AUBURN NATIONAL BANCORPORATION, INC annual report, FY2022

Auburn National Bancorporation, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022, with balance-sheet comparisons to December 31, 2021. This is an annual report; it does not provide standalone fourth-quarter results. The company is a bank holding company whose primary business is AuburnBank, serving East Alabama, principally Lee County.

Financial performance and condition

Metric	2022	2021
Net interest income, GAAP	$27.2 million	$24.0 million
Net interest margin, tax-equivalent	2.81%	2.55%
Total noninterest income	$6.5 million	$4.3 million
Net earnings	$10.3 million	$8.0 million
Diluted earnings per share	$2.95	$2.27
Efficiency ratio	58.08%	67.60%
Cash and cash equivalents, year-end	$27.3 million	$156.3 million

• Revenue and earnings: Tax-equivalent net interest income increased 13%. Net earnings rose about 29%. Total revenue, defined in the filing as GAAP net interest income plus noninterest income, was $33.7 million, versus $28.3 million.
• Key nonrecurring items: Noninterest income included a $3.2 million gain on the sale of land near the headquarters. The company also recognized a $1.6 million employee retention tax credit as a reduction of expense. Excluding these items, management reported that noninterest income declined 24% and noninterest expense increased 10% year over year.
• Credit costs and quality: Provision for loan losses was $1.0 million, compared with a $0.6 million reserve release in 2021. The allowance was $5.8 million, or 1.14% of loans, versus $4.9 million, or 1.08%. Nonperforming loans were $2.7 million, or 0.54% of loans, up from $0.4 million, or 0.10%. Net charge-offs were 0.04% of average loans. Potential problem loans declined to $1.3 million from $2.4 million.
• Loans and concentrations: Loans, net of unearned income, increased 10% to $504.5 million; excluding PPP loans, the increase was 12%. Commercial real estate (excluding owner-occupied properties) was 40.4% of the loan portfolio. The filing reports $66.5 million in construction and land-development loans and $203.9 million in CRE loans excluding owner-occupied properties.
• Deposits and liquidity: Deposits fell 4% to $950.3 million. Noninterest-bearing deposits were 33% of deposits. Estimated uninsured deposits were $381.7 million; the Bank had no brokered deposits. Management cited $312.6 million of FHLB borrowing capacity and $61.0 million of federal-funds lines, with no amounts outstanding on those lines at year-end.
• Debt and capital: The company had no long-term debt. Federal funds purchased and repurchase-agreement borrowings totaled $2.6 million. AuburnBank’s total risk-based capital ratio was 16.25%, CET1 ratio 15.39%, and leverage ratio 10.01%; it remained well capitalized.
• Securities and equity: Available-for-sale securities were $405.3 million. Rising rates drove gross unrealized securities losses of $54.7 million and an after-tax other-comprehensive loss of $41.8 million. Stockholders’ equity fell to $68.0 million from $103.7 million; the filing says regulatory capital excluded most AOCI under the company’s election.
• Cash flow: Operating cash flow was $11.0 million, investing cash outflow was $91.0 million, and financing cash outflow was $49.0 million. Cash and cash equivalents decreased by $129.0 million during the year.

Material changes versus 2021

• Higher market rates and asset-mix changes lifted net interest margin, while loan yields averaged 4.45% in both years and the cost of interest-bearing liabilities edged down to 0.35% from 0.39%.
• Mortgage lending income declined to $0.7 million from $1.5 million as refinancing slowed; lower mortgage prepayments helped increase net servicing fees.
• Loans grew while deposits contracted, contributing to the sharp reduction in cash and cash equivalents. Management attributed deposit outflows to higher-yield alternatives and customer spending.
• The new AuburnBank headquarters opened in June 2022. Occupancy and equipment expense increased by $1.0 million, partly reflecting the new facility and related costs.
• Book value per share declined to $19.42 from $29.46, principally because of unrealized securities losses; the stock’s year-end price declined to $23.00 from $32.30.

Outlook, risks and contingencies

• Management said deposit pricing and loan pricing remained competitive and that this challenging environment was expected to continue in 2023. It said holding deposit rates down as assets reprice would be important to maintaining or improving margin. This is commentary, not formal earnings guidance.
• CECL took effect for the company on January 1, 2023. Management estimated the allowance would rise from 1.14% of loans to 1.32%–1.36% upon adoption; the estimate was subject to change. The filing did not state a clear dollar amount for the expected day-one adjustment.
• Principal risks include higher interest rates and funding costs, deposit competition and outflows, unrealized securities losses and potential liquidity needs, inflation and economic slowing, and credit deterioration—particularly in commercial real estate and construction lending.
• The company reported $87.7 million of unfunded loan commitments and $1.0 million of standby letters of credit. It had no material pending litigation, and management did not expect ordinary-course legal proceedings to materially affect results.
• The Federal Reserve’s Bank Term Funding Program, established after year-end in March 2023, was described as an additional potential liquidity source. Its availability does not remove the company’s exposure to deposit flows or funding-market conditions.
• The land sale and employee retention credit materially benefited reported 2022 results. The company paid $1.06 per share in dividends and repurchased $0.5 million of shares during the year; future dividends remain subject to earnings, capital, liquidity and regulatory limits.
• The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal-control effectiveness.

Important facts for investors to verify

1. How the January 2023 CECL adoption affected the allowance, retained earnings and subsequent credit-loss provisions.
2. Whether deposit outflows continued after year-end, including changes in uninsured deposits, deposit costs and available borrowing capacity.
3. Subsequent trends in nonperforming loans, criticized or potential problem credits, and performance of CRE and construction loans as rates and refinancing conditions change.
4. The size and duration of unrealized securities losses, and whether liquidity needs could require securities sales or other costly funding.
5. How much of 2022 earnings depended on the $3.2 million land-sale gain and $1.6 million employee retention credit, and whether headquarters-related costs or rental income develop as expected.