Auburn National Bancorporation, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company operates AuburnBank, serving individuals and commercial customers primarily in East Alabama. Amounts below are in U.S. dollars; financial-statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income, GAAP | $6.27 | $7.24 | $20.27 | $19.70 |
| Net interest income, tax-equivalent | $6.38 | $7.36 | $20.59 | $20.03 |
| Net interest margin, tax-equivalent | 2.73% | 3.00% | 2.97% | 2.67% |
| Net earnings | $1.49 | $2.00 | $5.38 | $5.88 |
| Diluted EPS | $0.43 | $0.57 | $1.54 | $1.67 |
| Noninterest income | $0.87 | $0.85 | $2.45 | $2.61 |
| Noninterest expense | $5.36 | $5.42 | $16.79 | $15.37 |
Balance sheet at September 30: Total assets were $1.031 billion, versus $1.024 billion at year-end 2022. Loans were $545.6 million, up 8% from year-end; deposits were $964.6 million, up 1.5%. Cash and cash equivalents totaled $29.6 million. Available-for-sale securities were $373.3 million, down from $405.3 million.
Credit and capital: The allowance for credit losses was $6.8 million, or 1.24% of loans, compared with $5.8 million, or 1.14%, at year-end. Nonperforming assets were $1.2 million (0.12% of assets), down from $2.7 million at year-end; nonaccrual loans were $1.2 million. AuburnBank reported a 15.98% total risk-based capital ratio, 15.01% CET1 ratio, and 10.26% tier 1 leverage ratio, each above the stated well-capitalized minimums.
Cash flow and funding: For the nine months, operating activities provided $10.7 million, investing activities used $18.7 million, and financing activities provided $10.4 million. The Bank had no long-term debt, FHLB advances, or federal-funds borrowings outstanding; it reported $307.7 million of available FHLB credit and $61.0 million in available federal-funds lines.
Changes versus comparable periods
- Q3 net earnings fell 26% year over year, with EPS down from $0.57 to $0.43. Tax-equivalent net interest income declined about 13%, and margin narrowed 27 basis points, principally reflecting higher deposit costs and a changed deposit mix.
- For the first nine months, tax-equivalent net interest income rose 3% and margin improved to 2.97% from 2.67%, supported by higher asset yields and a more favorable asset mix. The average cost of interest-bearing liabilities rose to 1.02% from 0.32%.
- Nine-month earnings declined 9%. Mortgage lending income fell $0.2 million, largely due to higher mortgage rates and lower origination activity. Noninterest expense rose $1.4 million, including costs associated with the new headquarters, professional fees, and other expenses.
- Customer deposits excluding brokered deposits declined $32.3 million, or 3%, during the nine months; the Bank had $46.6 million of brokered deposits at quarter-end. Noninterest-bearing deposits fell to 29% of deposits from 33% at year-end.
- Stockholders’ equity decreased to $61.5 million from $68.0 million, mainly due to an $8.1 million after-tax securities-related other comprehensive loss, dividends, and CECL adoption. Unrealized losses on available-for-sale securities totaled $65.5 million; management attributed them to interest rates, not credit deterioration, and reported no securities credit-loss allowance.
Outlook, risks and contingencies
- No quantified earnings or financial guidance is provided. Management said the challenging interest-rate environment was expected to continue through 2023, with monetary tightening potentially continuing into 2024. It noted that deposit costs may rise as rates remain high and customers seek higher-yield alternatives.
- Management said the Bank’s interest-rate simulation showed it was liability-sensitive over the coming 12 months, while remaining within policy limits in its earnings and economic-value-of-equity models.
- Key stated risks include inflation and interest-rate changes, deposit competition and outflows, securities valuation losses, borrower credit deterioration, commercial and residential real-estate conditions, and changes in collateral values and liquidity. The loan portfolio is concentrated in the local East Alabama market; real-estate-secured loans were about 86% of total loans.
- Unfunded loan commitments were $60.1 million and standby letters of credit were $0.8 million. Management stated liquidity was adequate for anticipated needs; commitments may not all be drawn.
- The company reported no pending mortgage repurchase or make-whole requests and no repurchases during the first nine months. Management said it had no material subsequent events and no pending or threatened legal proceedings expected to have a material adverse effect.
- CECL adoption on January 1, 2023 increased the loan allowance by about $1.0 million and reduced opening retained earnings by $0.8 million, net of tax. The nine-month negative provision was primarily related to full collection of a previously nonperforming collateral-dependent loan.
Important facts for investors to verify
- Whether deposit pricing, mix, brokered funding, and customer outflows continue to pressure net interest margin.
- How loan growth and local real-estate exposures affect credit quality, the CECL allowance, and nonperforming loans.
- The effect of further rate movements on the $65.5 million of unrealized securities losses, equity, and liquidity.
- Whether noninterest expenses, including headquarters-related costs and other operating expenses, stabilize or continue to rise.
- Capital and liquidity capacity relative to deposit concentration, uninsured deposits (reported at $337.4 million), and $60.1 million of unfunded commitments.