Auburn National Bancorporation, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company is a community banking holding company serving East Alabama through AuburnBank.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income, GAAP | $6.1 million | $6.6 million | $12.3 million | $13.2 million |
| Total revenue | $7.4 million | $7.5 million | $14.9 million | $15.3 million |
| Provision for loan losses | $0.45 million | — | $0.85 million | — |
| Net earnings | $1.7 million | $2.3 million | $3.5 million | $4.9 million |
| Diluted earnings per share | $0.47 | $0.64 | $0.97 | $1.35 |
Tax-equivalent net interest margin was 2.95% in Q2 and 3.09% for the first half, down from 3.50% and 3.52%, respectively, in 2019. Management attributed the pressure primarily to lower interest rates and increased short-term liquidity from deposit inflows. Mortgage lending income rose with refinancing activity, while service charges declined amid reduced customer spending. First-half noninterest expense increased to $9.8 million from $9.2 million, mainly due to headquarters redevelopment costs.
Financial position, cash flow and capital
- Total assets were $942.9 million at June 30, 2020, up from $827.9 million at year-end 2019. Deposits rose to $829.8 million from $724.2 million, reflecting PPP-related deposits, stimulus payments, delayed tax payments and lower customer spending.
- Cash and cash equivalents were $137.8 million, versus $92.4 million at year-end. First-half operating cash flow was $3.8 million; investing activities used $63.1 million, primarily reflecting $91.3 million of securities purchases; financing activities provided $104.8 million, largely from deposit growth.
- Loans, net of unearned income, were $464.3 million, including $36.5 million in PPP loans. Excluding PPP loans, balances declined $32.0 million, or 7%, from year-end.
- The allowance for loan losses was $5.3 million, or 1.14% of loans (1.24% excluding PPP loans), compared with $4.4 million, or 0.95%, at year-end. Nonperforming assets were $0.7 million, or 0.07% of assets.
- The company reported no long-term debt. Short-term repurchase-agreement borrowings were $2.0 million. AuburnBank had $41.0 million of federal funds lines and $256.5 million of available FHLB credit; management said liquidity was adequate for expected needs over the next 12 months.
- AuburnBank’s capital ratios exceeded well-capitalized thresholds: total risk-based capital 19.04%, CET1 18.00%, and tier 1 leverage 10.62%. First-half dividends were $0.51 per share.
Material changes and outlook
- Net earnings declined year over year as lower rates and average loan balances reduced net interest income, while the company added $0.85 million of loan-loss provision in response to COVID-19-related economic uncertainty.
- Management said net interest income and margin would likely continue to decrease in 2020 versus 2019, as deposit-cost reductions may lag declines in earning-asset yields. It also expected additional 2020 expenses for headquarters redevelopment.
- The company had granted payment deferrals or interest-only terms on $112.7 million of loans, about 24% of total loans. Modified balances included $42.1 million of hotel/motel loans (79% of that segment), $17.0 million of shopping-center loans (50%), and $11.0 million of restaurant loans (60%). Management said the allowance could increase as pandemic effects are more fully realized.
- AuburnBank originated 422 PPP loans totaling $36.5 million and collected about $1.5 million in fees to be recognized over the loans’ lives. The filing identifies potential PPP litigation, SBA-guarantee, eligibility and forgiveness risks.
- COVID-19 risks include borrower stress, collateral-value declines, further loan modifications and credit losses, lower fee income, interest-rate pressure, and operational and cybersecurity risks. Commercial real estate represented about 54% of loans; identified higher-risk COVID-affected sectors totaled $119.8 million, or 26% of loans.
- Unusual items included $0.3 million of nontaxable bank-owned life insurance death benefits in the first half and headquarters redevelopment costs. Management reported no material subsequent events, no material pending legal proceedings, and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether borrower performance, deferral expirations and COVID-19 conditions require further provision increases or changes to the allowance.
- Progress in restoring net interest margin and the pace of deposit repricing as low-rate conditions persist.
- Credit quality and concentration exposure in hotels, shopping centers, restaurants and other commercial real estate, including modified loans.
- PPP fee recognition, loan forgiveness outcomes, SBA-guarantee compliance and any related litigation.
- Additional costs and timing of the headquarters redevelopment, and the sustainability of earnings and dividends.