Auburn National Bancorporation, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in millions of dollars unless stated otherwise. The company provides banking services primarily in East Alabama through AuburnBank.
Financial performance
- Third quarter: Net interest income was $4.85 million, up from $4.74 million a year earlier. Net earnings were $1.37 million ($0.38 per share), versus $1.24 million ($0.34 per share). Pretax earnings declined to $1.30 million from $1.50 million; a $63,000 income tax benefit helped lift net earnings.
- First nine months: Net interest income was $14.72 million, compared with $14.26 million; net earnings were $4.37 million ($1.20 per share), versus $4.47 million ($1.23 per share). Tax-equivalent net interest margin was 3.02%, up from 2.87%.
- Revenue and expenses: Nine-month total revenue, including tax-equivalent net interest income, was $18.61 million, down from $21.20 million. Noninterest income fell to $3.90 million from $6.95 million, mainly because securities gains declined by $2.05 million and mortgage lending income fell by $0.60 million. Noninterest expense declined to $12.35 million from $12.81 million.
- Credit costs: The nine-month provision for loan losses declined to $1.80 million from $2.93 million, while net charge-offs increased to $3.14 million from $2.34 million. The annualized nine-month net charge-off ratio was 1.12%, versus 0.79%.
- Cash flow: Operating cash flow was $11.01 million for the first nine months, compared with $7.17 million. Cash and cash equivalents ended the period at $55.65 million, up from $21.42 million at year-end 2010.
Financial position, capital and liquidity
- Total assets were $764.64 million at September 30, 2011, little changed from $763.83 million at December 31, 2010. Loans, net of unearned income, were $374.79 million; available-for-sale securities were $283.07 million.
- Total deposits were $609.07 million, compared with $607.13 million at year-end. Noninterest-bearing deposits increased to $99.15 million from $87.66 million; interest-bearing deposits declined to $509.92 million from $519.47 million.
- Long-term debt declined to $85.32 million from $93.33 million. It included $63.1 million of FHLB advances, $15.0 million of long-term repurchase agreements and $7.2 million of junior subordinated debentures. The Bank also had $229.5 million of available FHLB capacity, with $63.1 million outstanding, and $40.0 million of federal funds lines, with none outstanding.
- Stockholders’ equity was $64.42 million, up from $56.37 million, reflecting earnings and $5.87 million of other comprehensive income, partly offset by $2.19 million of dividends. Regulatory capital ratios were 8.87% Tier 1 leverage, 15.25% Tier 1 risk-based and 16.51% total risk-based; management classified the company as well capitalized.
- Management said liquidity was adequate for known contractual obligations and unfunded commitments over the next 12 months. The Bank had $38.9 million in unfunded loan commitments and $8.3 million in standby letters of credit.
Material changes, outlook and risks
- Asset quality remained a key concern. Nonperforming assets were $18.28 million (2.39% of assets), compared with $19.96 million at year-end; nonaccrual loans were $10.51 million. Potential problem loans rose to $17.97 million from $13.22 million at year-end.
- The allowance for loan losses fell to $6.34 million, or 1.69% of loans, from $7.68 million, or 2.05%. Coverage of nonperforming loans was 60%, down from 65%. Third-quarter net charge-offs were $2.01 million, including about $1.6 million related to one construction and land development loan; management also cited about $0.6 million of charge-offs on two A/B-note restructurings during the nine months.
- Troubled debt restructurings totaled $9.5 million, up from $7.6 million at year-end; $0.7 million were accruing. Management reported no significant additional-funding commitments to restructured borrowers and no TDRs modified in the prior 12 months that had subsequently defaulted by more than 90 days.
- Real-estate exposure is material: real-estate-secured loans were approximately 82.4% of the portfolio. Other real estate owned was $7.77 million, with property valuation and holding-cost risks. Management warned that continued weakness in local real estate and the broader economy could adversely affect credit quality.
- Unrealized securities gains improved to $5.8 million from unrealized losses of $3.5 million at year-end, largely due to lower long-term rates and narrower credit spreads. The company reported $0.49 million of gross unrealized securities losses at quarter-end and warned that deterioration in certain trust-preferred securities or issuers could result in future impairment charges. It held no securities issued by Jefferson County subject to that county’s November 2011 bankruptcy.
- Affordable-housing partnership losses were $0.46 million for the nine months, but associated federal tax credits contributed to a 1.99% effective tax rate, compared with 18.18% a year earlier. Mortgage lending income also declined with lower origination and sale volume.
- No specific earnings or revenue guidance was provided. Management’s forward-looking statements are subject to economic, interest-rate, real-estate, credit, regulatory and other risks. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track construction and land-development credit performance, charge-offs, potential problem loans and allowance coverage.
- Assess whether improving noninterest expense and net interest margin can offset lower securities gains and mortgage revenue.
- Review real estate owned valuations, disposition progress and the concentration of real-estate-secured lending.
- Verify the sustainability of the unusually low effective tax rate and the benefits and losses associated with affordable-housing investments.
- Monitor deposit mix, debt repayment, available borrowing capacity and the company’s capital ratios.