
$
|
40,649
|
|
|
|
5.00 %
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
77,714
|
|
|
|
15.28 %
|
|
|
$
|
22,886
|
|
|
|
4.50 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
82,848
|
|
|
|
16.26
|
|
|
|
22,933
|
|
|
|
4.50
|
|
|
$
|
33,125
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
84,268
|
|
|
|
16.57 %
|
|
|
$
|
30,515
|
|
|
|
6.00 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
82,848
|
|
|
|
16.26
|
|
|
|
30,577
|
|
|
|
6.00
|
|
|
$
|
40,769
|
|
|
|
8.00 %
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn National Bancorporation
|
|
$
|
88,682
|
|
|
|
17.44 %
|
|
|
$
|
40,687
|
|
|
|
8.00 %
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AuburnBank
|
|
|
87,262
|
|
|
|
17.12
|
|
|
|
40,769
|
|
|
|
8.00
|
|
|
$
|
50,962
|
|
|
|
10.00 %
|
|
|
|
Dividends paid by the Bank are a principal source of funds available to the Company for payment of dividends to its
stockholders and for other needs. Applicable federal and state statutes and regulations impose restrictions on the amounts of dividends that may be declared by the subsidiary bank. State law and Federal Reserve policy restrict the Bank from
declaring dividends in excess of the sum of the current years earnings plus the retained net earnings from the preceding two years without prior approval. In addition to the formal statutes and regulations, regulatory authorities also consider
the adequacy of the Banks total capital in relation to its assets, deposits, and other such items. Capital adequacy considerations could further limit the availability of dividends from the Bank. At December 31, 2016, the Bank could have
declared additional dividends of approximately $10.1 million without prior approval of regulatory authorities. As a result of this limitation, approximately $73.9 million of the Companys investment in the Bank was restricted from
transfer in the form of dividends.
98
NOTE 20: AUBURN NATIONAL BANCORPORATION (PARENT COMPANY)
The Parent Companys condensed balance sheets and related condensed statements of earnings and cash flows are as follows:
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
2,190
|
|
|
|
2,187
|
|
Investment in bank subsidiary
|
|
|
83,984
|
|
|
|
85,529
|
|
Other assets
|
|
|
881
|
|
|
|
845
|
|
|
|
Total assets
|
|
$
|
87,055
|
|
|
|
88,561
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
1,661
|
|
|
|
1,395
|
|
Long-term debt
|
|
|
3,217
|
|
|
|
7,217
|
|
|
|
Total liabilities
|
|
|
4,878
|
|
|
|
8,612
|
|
|
|
Stockholders equity
|
|
|
82,177
|
|
|
|
79,949
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
87,055
|
|
|
|
88,561
|
|
|
|
CONDENSED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
Dividends from bank subsidiary
|
|
$
|
6,709
|
|
|
|
3,450
|
|
Noninterest income
|
|
|
129
|
|
|
|
135
|
|
|
|
Total income
|
|
|
6,838
|
|
|
|
3,585
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
228
|
|
|
|
236
|
|
Gain on early extinguishment of debt
|
|
|
(790
|
)
|
|
|
|
|
Noninterest expense
|
|
|
193
|
|
|
|
195
|
|
|
|
Total expense
|
|
|
(369
|
)
|
|
|
431
|
|
|
|
Earnings before income tax benefit and equity in undistributed earnings of bank
subsidiary
|
|
|
7,207
|
|
|
|
3,154
|
|
Income tax expense (benefit)
|
|
|
157
|
|
|
|
(80)
|
|
|
|
Earnings before equity in undistributed earnings of bank subsidiary
|
|
|
7,050
|
|
|
|
3,234
|
|
Equity in undistributed earnings of bank subsidiary
|
|
|
1,100
|
|
|
|
4,624
|
|
|
|
|
|
|
Net earnings
|
|
$
|
8,150
|
|
|
|
7,858
|
|
|
|
99
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
|
|
8,150
|
|
|
|
7,858
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
(790)
|
|
|
|
|
|
Net (increase) decrease in other assets
|
|
|
|
|
(36)
|
|
|
|
1
|
|
Net increase (decrease) in other liabilities
|
|
|
|
|
268
|
|
|
|
(153)
|
|
Equity in undistributed earnings of bank subsidiary
|
|
|
|
|
(1,100)
|
|
|
|
(4,624)
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
6,492
|
|
|
|
3,082
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayments or retirement of long-term debt
|
|
|
|
|
(3,210)
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
(3,279)
|
|
|
|
(3,206)
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
(6,489)
|
|
|
|
(3,206)
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
|
|
3
|
|
|
|
(124)
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
2,187
|
|
|
|
2,311
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
2,190
|
|
|
|
2,187
|
|
|
|
100