Auburn National Bancorporation(AUBN) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements present the company's financial position as of September 30, 2023, with $1.03 billion in total assets, a nine-month net earnings of $5.4 million, and a comprehensive loss, reflecting the CECL adoption and its $1.0 million impact on credit loss allowance Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Metric | Sep 30, 2023 ($ thousands) | Dec 31, 2022 ($ thousands) | Change | | :--- | :--- | :--- | :--- | | Total Assets | 1,030,724 | 1,023,888 | +0.7% | | Loans, net | 538,832 | 498,693 | +8.0% | | Securities available-for-sale | 373,286 | 405,304 | -7.9% | | Total Deposits | 964,601 | 950,337 | +1.5% | | Total Stockholders' Equity | 61,451 | 68,041 | -9.7% | - The decrease in stockholders' equity was primarily driven by an increase in accumulated other comprehensive loss from $(40.9) million to $(49.0) million, reflecting unrealized losses on the securities portfolio[7] Consolidated Statements of Earnings Earnings Performance (Unaudited) | Metric | Q3 2023 ($ thousands) | Q3 2022 ($ thousands) | Nine Months 2023 ($ thousands) | Nine Months 2022 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 6,272 | 7,243 | 20,269 | 19,695 | | Provision for Credit Losses | 105 | 250 | (191) | — | | Net Earnings | 1,488 | 1,998 | 5,380 | 5,880 | | EPS (Basic and Diluted) | $0.43 | $0.57 | $1.54 | $1.67 | - Net earnings decreased by 25.5% for the third quarter and 8.5% for the nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to lower net interest income in Q3 and higher noninterest expense over the nine-month period[9] Consolidated Statements of Comprehensive Income - The company reported a comprehensive loss of $8.5 million for Q3 2023 and $2.7 million for the nine months ended September 30, 2023, primarily due to significant unrealized net losses on securities, which amounted to $9.9 million and $8.1 million for the respective periods, net of tax[12] Consolidated Statements of Stockholders' Equity - Total stockholders' equity decreased from $68.0 million at the end of 2022 to $61.5 million at September 30, 2023, mainly caused by an $8.1 million other comprehensive loss and $2.8 million in cash dividends, partially offset by $5.4 million in net earnings[15] - The company paid cash dividends of $0.81 per share and repurchased 10,108 shares during the first nine months of 2023[15] Consolidated Statements of Cash Flows - For the nine months ended September 30, 2023, net cash provided by operating activities was $10.7 million, net cash used in investing activities was $18.7 million primarily due to a net increase in loans, and net cash provided by financing activities was $10.4 million driven by a net increase in deposits[16] - Cash and cash equivalents increased by $2.4 million during the first nine months of 2023, ending the period at $29.6 million[16] Notes to Consolidated Financial Statements The notes detail significant accounting policies, including the CECL adoption on January 1, 2023, which increased the allowance for credit losses by $1.0 million, and provide breakdowns of the securities portfolio with significant unrealized losses and the real estate-concentrated loan portfolio - Effective January 1, 2023, the company adopted ASU 2016-13 (CECL), replacing the incurred loss methodology with an expected loss methodology, with a transition adjustment including a $1.0 million increase in the allowance for credit losses on loans and a net decrease to retained earnings of $0.8 million[26][28] Securities Available-for-Sale (September 30, 2023) | Security Type | Fair Value ($ thousands) | Amortized Cost ($ thousands) | Gross Unrealized Losses ($ thousands) | | :--- | :--- | :--- | :--- | | Agency obligations | 122,750 | 139,902 | 17,152 | | Agency MBS | 192,457 | 232,038 | 39,581 | | State and political subdivisions | 58,079 | 66,796 | 8,717 | | Total | 373,286 | 438,736 | 65,450 | - The loan portfolio totaled $545.6 million as of September 30, 2023, with commercial real estate (52%) and residential real estate (21%) being the largest segments, and nonaccrual loans stood at $1.2 million[66][141] Allowance for Credit Losses Roll-Forward (Nine Months Ended Sep 30, 2023) | Description | Amount ($ thousands) | | :--- | :--- | | Beginning Balance (Dec 31, 2022) | 5,765 | | Impact of adopting ASC 326 | 1,019 | | Net recoveries (charge-offs) | 127 | | Provision for credit losses | (133) | | Ending Balance (Sep 30, 2023) | 6,778 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a decrease in nine-month net earnings to $5.4 million, driven by higher noninterest expenses and declining net interest margin, alongside 8% loan growth, a shift in deposit composition, and a decline in stockholders' equity due to unrealized securities losses, while capital ratios remain strong Summary of Results of Operations Financial Summary | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | Net Earnings | $5.4 million | $5.9 million | | EPS (Basic and Diluted) | $1.54 | $1.67 | | Net Interest Income (tax-equivalent) | $20.6 million | $20.0 million | | Net Interest Margin (tax-equivalent) | 2.97% | 2.67% | - The increase in net interest income for the nine-month period was driven by a more favorable asset mix and higher yields on earning assets, partially offset by increased funding costs, though Q3 2023 net interest income decreased year-over-year due to a declining net interest margin[118][124] - The allowance for credit losses increased to $6.8 million (1.24% of total loans) at September 30, 2023, up from $5.8 million (1.14% of total loans) at year-end 2022, largely due to the adoption of CECL[119] Results of Operations For the first nine months of 2023, net interest income (tax-equivalent) increased 3% to $20.6 million, with net interest margin expanding 30 