Auburn National Bancorporation, Inc. — Q3 2015 Form 10-Q
Business context and period. Auburn National is a bank holding company operating through AuburnBank, serving East Alabama, including Lee County and surrounding areas. This unaudited filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net earnings were $1.91 million, or $0.52 per diluted share, versus $1.87 million and $0.51 a year earlier. GAAP net interest income was $5.67 million (up 4%); net interest margin was 3.13%, compared with 3.16% in Q3 2014. Noninterest income was $1.06 million and noninterest expense was $3.89 million.
- First nine months: Net earnings were $5.92 million, or $1.63 per share, versus $5.55 million and $1.52 in 2014. GAAP net interest income was $16.98 million, up 6%; tax-equivalent net interest income was $18.00 million, up 6% (up 5% excluding $0.2 million in recoveries on previously impaired loans). Net interest margin was 3.19%, versus 3.15%. Management-reported total revenue, calculated using tax-equivalent net interest income, was $20.53 million, up from $18.83 million.
- Drivers and expenses: Loan growth, lower deposit funding costs, and reduced higher-cost wholesale funding supported net interest income. Nine-month noninterest income increased to $3.54 million, primarily reflecting $0.3 million of additional bank-owned life insurance income from death benefits and a $0.5 million year-over-year improvement in securities gains/losses. Noninterest expense rose to $12.24 million, including $0.36 million of penalties associated with early repayment of debt.
- Cash flow: Operating activities provided $6.40 million in the first nine months, down from $13.66 million in 2014; investing activities used $2.22 million versus providing $4.84 million; financing activities provided $21.92 million versus $10.54 million. Cash and cash equivalents increased $26.10 million to $109.60 million.
- Balance sheet and liquidity: Total assets were $817.99 million, up from $789.23 million at year-end. Loans, net of unearned income, rose to $422.57 million from $402.95 million; deposits increased to $724.31 million from $693.39 million, including noninterest-bearing deposits of $155.61 million, up from $130.16 million. Available-for-sale securities declined to $250.14 million from $267.60 million. The Bank reported $237.1 million of available FHLB borrowing capacity and $41.0 million in available federal funds lines, with none drawn on the latter at quarter-end.
- Debt and capital: Long-term debt was $7.22 million, down from $12.22 million after repayment of a $5.0 million FHLB advance; $7.2 million of trust-preferred-related junior subordinated debentures remained outstanding. Stockholders’ equity was $79.60 million. Regulatory ratios were 10.37% Tier 1 leverage, 15.01% CET1, 16.29% Tier 1 risk-based, and 17.33% total risk-based; the Company stated it was well capitalized.
- Credit quality: The allowance for loan losses was $5.13 million, or 1.21% of loans, versus $4.84 million and 1.20% at year-end. Nine-month net recoveries were $91,000, compared with $414,000 of net charge-offs in 2014. However, nonperforming assets increased to $3.93 million from $1.65 million at year-end, principally due to a $2.1 million commercial real estate loan placed on nonaccrual. Nonperforming loans were 0.86% of loans; allowance coverage of nonperforming loans fell to 140% from 433%. Potential problem loans were $6.5 million, down from $7.8 million at year-end.
Material changes versus comparable periods
- Nine-month earnings and EPS improved year over year, with higher net interest income and noninterest income partly offset by higher operating expenses and a $0.2 million provision for loan losses; the prior-year period had a $0.1 million provision benefit.
- Average loans increased 6% and average deposits increased 4% year over year. The cost of interest-bearing liabilities declined to 0.79% from 0.95%, while the yield on interest-earning assets declined to 3.79% from 3.90%.
- Loan growth and deposit growth were accompanied by higher nonperforming assets, chiefly from the newly nonaccrual CRE credit. CRE loans were approximately 48% of the loan portfolio, and loans secured by real estate were approximately 85%.
- Securities declined as mortgage-backed security principal repayments were not fully reinvested. Unrealized securities losses totaled $0.81 million at September 30, 2015, compared with $1.48 million at year-end; management attributed these primarily to interest-rate movements and said it did not expect to be forced to sell before recovery.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management noted potential net interest margin pressure from low reinvestment yields, competition for quality loans, and limited room to reduce already-low deposit costs. Interest-rate changes, local economic and real estate conditions, borrower credit performance, and deposit competition are cited risks.
- Management said liquidity was adequate for known obligations and expected requirements over the next 12 months. At September 30, outstanding unfunded loan commitments were $58.7 million and standby letters of credit were $8.2 million; these do not necessarily represent future cash outflows.
- Mortgage sale agreements include representations and warranties that may require loan repurchases or reimbursement of investor losses. During the first nine months, the Company repurchased two loans totaling $287,000 and paid approximately $37,000 on a make-whole request. It also voluntarily repurchased ten investment-property loans to one borrower totaling $4.0 million; management reported additional controls and reviews and said it believed material exposure was not present. There were no pending repurchase or make-whole requests at quarter-end, and 99% of Fannie Mae-serviced residential loans were current.
- Other notable items include $0.36 million in debt prepayment penalties, a $0.28 million bank-owned life insurance death-benefit receipt in the nine-month cash-flow disclosures, and $0.23 million of impaired-loan interest recoveries. Management said no material subsequent events or material pending legal proceedings were identified.
- Key estimates subject to judgment include the loan-loss allowance, securities impairment, fair values, OREO valuations, and deferred tax assets. Management reported interest-rate simulation and economic-value-of-equity results within its policy limits; these models depend on assumptions and are not guarantees of future results.
Important facts for investors to verify
- Track the $2.1 million nonaccrual CRE loan, related collateral and allowance, and whether nonperforming assets continue to rise.
- Review loan growth and real-estate concentration, including CRE and residential-property exposures, and the movement in criticized or potential problem loans.
- Assess whether core net interest income growth persists without the $0.2 million of impaired-loan interest recoveries, given margin pressure and falling asset yields.
- Monitor expense trends and whether the benefit from lower funding costs offsets debt-repayment costs and operating expense increases.
- Follow mortgage repurchase and make-whole claims, especially exposure related to the borrower whose ten loans were voluntarily repurchased, and the effectiveness of added controls.
- Confirm capital and liquidity remain strong as lending commitments are funded and deposits, securities, and borrowing needs change.