Auburn National Bancorporation, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a community banking holding company operating through AuburnBank, primarily in East Alabama.
Financial results and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income, GAAP | $6.57 million | $6.42 million | $19.78 million | $19.02 million |
| Noninterest income | $0.99 million | $0.79 million | $3.04 million | $2.48 million |
| Total revenue | $7.56 million | $7.21 million | $22.82 million | $21.51 million |
| Noninterest expense | $4.82 million | $4.75 million | $14.06 million | $13.48 million |
| Net earnings | $2.21 million | $1.98 million | $7.06 million | $6.43 million |
| Diluted earnings per share | $0.62 | $0.54 | $1.97 | $1.77 |
- For the first nine months, net interest income on a tax-equivalent basis rose 4% to $20.22 million. Net interest margin was 3.48%, up from 3.36%; average loans increased about 5% to $475.5 million.
- No loan-loss provision was recorded in either comparative period. The allowance was $4.81 million, or 1.03% of loans, at September 30.
- Nine-month operating cash flow was $8.51 million; investing activities provided $5.92 million and financing activities used $7.85 million. Cash and cash equivalents ended at $71.64 million, up from $65.08 million at year-end 2018.
- At September 30, total assets were $824.96 million, deposits $723.07 million, and stockholders’ equity $96.72 million. The company had no long-term debt; short-term repurchase-agreement borrowings were $0.97 million.
- Bank capital ratios were strong: total risk-based capital 17.96%, CET1 17.06%, and tier 1 leverage 11.22%, each above the stated well-capitalized thresholds.
Material changes and operating trends
- Nine-month net earnings increased about 10%, supported by stronger net interest income and noninterest income. Q3 earnings rose about 12% year over year.
- Noninterest income grew mainly from higher mortgage lending income and a $0.3 million insurance recovery related to a $0.4 million loss recorded in Q3 2018. Q3 also included $44,000 of net securities gains.
- Noninterest expense increased about 4% year to date, chiefly due to salaries and benefits. Deposit funding costs rose: the average cost of interest-bearing deposits was 0.79% for the nine-month period versus 0.66% in 2018.
- Loans, net of unearned income, declined to $465.1 million from $476.9 million at December 2018, mainly reflecting lower C&I and residential real estate balances, partly offset by CRE growth. Total deposits were broadly stable, down $1.1 million from year-end.
- Available-for-sale securities increased to $251.2 million from $239.8 million. Accumulated other comprehensive income improved to $2.24 million from a $3.76 million loss, reflecting securities valuation gains as long-term rates declined.
- The company repurchased 77,907 shares for $2.72 million during the first nine months, at an average $34.92 per share, and paid $0.75 per share in dividends.
Outlook, risks and contingencies
- Management expected net interest margin to decrease slightly for the remainder of 2019, while net interest income was expected to increase versus 2018, primarily from higher average loan volumes. Management cited competitive pricing and the risk that deposit costs may decline more slowly than asset yields if short-term rates fall.
- Management said liquidity was adequate for known obligations and expected commitments over the next 12 months. Available funding included a $251 million FHLB line and $41 million in federal funds lines; neither federal funds line was drawn at quarter-end.
- Outstanding unfunded loan commitments were $57.8 million and standby letters of credit $2.2 million. These amounts do not necessarily represent future cash needs because commitments may expire undrawn.
- Credit exposure is concentrated in real estate: approximately 86.8% of loans were real-estate secured, and CRE represented 58% of the portfolio. Nonperforming assets were $174,000 (0.02% of assets); potential problem loans were $4.8 million, down from $6.5 million at year-end. The allowance depends on estimates and could require increases if economic, borrower, or collateral conditions deteriorate.
- The bank’s investment securities had $476,000 of gross unrealized losses, which management attributed primarily to interest rates rather than credit concerns; management did not intend, and did not expect to be required, to sell before recovery. Future impairment remains a stated risk.
- The company was preparing for the expected-credit-loss standard (CECL), which management anticipated could affect the credit-loss reserve. The filing noted that the FASB had approved a proposed delay for smaller reporting companies, applicable to the company, with finalization then pending.
- Mortgage repurchase or make-whole claims are a contingent risk. No loans were repurchased and no requests were pending at quarter-end; management considered exposure not material and reported 99% of Fannie Mae-serviced loans current.
- Management reported no material subsequent events or pending legal proceedings expected to materially adversely affect the company. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether loan volumes and net interest income meet management’s stated outlook, and how falling rates affect margins and deposit costs.
- Credit quality trends in CRE and residential lending, including potential problem loans, delinquency levels, and allowance adequacy.
- The timing and quantified impact of CECL adoption on the allowance and regulatory capital.
- Liquidity and deposit trends, including funding needs if loan growth resumes or commitments are drawn.
- Sustainability of mortgage refinancing income, insurance-related gains, securities gains, and share repurchases when assessing recurring earnings.