Auburn National Bancorporation, Inc. — Q3 2012 Form 10-Q
Business and period. Auburn National is a bank holding company operating AuburnBank, with banking operations concentrated in Lee County and surrounding areas of Alabama. This unaudited filing covers the quarter and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income, GAAP | $5.26 | $4.85 | $15.57 | $14.72 |
| Net earnings | $1.61 | $1.37 | $5.10 | $4.37 |
| Diluted earnings per share | $0.44 | $0.38 | $1.40 | $1.20 |
| Provision for loan losses | $1.55 | $0.60 | $2.75 | $1.80 |
| Noninterest income | $2.02 | $1.33 | $8.70 | $3.72 |
| Noninterest expense | $3.77 | $4.27 | $15.36 | $12.17 |
- Revenue and margins: Total revenue, using the company’s tax-equivalent net interest income measure, was $7.28 million in Q3 and $24.27 million year to date, up from $6.17 million and $18.43 million, respectively. Tax-equivalent net interest margin was 3.23% for Q3 (2.98% prior year) and 3.21% year to date (3.02% prior year). GAAP net interest income increased as funding costs declined, despite lower yields on earning assets.
- Balance sheet: Total assets were $753.5 million, down from $776.2 million at year-end 2011. Loans, net of unearned income, grew 7% to $397.7 million; commercial real estate loans drove much of the increase. Available-for-sale securities declined 15% to $254.8 million. Deposits increased to $629.8 million from $619.6 million, including noninterest-bearing deposits of $116.0 million.
- Credit quality: The allowance for loan losses was $6.0 million, or 1.52% of loans, versus $6.9 million and 1.87% at year-end. Year-to-date net charge-offs were $3.6 million, or 1.24% annualized of average loans, compared with $3.1 million and 1.12% a year earlier. Nonperforming assets were $18.6 million (2.46% of assets), including $13.6 million of nonaccrual loans, versus $18.3 million and $10.4 million, respectively, at year-end.
- Cash flow: Nine-month operating cash flow was $8.6 million, compared with $11.0 million in 2011; investing cash flow was $27.3 million versus $31.5 million, and financing used $34.0 million versus $8.3 million. Cash and cash equivalents ended at $57.3 million, up $1.9 million from year-end.
- Debt, liquidity, and capital: Long-term debt fell to $47.2 million from $85.3 million after repayment of $38.0 million of FHLB advances. The Bank had $230 million of available FHLB capacity, with $25 million outstanding, and $40 million of federal funds lines, none drawn. Management said liquidity was adequate for known obligations and expected needs over the next 12 months. The company reported a 17.00% total risk-based capital ratio and 9.54% Tier 1 leverage ratio and was classified as well capitalized.
Material changes and unusual items
- Nine-month earnings rose to $5.1 million from $4.4 million. The $3.3 million gain from selling three affordable-housing investments and higher mortgage-lending income contributed to the increase in noninterest income. The investments were sold in January 2012; the company does not expect related federal tax credits in 2012.
- Nine-month noninterest expense increased mainly because of a $3.7 million prepayment penalty on the January repayment of FHLB advances. Excluding that penalty, expenses also reflected higher salaries and benefits, partly offset by lower OREO expenses.
- Mortgage-lending income increased to $2.5 million year to date from $1.3 million, principally reflecting greater refinance and purchase activity. One mortgage with a $0.3 million unpaid balance was repurchased during the first nine months, with no loss; 99.3% of serviced Fannie Mae loans were current at quarter-end.
Outlook, risks, and contingencies
- The filing gives no specific earnings or revenue guidance. Management noted potential net interest margin pressure from low reinvestment yields, competition for quality loans, and limited room to reduce deposit costs.
- Credit exposure remains significant: about 82% of loans were secured by real estate, and the portfolio is concentrated in the company’s Alabama markets. A newly nonperforming commercial real estate loan had a $5.3 million recorded investment at quarter-end and resulted in an impairment charge-off of about $1.5 million. The allowance covered 44% of nonperforming loans; management reported 73% coverage excluding that loan.
- Other risks include uncertain borrower repayment and collateral values, potential OREO valuation changes, interest-rate sensitivity, and mortgage-loan representations and warranties. The company reported $43.3 million of unfunded loan commitments and $7.1 million of standby letters of credit.
- Management said the proposed Basel III rules could affect capital requirements and noted that trust preferred securities may be phased out of Tier 1 capital over ten years for institutions below $15 billion in assets. Management reported no material subsequent events or pending legal proceedings expected to materially harm financial condition or results.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and commercial real estate charge-offs is contained, and how the $5.3 million nonperforming loan performs.
- Whether loan growth and margin improvement can continue as funding costs approach a lower bound and asset yields remain under pressure.
- How much of year-to-date earnings growth depended on the one-time affordable-housing sale gain and other nonrecurring items.
- Whether the allowance remains adequate given higher year-to-date net charge-offs and real-estate collateral risks.
- The eventual impact of Basel III rules on regulatory capital, including treatment of trust preferred securities.