Auburn National Bancorporation(AUBN) - 2020 Q4 - Annual Report

Part I Business Auburn National Bancorporation, Inc is a bank holding company for AuburnBank, offering financial services in East Alabama while navigating competition, regulation, and pandemic-related operational changes - The Company is a bank holding company whose principal subsidiary is AuburnBank, an Alabama state member bank operating since 1907, primarily serving East Alabama[9][10] - The Company faces significant competition from larger regional and national banks, credit unions, and non-bank financial institutions which have greater resources and broader service offerings[15][16] - In response to COVID-19, the company limited branch lobby services, enhanced drive-thru and electronic channels, and enabled remote work for employees where possible[21] - The Bank offers a comprehensive suite of services including checking, savings, certificates of deposit, residential mortgages, commercial, financial, agricultural, and consumer loans[14] - The Bank operates 13 ATM locations and provides online banking, bill payment, and Visa Checkcards with international access through the Plus® network[14] - The Bank's loan portfolio includes commercial, financial, agricultural, real estate (mortgage, acquisition, construction), and consumer loans[18] - The local economy is positively affected by nearby Kia and Hyundai automotive plants, but this also introduces cyclical risk tied to the auto industry and interest rate changes[20] - Management believes the diversified industrial mix within its primary service area helps mitigate the impact of adverse changes in any single industry[20] - The Company is a bank holding company subject to supervision by the Federal Reserve under the BHC Act, while the Bank is regulated by the Federal Reserve and the Alabama Superintendent of Banks[23][24][33] - The Company qualifies as a small bank holding company under the Small BHC Policy (for institutions up to $3 billion in assets), allowing its capital adequacy to be evaluated on a bank-only basis[31][32] - The Bank is subject to Basel III Capital Rules, which require a minimum Common Equity Tier 1 (CET1) ratio of 4.5% and a capital conservation buffer of 2.5%, leading to a total CET1 requirement of 7.0%[70][71][77] - The CARES Act provided temporary relief allowing banks to suspend Troubled Debt Restructuring (TDR) classifications for certain loan modifications made in response to the COVID-19 pandemic[48] - The 2018 Growth Act provided regulatory relief for smaller banks, including exempting those with less than $10 billion in assets from the Volcker Rule and allowing certain residential mortgages held in portfolio to be deemed "qualified mortgages"[44][120][121] Risk Factors The company faces operational, financial, and regulatory risks, which are heightened by the economic impact of the COVID-19 pandemic - The COVID-19 pandemic has disrupted the economy, affecting key local sectors like hotels, restaurants, and retail, making creditworthiness and collateral value assessments less predictable[128][130] - A significant portion of the loan portfolio is concentrated in sectors heavily impacted by COVID-19; at year-end 2020, 25% of total loans ($117.0 million) were in hotels/motels, retail, shopping centers, and restaurants[132][144] - The company faces risks from technological changes and competition from "fintech" businesses, and may have fewer resources to invest in technology compared to larger competitors[150][151] - As a participating lender in the Paycheck Protection Program (PPP), the company is exposed to litigation risk regarding loan processing and credit risk if the SBA denies loan guarantees[199][200][201] Unresolved Staff Comments The company reports no unresolved staff comments - None[202] Properties The Bank operates from multiple branches and is currently redeveloping its main office, which was demolished in 2020 - The Bank conducts business from its main office, seven full-service branches, and two loan production offices in Auburn and Phenix City, Alabama[202] - The main office was demolished in 2020 for a redevelopment project; a new headquarters and parking deck are under construction, with activities starting in the second half of 2020[202][203] - During construction, main office operations are located in the temporary main office branch in the adjacent, company-owned AuburnBank Center[202] Legal Proceedings Management does not expect pending legal proceedings to have a material adverse effect on the company's financial condition - Management believes there are no pending or threatened legal proceedings expected to have a material adverse effect on the Company's financial condition or results of operations[211] Mine Safety Disclosures This item is not applicable to the company - Not applicable[211] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, with details on shareholder count, dividend history, and a share repurchase plan provided - The Company's Common Stock is listed on the Nasdaq Global Market under the symbol "AUBN"; as of March 8, 2021, there were 3,566,326 shares outstanding[212] - As of December 31, 2020, the company had an approximate value of $5,000,000 remaining under its publicly announced share repurchase plan, though no shares were purchased in Q4 2020[218] Quarterly Stock Prices and Dividends (per share) | Year | Quarter | High Price ($) | Low Price ($) | Cash Dividend ($) | | :--- | :--- | :--- | :--- | :--- | | 2020 | Q1 | 59.99 | 24.11 | 0.255 | | 2020 | Q2 | 63.40 | 36.81 | 0.255 | | 2020 | Q3 | 56.80 | 26.26 | 0.255 | | 2020 | Q4 | 43.00 | 36.75 | 0.255 | | 2019 | Q1 | 39.43 | 30.61 | 0.25 | | 2019 | Q2 | 39.55 | 31.06 | 0.25 | | 2019 | Q3 | 47.38 | 32.33 | 0.25 | | 2019 | Q4 | 53.90 | 40.00 | 0.25 | Selected Financial Data This section refers to the detailed financial data presented in Item 7 - Selected Financial Data is presented within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"[219] Management's Discussion and Analysis of Financial Condition and Results of Operations Net earnings declined in 2020 due to pandemic-related loan loss provisions and margin compression, though assets grew from increased deposits - The decrease in 2020 net earnings was primarily driven by an elevated provision for loan losses ($1.1 million) and a lower interest rate environment due to the COVID-19 pandemic[222] - The company extended $36.5 million in loans to 423 small