Auburn National Bancorporation, Inc. (AUBN): Navigating the Banking Landscape with Resilience and Adaptability

Published on November 28, 2024 | Ticker: AUBN

Company Overview and History

Auburn National Bancorporation, Inc. (AUBN) is a bank holding company that has operated continuously since 1907, providing a range of banking services to individuals and commercial customers in Lee County, Alabama and the surrounding areas. The company's wholly-owned subsidiary, AuburnBank, has been a member of the Federal Reserve System since 1995 and is regulated by the Federal Reserve and the Alabama Superintendent of Banks.

Auburn National Bancorporation has a long and storied history, having been founded in 1907 and weathering numerous economic cycles and challenges over the decades. The company was incorporated in Delaware in 1990, succeeding its Alabama predecessor as the bank holding company controlling AuburnBank. The Company and its predecessor have controlled the Bank since 1984. AuburnBank has been a member of the Federal Home Loan Bank (FHLB) of Atlanta since 1991, further strengthening its financial position and access to resources.

Over the years, Auburn National Bancorporation has demonstrated its resilience by navigating through periods of inflation, changing interest rate environments, and broader economic turbulence. The company has faced various challenges and regulatory changes, including the implementation of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes in 2015. In 2019, the company encountered some unusual items and special charges, including $1.72 million in other special charges, but was able to navigate these challenges and continue operating its banking business effectively.

Throughout its history, Auburn National Bancorporation has maintained a strong focus on serving the banking needs of its local community, primarily in East Alabama, including Lee County and surrounding areas. The company has consistently paid cash dividends to its shareholders, underscoring its financial stability and commitment to returning capital to investors.

Loan Portfolio and Business Segments

One of the key strengths of Auburn National Bancorporation is its diversified loan portfolio, which includes commercial and industrial loans, construction and land development loans, commercial real estate loans, residential real estate loans, and consumer installment loans. As of September 30, 2024, the company's loan portfolio stood at $565.70 million, a 2% increase compared to the end of 2023. The company's loan mix is well-balanced, with commercial real estate loans accounting for the largest portion at 53%, followed by residential real estate loans at 21%, construction and land development loans at 14%, and commercial and industrial loans at 11%.

Within the commercial real estate portfolio, owner-occupied properties make up 21% of the segment. The residential real estate portfolio includes $10.1 million in junior lien mortgages, representing 2% of total loans. It's worth noting that AUBN's residential mortgage portfolio does not include any high-risk products such as option ARMs or subprime loans, reflecting the company's conservative approach to lending.

Financials

The company's net interest income, a critical driver of its profitability, was $20.16 million for the first nine months of 2024, a 2% decrease compared to the same period in 2023. This decline was primarily due to a smaller balance sheet, which was partially offset by an increase in the company's net interest margin. The net interest margin, on a tax-equivalent basis, was 3.05% in the first nine months of 2024, compared to 2.97% in the same period of 2023. The improvement in net interest margin was largely attributable to a more favorable asset mix and higher yields on interest-earning assets, which was partially offset by increased costs of interest-bearing deposits.

The average yield on loans and loans held for sale increased to 5.18% in the first nine months of 2024, up from 4.71% in the same period of 2023. This increase was driven by higher market interest rates and growth in the loan portfolio.

For the most recent fiscal year ending December 31, 2023, Auburn National Bancorporation reported revenue of $23.35 million, net income of $1.40 million, operating cash flow of $11.90 million, and free cash flow of $11.48 million. In the most recent quarter ending September 30, 2024, the company's performance showed improvement, with revenue of $7.64 million (up 7% year-over-year), net income of $1.73 million (up 16% year-over-year), operating cash flow of $2.39 million (up 15% year-over-year), and free cash flow of $2.34 million (up 12% year-over-year). These increases were primarily attributed to higher interest income from loans and securities, as well as higher mortgage lending income.

Auburn National Bancorporation has also demonstrated its ability to effectively manage its credit risk. The company's allowance for credit losses was $6.90 million, or 1.22% of total loans, as of September 30, 2024, compared to $6.90 million, or 1.23% of total loans, at the end of 2023. The company's nonperforming assets, which include nonaccrual loans, were $775,000, or 0.14% of loans and other real estate owned, as of September 30, 2024, compared to $911,000, or 0.16% of loans and other real estate owned, at the end of 2023. The bank recorded a provision for credit losses of $0.1 million in the first nine months of 2024, compared to a negative provision of $0.2 million in the same period of 2023.

The company's strong capital position is another key strength, with the Bank's tier 1 leverage ratio at 10.43%, the common equity tier 1 (CET1) ratio at 14.75%, and the total risk-based capital ratio at 15.76% as of September 30, 2024. These ratios exceed the minimum regulatory capital requirements for a well-capitalized institution, providing the company with the financial flexibility to support its growth and navigate potential economic challenges.

Liquidity

In terms of liquidity, Auburn National Bancorporation maintains a diverse funding base, primarily consisting of customer deposits, which totaled $901.72 million as of September 30, 2024, up from $896.2 million at the end of 2023. Noninterest-bearing deposits made up 30% of total deposits at the end of the third quarter. The company's cost of total interest-bearing deposits increased to 1.80% in the first nine months of 2024, compared to 1.02% in the same period of 2023, reflecting the impact of rising market interest rates.

The company also has access to federal funds lines and the ability to borrow from the Federal Home Loan Bank of Atlanta, providing additional sources of liquidity as needed. As of September 30, 2024, AUBN had access to $65.2 million in federal funds lines and $307.7 million in available credit from the Federal Home Loan Bank of Atlanta. The company also has the ability to borrow from the Federal Reserve's discount window if needed.

Auburn National Bancorporation's liquidity position is further strengthened by its lack of long-term debt, with a debt-to-equity ratio of 0.00. As of December 31, 2023, the company held $71.37 million in cash and cash equivalents. The company's current ratio and quick ratio both stand at 0.68, indicating a solid ability to meet short-term obligations.

Challenges and Future Outlook

Looking ahead, Auburn National Bancorporation faces a number of challenges, including the ongoing effects of the COVID-19 pandemic, rising inflation, and the Federal Reserve's efforts to tighten monetary policy to combat inflation. The company's ability to effectively manage interest rate risk, maintain credit quality, and adapt to changing market conditions will be critical in navigating these headwinds.

Despite these challenges, Auburn National Bancorporation remains well-positioned for the future. The company's diverse loan portfolio, strong capital position, and conservative risk management approach position it to weather economic uncertainty and continue serving the banking needs of its local community. Additionally, the company's focus on technology and digital banking initiatives may help it stay competitive and meet the evolving needs of its customers.

Conclusion

In conclusion, Auburn National Bancorporation, Inc. (AUBN) is a well-established and resilient banking institution that has successfully navigated various economic and industry challenges throughout its long history. With its diversified loan portfolio, strong capital position, and prudent risk management practices, the company is poised to continue delivering value to its shareholders and supporting the financial needs of its local community in East Alabama. The company's recent financial performance, including growth in revenue, net income, and cash flows, demonstrates its ability to adapt to changing market conditions and capitalize on opportunities in its core market.

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