Auburn National Bancorporation, Inc. — Q3 2020 Form 10-Q
Business context and period. Auburn National Bancorporation is a community bank holding company operating through AuburnBank, primarily in Lee County and surrounding areas of Alabama. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are with 2019 unless noted. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| GAAP net interest income | $5.87 | $6.57 | $18.15 | $19.78 |
| Noninterest income | $1.37 | $0.99 | $3.97 | $3.04 |
| Provision for loan losses | $0.25 | — | $1.10 | — |
| Noninterest expense | $4.65 | $4.82 | $14.47 | $14.06 |
| Net earnings | $1.94 | $2.21 | $5.40 | $7.06 |
| Diluted earnings per share | $0.54 | $0.62 | $1.51 | $1.97 |
- Margins and revenue: Tax-equivalent net interest margin was 2.72% in Q3 and 2.96% for the first nine months, versus 3.41% and 3.48%, respectively, in 2019. Nine-month total revenue was $22.12 million, down from $22.82 million. Mortgage lending income rose to $1.62 million from $0.64 million for the nine months, mainly on refinancing activity and improved pricing; deposit service charges declined.
- Balance sheet: Total assets were $937.9 million at September 30, up from $827.9 million at year-end 2019. Deposits increased to $824.0 million from $724.2 million. Loans, net of unearned income, were $472.5 million, including $36.5 million of PPP loans; excluding PPP, loans declined 5% from year-end. Available-for-sale securities increased to $320.9 million from $235.9 million.
- Credit and allowance: The allowance for loan losses was $5.6 million, or 1.18% of loans (1.28% excluding PPP), compared with $4.4 million, or 0.95%, at year-end. Nonperforming assets were $0.55 million, or 0.06% of assets; potential problem loans were $3.5 million. The filing reports $71,000 of loans at least 90 days past due and still accruing.
- Cash flow, debt, and liquidity: Nine-month operating cash flow was $4.2 million, investing cash flow was negative $92.0 million, and financing cash flow was positive $98.1 million. Cash and cash equivalents ended the period at $102.7 million, up from $92.4 million at year-end. The company reported no long-term debt; federal funds lines of $41.0 million were undrawn, and the Bank had $282.9 million of remaining FHLB capacity. Management said liquidity was adequate for known obligations and commitments over the next 12 months.
- Capital and shareholder returns: Stockholders’ equity was $106.3 million, up from $98.3 million. The Bank’s reported CET1 and total risk-based capital ratios were 17.70% and 18.77%. Dividends paid were $0.765 per share during the nine months. No shares were repurchased in Q3; a $5 million repurchase authorization remained available.
Material changes versus the prior comparable period
- Nine-month net earnings fell to $5.4 million from $7.1 million; Q3 net earnings fell to $1.9 million from $2.2 million. Lower net interest income and the new $1.1 million year-to-date loan-loss provision were principal pressures.
- The lower-rate environment reduced earning-asset yields more than funding costs declined. Management cited the 150-basis-point federal funds rate reduction late in Q1 and increased short-term liquidity from deposit growth.
- Deposits grew substantially, reflecting PPP proceeds, government stimulus, delayed tax payments, and reduced customer spending. The company deployed additional funding into securities.
- The allowance increased amid COVID-19-related economic uncertainty. Net recoveries were $89,000 for the first nine months, despite the higher provision.
- Headquarters redevelopment contributed approximately $0.8 million of year-to-date expenses, including revised depreciation estimates and temporary relocation costs.
Outlook, risks, and unusual items
- Management expected net interest income and margin to likely decline further in 2020 versus 2019, as deposit costs might fall more slowly than earning-asset yields. It also expected additional headquarters redevelopment expense in Q4. No quantified earnings or revenue guidance was provided.
- COVID-19 remained a material uncertainty. At September 30, the Bank had $87.1 million of loans with COVID-related payment deferrals or interest-only arrangements, down from $112.7 million at June 30. Management warned that prolonged economic effects could weaken credit quality, increase provisions and the allowance, and affect liquidity, capital, and earnings.
- COVID-sensitive sectors represented $120.8 million, or 26% of loans, including hotels/motels, shopping centers, retail, and restaurants. Hotels/motels were $53.8 million across loan categories; 78% of that CRE segment was modified. Concentration and borrower performance warrant monitoring.
- The Bank originated 422 PPP loans totaling $36.5 million and received approximately $1.5 million in fees to be recognized over the loans’ lives. PPP participation entails potential litigation and SBA-guarantee or forgiveness risks if program requirements were not met.
- The filing identifies risks from interest-rate changes, local and national economic conditions, real-estate values, borrower repayment capacity, cyber and operational disruptions, and possible expiration of pandemic relief measures. Management reported no material subsequent events and no pending or threatened legal proceedings expected to materially harm financial condition or results.
- There is an internal inconsistency in the reported tier 1 leverage ratio: the results summary and quarterly data show 10.38%, while another MD&A passage states 10.62%. The filing text does not provide a clear reconciled value.
Most important facts for investors to verify
- How loan performance and deferral outcomes develop after pandemic relief programs and payment accommodations expire, particularly in hotels, restaurants, retail, and shopping centers.
- Whether the allowance adequately reflects changing economic conditions and the eventual impact of adopting the expected-credit-loss standard, scheduled for January 2023.
- Whether net interest margin continues to compress and whether deposit costs can adjust sufficiently to offset lower asset yields.
- The resolution and timing of PPP forgiveness, fee recognition, and any SBA or litigation exposure.
- The correct September 30 tier 1 leverage ratio, given the conflicting 10.38% and 10.62% figures in the filing.