Auburn National Bancorporation, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
The filing covers the quarter ended March 31, 2020, compared with Q1 2019 for operating results and December 31, 2019 for balance-sheet changes. Auburn National provides banking services primarily in East Alabama through AuburnBank.
Financial results and position
- Earnings and revenue: Net earnings were $1.8 million, or $0.50 per diluted share, versus $2.5 million, or $0.70, in Q1 2019. Total revenue was $7.4 million versus $7.8 million. GAAP net interest income was $6.2 million, down from $6.6 million; tax-equivalent net interest income was $6.3 million, down 6%.
- Margins and expenses: Tax-equivalent net interest margin declined to 3.23% from 3.54%, as earning-asset yields fell; the cost of interest-bearing liabilities remained 0.78%. Noninterest expense rose to $4.9 million from $4.6 million. The efficiency ratio increased to 64.17% from 58.18%.
- Credit costs and asset quality: The company recorded a $400,000 loan-loss provision, compared with none a year earlier. The allowance was $4.9 million, or 1.10% of loans, versus $4.4 million, or 0.95%, at year-end 2019. Nonperforming assets were $215,000, or 0.05% of loans and OREO; nonaccrual loans were $116,000. There were no impaired loans or troubled debt restructurings at quarter-end.
- Balance sheet: Total assets were $856.5 million, up from $827.9 million at year-end. Net loans were $439.0 million, down from $456.5 million; available-for-sale securities were $280.4 million, up from $235.9 million. Deposits rose to $746.8 million from $724.2 million. Stockholders’ equity increased to $103.6 million from $98.3 million, including $4.3 million of after-tax other comprehensive income from securities valuation changes.
- Cash flow and liquidity: Operating cash flow was $1.8 million; investing activities used $21.6 million, largely reflecting securities purchases; financing activities provided $22.0 million. Cash and cash equivalents ended at $94.7 million, compared with $83.5 million at March 31, 2019. The Bank had $248 million of available FHLB credit and $41 million of federal-funds lines, with none drawn; it had no long-term debt. Management said liquidity was adequate for known obligations and reasonable funding needs.
- Capital and shareholder returns: Bank capital ratios were 11.17% tier 1 leverage, 17.77% CET1, and 18.72% total risk-based capital, all above “well-capitalized” thresholds. The company paid $0.255 per share in dividends during the quarter. No shares were repurchased in Q1.
Material changes and management commentary
- Average loans fell 5% year over year, and period-end net loans declined 4% from year-end, primarily due to commercial real estate paydowns. Management cited loan payoffs and lower market rates as drivers of reduced net interest income and margin.
- Management expected net interest income and margin to likely continue decreasing in 2020, in part because deposit-cost reductions may lag declines in earning-asset yields. It also expected the allowance to increase as the cumulative effects of COVID-19 became clearer. The filing gives no earnings or revenue guidance.
- COVID-19 had restricted economic activity in the company’s markets; management cautioned that Q1 results reflected only initial effects and might not indicate future performance. The company adjusted qualitative credit factors for pandemic-related economic conditions and higher local unemployment; without those adjustments, the calculated allowance would have been about $400,000 lower.
- As of April 30, the Bank had granted payment deferrals or interest-only relief on $43.3 million of loans, about 10% of the portfolio, and expected requests to increase in Q2. COVID-sensitive hotel/motel, shopping-center, other retail, and restaurant exposures totaled $119.7 million, or 27% of loans.
- Through April 30, 389 Paycheck Protection Program applications totaling more than $35 million had been approved by the SBA. The filing identifies potential litigation, operational, and SBA-guarantee risks related to PPP processing and eligibility.
- Noninterest income included $282,000 of non-taxable bank-owned life-insurance death-benefit income. Q1 2019 included a $300,000 pretax insurance-recovery gain. Q1 2020 occupancy and equipment costs included about $200,000 related to headquarters redevelopment, with additional 2020 costs expected.
Risks, contingencies, and other items
- COVID-19 could weaken borrowers, collateral values, loan demand, deposits, and credit quality; increase loan modifications, funding costs, and cybersecurity or fraud risks; and pressure earnings and capital. Commercial real estate is a major portfolio concentration, including hotel/motel loans.
- The Bank reported $55.7 million of unfunded loan commitments and $1.5 million of standby letters of credit. Mortgage loans serviced for Fannie Mae had a $269.0 million unpaid principal balance; no repurchases or pending make-whole requests were reported at March 31.
- Management reported no pending or threatened legal proceedings expected to have a material adverse effect. Disclosure controls were considered effective. The company stated that adoption of the current expected credit-loss standard was deferred to January 2023 and that the standard was expected to affect its credit-loss reserve.
Important facts for investors to verify
- Track subsequent loan deferrals, borrower performance, and allowance increases, especially in commercial real estate and COVID-sensitive sectors.
- Confirm the scale and terms of PPP originations, forgiveness, SBA funding, and any related claims or litigation.
- Monitor net interest margin, deposit pricing, loan balances, and management’s expectation of further margin pressure.
- Assess whether headquarters redevelopment costs and pandemic-related operating expenses exceed expectations.
- Review liquidity, unused funding facilities, capital ratios, and any changes in dividend or repurchase plans as conditions evolve.