Auburn National Bancorporation, Inc. — Q1 2023 10-Q
Business and period: The company provides banking services through AuburnBank, principally in Lee County, Alabama and nearby areas. This unaudited report covers the quarter ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period |
|---|---|---|
| Net interest income, GAAP | $7.109 | $6.078 in Q1 2022 |
| Net interest income, tax-equivalent | $7.217; margin 3.17% | $6.190; margin 2.43% in Q1 2022 |
| Total revenue | $7.901 | $6.986 in Q1 2022 |
| Net earnings / diluted EPS | $1.964 / $0.56 | $2.081 / $0.59 in Q1 2022 |
| Provision for credit losses | $0.066 | $0.250 recovery in Q1 2022 |
| Noninterest income / expense | $0.792 / $5.604 | $0.908 / $4.901 in Q1 2022 |
| Total assets | $1,017.7 | $1,023.9 at Dec. 31, 2022 |
| Loans / deposits | $505.0 / $939.2 | $504.5 / $950.3 at Dec. 31, 2022 |
| Allowance for credit losses | $6.8; 1.35% of loans | $5.8; 1.14% at Dec. 31, 2022 |
| Cash and cash equivalents | $25.9 | $27.3 at Dec. 31, 2022 |
| Stockholders’ equity | $73.6; 7.24% of assets | $68.0; 6.65% at Dec. 31, 2022 |
Profitability and cash flow: Net interest income increased 17% on a tax-equivalent basis, as higher earning-asset yields and a more favorable asset mix outweighed higher funding costs. Net earnings declined about 6%, as higher operating expenses and the move from a prior-year credit-loss recovery to a provision offset the improvement in net interest income. Net cash from operating activities was $4.9 million; investing activities provided $6.0 million and financing activities used $12.3 million, resulting in a $1.4 million net decrease in cash during the quarter.
Margins and costs: Tax-equivalent yield on earning assets rose to 3.66% from 2.66%; the cost of interest-bearing liabilities increased to 0.71% from 0.34%. The reported efficiency ratio was 69.97%, compared with 69.05% in Q1 2022.
Debt and liquidity: The company reported no long-term debt and no borrowings from the Federal Reserve discount window or Bank Term Funding Program. Repurchase-agreement borrowings were $2.5 million. The Bank had $61 million in available federal funds lines and a $307 million available FHLB line. Management said liquidity was adequate for known obligations and expected funding needs. Deposits fell $11.1 million from year-end; estimated uninsured deposits were $368.6 million. There were no brokered deposits.
Material changes and notable items
- CECL adoption on January 1, 2023 increased the loan-loss allowance by $1.0 million and the unfunded-commitment allowance by $0.1 million; the after-tax cumulative reduction to retained earnings was $0.8 million. The new methodology makes period comparisons less directly comparable.
- Noninterest expense rose $0.7 million, mainly due to occupancy and equipment costs associated with the new headquarters, professional fees, and other expenses. Mortgage lending income fell $0.2 million amid higher mortgage rates and lower origination income.
- Available-for-sale securities were $405.7 million. Gross unrealized losses were $47.4 million, attributed by management to market interest rates rather than credit deterioration. The company recorded $5.5 million of after-tax other comprehensive income from securities valuation changes in Q1.
- Nonperforming loans were $2.68 million, or 0.53% of loans, versus $2.73 million at year-end. No loans were 90 days or more past due and still accruing. A collateral-dependent loan with a $1.3 million recorded investment and $0.5 million valuation allowance was paid in full after quarter-end.
- Commercial real estate represented 53% of loans; real-estate-secured loans were 86.4% of the portfolio. Bank capital ratios exceeded regulatory “well capitalized” thresholds: total risk-based capital 16.48%, CET1 15.45%, and tier 1 leverage 10.07%.
- The company paid $0.27 per share in dividends and repurchased 2,648 shares for approximately $64,000.
Outlook, risks, and contingencies
Management said the challenging interest-rate environment was expected to continue through 2023; further Federal Reserve rate increases appeared possible if inflation remained elevated. It emphasized that managing deposit costs as assets reprice would be important to maintaining or improving net interest margin. The filing gives no specific earnings or revenue guidance.
Key risks cited include rising deposit costs and deposit outflows, interest-rate-driven declines in securities values, inflation and economic weakness, borrower credit deterioration, real-estate collateral values and concentrations, and uncertainty in CECL forecasts. The Bank had $91.1 million of unfunded loan commitments and $0.8 million of standby letters of credit; these do not necessarily represent expected cash draws. Mortgage-sale agreements include representations and warranties, but there were no pending repurchase or make-whole requests at quarter-end. Management reported no pending or threatened legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether deposit outflows and higher deposit pricing continue, particularly given $368.6 million of estimated uninsured deposits.
- How net interest margin responds to asset repricing, funding costs, and further rate changes.
- Whether credit quality, the $6.8 million CECL allowance, and CRE concentrations change as economic conditions and property markets evolve.
- Whether securities valuation losses, liquidity needs, or use of available borrowing facilities materially affect capital or earnings.
- Whether the post-quarter repayment of the collateral-dependent loan is reflected in subsequent credit-loss estimates and disclosures.