Auburn National Bancorporation(AUBN) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Total assets increased to $942.9 million, funded by deposit growth, while net earnings decreased to $3.5 million due to lower net interest income and increased loan loss provisions Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | (Dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $137,835 | $92,443 | | Securities available-for-sale | $302,193 | $235,902 | | Loans, net | $458,966 | $456,515 | | Total assets | $942,887 | $827,879 | | Liabilities & Equity | | | | Total deposits | $829,810 | $724,152 | | Total liabilities | $837,588 | $729,551 | | Total stockholders' equity | $105,299 | $98,328 | | Total liabilities and stockholders' equity | $942,887 | $827,879 | Consolidated Statements of Earnings Consolidated Earnings Summary (Unaudited) | (In thousands, except per share data) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--- | :--- | :--- | | Net interest income | $12,282 | $13,217 | | Provision for loan losses | $850 | $0 | | Noninterest income | $2,598 | $2,045 | | Noninterest expense | $9,815 | $9,240 | | Net earnings | $3,462 | $4,850 | | Basic and diluted EPS | $0.97 | $1.35 | Consolidated Statements of Comprehensive Income Consolidated Comprehensive Income (Unaudited) | (Dollars in thousands) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--- | :--- | :--- | | Net earnings | $3,462 | $4,850 | | Other comprehensive income, net of tax | $5,327 | $4,443 | | Comprehensive income | $8,789 | $9,293 | Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $98.3 million at December 31, 2019, to $105.3 million at June 30, 2020, driven by net earnings of $3.5 million and other comprehensive income of $5.3 million, partially offset by cash dividends paid of $1.8 million[9] Consolidated Statements of Cash Flows Consolidated Cash Flows Summary (Unaudited) | (In thousands) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,768 | $4,323 | | Net cash used in investing activities | ($63,142) | ($4,556) | | Net cash provided by financing activities | $104,766 | $10,825 | | Net change in cash and cash equivalents | $45,392 | $10,592 | Notes to Consolidated Financial Statements Notes detail accounting policies, a $302.2 million securities portfolio, $464.3 million loan portfolio, and $5.3 million allowance for loan losses - All securities held by the company, totaling $302.2 million at fair value as of June 30, 2020, were classified as available-for-sale, primarily composed of Agency residential mortgage-backed securities (RMBS) and Agency obligations[28][29] Loan Portfolio Composition (June 30, 2020) | Loan Type | Amount (In thousands) | | :--- | :--- | | Commercial and industrial | $87,754 | | Construction and land development | $32,967 | | Commercial real estate | $250,588 | | Residential real estate | $85,825 | | Consumer installment | $8,631 | | Total loans, net of unearned income | $464,274 | Changes in Allowance for Loan Losses (Six months ended June 30, 2020) | (In thousands) | Amount | | :--- | :--- | | Beginning balance (Dec 31, 2019) | $4,386 | | Net recoveries (charge-offs) | $72 | | Provision for loan losses | $850 | | Ending balance (June 30, 2020) | $5,308 | - The company's fair value hierarchy for recurring measurements as of June 30, 2020, shows that all $302.2 million of securities available-for-sale are valued using significant other observable inputs (Level 2), with no assets valued using Level 1 or Level 3 inputs on a recurring basis[102][103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net earnings declined 28% due to lower net interest margin and $0.9 million loan loss provision, with $105.6 million deposit growth and $36.5 million in PPP loans Financial Summary Financial Performance Summary | Metric | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | | Net Earnings | $3.5 million | $4.9 million | | Basic and Diluted EPS | $0.97 | $1.35 | | Net Interest Income (tax-equivalent) | $12.5 million | $13.5 million | | Provision for Loan Losses | $0.9 million | $0 | | Noninterest Income | $2.6 million | $2.0 million | - The decrease in net interest income was primarily due to a lower rate environment, with the net interest margin (tax-equivalent) falling to 3.09% from 3.52% in the prior year period[131] - The increase in the provision for loan losses was directly related to changes in economic conditions driven by the impact of the COVID-19 pandemic, including higher unemployment in the company's primary market area[132] COVID-19 Impact Assessment - In response to the COVID-19 pandemic, the company implemented business continuity plans, including limiting branch lobby service, enabling remote work, and offering loan extensions and deferrals to affected customers[141][142] Paycheck Protection Program (PPP) Loan Summary (as of June 30, 2020) | SBA Tier | of Loans | $ of Loans (in thousands) | | :--- | :--- | :--- | | $350k to < $2M | 22 | $14,687 | | Up to $350k | 400 | $21,784 | | Total | 422 | $36,471 | - The company collected approximately $1.5 million in fees related to its PPP loans, which will be recognized as a yield adjustment over the life of the loans[144] Critical Accounting Policies - Management identifies several critical accounting policies that require significant judgments and estimates, including the determination of the allowance for loan losses, assessment of other-than-temporary impairment on securities, fair value measurements, and the valuation of OREO and deferred tax assets[147] - To determine the allowance for loan losses, the company has extended its look-back period to 45 quarters (since Q1 2009) to incorporate the effects of at least one economic downturn, with certain qualitative factors adjusted for COVID-19's adverse economic conditions in H1 2020[155] Results of Operations - Net interest income (tax-equivalent) decreased to $12.5 million in the first six months of 2020 from $13.5 million in the prior year, as the tax-equivalent yield on interest-earning assets fell 47 basis points to 3.58%[166][167] - The provision for loan losses was $0.9 million for the first six months of 2020, compared to no provision in the same period of 2019, reflecting adverse economic changes from the COVID-19 pandemic[169] - Noninterest income increased, primarily due to a significant rise in mortgage lending income from $376 thousand to $913 thousand, driven by increased mortgage refinance activity[171][175] - Noninterest expense increased, mainly due to higher net occupancy and equipment costs related to the redevelopment of the company's headquarters[178][179] Balance Sheet Analysis - Total loans, net of unearned income, increased by $3.4 million since year-end 2019 to $464.3 million, but excluding the $36.5 million in PPP loans, total loans decreased by $32.0 million, or 7%, primarily due to payoffs in commercial and residential real estate loans[182] COVID-19 High-Risk Industry Exposure (June 30, 2020) | Industry | Loan Balance (in thousands) | % of Total Loans | | :--- | :--- | :--- | | Hotel/motel | $52,472 | 11% | | Shopping centers | $33,891 | 7% | | Retail, excluding shopping centers | $18,314 | 4% | | Restaurants | $15,167 | 4% | | Total | $119,844 | 26% | - As of June 30, 2020, the company had granted loan payment deferrals or interest-only payments on loans totaling $112.7 million, representing 24% of the total loan portfolio, to assist borrowers impacted by COVID-19[191][193] - The allowance for loan losses as a percentage of total loans increased to 1.14% at June 30, 2020, from 0.95% at December 31, 2019, with the ratio at 1.24% excluding PPP loans[198] - Total deposits grew by $105.6 million to $829.8 million at June 30, 2020, from year-end 2019, attributed to deposits from PPP loan recipients, government stimulus, and reduced customer spending[209] Capital Adequacy - Stockholders' equity increased to $105.3 million at June 30, 2020, from $98.3 million at year-end 2019, driven by net earnings and a $5.3 million increase in unrealized gains on securities[214] Bank Regulatory Capital Ratios (June 30, 2020) | Ratio | Bank's Ratio | "Well Capitalized" Minimum | | :--- | :--- | :--- | | Tier 1 leverage ratio | 10.62% | 5.0% | | CET1 risk-based capital ratio | 18.00% | 6.5% | | Tier 1 risk-based capital ratio | 18.00% | 8.0% | | Total risk-based capital ratio | 19.04% | 10.0% | Market and Liquidity Risk Management - The company manages interest rate risk using an earnings simulation model and an Economic Value of Equity (EVE) model, both indicating compliance with internal policy guidelines as of June 30, 2020[219][220][221] - The Bank maintains strong liquidity sources, including customer deposits, access to the Federal Reserve discount window, and an available line of credit with the FHLB of $256.5 million as of June 30, 2020[228] - As of June 30, 2020, the company had outstanding standby letters of credit of $1.6 million and unfunded loan commitments of $70.5 million[230] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the market and liquidity risk management details from Item 2 of this report Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, with no expected material adverse effect on financial condition or operations Item 1A. Risk Factors Primary risks include the ongoing COVID-19 pandemic's impact on loan demand, credit quality, net interest income, and operational risks, alongside PPP-related litigation Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company made no common stock repurchases in Q2 2020, with a $5 million repurchase program remaining fully available Item 6. Exhibits This section lists filed exhibits, including corporate documents, CEO/CFO certifications, and XBRL interactive data files