businesses under the Paycheck Protection Program (PPP) during 2020[232] - The allowance for loan losses increased to $5.6 million (1.22% of total loans) at year-end 2020, up from $4.4 million (0.95% of total loans) at year-end 2019, reflecting the economic impact of COVID-19[224] - The provision for loan losses was $1.1 million in 2020, compared to a negative provision of $0.3 million in 2019, due to adverse economic changes from the COVID-19 pandemic[255] - Mortgage lending income increased significantly to $2.3 million in 2020 from $0.9 million in 2019, driven by higher refinance activity in the low-rate environment[257][260] - Noninterest expense decreased slightly, with a $0.6 million reduction in salaries and benefits being offset by a $0.6 million increase in expenses related to the headquarters redevelopment[225][263] - Total deposits grew 16% to $839.8 million at Dec 31, 2020, driven by PPP loan deposits, government stimulus, and reduced consumer spending during the pandemic[295] - Securities available-for-sale increased by $99.3 million to $335.2 million as management allocated excess liquidity from deposit growth into the investment portfolio[266] - Total loans were flat at $461.7 million; excluding PPP loans, the portfolio decreased by $18.2 million (4%), primarily due to payoffs in commercial and residential real estate loans[269] - The company had granted COVID-19 related loan modifications on loans totaling $32.3 million, or 7% of total loans, as of December 31, 2020, down from a peak of $112.7 million[278] - The Company is treated as a "small bank holding company", meaning its capital adequacy is evaluated at the Bank level rather than on a consolidated basis[302][508] - At December 31, 2020, the Bank's capital conservation buffer was 10.31%, well above the 2.5% fully phased-in requirement[300][302] Summary of Results of Operations (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net interest income (GAAP) | $24,338 | $26,064 | | Provision for loan losses | $1,100 | $(250) | | Noninterest income | $5,375 | $5,494 | | Noninterest expense | $19,554 | $19,697 | | Net earnings | $7,454 | $9,741 | | Basic and diluted EPS | $2.09 | $2.72 | Net Interest Income and Margin Analysis | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income (tax-equivalent) | $24,830 thousand | $26,621 thousand | | Net Interest Margin (tax-equivalent) | 2.92% | 3.43% | | Yield on Interest-Earning Assets | 3.38% | 3.97% | | Cost of Interest-Bearing Liabilities | 0.68% | 0.80% | Bank Capital Ratios (as of Dec 31, 2020) | Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Tier 1 Leverage Ratio | 10.32% | 5.00% | | CET1 Risk-Based Capital Ratio | 17.27% | 6.50% | | Tier 1 Risk-Based Capital Ratio | 17.27% | 8.00% | | Total Risk-Based Capital Ratio | 18.31% | 10.00% | Quantitative and Qualitative Disclosures About Market Risk Market risk is managed through earnings simulation and EVE models, with results indicating compliance with internal policy limits - The information for this item is incorporated by reference from the "Market and Liquidity Risk Management" section within Item 7[342] - The company's earnings simulation model at Dec 31, 2020, showed that a gradual 100 basis point increase in rates would decrease net interest income by 0.86%, while a 100 basis point decrease would increase it by 2.34%, both within policy limits[308][309] - The Economic Value of Equity (EVE) model showed that an instantaneous 100 basis point rate increase would decrease EVE by 2.63%, well within the 15% policy limit[311][312] Financial Statements and Supplementary Data This section includes the audited consolidated financial statements, an unqualified auditor's opinion, and notes on critical audit matters - The independent auditor, Elliott Davis, LLC, issued an unqualified opinion on the consolidated financial statements[344] - The auditor identified the allowance for loan losses as a critical audit matter due to the high degree of subjective judgment involved in determining qualitative factors[348][350] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $956,597 | $827,879 | | Loans, net | $456,082 | $456,515 | | Total Deposits | $839,792 | $724,152 | | Total Stockholders' Equity | $107,690 | $98,328 | Consolidated Earnings Statement Highlights (in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $24,338 | $26,064 | | Provision for loan losses | $1,100 | $(250) | | Net Earnings | $7,454 | $9,741 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[517] Controls and Procedures Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2020 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period[517] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[519] - No changes in internal control over financial reporting occurred during the period that materially affected, or are reasonably likely to materially affect, the controls[520] Other Information The company reports no other information for this item - None[520] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the company's Proxy Statement - Required information is incorporated by reference from the Proxy Statement[521] - The Company has adopted a Code of Conduct and Ethics, which is available on its website, www.auburnbank.com, under the "Investor Relations" section[522] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the Company's Proxy Statement - Required information is incorporated by reference from the Proxy Statement[523] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the Company's Proxy Statement - Required information is incorporated by reference from the Proxy Statement[523] Certain Relationships, Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the Company's Proxy Statement - Required information is incorporated by reference from the Proxy Statement[524] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the Company's Proxy Statement - Required information is incorporated by reference from the Proxy Statement[525] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the Form 10-K, including key corporate and certification documents - This section lists the consolidated financial statements and the report of the independent registered public accounting firm included in the Form 10-K[526] - A list of filed exhibits is provided, including corporate governance documents, SOX certifications (302 and 906), and XBRL data files[527] Form 10-K Summary The company reports no summary for this item - None[528]