Auburn National Bancorporation, Inc. — Q1 2019 10-Q
Business context and period. Auburn National provides banking services through AuburnBank, primarily in Lee County and surrounding East Alabama communities. This unaudited filing covers the quarter ended March 31, 2019; comparative earnings and cash-flow figures are for Q1 2018. Balance-sheet comparisons are against December 31, 2018. Dollar amounts below are in millions unless noted.
Financial results and position
- Earnings and revenue: Net earnings were $2.54 million, up 15.8% from $2.20 million; diluted EPS was $0.70 versus $0.60. Total revenue was $7.78 million versus $7.14 million. GAAP net interest income increased to $6.62 million from $6.28 million; tax-equivalent net interest income rose 5% to $6.77 million.
- Margins and expenses: Tax-equivalent net interest margin expanded to 3.54% from 3.29%, as loan and short-term asset yields improved. Noninterest income increased to $1.16 million from $0.85 million, while noninterest expense rose to $4.61 million from $4.40 million, primarily reflecting routine salary and benefit increases. Effective tax rates were approximately 19.75% in both periods.
- Cash flow: Operating activities provided $2.55 million, versus $3.10 million in Q1 2018. Investing activities provided $4.15 million. Financing activities provided $11.73 million, including deposit growth, partly offset by $2.15 million of share repurchases and $0.90 million of dividends. Cash and cash equivalents increased $18.43 million to $83.50 million.
- Assets, loans, and deposits: Total assets were $835.0 million, up from $818.1 million at year-end. Total deposits rose to $739.6 million from $724.2 million; noninterest-bearing deposits were $212.3 million, or 28.7% of deposits. Loans, net of unearned income, were $472.7 million, down from $476.9 million at year-end but up from $443.8 million at March 31, 2018. Average loans grew 6% year over year.
- Credit quality: The allowance for loan losses was $4.81 million, or 1.02% of loans, compared with 1.00% at year-end; no loan-loss provision was recorded in either Q1 2019 or Q1 2018. Net recoveries were $18,000. Nonperforming assets were $341,000, or 0.07% of loans and OREO; nonaccrual loans were $169,000, with no loans 90 days past due and still accruing. Potential problem loans totaled $5.48 million, down from $6.53 million at year-end.
- Debt, liquidity, and capital: The company had no long-term debt at March 31; repurchase-agreement borrowings were $1.63 million. AuburnBank had $41.0 million in available federal funds lines and $239.5 million of available FHLB credit. Management said liquidity was adequate for known obligations and commitments over the next 12 months. Bank capital ratios remained above “well-capitalized” thresholds: total risk-based capital 17.06%, CET1 16.17%, and tier 1 leverage 10.87%.
Material changes and unusual items
- Noninterest income included a $0.3 million pretax insurance recovery related to a $0.4 million pretax loss from misappropriation of assets in Q3 2018. This recovery was a major contributor to the year-over-year increase in noninterest income.
- Unrealized gains on available-for-sale securities generated $2.39 million of other comprehensive income, versus a $3.12 million loss in Q1 2018. Accumulated other comprehensive loss improved to $1.37 million from $3.76 million at year-end.
- The company repurchased 62,518 shares for $2.15 million at an average $34.34 per share under a new $5 million program; approximately $2.85 million remained authorized at March 31. The quarterly dividend was $0.25 per share, up from $0.24 a year earlier.
- Loans are heavily real-estate focused: approximately 87.4% were secured by real estate, and commercial real estate represented 56% of total loans. The largest disclosed industry concentrations included residential-property lessors ($48.5 million), hotels/motels ($45.2 million), and multifamily properties ($40.1 million).
Outlook, risks, and contingencies
- Management expected net interest income to increase in 2019 versus 2018, primarily from higher average loan balances and an improved funding mix. It also anticipated a challenging, competitive environment and identified possible margin pressure from competition for quality loans, lower asset yields, and higher funding costs.
- Interest-rate, borrower-credit, local real-estate, and concentration risks are material considerations. Management’s interest-rate simulations were within policy limits at quarter-end; the filing cautions that modeled sensitivity may not predict actual results.
- At March 31, the Bank had $63.2 million of unfunded loan commitments and $5.9 million of standby letters of credit. These amounts are not necessarily future cash requirements, as some commitments may expire unused.
- The company serviced $288.4 million of residential mortgages sold to Fannie Mae. It reported no repurchase requests pending and no repurchases during the quarter; management said exposure was not material, noting 99% of those serviced loans were current. Investor claims could increase, and repurchases or make-whole payments may be required for certain representation, warranty, or servicing breaches.
- Management reported no pending or threatened legal proceedings expected to have a material adverse effect. Adoption of new lease and hedge-accounting guidance had no material financial-statement impact. The company was evaluating the effect of the forthcoming credit-loss standard (CECL).
Most important facts for investors to verify
- Whether management’s expected 2019 net interest income growth is supported by loan growth and deposit pricing, given rising interest-bearing deposit costs.
- Credit performance and allowance adequacy, especially for real-estate-secured lending, industry concentrations, and the $5.48 million of potential problem loans.
- How much of earnings growth is attributable to the nonrecurring insurance recovery, and whether recurring noninterest income and expense trends support earnings.
- Liquidity and capital capacity after share repurchases and dividends, alongside the $63.2 million of unfunded loan commitments and available borrowing facilities.
- Future mortgage repurchase or make-whole claims and the eventual impact of CECL on the allowance and reported earnings.