Auburn National Bancorporation, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; unaudited consolidated results. The company operates AuburnBank, a community bank serving East Alabama through eight full-service branches and a loan production office. Dollars below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable period / Dec. 31, 2017 |
|---|---|---|
| Net interest income (GAAP) | $6.284 | $5.889 in Q1 2017 |
| Net interest income, tax-equivalent | $6.440 | $6.189 in Q1 2017 |
| Net interest margin, tax-equivalent | 3.29% | 3.19% in Q1 2017 |
| Total noninterest income | $0.853 | $0.836 in Q1 2017 |
| Noninterest expense | $4.402 | $4.118 in Q1 2017 |
| Net earnings / diluted EPS | $2.195 / $0.60 | $1.890 / $0.52 in Q1 2017 |
| Total assets | $830.721 | $853.381 at Dec. 31, 2017 |
| Loans, net of unearned income | $443.804 | $453.651 at Dec. 31, 2017 |
| Total deposits | $737.332 | $757.659 at Dec. 31, 2017 |
| Cash and cash equivalents | $91.264 | $105.528 at Dec. 31, 2017 |
| Stockholders’ equity | $85.108 | $86.906 at Dec. 31, 2017 |
Net earnings increased about 16% year over year. Average loans rose 5% to $451.3 million, supporting higher net interest income; improved yields on short-term assets also contributed. Noninterest expense rose about 7%, mainly from routine annual salary increases. The effective tax rate fell to 19.74% from 27.50%, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
Q1 operating cash flow was $3.1 million and investing cash flow was positive $3.6 million; financing cash flow was negative $21.0 million, largely reflecting a $20.3 million net decrease in deposits and $0.9 million of dividends. The resulting decrease in cash and equivalents was $14.3 million. The company reported $41.0 million of available federal funds lines and a $252.0 million available FHLB line at quarter end.
Material changes and asset quality
- Loans declined 2% from year-end, primarily from paydowns in construction and commercial real estate. Average loans nevertheless increased year over year. About 84.8% of loans were secured by real estate; commercial real estate represented 53% of the portfolio.
- Deposits declined $20.3 million from year-end: interest-bearing deposits fell $24.7 million, partly offset by a $4.4 million rise in noninterest-bearing deposits. Management attributed the reduction mainly to one unusually large deposit relationship at year-end.
- The allowance for loan losses was $4.732 million, or 1.07% of loans, versus $4.757 million and 1.05% at year-end. No loan-loss provision was recorded. Annualized net charge-offs were 0.02% of average loans.
- Nonperforming assets increased to $3.239 million from $2.972 million; nonperforming loans were 0.73% of loans versus 0.66%. There were no loans 90 days or more past due and still accruing. Potential problem loans totaled $5.349 million, down from $5.651 million.
- Available-for-sale securities were $259.2 million. Unrealized losses rose to $5.948 million from $2.780 million at year-end, primarily due to higher interest rates. The $3.120 million after-tax other comprehensive loss reduced equity; management said it did not intend to sell the securities and did not expect to be required to sell before recovery.
- Regulatory capital ratios were strong: total risk-based capital 18.39%, CET1 16.89%, and Tier 1 leverage 10.90%. Management reported these levels above the applicable “well capitalized” thresholds.
Outlook, commentary, risks and unusual items
- Management expected net interest income to increase in 2018, primarily from higher average earning-asset volumes, especially loans. It also cautioned that competition, potential increases in funding costs, low interest rates, and effects of the tax law on competitive pricing could pressure margins.
- On April 27, 2018, after quarter-end, the company redeemed the remaining trust preferred securities and related junior subordinated debentures, paying approximately $3.0 million including accrued distributions. The debt was $3.217 million at March 31; the company reported no such securities or debentures outstanding after redemption.
- Interest-rate and credit risks include changing rates, deposit costs, borrower repayment capacity, real-estate values, and the concentration of lending in real estate and the local region. Management said its interest-rate sensitivity models were within policy limits at quarter-end.
- At March 31, unfunded loan commitments were $60.7 million and standby letters of credit were $7.0 million. Mortgage servicing covered $308.8 million of loans sold; no repurchases were required and none were pending. Management considered exposure not material, while noting future investor claims could increase.
- Management reported no pending or threatened legal proceedings expected to have a material adverse effect. Disclosure controls were deemed effective. The company adopted several accounting updates in Q1 without material impact; the financial statements do not quantify the expected impact of the future credit-loss standard (CECL), which was still under evaluation.
Important facts for investors to verify
- Whether the deposit decline was temporary and how deposit balances and funding costs evolve after the large relationship runoff.
- Trends in nonaccrual loans, potential problem loans, and commercial real-estate concentrations, particularly given the higher nonperforming-asset ratio.
- The effect of interest-rate changes on securities fair values, accumulated other comprehensive loss, and net interest margin.
- Cash, liquidity, and capital effects of the April 27 debt redemption, including the resulting cost savings and use of funds.
- Management’s subsequent loan-growth outlook and the eventual quantified impact of CECL adoption.