Auburn National Bancorporation, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company provides banking services primarily in Lee County, Alabama, and surrounding areas through AuburnBank.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income, GAAP | $7.24 million | $6.04 million | $19.70 million | $17.95 million |
| Net earnings | $2.00 million | $1.88 million | $5.88 million | $6.17 million |
| Diluted earnings per share | $0.57 | $0.53 | $1.67 | $1.74 |
| Net interest margin, tax-equivalent | 3.00% | 2.51% | 2.67% | 2.59% |
| Noninterest income | $0.85 million | $0.98 million | $2.61 million | $3.29 million |
| Noninterest expense | $5.42 million | $4.76 million | $15.37 million | $14.36 million |
At September 30, 2022, total assets were $1.04 billion; loans, net of unearned income, were $474.0 million; securities available-for-sale were $411.5 million; deposits were $977.9 million; and stockholders’ equity was $59.8 million. Cash and cash equivalents were $69.6 million. The bank had no long-term debt; repurchase agreements totaled $2.6 million.
For the first nine months, operating cash flow was $8.7 million, investing cash outflow was $75.0 million, and financing cash outflow was $20.4 million. Cash and cash equivalents decreased $86.6 million from year-end 2021.
The allowance for loan losses was $5.0 million, or 1.05% of loans. Nonperforming assets were $347,000 (0.07% of loans and foreclosed property); potential problem loans were $1.3 million. Bank regulatory capital ratios remained above “well capitalized” thresholds: total risk-based capital 16.16%, CET1 15.39%, and Tier 1 leverage 9.29%.
Changes versus comparable periods
- Q3 net earnings increased about 7% year over year, while nine-month earnings declined about 5%. Nine-month EPS fell from $1.74 to $1.67.
- Higher market rates and balance-sheet mix contributed to stronger net interest income and margin. Nine-month tax-equivalent net interest income increased 9%.
- Nine-month noninterest income declined 21%, mainly because mortgage origination income fell as mortgage rates rose. Noninterest expense rose 7%, including costs associated with the new headquarters.
- Loans increased 3% from December 2021; excluding PPP loans that were repaid, they increased 5%. Deposits declined 1.6%, primarily from lower rate-sensitive money market and savings balances.
- Accumulated other comprehensive loss reached $45.7 million, largely reflecting rate-driven unrealized losses on available-for-sale securities. Stockholders’ equity fell from $103.7 million at year-end 2021 to $59.8 million; management stated these securities losses did not reduce regulatory capital.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management said further Federal Reserve rate increases were possible if inflation remained elevated. Higher rates had supported margin but reduced securities values; deposit costs could rise as rates and customer behavior change.
- Management described the bank as asset-sensitive and reported compliance with its interest-rate-risk policy limits. It believed liquidity was adequate for known obligations and expected needs over the following 12 months. Available funding included $325.1 million of FHLB capacity and $61.0 million in federal-funds lines, with no federal-funds borrowings outstanding.
- Estimated uninsured deposits were $393.8 million; the bank reported no brokered deposits. Loan commitments were $88.8 million and standby letters of credit were $1.0 million.
- Credit and valuation risks include commercial real estate concentrations, inflation, rising rates, borrower and collateral deterioration, and economic uncertainty. Commercial real estate represented 53% of loans; 83.5% of the portfolio was secured by real estate.
- The company had $61.0 million of gross unrealized losses on securities at quarter-end, primarily attributed to higher interest rates. Management said it did not intend to sell and did not expect to be required to sell before recovery of amortized cost; future rate increases or issuer deterioration could change that assessment.
- CECL was scheduled for adoption in January 2023. Management expected an increase in the allowance upon adoption but had not quantified the effect. The company also reported an estimated $1.6 million employee-retention-credit claim filed with the IRS; approval, timing, and amount were uncertain.
- On October 13, 2022, the company sold land near its headquarters for $4.26 million and estimated a $3.2 million pretax gain after costs. The new headquarters opened in June 2022, with related occupancy, depreciation, and one-time costs affecting expenses.
- Management reported no material pending legal proceedings and effective disclosure controls. The filing states no material subsequent event other than the land sale.
Key facts for investors to verify
- How deposit pricing, uninsured balances, and deposit outflows evolve as market rates rise.
- Whether net interest margin gains persist as funding costs reprice and loan demand changes.
- Loan quality, commercial real estate concentrations, and the adequacy of the allowance, including the impact of CECL adoption.
- Whether securities losses remain recoverable without forced sales and how they affect reported equity and liquidity.
- The realized proceeds and gain from the land sale, and the IRS decision on the employee retention credit.