Auburn National Bancorporation(AUBN) - 2022 Q4 - Annual Report

Economic Growth and Demographics - The Auburn-Opelika Metropolitan Statistical Area's population increased approximately 29.7% from 2010 to 2022, with an estimated population of 181,881 in 2022[16] - The unemployment rate in Lee County was 2.0% at year-end 2022, indicating a strong local economy[16] - The Auburn-Opelika MSA is projected to grow by 6.6% from 2023 to 2028, with household income expected to increase by 14.25% to $69,213 during the same period[17] Company Operations and Employee Management - The Company received a federal employee retention tax credit of approximately $1.6 million in 2022 due to maintaining employee levels during the COVID-19 pandemic[21] - The Company has 150 full-time equivalent employees, with an average term of service of approximately 10 years[20] - The Bank is one of the largest providers of ATM services in East Alabama, operating machines in 13 locations[13] Regulatory Compliance and Governance - The Company is required to maintain a minimum capital ratio of 10.5% for risk-weighted assets, including a capital conservation buffer of 2.5%[86] - The minimum Common Equity Tier 1 (CET1) capital ratio is set at 4.5%, with a total CET1 requirement of 7.0%[97] - The Company must comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act, including annual reporting on internal controls[76] Capital and Financial Stability - The Bank has been a member of the Federal Home Loan Bank of Atlanta since 1991, enhancing its financial stability[10] - The Federal Reserve expects banks to operate with capital positions well above minimum ratios, considering the quality of capital and various risks[88] - The Company qualifies as a small banking holding company under the Small BHC Policy, with capital adequacy evaluated on a bank-only basis[35] Community Reinvestment Act (CRA) and Lending Practices - The Bank had a "satisfactory" CRA rating in its latest evaluation dated February 28, 2022, with satisfactory ratings on both lending and community development tests[47] - The Bank currently designates two CRA assessment areas: Auburn-Opelika MSA (Lee County) and Chambers-Macon-Tallapoosa assessment area, with two branches in the latter[53] - The proposed Retail Lending Test aims to make evaluations more transparent and predictable by specifying quantitative standards for lending[51] Economic Challenges and Market Conditions - The company is subject to market conditions and economic cyclicality, which may adversely affect its operations in 2023[160] - Inflation is currently running above the Federal Reserve's long-term goal of 2.0%, affecting consumer confidence and economic activity[161] - Higher interest rates and inflation have led to a slowdown in housing starts and sales, adversely affecting mortgage loan production and the value of residential mortgage collateral[168] Risk Management and Compliance - The AML Act of 2020 strengthens anti-money laundering programs and increases penalties for violations, enhancing compliance requirements for financial institutions[71] - The Company has no material weaknesses reported in its financial reporting controls as of December 31, 2022[77] - The company may need to implement more extensive risk management policies as regulations change, including potential climate risk stress tests proposed by the Federal Reserve[197] Financial Performance and Dividends - The Bank paid total cash dividends of approximately $3.7 million to the Company during 2022, with an additional potential of $13.9 million available without prior regulatory approval as of December 31, 2022[78] - The Federal Reserve's guidelines indicate that the board of directors should consult with the Federal Reserve and potentially reduce dividends if net income is insufficient to cover them[80] - The Basel III Capital Rules limit permissible dividends and stock repurchases unless the Company meets the capital conservation buffer requirement[81] Loan and Credit Risk - The allowance for loan losses may prove inadequate, and the company may face credit risk exposures[166] - The company periodically reviews its allowance for loan losses, which may be affected by economic conditions, collateral values, and credit quality indicators, with potential adverse impacts from inflation and higher interest rates[167] - The company’s nonperforming loans were 0.54% of total loans as of December 31, 2022, with $2.7 million in other real estate owned (OREO) due to foreclosures[165] Technology and Cybersecurity - Cybersecurity risks have increased due to the rise in electronic and mobile banking activities, particularly during the COVID-19 pandemic[191] - Operational risks, including those from technological changes and cyber threats, are inherent in the company's business model and may impact its financial stability[185] - The company has established disaster recovery and business continuity policies to mitigate risks from severe weather and natural disasters[196]