Auburn National Bancorporation (AUBN), the bank-holding company for AuburnBank, operates 9 branch locations in southeast Alabama with total assets of approximately $800 million. Founded in 1907, the Bank has operated continuously since it was established as the first financial institution in Auburn, Alabama. AuburnBank is community oriented and focuses primarily on offering commercial and consumer loan and deposit services to individuals, and small and middle market businesses.
AUBN had an interesting year in 2018: balance sheet growth was nonexistent, profitability improved, and the stock traded from $35 to $55 and back to $30. In June 2018, AUBN was added to the Russell 2000 Index — which can be a challenge for a stock that doesn’t have more than 4,000 shares trade on a typical day. The share price of AUBN had a version of a melt-up in June as it moved from ~$42 to ~$55 over the course of the month as the Russell rebalancing flows impacted the stock. Since then, the stock has sold off by nearly 35% (it was worse in December…) as the entire banking sector has traded lower and, I’d argue, selling in the Russell-linked funds put additional pressure on AUBN.
As a result, I think we are getting a nice opportunity to begin accumulating AUBN shares. It is an valuable community franchise and I think there are some nice near- and long-term drivers. AUBN’s P/TBV valuation (148%) is a touch on the high-end for my taste, but the P/E valuation (~14x) is manageable. I’m a buyer on any additional weakness.
AuburnBank has proven its mettle over the years. The bank was established in 1907 and managed well through the previous financial crisis; its worst year of profitability was 2009 when it printed a full-year ~4.25% ROE and full-year charge-offs peaked at 1.01% in 2012. AUBN has printed normalized earnings since FY 2011 and they’ve posted at least 0.90% ROA and 9.00% ROE every year since 2012. As positioned today, 1%+ ROA and 10%+ ROE profile is a reasonable forecast for returns during expansionary periods.
There is one ownership/management dynamic I’d like to address: it’s two largest shareholders are E.L. Spencer (former Chairman and CEO) and Emil Wright (former Vice Chairman). Mr. Spencer owns ~20% of the bank and is 87 years old. Dr. Wright owns ~11% and is 82 years old. I’ll address the elephant in the room: there could be a couple tax events on the horizon that impact AUBN shareholders should it remain a standalone entity over the next 5 years.
Primary drivers setting up AUBN shareholders for continued investment performance over the near- and longer-term:
- Compounding Earnings: Under the current regulatory environment, ROE should print a 10%+ rate and provide attractive growth and investment returns to shareholders.
- Dividend Income: AUBN pays a ~2.75% dividend yield (40% payout ratio).
- Potential M&A Upside: from an acquirer’s perspective, AUBN checks the boxes that most acquirers are searching for in this market.
- Deposit Funding: impressive, all around
- 28% of AUBN’s deposits are noninterest-bearing
- The cost of the interest-bearing deposits is 0.65% – somewhat high due to mix of time deposits, but interest-rate has only increased 3bps since 12/2017.
- The total cost of funds on AUBN’s $720 Million deposit book is 0.58%
- Loan/Deposit ratio is just ~64%, meaning an acquirer can tap into the excess (and cheap) deposit funding for loan/asset growth.
- Capital Positions: AUBN is over-capitalized (16% Tier 1 Ratio) and under-levered (11% leverage) – acquirer can right-size those positions.
- Asset Quality: credit book is in great shape; low 0.15% NPA/Assets metric along with a reserve balance 3.9x the NPAs. Bank management proved its underwriting strength thru the financial crisis when NPLs peaked at 3.1% and charge-offs peaked at 1.0%. Loan allocation to Construction & Land Development a touch high for me at 9.7%, but management ran that mix at 18% pre-crisis and the underwriting strength held up fine.
- Deposit Funding: impressive, all around
Some concerns that could pressure earnings/profitability/growth to keep an eye on:
- Economic Cycle – Hard to forecast how close we are to a turn in the credit cycle, but all banks and shareholders, no matter the quality of management, bear the risk of a downturn in local and national economies.
- Russell 2000 Member – Back in June 2018, AUBN was added to the Russell 2000 Index and, as a result of the low float, caused a melt-up scenario as shares moved from low/mid $40s to nearly $55 from early-June to mid-July. Given the concentrated ownership at AUBN and low daily liquidity, ETF rebalancing could cause outsized price swings in AUBN.
- Father Time – Don’t like having to point this out again, but there are two octogenarian shareholders holding nearly 35% of the shares. There are material estate/tax implications should one or both pass while AUBN is a standalone entity. This could also act as a catalyst for Mr. Spencer and/or Dr. Wright to advocate for a sale.
Bank Description & Geography
AuburnBank’s roots trace back to 1907, and the bank currently has a 9 branch network in and around the Auburn, AL area. Nicely adjacent to Birmingham, Atlanta, and Northern Florida market footprints.
- E.L. Spencer – 20.4%
- Dr. Emil Wright – 10.8%
- BlackRock – 2.9%
- Banc Funds – 1.5% (sold shares in Q3 2018)
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