AUBURN NATIONAL BANCORPORATION, INC (AUBN) stock intrinsic value fair value estimate & owner earnings analysis

Auburn National Bancorporation is the holding company for AuburnBank, a community bank founded in 1907 that does essentially all of its business in East Alabama: Auburn and Opelika in Lee County, Notasulga, Valley, and a loan production office in Phenix City. At the end of 2025 it had about $1.02 billion of assets, $565 million of loans, $233 million of securities, $923 million of deposits and $92 million of shareholders' equity ($26.35 a share, held down by roughly $5.55 a share of unrealized losses on older, low-yielding bonds that reverse as those bonds mature). Loans are 58% commercial real estate, 21% residential, 10% construction and land and 10% commercial and industrial. By June 30, 2026 assets had grown to $1.086 billion and deposits to $988 million. How we measure earnings. For a bank, deposits are the raw material of the business rather than debt, so we measure owner earnings as net income per share and subtract no borrowings; stock compensation is already inside reported earnings. Per share: $2.24 (2016), $2.15 (2017), $2.42 (2018), $2.72 (2019), $2.09 (2020), $2.27 (2021), $2.95 (2022), $0.40 (2023), $1.83 (2024), $2.08 (2025). Two years are distorted: 2022 was lifted by a $3.2 million land-sale gain and a $1.6 million payroll tax credit (core about $1.87), and 2023 was cut by a $6.3 million loss on selling $111 million of low-yield bonds to retire 5.38% wholesale funding (core about $1.82). Excluding those two, the median of the other eight years is about $2.20, and the median of 2020, 2021, 2024 and 2025 is about $2.09. The central fact is that earnings per share ended the decade almost where they began ($2.24 to $2.08) even though assets grew about a quarter; rising costs absorbed the growth. What has changed since our September review. The business has improved on the numbers. Net interest income rose 8.6% in the first half of 2026 ($15.6 million versus $14.4 million) while operating expenses rose 3.7%, and earnings per share were $1.29 versus $0.96 a year earlier. Quarterly earnings have stepped up from about $0.44 and $0.52 in the first half of 2025, to about $0.56 a quarter in the second half, to $0.63 and $0.66 in the first two quarters of 2026. Three straight quarters above the old normal is enough for us to lift the starting level for the next twelve months to $2.35. The earlier figures were built on a different basis and are not comparable, so we do not line them up against today's. Growth-path check. Owner earnings grew 13.7% in 2025 ($2.08 versus $1.83). Our base case assumes about 13% for year one ($2.35 versus $2.08), at or below the last full-year pace and below the last four quarters' actual $2.41, because the bank's own interest-rate model shows net interest income falling about 2% for each 1 point cut in rates, and the Federal Reserve cut 175 basis points between September 2024 and December 2025. Base case: $40.54 a share. Year one earnings $2.35. After that we credit only 1% a year for four years. The evidence: the bond book runs off by a contractual $22-26 million a year (22.0 million in 2025, 25.6 million in 2024) and is reinvested at today's higher yields (the $19.4 million after-tax unrealized loss on these bonds shows how low their old coupons are), which we estimate is worth about $0.10 a share a year gross; but operating costs rose 3.5% in 2025 and 3.7% in the first half of 2026, and over the last decade rising costs absorbed the gains. We then hold earnings flat at about $2.45 for the rest of the ten years and beyond, because a bank operating since 1907 whose earnings have held in a narrow range for a decade is evidence of persistence, not of growth. Not credited: loan growth (loans were flat to down in 2025), share gains, cost savings and any further margin expansion. A bank has no debt to subtract: the business is worth about $40.54 a share and it owes no borrowings (no Federal Home Loan Bank advances outstanding at December 31, 2025), so the difference is $40.54. Bear case: $22.53 a share. Earnings fall back to $1.85, the 2024 and core 2022-2023 level, in years one and two as deposit costs and rate cuts erode the margin. Then a full credit cycle of the kind Southeast community banks suffered in 2009-2012. Losses are sized from that episode on this loan mix: about 3.5% on commercial real estate, 12% on construction and land, 3% on residential and 3% on commercial loans, about 4% of loans in total, or $22.6 million over four years, plus lifting the loan loss reserve from 1.27% to about 2.0% of loans; total provisions are about $27 million, or $6.7 million a year against roughly $7 million a year of pre-provision profit after the downturn's squeeze. Earnings drop to about $0.10 a share for four years (years three to six), recover to $1.40 in year seven and $1.85 after. Capital stays above regulatory requirements because earnings fall to near break-even rather than deep losses, so no dilution is assumed. After year ten the bank is assumed to drift down 1% a year, the actual ten-year record. The business is worth $22.53 a share, it owes no borrowings, so the difference is $22.53, below book value of $26.35, which fits a case with four years of near-zero earnings. Bull case: $52.01 a share. The current run rate holds: $2.64 in year one (the second quarter of 2026 annualized). The bond book keeps repricing, with its roughly $233 million rolling over in about ten years, and earnings compound 3% a year for seven years, then flat at about $3.25. This is the bank's own mechanism executing without cost slippage. We do not credit any acquisition, a new market or an efficiency-ratio target (70% today). Balance sheet and credit. Nonperforming loans are 0.09% of loans, net charge-offs were 0.07% of average loans in 2025, the loan loss reserve is 1.27% of loans (about fifteen times nonperforming loans), there is no preferred stock and no meaningful borrowings. Cash was $148 million and securities $233 million at year-end. The things to watch are the commercial real estate concentration, and that 43% of deposits ($393 million) are uninsured, of which 58% are state, county and local government deposits secured by pledged securities. Loss of those deposits would have to be replaced from cash and securities. The 2025 provision was tiny ($31 thousand) and came from two individually reviewed loans. What would make this wrong: a margin that gives back the 2025-26 gains faster than costs are controlled; a regional commercial real estate downturn larger than the four-percent-of-loans cycle in the bear case; or a loss of government deposits. We tested the year-one level against the filings: first-half 2026 profit before provisions and taxes was $5.4 million versus $4.3 million a year earlier, net interest income rose again from the first quarter ($7.7 million) to the second ($7.9 million), and credit remains clean, so we kept $2.35. How we reached the margin-of-safety price: $18.50. We are fairly sure of the earnings level: a plain bank whose core earnings have stayed in a narrow $1.80-$2.70 range for ten years, with four rising quarters behind the new level. We are less sure of any growth. The worst plausible outcome is the bear case or worse: a commercial real estate and construction downturn plus a deposit squeeze at the same time. The bank would survive it, with no borrowings, large liquidity and high capital, but earnings could be near zero for years and the shares could trade far below book value. If we are wrong about margin and earnings settle at $1.85, and wrong about credit and the cycle costs more than modeled, the shares are worth roughly the bear value of $22.53 at best, so a price above the low twenties leaves no cushion. The price assumes a three-to-four-year holding period for the price to reflect value, during which the business pays $1.08 a year in dividends, a 5.8% yield at $18.50 with a payout of about half of earnings. From $18.50, dividends of roughly $3.20 over three years plus a price of about $29.50 (roughly book value after three years of retained earnings and bond-loss recovery, with earnings near $2.35) implies about 21% a year; if earnings only hold at $1.85 and the price reaches $26, that outcome implies about 16% a year. The margin-of-safety price is not set higher, because a higher price would depend on earnings growth or an exit price that this bank has not delivered over the last decade.