10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2020

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period __________ to __________

Commission File Number: 0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

63-0885779

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn, Alabama 36830

(334) 821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01	AUBN		NASDAQ Global Market

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at October 29,
Common Stock, $0.01 par value per share		3,566,276 shares

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION			PAGE

Item 1	Financial Statement
		Consolidated Balance Sheets (Unaudited) as of September 30, 2020 and December 31, 2019			3
		Consolidated Statements of Earnings (Unaudited) for the quarter and nine months ended September 30, 2020 and 2019			4
		Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and nine months ended September 30, 2020 and 2019			5
		Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarter and nine months ended September 30, 2020 and 2019			6
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019			7
		Notes to Consolidated Financial Statements (Unaudited)			8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
		Table 1 – Explanation of Non-GAAP Financial Measures			50
		Table 2 – Selected Quarterly Financial Data			51
		Table 3 – Selected Financial Data			52
		Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended September 30, 2020 and 2019			53
		Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September 30, 2020 and 2019			54
		Table 6 – Loan Portfolio Composition			55
		Table 7 – Allowance for Loan Losses and Nonperforming Assets			56
		Table 8 – Allocation of Allowance for Loan Losses			57
		Table 9 – CDs and Other Time Deposits of $100,000 or more			58
Item 3	Quantitative and Qualitative Disclosures About Market Risk			59
Item 4	Controls and Procedures			59

PART II. OTHER INFORMATION

Item 1	Legal Proceedings			59
Item 1A	Risk Factors			59
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 3	Defaults Upon Senior Securities			63
Item 4	Mine Safety Disclosures			63
Item 5	Other Information			63
Item 6	Exhibits			64

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

				September 30,		December 31,
(Dollars in thousands, except share data)				2020		2019
Assets:
Cash and due from banks			$	17,079	$	15,172
Federal funds sold				29,182		25,944
Interest-bearing bank deposits				56,412		51,327
		Cash and cash equivalents		102,673		92,443
Securities available-for-sale				320,922		235,902
Loans held for sale				4,765		2,202
Loans, net of unearned income				472,453		460,901
	Allowance for loan losses			(5,575)		(4,386)
		Loans, net		466,878		456,515
Premises and equipment, net				15,473		14,743
Bank-owned life insurance				19,124		19,202
Other assets				8,055		6,872
		Total assets	$	937,890	$	827,879
Liabilities:
Deposits:
	Noninterest-bearing		$	238,482	$	196,218
	Interest-bearing			585,498		527,934
		Total deposits		823,980		724,152
Federal funds purchased and securities sold under agreements to repurchase				2,070		1,069
Accrued expenses and other liabilities				5,526		4,330
		Total liabilities		831,576		729,551
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
	no shares issued			—		—
Common stock of $.01 par value; authorized 8,500,000 shares;
	issued 3,957,135 shares			39		39
Additional paid-in capital				3,789		3,784
Retained earnings				104,471		101,801
Accumulated other comprehensive income, net				7,369		2,059
Less treasury stock, at cost - 390,859 shares and 390,989 at September 30, 2020
	and December 31, 2019, respectively			(9,354)		(9,355)
		Total stockholders’ equity		106,314		98,328
		Total liabilities and stockholders’ equity	$	937,890	$	827,879
See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

					Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands, except share and per share data)					2020		2019		2020		2019
Interest income:
	Loans, including fees			$	5,453	$	5,787	$	16,359	$	17,277
	Securities:
		Taxable			913		997		3,080		2,997
		Tax-exempt			461		526		1,390		1,619
	Federal funds sold and interest-bearing bank deposits				26		335		332		998
			Total interest income		6,853		7,645		21,161		22,891
Interest expense:
	Deposits				983		1,076		3,005		3,101
	Short-term borrowings				2		2		6		6
			Total interest expense		985		1,078		3,011		3,107
	Net interest income				5,868		6,567		18,150		19,784
Provision for loan losses					250		—		1,100		—
		Net interest income after provision for loan losses			5,618		6,567		17,050		19,784

