Auburn National Bancorporation, Inc. — 2016 Q3 Form 10-Q
Business context and reporting period. Community banking company headquartered in Auburn, Alabama, serving East Alabama through AuburnBank. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue, as reported | $6.671 | $6.726 | $19.887 | $20.525 |
| Net interest income (GAAP) | $5.608 | $5.670 | $16.997 | $16.981 |
| Net interest income (tax-equivalent) | $5.924 | $6.011 | $17.957 | $17.995 |
| Net earnings | $1.951 | $1.910 | $6.073 | $5.922 |
| Diluted earnings per share | $0.54 | $0.52 | $1.67 | $1.63 |
| Net interest margin (tax-equivalent) | 2.94% | 3.13% | 3.05% | 3.19% |
- Balance sheet: Total assets were $851.7 million, up from $817.2 million at year-end 2015. Loans, net of unearned income, were $427.2 million versus $426.4 million; available-for-sale securities were $249.6 million versus $241.7 million.
- Funding and liquidity: Deposits reached $751.9 million, up from $723.6 million; noninterest-bearing deposits were $179.6 million. Cash and cash equivalents were $141.3 million, compared with $113.9 million at year-end. Nine-month operating cash flow was $8.2 million; cash increased $27.3 million overall. The Bank reported $249.7 million of available FHLB capacity and $41.0 million of federal funds lines, with none drawn on those lines.
- Debt and capital: Long-term debt was $7.2 million at quarter-end, all junior subordinated debentures; short-term repurchase-agreement borrowings were $3.5 million. Total risk-based capital was 17.97%, Tier 1 leverage 10.36%, and stockholders’ equity $85.1 million. Management stated the Company remained well capitalized.
- Credit quality: Allowance for loan losses was $4.6 million, or 1.07% of loans, versus $4.3 million, or 1.01%, at year-end. Nonperforming assets declined to $1.65 million from $2.97 million; nonperforming loans were 0.38% of total loans. Potential problem loans were $6.4 million, up from $5.9 million at year-end.
- Cash dividends: The Company paid $0.675 per share in dividends during the first nine months, totaling $2.5 million.
Material changes versus comparable periods
- Nine-month net earnings rose to $6.1 million from $5.9 million, while reported total revenue fell to $19.9 million from $20.5 million. Q3 earnings improved to $2.0 million from $1.9 million even as revenue was slightly lower.
- Nine-month tax-equivalent net interest income was nearly unchanged. Management attributed underlying improvement, excluding $0.2 million of prior-year impaired-loan interest recoveries, to lower deposit costs and reduced higher-cost wholesale funding. However, net interest margin contracted year over year, including a 19-basis-point Q3 decline.
- Nine-month noninterest income decreased by $0.65 million, mainly due to lower mortgage lending income and the absence of prior-year bank-owned life insurance death benefits; higher securities gains partly offset the decline. Noninterest expense decreased modestly, including no 2016 debt-prepayment penalty versus $0.36 million in 2015, partly offset by higher salaries.
- The 2016 nine-month negative provision for loan losses was $0.6 million, compared with a $0.2 million provision in 2015. Management cited $1.2 million recovered on payoff of a nonperforming construction and land-development loan; nine-month net recoveries were $0.89 million.
- Average loans and deposits for the first nine months increased 6% and 4%, respectively, year over year. At quarter-end, noninterest-bearing deposits represented 23.9% of deposits, up from 21.7% at year-end.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it aims to grow loans, manage deposit pricing, and reduce higher-cost funding, while noting pressure from lower securities reinvestment yields, competition for quality loans, and limited scope to reduce already-low deposit costs.
- In October 2016, after quarter-end, the Company purchased and cancelled $4.0 million par value of its trust preferred securities and an equivalent amount of related debt, realizing a $0.8 million pretax gain. It reported $3.2 million of junior subordinated debentures and $3.0 million of related trust preferred securities remaining.
- Interest-rate, credit, local real-estate, funding, regulatory, competition, cybersecurity, and valuation risks are discussed. Loans are concentrated in East Alabama; commercial real estate is approximately 49% of the portfolio, and real-estate-secured loans approximately 86%.
- Unfunded loan commitments were $51.5 million and standby letters of credit $7.0 million. Mortgage loans serviced for Fannie Mae had an unpaid principal balance of $343.4 million; one current loan with a $198,000 balance was repurchased during the first nine months, and no repurchase or make-whole requests were pending at quarter-end.
- Management reported effective disclosure controls and no material adverse pending or threatened legal proceedings. The filing cautions that estimates, including the loan-loss allowance and asset valuations, are uncertain and actual results may differ.
Most important facts for investors to verify
- Whether margin pressure continues and loan growth can offset lower asset yields.
- The sustainability of earnings given the negative loan-loss provision and the large recovery on one construction loan.
- Trends in potential problem loans, especially residential real estate and commercial real estate exposures, and the adequacy of the allowance.
- The realized effect of the October debt extinguishment, including the $0.8 million gain and remaining trust-preferred-related obligations.
- Deposit mix, available liquidity, and the ability to fund commitments while maintaining capital and dividends.