Auburn National Bancorporation, Inc. (NASDAQ:AUBN) is a bank holding company that operates through its wholly-owned subsidiary, AuburnBank, in East Alabama, including Lee County and surrounding areas. The company has a long history, having operated continuously since 1907, and has been a member of the Federal Reserve System since 1995.

Business Overview

AuburnBank provides a full range of banking services to individuals and commercial customers in its local market. The bank's primary focus is on commercial and industrial lending, commercial real estate lending, residential real estate lending, and consumer lending. The bank also offers a variety of deposit products, including checking accounts, savings accounts, money market accounts, and certificates of deposit.

The company's loan portfolio is well-diversified, with commercial real estate loans representing the largest segment at 51% of total loans, followed by residential real estate loans at 21%, commercial and industrial loans at 13%, and construction and land development loans at 13%. Approximately 21% of the company's commercial real estate loans are classified as owner-occupied.

Financials

Auburn National Bancorporation reported annual net income of $1.4 million, annual revenue of $31.4 million, annual operating cash flow of $11.9 million, and annual free cash flow of $11.5 million in its most recent fiscal year. In the second quarter of 2024, the company reported net earnings of $1.7 million, or $0.50 per share, compared to $1.9 million, or $0.55 per share, in the second quarter of 2023.

The company's net interest income (tax-equivalent) was $13.4 million for the first six months of 2024, a 6% decrease compared to $14.2 million for the first six months of 2023. This decrease was primarily due to a decline in the company's net interest margin (tax-equivalent), which was 3.05% in the first six months of 2024 compared to 3.10% in the first six months of 2023. The decrease in net interest margin was primarily due to higher market interest rates, which increased the company's cost of funds, and changes in the deposit mix to higher-cost interest-bearing deposits, partially offset by a more favorable asset mix and higher yields on interest-earning assets.

The company recorded a provision for credit losses during the first six months of 2024 of $0.2 million, compared to a negative provision of $0.3 million during the first six months of 2023. The increase in the provision for credit losses was related to changes in the composition of, and increases in, loans as well as changes in the economic forecasts used in the company's CECL model.

Noninterest income was $1.8 million in the first six months of 2024, compared to $1.6 million in the first six months of 2023. The increase was primarily related to an increase in mortgage lending income and other noninterest income. Noninterest expense was $11.2 million in the first six months of 2024, compared to $11.4 million for the first six months of 2023. The decrease was primarily related to decreases in net occupancy and equipment expense and other noninterest expense, partially offset by an increase in salaries and benefits expense.

The company's effective tax rate for the first six months of 2024 was 17.07%, compared to 12.48% in the first six months of 2023. The increase in the effective tax rate was primarily due to a decrease in the company's investment in municipal securities following a balance sheet restructuring in the fourth quarter of 2023, and the adoption of FASB ASU 2023-02, which allows the proportional amortization method for the company's New Markets Tax Credit investments.

Loan Portfolio and Asset Quality

Auburn National Bancorporation's loan portfolio is well-diversified, with commercial real estate loans representing the largest segment at 51% of total loans, followed by residential real estate loans at 21%, commercial and industrial loans at 13%, and construction and land development loans at 13%. Approximately 21% of the company's commercial real estate loans are classified as owner-occupied.

At June 30, 2024, the company's allowance for credit losses was $7.1 million, or 1.24% of total loans, compared to $6.9 million, or 1.23% of total loans, at December 31, 2023, and $6.6 million, or 1.27% of total loans, at June 30, 2023. The company's nonperforming assets were $0.8 million, or 0.08% of total assets, at June 30, 2024, compared to $0.9 million, or 0.09% of total assets, at December 31, 2023.

Liquidity

Auburn National Bancorporation maintains a strong liquidity position, with cash and cash equivalents of $114.5 million at June 30, 2024, compared to $71.4 million at December 31, 2023. The company had no long-term debt at June 30, 2024 and December 31, 2023, and had available federal funds lines totaling $61.0 million with no outstanding borrowings at those dates.

The Bank's regulatory capital ratios were well above the minimum amounts required to be "well capitalized" under current regulatory standards, with a total risk-based capital ratio of 15.49%, a tier 1 leverage ratio of 10.39%, and a common equity tier 1 ratio of 14.47% at June 30, 2024.

Risks and Challenges

Auburn National Bancorporation faces several risks and challenges, including the effects of current economic conditions, including inflation and rising interest rates, on its borrowers' cash flows, real estate market conditions, and credit quality. The company also faces competition from a wide range of other lenders, as well as the potential for deterioration in certain credits, interest rate fluctuations, and changes in applicable laws and regulations.

Additionally, the company's mortgage lending activities expose it to potential obligations to repurchase loans or reimburse investors for losses incurred due to breaches of representations and warranties, although the company has not had any significant repurchase or make-whole requests to date.

Outlook

Auburn National Bancorporation has demonstrated resilience in the face of challenging market conditions, maintaining a strong balance sheet, solid asset quality, and healthy capital levels. While the company faces ongoing risks and uncertainties, its diversified loan portfolio, prudent risk management practices, and focus on its local market position it well to navigate the current environment.

Conclusion

Overall, Auburn National Bancorporation appears to be a well-managed community bank with a solid foundation for future growth and profitability. Investors should closely monitor the company's performance and its ability to navigate the evolving economic and regulatory landscape.