Noninterest income:
	Service charges on deposit accounts				139		182		437		542
	Mortgage lending				702		263		1,615		639
	Bank-owned life insurance				109		109		615		326
	Other				408		393		1,202		1,472
	Securities gains, net				16		44		103		57
		Total noninterest income			1,374		991		3,972		3,036

Noninterest expense:
	Salaries and benefits				2,802		2,894		8,230		8,631
	Net occupancy and equipment				457		387		1,974		1,152
	Professional fees				230		195		877		698
	Other				1,164		1,348		3,387		3,583
		Total noninterest expense			4,653		4,824		14,468		14,064

		Earnings before income taxes			2,339		2,734		6,554		8,756
Income tax expense					403		527		1,156		1,699

		Net earnings		$	1,936	$	2,207	$	5,398	$	7,057

Net earnings per share:
	Basic and diluted			$	0.54	$	0.62	$	1.51	$	1.97

Weighted average shares outstanding:
	Basic and diluted				3,566,239		3,568,287		3,566,184		3,586,642
See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)



				Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)				2020		2019		2020		2019
Net earnings			$	1,936	$	2,207	$	5,398	$	7,057

Other comprehensive income (loss), net of tax:
	Unrealized net holding (loss) gain on securities			(5)		1,596		5,387		6,049
	Reclassification adjustment for net gain on securities
		recognized in net earnings		(12)		(33)		(77)		(43)
Other comprehensive (loss) income				(17)		1,563		5,310		6,006

Comprehensive income			$	1,919	$	3,770	$	10,708	$	13,063
See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

								Accumulated
	Common			Additional				other
	Shares		Common	paid-in		Retained		comprehensive			Treasury
(Dollars in thousands, except share data)	Outstanding		Stock	capital		earnings		income (loss)			stock		Total
Quarter ended September 30, 2020
Balance, June 30, 2020	3,566,176	$	39	$	3,785	$	103,444		$	7,386	$	(9,355)	$	105,299
Net earnings	—		—		—		1,936			—		—		1,936
Other comprehensive loss	—		—		—		—			(17)		—		(17)
Cash dividends paid ($.255 per share)	—		—		—		(909)			—		—		(909)
Sale of treasury stock	100		—		4		—			—		1		5
Balance, September 30, 2020	3,566,276	$	39	$	3,789	$	104,471		$	7,369	$	(9,354)	$	106,314

Quarter ended September 30, 2019
Balance, June 30, 2019	3,571,828	$	39	$	3,783	$	98,694		$	680	$	(9,131)	$	94,065
Net earnings	—		—		—		2,207			—		—		2,207
Other comprehensive income	—		—		—		—			1,563		—		1,563
Cash dividends paid ($.25 per share)	—		—		—		(892)			—		—		(892)
Stock repurchases	(5,702)		—		—		—			—		(224)		(224)
Sale of treasury stock	20		—		1		—			—		—		1
Balance, September 30, 2019	3,566,146	$	39	$	3,784	$	100,009		$	2,243	$	(9,355)	$	96,720

Nine months ended September 30, 2020
Balance, December 31, 2019	3,566,146	$	39	$	3,784	$	101,801		$	2,059	$	(9,355)	$	98,328
Net earnings	—		—		—		5,398			—		—		5,398
Other comprehensive income	—		—		—		—			5,310		—		5,310
Cash dividends paid ($.765 per share)	—		—		—		(2,728)			—		—		(2,728)
Sale of treasury stock	130		—		5		—			—		1		6
Balance, September 30, 2020	3,566,276	$	39	$	3,789	$	104,471		$	7,369	$	(9,354)	$	106,314

Nine months ended September 30, 2019
Balance, December 31, 2018	3,643,868	$	39	$	3,779	$	95,635		$	(3,763)	$	(6,635)	$	89,055
Net earnings	—		—		—		7,057			—		—		7,057
Other comprehensive income	—		—		—		—			6,006		—		6,006
Cash dividends paid ($.75 per share)	—		—		—		(2,683)			—		—		(2,683)
Stock repurchases	(77,907)		—		—		—			—		(2,721)		(2,721)
Sale of treasury stock	185		—		5		—			—		1		6
Balance, September 30, 2019	3,566,146	$	39	$	3,784	$	100,009		$	2,243	$	(9,355)	$	96,720
See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

