Auburn National Bancorporation, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company provides banking services in Lee County, Alabama, and surrounding areas through AuburnBank.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income (GAAP) | $6.9 million | $6.4 million | $14.0 million | $12.5 million |
| Net earnings | $1.9 million | $1.8 million | $3.9 million | $3.9 million |
| Diluted earnings per share | $0.55 | $0.51 | $1.11 | $1.10 |
| Net interest margin (tax-equivalent) | 3.03% | 2.60% | 3.10% | 2.51% |
| Noninterest income | $0.8 million | $0.8 million | $1.6 million | $1.8 million |
| Noninterest expense | $5.8 million | $5.1 million | $11.4 million | $10.0 million |
At June 30, total assets were $1.026 billion; loans were $520.4 million, up 3% from year-end 2022; deposits were $950.7 million; and stockholders’ equity was $71.0 million. The allowance for credit losses was $6.6 million, or 1.27% of loans. Six-month operating cash flow was $7.4 million; cash and cash equivalents ended at $29.5 million.
Material changes and financial condition
- Q2 net earnings rose about 7% year over year; first-half earnings were essentially flat. Higher loan and securities yields and a more favorable asset mix lifted net interest income, while funding costs also rose.
- Six-month noninterest income fell 10%, mainly due to lower mortgage origination income amid higher mortgage rates. Noninterest expense increased 15%, including higher headquarters occupancy costs, professional fees, and other expenses.
- Total deposits were broadly stable from December 2022, but noninterest-bearing deposits declined to $298.5 million from $311.4 million. The company reported $16.0 million of brokered deposits at June 30, versus none at year-end, and estimated uninsured deposits of $374.8 million.
- Available-for-sale securities were $394.1 million, with $52.2 million of gross unrealized losses, principally attributed to market interest rates rather than credit deterioration. First-half other comprehensive income was $1.8 million, while Q2 other comprehensive loss was $3.6 million.
- The company reported no outstanding indebtedness. AuburnBank had $61.0 million in available federal funds lines and $305.2 million in available FHLB credit; it had no FHLB advances, discount-window borrowings, or BTFP borrowings. Repurchase-agreement balances were $2.2 million.
- AuburnBank’s June 30 regulatory ratios included total risk-based capital of 16.31%, CET1 of 15.33%, and tier 1 leverage of 10.23%; the filing says these exceeded “well capitalized” minimums.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management expected a challenging rate environment to continue through 2023 and said deposit costs could rise further as rates and customer preferences change.
- Management described the balance sheet as asset-sensitive and reported compliance with its interest-rate-risk policy limits. It cautioned that higher rates could raise funding costs, pressure mortgage activity, and further reduce securities values; the yield curve was inverted at June 30.
- Key disclosed risks include inflation and economic conditions, borrower credit and collateral quality, commercial real estate concentrations, deposit outflows and costs, interest-rate changes, securities valuation, competition, regulation, and cybersecurity. Commercial real estate represented 53% of loans; 86.4% of loans were secured by real estate.
- CECL adoption on January 1, 2023 increased the loan allowance by $1.0 million and reduced retained earnings by $0.8 million after tax. The first-half negative provision for credit losses was primarily attributed to full collection of a collateral-dependent nonperforming loan.
- Nonperforming loans declined to $1.1 million from $2.7 million at year-end 2022. The company reported no material subsequent events, no material pending legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit composition, uninsured balances, and reliance on brokered deposits change as competition for deposits continues.
- Whether asset yields keep pace with rising deposit costs and how that affects net interest margin.
- Commercial real estate and other loan credit quality, nonperforming loans, and the adequacy of the CECL allowance.
- The potential effect of interest rates on the securities portfolio, unrealized losses, and reported equity.
- Drivers of elevated noninterest expense and the sustainability of mortgage lending income.