Auburn National Bancorporation, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter ended March 31, 2022. The company is a bank holding company whose wholly owned subsidiary, AuburnBank, provides banking services primarily in Lee County and surrounding areas of East Alabama.
Key financial results
| Metric | Q1 2022 | Q1 2021 or prior period |
|---|---|---|
| Net interest income, GAAP | $6.08 million | $5.94 million |
| Net interest income, tax-equivalent | $6.19 million | $6.06 million |
| Net interest margin, tax-equivalent | 2.43% | 2.66% |
| Total revenue | $6.99 million | $7.12 million |
| Provision for loan losses | $(0.25) million, a provision release | $0 |
| Noninterest expense | $4.90 million | $4.69 million |
| Net earnings | $2.08 million | $2.01 million |
| Diluted earnings per share | $0.59 | $0.56 |
| Efficiency ratio | 69.05% | 64.79% |
Net interest income increased 2% on a tax-equivalent basis, primarily due to balance-sheet growth; the margin declined as asset yields fell more than funding costs. Mortgage lending income declined as higher mortgage rates slowed refinancing. The effective tax rate fell to 10.88% from 17.41%, primarily due to a tax benefit associated with a New Markets Tax Credit investment.
Financial position, cash flow and liquidity
- Assets and deposits: Total assets were $1.110 billion at March 31, 2022, versus $1.105 billion at year-end 2021. Deposits were $1.018 billion, up $23.5 million; estimated uninsured deposits were $427.3 million.
- Loans: Loans, net of unearned income, were $428.4 million, down $30.0 million from year-end. Excluding PPP loans, loans declined $25.9 million, or 6%, mainly from multifamily and hotel loan payoffs. Commercial real estate represented 55% of the loan portfolio.
- Credit quality: The allowance for loan losses was $4.66 million, or 1.09% of loans, compared with $4.94 million, or 1.08%, at year-end. Nonperforming assets were $745,000, including $371,000 of nonaccrual loans and $374,000 of other real estate owned. Potential problem loans totaled $2.0 million.
- Securities and equity: Available-for-sale securities were $417.5 million. Stockholders’ equity declined to $86.4 million from $103.7 million, primarily because of an $18.3 million after-tax unrealized securities loss recorded in other comprehensive income as market rates rose. The filing says these unrealized losses do not affect the Bank’s regulatory capital ratios.
- Cash flow: Operating activities provided $2.0 million, investing activities provided $8.3 million, and financing activities provided $23.0 million. Cash and cash equivalents increased $33.3 million to $189.6 million.
- Debt and liquidity: The company had no long-term debt. Short-term borrowings were $4.0 million, consisting of repurchase agreements. The Bank had $51.0 million of available federal funds lines and a $331.4 million available FHLB line; management stated liquidity was adequate for known obligations and expected needs over the next 12 months.
- Capital and distributions: AuburnBank reported a 9.09% tier 1 leverage ratio, 17.26% CET1 ratio and 18.08% total risk-based capital ratio, above the stated well-capitalized thresholds. The company paid a $0.265-per-share dividend and repurchased $120,000 of stock during the quarter.
Changes, outlook and risks
- Compared with Q1 2021, earnings and EPS increased, but total revenue declined as mortgage income fell; expenses rose and the net interest margin contracted.
- Management reported no formal earnings or revenue guidance. It noted that margin pressure could continue from lower earning-asset yields and competition for quality loans.
- Management attributed the securities valuation decline primarily to higher long-term market interest rates and said it did not intend, and was not more likely than not required, to sell securities before recovery of amortized cost. It reported no credit-impaired debt securities.
- Risks highlighted include inflation and further rate changes, effects on securities values and mortgage originations, deposit costs and customer behavior, COVID-19 and economic conditions, borrower credit quality, real estate concentrations, and uncertainty in loan-loss estimates. The bank’s loan portfolio is concentrated geographically in East Alabama.
- The company had no COVID-19 loan deferrals at quarter-end. It reported 82 remaining PPP loans totaling approximately $4.1 million. The expected adoption of the current expected credit losses standard (CECL) is January 2023; management expects an effect on credit-loss reserves but had not quantified it.
- At quarter-end, unfunded loan commitments were $53.7 million and standby letters of credit were $1.4 million. No mortgage repurchases were required and no repurchase or make-whole requests were pending. Management said no pending or threatened legal proceedings were expected to have a material adverse effect.
- A new $5 million share repurchase program became effective April 12, 2022. The filing reported no material subsequent events requiring recognition or disclosure in the financial statements.
Important facts for investors to verify
- Whether the decline in net interest margin persists as interest rates, asset yields and deposit costs change.
- Whether loan balances stabilize and whether commercial real estate concentrations or borrower conditions affect credit quality and the allowance.
- The sensitivity of securities values, equity and liquidity to further rate increases, including the distinction between GAAP equity and regulatory capital.
- The continuing effect of lower mortgage refinancing activity on mortgage income and servicing rights.
- The eventual CECL adoption impact, which the filing does not quantify, and any updates to management’s credit-loss assumptions.
- Execution of the new repurchase program, dividend capacity, and the level and behavior of uninsured deposits and unfunded commitments.