				Nine months ended September 30,
(Dollars in thousands)				2020		2019
Cash flows from operating activities:
Net earnings			$	5,398	$	7,057
Adjustments to reconcile net earnings to net cash provided by
operating activities:
	Provision for loan losses			1,100		—
	Depreciation and amortization			1,336		705
	Premium amortization and discount accretion, net			1,950		1,365
	Net gain on securities available-for-sale			(103)		(57)
	Net gain on sale of loans held for sale			(1,569)		(382)
	Net gain on other real estate owned			(52)		(59)
	Loans originated for sale			(60,173)		(22,051)
	Proceeds from sale of loans			58,707		21,585
	Increase in cash surrender value of bank-owned life insurance			(334)		(326)
	Income recognized from death benefit on bank-owned life insurance			(282)		—
	Net increase in other assets			(1,241)		(1,009)
	Net (decrease) increase in accrued expenses and other liabilities			(585)		1,671
		Net cash provided by operating activities		4,152		8,499

Cash flows from investing activities:
Proceeds from sales of securities available-for-sale				21,029		12,159
Proceeds from prepayments and maturities of securities available-for-sale				39,909		38,413
Purchase of securities available-for-sale				(140,714)		(55,212)
(Increase) decrease in loans, net				(11,562)		11,735
Net purchases of premises and equipment				(1,527)		(1,604)
Proceeds from bank-owned life insurance death benefit				694		—
(Increase) decrease in FHLB stock				(9)		32
Proceeds from sale of other real estate owned				151		394
		Net cash (used in) provided by investing activities		(92,029)		5,917

Cash flows from financing activities:
Net increase in noninterest-bearing deposits				42,264		1,630
Net increase (decrease) in interest-bearing deposits				57,564		(2,752)
Net increase (decrease) in federal funds purchased and securities sold
	under agreements to repurchase			1,001		(1,328)
Proceeds from sale of treasury stock				6		6
Stock repurchases				—		(2,721)
Dividends paid				(2,728)		(2,683)
		Net cash provided by (used in) financing activities		98,107		(7,848)

Net change in cash and cash equivalents				10,230		6,568
Cash and cash equivalents at beginning of period				92,443		65,076
Cash and cash equivalents at end of period			$	102,673	$	71,644

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest			$	3,011	$	3,037
Income taxes				678		1,499
Supplemental disclosure of non-cash transactions:
Initial recognition of operating lease right of use assets				—		891
Initial recognition of operating lease liabilities				—		889
Real estate acquired through foreclosure				99		82
See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individual and corporate customers in Lee County, Alabama and surrounding counties through its wholly owned subsidiary, AuburnBank (the “Bank”). The Company does not have any segments other than banking that are considered material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).

Revenue Recognition

On January 1, 2018, the Company implemented Accounting Standards Update (“ASU” or “updates”) 2014-09, Revenue from Contracts with Customers, codified at Accounting Standards Codification (“ASC”) 606. The Company adopted ASC 606 using the modified retrospective transition method. The majority of the Company’s revenue stream is generated from interest income on loans and deposits which are outside the scope of ASC 606.

The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, investment services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606:

 Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period.

 Gains on sales of OREO – A gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. In addition to the loan-to-value, the analysis is based on various other factors, including the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability.

Table of Contents

Reclassifications

Certain amounts reported in the prior period have been reclassified to conform to the current-period presentation. These reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 30, 2020. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first nine months of 2020, the Company adopted new guidance related to the following ASUs:

 ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement; and

 ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

Information about these pronouncements is described in more detail below.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption was permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. The Company adopted this ASU on January 1, 2020. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

ASU 2018- 15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption was permitted. The Company adopted this ASU on January 1, 2020. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Table of Contents

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30, 2020 and 2019, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective periods are presented below.

				Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands, except share and per share data)				2020		2019		2020		2019
Basic and diluted:
	Net earnings		$	1,936	$	2,207	$	5,398	$	7,057
	Weighted average common shares outstanding			3,566,239		3,568,287		3,566,184		3,586,642
		Net earnings per share	$	0.54	$	0.62	$	1.51	$	1.97