Auburn National Bancorporation, Inc. — Q1 2017 Form 10-Q
Period: Three months ended March 31, 2017; balance sheet comparisons are with December 31, 2016 unless noted. AuburnBank provides banking services in East Alabama, primarily Lee County and surrounding areas.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net earnings | $1.890 million; $0.52 per share | $2.191 million; $0.60 per share in Q1 2016 |
| Total revenue, tax-equivalent basis | $6.725 million | $6.531 million in Q1 2016 |
| Net interest income, GAAP | $5.889 million | $5.697 million in Q1 2016 |
| Net interest margin, tax-equivalent | 3.19% | 3.12% in Q1 2016 |
| Noninterest income / expense | $0.836 million / $4.118 million | $0.834 million / $4.109 million in Q1 2016 |
| Efficiency ratio | 58.62% | 59.96% in Q1 2016 |
| Cash from operating activities | $1.849 million | $1.331 million in Q1 2016 |
| Total assets | $842.781 million | $831.943 million at December 31, 2016 |
| Loans, net of allowance | $425.965 million | $426.303 million at December 31, 2016 |
| Total deposits | $750.302 million | $739.143 million at December 31, 2016 |
| Cash and cash equivalents | $103.425 million | $121.277 million at December 31, 2016 |
| Long-term debt | $3.217 million | $3.217 million at December 31, 2016 |
The company reported no loan-loss provision in Q1 2017, compared with a $0.600 million negative provision in Q1 2016. The prior-year comparison included a $1.2 million recovery after payoff of a nonperforming construction and land development loan. Income tax expense was $0.717 million, with a 27.50% effective rate. Average loans were $429.8 million and average deposits were $742.0 million. The company paid a $0.23-per-share dividend.
Investing cash outflow was $30.287 million, principally reflecting $38.559 million of securities purchases, partly offset by maturities and prepayments. Financing cash inflow was $10.586 million. The company reported $83.366 million of stockholders’ equity. Its capital ratios included a 10.40% tier 1 leverage ratio, 16.24% CET1 ratio, and 17.75% total risk-based capital ratio; management said the company and bank exceeded applicable well-capitalized levels and the fully phased-in capital conservation buffer.
Changes and asset quality
- Net earnings declined about 14% year over year and earnings per share fell from $0.60 to $0.52, despite higher GAAP net interest income. The prior-year negative provision materially benefited the comparison.
- Net interest income increased as deposit costs declined and higher-cost wholesale funding was repaid. The average cost of interest-bearing liabilities fell to 0.64% from 0.73%; average interest-earning asset yield was nearly unchanged at 3.65% versus 3.66%.
- Securities available-for-sale increased to $273.853 million from $243.572 million, primarily as the company allocated more funding to investments. Loans were broadly stable; commercial real estate represented about 51% of loans, and approximately 86% of loans were secured by real estate.
- The allowance for loan losses was $4.588 million, or 1.07% of loans, versus $4.643 million, or 1.08%, at year-end. Q1 net charge-offs were $55,000; annualized net charge-offs were 0.05% of average loans.
- Nonperforming assets were $2.470 million, or 0.29% of assets, compared with $2.522 million at year-end. Nonaccrual loans were $2.318 million; there were no loans 90 days or more past due and still accruing. Potential problem loans totaled $5.687 million.
Outlook, risks, and unusual items
- Management expected net interest income in 2017 to exceed 2016, based on expected growth in average earning assets and an expectation that asset yields could rise faster than funding costs, subject to competition. This is an expectation, not formal earnings guidance.
- Management cited pressure on earning-asset yields, competition for quality loans, and the possibility that funding costs and variable-rate assets could rise as the Federal Reserve increases rates. The company reported that its interest-rate simulation and economic-value-of-equity models were within policy limits at quarter-end.
- Liquidity sources included $249.7 million of remaining FHLB credit availability and $41.0 million of available federal funds lines, with none drawn on those lines. Outstanding standby letters of credit were $7.2 million and unfunded loan commitments were $64.5 million. Management said liquidity was adequate for known obligations and expected needs over the next 12 months.
- Credit risks include the concentration in commercial real estate and the company’s geographic concentration in East Alabama. The allowance estimate is judgmental; management refined its methodology by extending the historical loss look-back period and widening the range for qualitative adjustments.
- In Q1, the company repurchased two mortgage loans under representation-and-warranty provisions, with aggregate principal of $553,000; both were current when repurchased. There were no pending repurchase or make-whole requests at March 31, and management did not consider the exposure material. About 99% of serviced Fannie Mae residential mortgages were current.
- Management reported no material subsequent events and no pending or threatened legal proceedings expected to have a material adverse effect. Disclosure controls were judged effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether net interest income growth and the expected 2017 improvement materialize as rates, competition, and funding costs change.
- Whether the allowance remains adequate given real-estate-related loan concentration, potential problem loans, and changes to loss-estimation methodology.
- Trends in nonaccrual loans, past-due residential loans, and potential problem loans, including the collateral and performance of the largest commercial real estate exposures.
- Deposit growth and mix, liquidity usage, and the impact of securities purchases and interest-rate movements on cash flows and accumulated other comprehensive income.
- Whether mortgage repurchase or make-whole requests increase, and the resulting effect on earnings or liquidity.