Auburn National Bancorporation, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. AuburnBank provides banking services primarily in East Alabama, including Lee County. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial results and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income (GAAP) | $6.374 | $5.975 | $12.452 | $11.912 |
| Net interest margin (tax-equivalent) | 2.60% | 2.60% | 2.51% | 2.63% |
| Noninterest income | $0.848 | $1.131 | $1.756 | $2.313 |
| Noninterest expense | $5.058 | $4.916 | $9.959 | $9.606 |
| Net earnings | $1.801 | $2.286 | $3.882 | $4.292 |
| Diluted earnings per share | $0.51 | $0.65 | $1.10 | $1.21 |
- Revenue and earnings: Q2 total revenue was $7.222 million versus $7.106 million a year earlier. Net earnings declined about 21% year over year in Q2 and about 10% for the first six months.
- Drivers: Higher net interest income reflected balance-sheet growth and, in Q2, recent rate increases. Lower mortgage origination activity reduced mortgage income. Six-month expenses rose, mainly from salaries and costs related to the new headquarters. A New Markets Tax Credit investment reduced the effective tax rate to 13.71% for the half year, versus 17.76%.
- Cash flow: For the six months, operating cash flow was $4.178 million, investing cash outflow was $34.284 million, and financing cash inflow was $6.961 million. Cash and cash equivalents fell $23.145 million to $133.114 million.
- Balance sheet and funding: Total assets were $1.084 billion, down from $1.105 billion at year-end 2021. Deposits were $1.003 billion, broadly stable; loans net of unearned income were $440.9 million, down from $458.4 million. Noninterest-bearing deposits were 31% of deposits. Estimated uninsured deposits were $411.3 million.
- Securities and equity: Available-for-sale securities had a $429.2 million fair value and $467.2 million amortized cost. Six-month after-tax unrealized securities losses of $29.3 million drove much of the decline in stockholders’ equity, to $76.1 million from $103.7 million. Management attributed the securities losses primarily to higher market rates and said it did not intend, and was not more likely than not expected, to sell before recovery.
- Credit quality: The allowance for loan losses was $4.716 million, or 1.07% of loans, compared with $4.939 million at year-end. Nonperforming assets were $359,000 versus $818,000 at year-end; potential problem loans were $1.31 million. The six-month negative provision was $250,000, which management primarily attributed to lower loans excluding PPP loans.
- Debt and capital: The company reported no long-term debt. Short-term repurchase-agreement borrowings were $4.1 million. AuburnBank’s total risk-based capital ratio was 17.38%, CET1 ratio 16.59%, and tier 1 leverage ratio 9.16%; the filing says these exceeded “well capitalized” thresholds.
- Liquidity: The filing reports $332.7 million of available FHLB capacity. Federal funds line availability is reported inconsistently: one section states $61.0 million and another $51.0 million, both with no borrowings outstanding. Management said liquidity was adequate for known obligations and commitments over the next 12 months.
Material changes, outlook, and risks
- Six-month tax-equivalent net interest income increased about 4%, while net interest margin fell to 2.51% from 2.63%. Management noted that deposit costs may rise as rates increase and that keeping deposit rates low as assets reprice will be important to margins.
- Mortgage lending income fell to $440,000 for the half year from $973,000, as higher mortgage rates slowed refinancing. Management expected competitive conditions to continue through the remainder of 2022; the filing provides no quantified earnings or revenue guidance.
- The new headquarters opened in June 2022, contributing to higher occupancy and equipment costs. The company contracted to sell approximately 0.85 acres of adjacent land for $4.26 million, subject to due diligence and closing conditions. If completed, management expected the sale to add approximately $0.70 per share to earnings; it expected closing later in 2022.
- The company intended to seek an employee retention credit of $1.6 million gross, or approximately $1.2 million after estimated taxes ($0.33 per share). IRS approval, timing, and amount were uncertain.
- Key risks include inflation and further rate changes, effects on securities values, mortgage activity, deposit costs and customer behavior; possible deterioration in borrower credit and collateral values; and continued economic effects from COVID-19 and supply disruptions. Management said adoption of the expected-loss accounting standard (CECL) in January 2023 could affect the reserve, with the impact still under evaluation.
- The filing reports no material pending legal proceedings, no COVID-19 loan deferrals at June 30, 2022, and no loans modified as troubled debt restructurings during the reported periods.
Important facts for investors to verify
- Reconcile the filing’s conflicting figures for available federal funds lines ($51 million versus $61 million).
- Track the size and duration of securities’ unrealized losses, liquidity needs, and any changes in management’s ability or intent to hold securities through recovery.
- Confirm whether the land sale closes and whether its terms or expected earnings contribution change.
- Check the IRS decision and timing for the proposed employee retention credit; it was not an approved or recognized amount in the reported results.
- Monitor deposit pricing, net interest margin, commercial real estate concentration, credit quality, and the eventual CECL adoption impact.