Auburn National Bancorporation, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a bank holding company operating AuburnBank primarily in East Alabama.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income, GAAP | $6.041m | $5.868m | $17.953m | $18.150m |
| Net interest income, tax-equivalent | $6.158m | $5.990m | $18.308m | $18.519m |
| Noninterest income | $0.929m | $1.374m | $3.221m | $3.972m |
| Provision for loan losses | $0 | $0.250m | $(0.600)m | $1.100m |
| Noninterest expense | $4.709m | $4.653m | $14.294m | $14.468m |
| Net earnings | $1.875m | $1.936m | $6.167m | $5.398m |
| Diluted EPS | $0.53 | $0.54 | $1.74 | $1.51 |
| Net interest margin, tax-equivalent | 2.51% | 2.72% | 2.59% | 2.96% |
- Balance sheet at September 30: Assets were $1.066bn, up from $956.6m at year-end 2020. Deposits were $955.0m, up 14% from $839.8m. Loans, net of unearned income, were $453.2m, down from $461.7m. Available-for-sale securities were $407.5m, up from $335.2m.
- Credit and capital: Allowance for loan losses was $5.1m, or 1.13% of loans (1.16% excluding SBA-guaranteed PPP loans). Nonperforming assets were $486,000, 0.05% of assets. AuburnBank reported a 17.72% total risk-based capital ratio, 16.82% CET1 ratio and 9.57% tier 1 leverage ratio; each exceeded the stated well-capitalized thresholds.
- Cash flow and liquidity: Nine-month operating cash flow was $9.0m; investing cash flow was $(86.2)m and financing cash flow was $112.0m. Cash and cash equivalents ended at $147.4m, up $34.8m since year-end. The bank had no long-term debt, $3.3m of repurchase-agreement borrowings, $41.0m of available federal funds lines and a $310.7m available FHLB line. Management said liquidity was adequate for known obligations and expected needs over the next 12 months.
- Shareholder returns: The company paid $0.78 per share in dividends during the first nine months and repurchased 37,093 shares for $1.3m. Book value per share was $29.73.
Changes versus comparable periods
- Q3 net earnings edged down from $1.936m to $1.875m, despite higher tax-equivalent net interest income; lower mortgage lending income was the principal reported drag on noninterest income.
- For the first nine months, net earnings rose to $6.167m from $5.398m, while tax-equivalent net interest income declined 1% and total revenue declined to $21.174m from $22.122m. The lower loan-loss provision, including a $0.6m release versus a $1.1m provision in 2020, supported earnings.
- Margin compression reflected low market rates and a larger share of lower-yielding securities and cash as deposits grew. The nine-month net interest margin fell to 2.59% from 2.96%.
- Mortgage lending income fell to $1.241m from $1.615m for the nine months as refinancing activity slowed. Noninterest expense declined modestly, including lower headquarters-redevelopment costs; salaries and benefits increased.
- Unrealized losses on available-for-sale securities reduced nine-month other comprehensive income by $4.8m, compared with $5.3m of other comprehensive income in 2020. Stockholders’ equity declined to $104.9m from $107.7m at year-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management noted that net interest margin could remain under pressure from low asset yields and competition for quality loans.
- Management attributed the negative loan-loss provision to improved local economic conditions and asset quality, but emphasized that the allowance depends on estimates and could rise if conditions or borrower performance deteriorate. The allowance methodology uses subjective assumptions; the company continued lengthening its historical loss look-back period to 50 quarters.
- COVID-19 remains a source of uncertainty for borrowers, collateral values and future results. There were no COVID-19 loan deferrals outstanding at September 30, 2021, compared with $32.3m at December 31, 2020. PPP balances were $13.3m across 178 loans, with no allowance allocated because of the SBA guarantee.
- Credit concentration is notable: commercial real estate represented 56% of loans; hotel/motel loans were $44.4m and multifamily loans $41.3m. The loan portfolio is concentrated in Lee County and surrounding areas.
- Interest-rate risk, changing deposit costs, inflation-related expense pressure, competition, cybersecurity, real-estate market conditions and potential effects of COVID-19 are among the disclosed risks. Management reported compliance with its interest-rate sensitivity policy limits.
- The company was redeveloping its downtown Auburn headquarters; related costs and the timing and amount of future rental income were identified as risks. Management reported no material subsequent events, no material pending legal proceedings, and effective disclosure controls.
Investor verification priorities
- Verify the sustainability of the loan-loss reserve release and whether credit quality remains favorable as pandemic effects evolve.
- Track net interest margin, deposit growth and mix, and reinvestment yields on securities.
- Review commercial real-estate and hotel/motel exposures, local-market concentration, and potential problem loans.
- Assess the impact of securities fair-value changes on equity and capital, alongside dividends and repurchases.
- Monitor headquarters redevelopment costs, inflationary expense trends, and mortgage-origination income as refinancing activity changes.
- Confirm the eventual effect of adopting the expected-credit-loss standard (CECL), scheduled for January 2023, on reserves and reported results.