basis points to 2.97%, while a negative provision of $0.2 million was recorded, and noninterest income decreased as noninterest expense rose - Net interest margin (tax-equivalent) for the first nine months of 2023 increased to 2.97% from 2.67% in the prior year period, as the yield on interest-earning assets rose by 81 basis points, while the cost of interest-bearing liabilities increased by 70 basis points[127][128] - A negative provision for credit losses of $0.2 million was recorded in the first nine months of 2023, compared to zero in the same period of 2022, mainly due to the full collection of a $1.3 million collateral-dependent nonperforming loan[130] Noninterest Income (Nine Months Ended) | Category | 2023 ($ thousands) | 2022 ($ thousands) | | :--- | :--- | :--- | | Service charges on deposit accounts | 456 | 446 | | Mortgage lending income | 345 | 566 | | Bank-owned life insurance | 311 | 293 | | Other | 1,336 | 1,259 | | Total | 2,448 | 2,608 | Noninterest Expense (Nine Months Ended) | Category | 2023 ($ thousands) | 2022 ($ thousands) | | :--- | :--- | :--- | | Salaries and benefits | 8,809 | 8,901 | | Net occupancy and equipment | 2,341 | 1,955 | | Professional fees | 898 | 704 | | Other | 4,743 | 3,814 | | Total | 16,791 | 15,374 | Balance Sheet Analysis Total loans grew 8% to $545.6 million, with increased allowance for credit losses to 1.24% post-CECL, while nonperforming assets decreased to $1.2 million, and total deposits increased to $964.6 million with a shift to interest-bearing accounts and 35% uninsured deposits - Total loans increased by 8% to $545.6 million at September 30, 2023, from $504.5 million at December 31, 2022, with the portfolio primarily composed of commercial real estate (52%) and residential real estate (21%)[141] - Nonperforming assets decreased to $1.2 million (0.12% of total assets) at September 30, 2023, from $2.7 million (0.27% of total assets) at December 31, 2022, mainly due to the resolution of a large nonperforming loan[152][153] Deposit Composition | Deposit Type | Sep 30, 2023 ($ thousands) | Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Noninterest bearing demand | 279,458 | 311,371 | | Interest-bearing deposits | 685,143 | 638,966 | | Total Deposits | 964,601 | 950,337 | - Estimated uninsured deposits totaled $337.4 million, or 35% of total deposits, at September 30, 2023, including $185.7 million of public funds collateralized by securities[158] Capital Adequacy - Consolidated stockholders' equity decreased to $61.5 million at September 30, 2023, from $68.0 million at year-end 2022, primarily due to an $8.1 million other comprehensive loss from unrealized losses on securities[162] Bank Regulatory Capital Ratios (September 30, 2023) | Ratio | Actual | "Well Capitalized" Minimum | | :--- | :--- | :--- | | Tier 1 Leverage | 10.26% | 5.0% | | CET1 Risk-Based Capital | 15.01% | 6.5% | | Total Risk-Based Capital | 15.98% | 10.0% | Market and Liquidity Risk Management - The company manages interest rate risk using earnings simulation and Economic Value of Equity (EVE) models, with modeling indicating the balance sheet is liability-sensitive over a 12-month forecast period and compliance with internal policy limits for both earnings at risk and EVE as of September 30, 2023[170][171][173] - The Bank maintains multiple sources of liquidity, including customer deposits, FHLB advances, and federal funds lines, with $307.7 million available credit from the FHLB and $61.0 million in federal funds lines at September 30, 2023, and no outstanding borrowings from either source[178] - At September 30, 2023, the Bank had unfunded loan commitments of $60.1 million and standby letters of credit of $0.8 million[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the Market and Liquidity Risk Management details from Item 2, outlining the company's approach to managing interest rate and liquidity risks - The company's disclosures about market risk are detailed in the "MARKET AND LIQUIDITY RISK MANAGEMENT" section of the MD&A[203] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[204] - There were no material changes in the company's internal control over financial reporting during the third quarter of 2023[204] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, with no expected material adverse effect on its financial condition or results of operations from pending or threatened cases - Management believes there are no pending or threatened legal proceedings that are expected to have a material adverse effect on the company[205] Item 1A. Risk Factors The company refers to its 2022 Form 10-K for risk factors, highlighting ongoing risks from inflation and monetary tightening impacting interest rates, mortgage income, securities values, deposit costs, and borrower financial health - The company directs investors to the risk factors in its 2022 Form 10-K and highlights ongoing risks from inflation and rising interest rates, which have adversely affected stockholders' equity through unrealized losses on the securities portfolio[206] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company repurchased 5,883 shares at an average of $22.16 per share under a program authorizing up to $5 million in repurchases through April 2024 Share Repurchases in Q3 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | 948 | $21.89 | | August 2023 | 4,935 | $22.21 | | September 2023 | — | — | | Total | 5,883 | $22.16 | - As of September 30, 2023, approximately $4.4 million remained available for future repurchases under the current plan, which expires in April 2024[208] Item 6. Exhibits This section lists the exhibits filed, including CEO and CFO certifications under Sarbanes-Oxley and XBRL interactive data files - The report includes certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL data files[210]