Auburn National Bancorporation, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This filing reports full-year results, not standalone fourth-quarter results. The Company is a bank holding company operating primarily through AuburnBank in East Alabama.
Financial performance
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest income, GAAP | $26.3 million | $27.2 million |
| Net interest income, tax-equivalent | $26.7 million | $27.6 million |
| Net interest margin, tax-equivalent | 2.89% | 2.81% |
| Net earnings | $1.4 million | $10.3 million |
| Diluted earnings per share | $0.40 | $2.95 |
| Provision for credit losses | $0.1 million | $1.0 million |
| Noninterest income | $(3.0) million | $6.5 million |
| Noninterest expense | $22.6 million | $19.8 million |
Net earnings fell sharply year over year. The principal unusual item was a $6.3 million pretax loss on securities sold in a December balance-sheet repositioning, reducing 2023 earnings by $4.7 million after tax. 2022 included a $3.2 million pretax gain on land sale and a $1.6 million employee-retention tax credit; the Company estimates earnings excluding these nonroutine items at $6.1 million in 2023 versus $6.7 million in 2022.
Net interest margin improved modestly, but tax-equivalent net interest income declined 3%. Higher loan and securities yields were offset by a smaller average earning-asset base and sharply higher funding costs: the average cost of interest-bearing liabilities rose to 1.22% from 0.35%. The efficiency ratio increased to 95.08% from 58.08%, reflecting the securities loss and lower reported revenue.
Balance sheet, cash flow, credit and capital
- Assets and loans: Total assets were $975.3 million, down from $1.024 billion. Loans grew 11% to $557.3 million. Average loans increased 15% to $523.8 million.
- Deposits and liquidity: Deposits declined 6% to $896.2 million; noninterest-bearing deposits were $270.7 million, or 30% of deposits, versus 33% a year earlier. Estimated uninsured deposits were $356.3 million, or 40% of deposits. Cash and cash equivalents were $71.4 million; available-for-sale securities were $270.9 million.
- Funding and debt: The Bank had no FHLB advances or other wholesale borrowings outstanding at year-end; repurchase agreements were $1.5 million. It reported $312.6 million of available FHLB credit and $61.0 million of federal funds lines. The Company had no long-term debt.
- Cash flow: Operating activities provided $11.9 million, investing activities provided $91.4 million (including $111.3 million of securities-sale proceeds), and financing activities used $59.2 million. Cash and cash equivalents increased $44.1 million during the year.
- Credit quality: Nonperforming loans were $0.9 million, or 0.16% of loans, versus $2.7 million and 0.54% in 2022; there were no OREO or loans 90 days past due and still accruing. Net charge-offs were $46,000. The allowance for credit losses was $6.9 million, or 1.23% of loans, compared with $5.8 million and 1.14%.
- CRE exposure: Commercial real estate was a major concentration. The loan table reports $287.3 million of CRE loans, including $66.8 million owner-occupied; the filing separately reports $220.5 million of CRE excluding owner-occupied, or 40% of total loans. It also gives a conflicting CRE figure elsewhere; see investor verification points below.
- Capital and equity: Bank regulatory ratios were 14.52% CET1, 14.52% Tier 1 risk-based, 15.52% total risk-based and 9.72% Tier 1 leverage; the Bank was categorized as well capitalized. Consolidated book equity was $76.5 million, or $21.90 per share, versus $68.0 million, or $19.42 per share. The capital conservation buffer was 7.52%.
- Dividends and repurchases: The Company paid $1.08 per share in dividends, up from $1.06. It repurchased $0.2 million of shares. Management notes that securities-sale losses reduced eligible retained income available for distributions.
Material changes and unusual items
- In December 2023, the Company sold approximately $117.6 million of available-for-sale securities with a 2.11% weighted-average book yield and 4.0-year weighted-average duration, recognizing a $6.3 million net loss. It used $48.0 million of proceeds to repay wholesale funding and retained the balance for liquidity, loan growth and other uses.
- Available-for-sale securities declined to $270.9 million from $405.3 million. The reported fair-value improvement reduced accumulated other comprehensive loss, which improved consolidated equity; securities unrealized losses do not reduce the Bank’s regulatory capital under the Company’s accounting election.
- CECL was adopted January 1, 2023. The transition increased the loan allowance by $1.0 million and reduced retained earnings by $0.8 million, net of tax and related adjustments.
- Net income included a $0.8 million income tax benefit despite pretax earnings of $0.6 million; management cites tax-exempt income and New Markets Tax Credits among the factors affecting the tax rate.
Outlook, management commentary and risks
The filing provides no quantified earnings or growth guidance. Management expects a challenging rate environment to continue in 2024 and says deposit pricing, competition for funding and the timing of asset repricing will be important to net interest margin. The Federal Reserve’s rate path, the inverted yield curve and customer movement toward higher-yielding alternatives could pressure funding costs, loan demand and margins.
Key risks include the sizable CRE concentration and possible refinancing, valuation and borrower-cash-flow pressure from higher rates; deposit competition and uninsured-deposit exposure; unrealized securities losses and liquidity risk; local economic and industry concentration; cybersecurity and third-party system risks; and evolving regulation. The Company says it did not use the Federal Reserve’s Bank Term Funding Program. Management reported adequate liquidity sources for known needs and the next 12 months.
The filing states there are no material pending or threatened legal proceedings and no material subsequent events requiring disclosure. The independent auditor issued an unqualified opinion on the financial statements and identified the allowance for credit losses as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal controls because the Company is a smaller reporting company.
Important facts for investors to verify
- Reconcile the CRE disclosures: one section reports $220.5 million excluding owner-occupied CRE, while another states $293.0 million of CRE excluding owner-occupied and 264% of risk-based capital. Confirm the correct regulatory CRE balance and concentration measure.
- Review the securities repositioning’s recurring benefit against the one-time $6.3 million loss, including expected changes in net interest income, liquidity and capital distributions.
- Assess deposit trends, uninsured balances and the cost and availability of alternative funding as certificates of deposit mature and customers seek higher yields.
- Evaluate whether the $6.9 million CECL allowance adequately reflects local economic forecasts, CRE exposures and borrower refinancing risk.
- Confirm the sustainability of dividends and repurchases given regulatory limits, eligible retained income and the filing’s warning that the securities-sale loss constrained distribution capacity.