Auburn National Bancorporation, Inc. — 2021 Form 10-K
Business context and reporting period. Auburn National is a Delaware bank holding company whose principal subsidiary, AuburnBank, serves East Alabama, primarily Lee County. The filing reports the year ended December 31, 2021, with comparative 2020 results; it does not present standalone fourth-quarter results.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income, GAAP | $24.0 million | $24.3 million |
| Net interest income, tax-equivalent | $24.5 million | $24.8 million |
| Net interest margin, tax-equivalent | 2.55% | 2.92% |
| Noninterest income | $4.3 million | $5.4 million |
| Noninterest expense | $19.4 million | $19.6 million |
| Net earnings | $8.0 million | $7.5 million |
| Diluted earnings per share | $2.27 | $2.09 |
| Return on average assets / equity | 0.78% / 7.54% | 0.83% / 7.12% |
- Balance sheet at December 31, 2021: total assets were $1.105 billion, up from $956.6 million; deposits were $994.2 million, up 18%; loans, net of unearned income, were $458.4 million, slightly lower than $461.7 million. Securities available for sale totaled $421.9 million, versus $335.2 million.
- Credit quality: the allowance for loan losses was $4.9 million, or 1.08% of loans (1.10% excluding SBA-guaranteed PPP loans), down from $5.6 million, or 1.22%. Nonperforming loans were $444,000, or 0.10% of loans; total nonperforming assets were $818,000.
- Cash flow: operating cash flow was $12.3 million; investing activities used $118.8 million, principally reflecting securities purchases and campus investment; financing activities provided $150.2 million, mainly from deposit growth. Cash and cash equivalents ended the year at $156.3 million, compared with $112.6 million.
- Debt and liquidity: there was no long-term debt. Repurchase-agreement borrowings were $3.4 million. The Bank had $319.6 million of available FHLB capacity and $41.0 million of federal funds lines, with none drawn on the latter. Management said liquidity was adequate for known obligations and expected needs over the next 12 months.
- Capital and shareholder returns: Bank capital ratios were 17.06% total risk-based, 16.23% CET1 and 9.35% tier 1 leverage; the Bank was well capitalized. The Company paid $1.04 per share in dividends and repurchased 45,946 shares for $1.6 million.
Material changes versus 2020
- Net earnings increased 8%, while tax-equivalent net interest income declined 1% and net interest margin contracted 37 basis points. Lower asset yields outweighed reduced funding costs; balance-sheet growth partly offset margin pressure.
- Noninterest income fell $1.1 million, mainly due to lower mortgage origination income as refinancing slowed and the absence of a 2020 bank-owned life insurance death benefit. Noninterest expense declined slightly, including lower headquarters redevelopment costs.
- The provision for loan losses shifted from a $1.1 million expense to a $0.6 million negative provision, reflecting management’s assessment of improving local economic conditions and asset quality. The allowance ratio declined year over year.
- Deposits grew substantially amid government stimulus, PPP activity and increased customer savings. Noninterest-bearing deposits rose to 32% of deposits from 29%.
- Unrealized losses on available-for-sale securities reduced other comprehensive income by $6.7 million after tax; total stockholders’ equity fell to $103.7 million from $107.7 million.
- COVID-19 loan deferrals fell to one loan totaling about $59,000 from $32.3 million across 16 loans at year-end 2020.
Outlook, commentary, risks and unusual items
- Management provided no quantified earnings guidance. It cited possible pressure on net interest margin from low asset yields and competition for quality loans, while noting that inflation and anticipated rate increases could affect funding costs, asset values and borrower performance.
- Credit exposure is concentrated in commercial real estate. Excluding owner-occupied properties, CRE was 50.0% of the loan portfolio at year-end, versus 43.6% in 2020; hotels/motels, retail and shopping centers, and restaurants represented 21% of total loans. Management highlighted pandemic, local economic and collateral-value risks.
- Other stated risks include COVID-19 effects, supply-chain disruption, inflation and interest-rate changes, cybersecurity and third-party system disruptions, competition, regulatory changes, and estimation uncertainty in the loan-loss allowance. CECL adoption is scheduled for January 1, 2023; its effect had not been determined.
- The company invested $2.2 million in a New Markets Tax Credit investment in 2021; the related tax benefit contributed to a lower effective tax rate of 14.89%, versus 17.72%.
- Headquarters redevelopment continued: the parking deck was completed in April 2021, and the new headquarters was expected to be completed in second-quarter 2022. At year-end, $6.4 million remained payable under construction contracts. In February 2022, the company agreed, subject to conditions, to sell an adjoining 0.85-acre parcel to a hotel developer; management expected the sale to add approximately $0.70 per share to 2022 earnings. The sale had not closed as of the filing.
- The independent auditor issued an unqualified opinion on the financial statements and identified the allowance for loan losses as a critical audit matter because of subjective judgments, particularly qualitative factors. Management reported effective disclosure controls and internal control over financial reporting, with no material weaknesses reported.
Important facts for investors to verify
- Whether net interest margin and net interest income stabilize as rates, deposit mix and loan demand change.
- Whether CRE concentrations and exposures to pandemic-affected property types lead to higher delinquencies, losses or allowance needs.
- The realized cost, completion timing and leasing economics of the headquarters project, and whether the hotel-parcel sale closes and produces the expected earnings benefit.
- The potential effects of CECL adoption in 2023 on provisions, retained earnings and regulatory capital.
- The sustainability of earnings, dividends and capital distributions given the lower margin, securities-related equity decline, and regulatory limits on Bank dividends.