Auburn National Bancorporation, Inc. — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021. AuburnBank provides banking services primarily in East Alabama. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 / prior period |
|---|---|---|
| Net interest income (GAAP) | $5.94 million | $6.21 million |
| Noninterest income | $1.18 million | $1.24 million |
| Total revenue | $7.12 million | $7.45 million |
| Provision for loan losses | None | $0.40 million |
| Net earnings / diluted EPS | $2.01 million / $0.56 | $1.80 million / $0.50 |
| Tax-equivalent net interest margin | 2.66% | 3.23% |
| Total assets | $993.3 million | $956.6 million at Dec. 31, 2020 |
| Total deposits | $880.6 million | $839.8 million at Dec. 31, 2020 |
| Loans, net of unearned income | $461.9 million | $461.7 million at Dec. 31, 2020 |
| Allowance for loan losses | $5.7 million; 1.23% of loans | $5.6 million; 1.22% at Dec. 31, 2020 |
| Cash and cash equivalents | $121.6 million | $112.6 million at Dec. 31, 2020 |
Cash flow: Operating cash flow was $5.9 million; investing activities used $37.7 million, largely reflecting securities purchases and premises/equipment spending; financing activities provided $40.8 million, mainly from deposit growth. Cash and cash equivalents increased $9.0 million during the quarter.
Liquidity and debt: Deposits rose $40.8 million, or 5%, from year-end. The Bank reported $3.3 million in repurchase-agreement borrowings and no long-term debt. It had $286.9 million of available FHLB credit and $41.0 million in federal funds lines, with no federal funds line borrowings outstanding.
Capital and shareholder returns: AuburnBank reported a 9.99% tier 1 leverage ratio, 17.21% CET1 ratio, and 18.25% total risk-based capital ratio, above regulatory well-capitalized thresholds. The company paid a $0.26-per-share dividend. Stockholders’ equity was $103.6 million, down from $107.7 million at year-end.
Material changes and management commentary
- Net earnings increased 11% year over year, despite a 4% decline in tax-equivalent net interest income. Management attributed margin compression primarily to the low-rate environment and deposit-driven changes in asset mix; asset yields fell faster than funding costs.
- Mortgage lending income increased to $0.55 million from $0.23 million, reflecting refinancing activity and improved pricing margins. The prior-year quarter included $0.3 million of nontaxable bank-owned life insurance death benefits, contributing to lower year-over-year BOLI income in 2021.
- Noninterest expense declined to $4.69 million from $4.86 million, mainly due to lower costs related to redevelopment of the headquarters in downtown Auburn.
- Available-for-sale securities increased to $359.6 million from $335.2 million at year-end. Rising long-term rates contributed to a $5.1 million after-tax unrealized securities loss in other comprehensive income and the decline in equity.
- Loans excluding PPP balances fell $9.5 million, or 2%, from year-end. The portfolio remained concentrated in commercial real estate, which represented 55% of loans; real-estate-secured loans were approximately 79% of the portfolio.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management said net interest margin could remain under pressure from lower earning-asset yields and competition for quality loans.
- COVID-19 effects remained uncertain. At March 31, $32.4 million of loans, or 7% of total loans, had payment deferrals or interest-only arrangements. Hotel/motel loans were $48.3 million, and management identified hotels, shopping centers, retail, and restaurants as COVID-sensitive sectors.
- Nonperforming assets were $0.8 million, or 0.08% of assets, versus $0.5 million at year-end. Nonaccrual loans rose to $0.8 million; potential problem loans were $2.8 million, down from $2.9 million at year-end. The filing reported no loans 90 days or more past due and still accruing at quarter-end.
- The $5.7 million allowance included no provision expense for the quarter; management’s estimate remains subject to economic conditions, credit trends, and regulatory review. PPP loans totaled $28.7 million at quarter-end and carried an SBA guarantee.
- The filing identifies risks from local economic conditions and COVID-19, borrower repayment capacity, real estate values and concentrations, interest-rate changes, competition, regulation, cybersecurity, and the headquarters redevelopment. Management stated that liquidity was adequate for known obligations and expected needs over the next 12 months.
- The company adopted a $5 million stock repurchase program effective April 1, 2021; no shares were repurchased during Q1. Management reported no material subsequent events, and no pending or threatened legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether net interest margin stabilizes after falling to 2.66%, and how deposit growth and asset repricing affect future net interest income.
- Credit performance of COVID-sensitive commercial real estate exposures and the $32.4 million of modified loans, especially hotel/motel borrowers.
- Whether the allowance remains adequate as pandemic-related support and borrower relief change, and the potential effect of CECL adoption scheduled for January 2023.
- Future securities valuation changes and their effects on accumulated other comprehensive income, equity, and capital.
- Execution costs, timing, and rental-income prospects for the headquarters redevelopment, along with actual use of the new repurchase authorization.