Auburn National Bancorporation, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are primarily with FY 2017. This is an annual report, not a standalone fourth-quarter earnings filing. The company is a bank holding company operating mainly through AuburnBank in East Alabama, including Lee County.
Financial performance and condition
| Metric | FY 2018 / year-end | FY 2017 / comparison |
|---|---|---|
| Net interest income, GAAP | $25.6 million | $24.5 million |
| Net interest income, tax-equivalent | $26.2 million | $25.7 million |
| Total revenue (GAAP net interest income plus noninterest income) | $28.9 million | $28.0 million |
| Net earnings / diluted EPS | $8.8 million / $2.42 | $7.8 million / $2.15 |
| Net interest margin, tax-equivalent | 3.40% | 3.29% |
| Return on average assets / equity | 1.08% / 10.14% | 0.94% / 9.17% |
| Efficiency ratio | 60.57% | 57.53% |
| Total assets / deposits | $818.1 million / $724.2 million | $853.4 million / $757.7 million |
| Loans, net of unearned income | $476.9 million | $453.7 million |
| Cash and cash equivalents | $65.1 million | $105.5 million |
| Stockholders’ equity / long-term debt | $89.1 million / none | $86.9 million / $3.2 million |
Operating cash flow was $12.1 million, versus $9.4 million in 2017. Investing activities used $12.1 million, primarily reflecting $24.7 million of net loan growth, partly offset by securities proceeds. Financing activities used $40.5 million, including a $41.2 million decline in interest-bearing deposits, retirement of $3.2 million in long-term debt, and $3.5 million in dividends. Cash and cash equivalents consequently declined $40.5 million.
The Bank reported capital ratios above “well capitalized” thresholds: total risk-based capital 17.38%, CET1 16.49%, and Tier 1 leverage 11.33%. It had $41.0 million in federal funds lines and $238.6 million of available FHLB credit at year-end. Management said liquidity was adequate for known obligations and anticipated needs.
Material changes versus FY 2017
- Net earnings increased 13%; higher net interest income and a lower tax bill more than offset higher operating costs.
- Net interest margin rose 11 basis points, supported by loan growth and improved yields on short-term assets. The cost of interest-bearing liabilities also increased.
- Loans grew 5%, while deposits fell 4.4%; the company attributed much of the interest-bearing deposit decline to public-depositor balance fluctuations.
- Noninterest expense rose $1.1 million, including higher salaries and a $0.4 million loss related to misappropriation of assets. The company received a $0.3 million insurance settlement in March 2019.
- The effective tax rate declined to 19.84% from 31.67%, primarily reflecting the federal corporate tax-rate reduction under the 2017 Tax Act.
- Nonperforming assets fell to $0.35 million from $2.97 million, principally following resolution of two nonperforming commercial real estate loans. Potential problem loans increased to $6.5 million from $5.7 million.
- The company redeemed all trust preferred securities and related junior subordinated debentures on April 27, 2018; year-end long-term debt was zero.
Outlook, risks and unusual items
Management expected net interest income to increase in 2019, primarily because of higher average loan balances, while anticipating continued competition and possible margin pressure from funding costs and asset yields. The filing does not provide numerical earnings or revenue guidance.
Key risks include the concentration in commercial real estate (CRE): CRE represented 62.8% of the loan portfolio at year-end, up from 61.1%; management reported CRE exposure at 251.6% of risk-based capital, below the cited 300% supervisory guidance trigger. Local economic conditions, including the cyclical automobile industry, interest-rate and deposit competition, borrower credit quality, mortgage-market changes, and cybersecurity and operational risks could also affect results. The company expects CECL credit-loss accounting adoption in 2020; its eventual effect on reserves, earnings and capital remained under evaluation.
Available-for-sale securities generated a $3.2 million after-tax other comprehensive loss in 2018, largely reflecting market-value changes. Management stated the unrealized losses were primarily interest-rate driven and did not expect to be forced to sell before recovery. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; no material control weaknesses were reported.
Important facts for investors to verify
- Whether loan and deposit trends, especially public deposits, continued after year-end and how they affect funding costs and liquidity.
- Credit quality and collateral behind CRE concentrations and the $6.5 million of potential problem loans; assess reserve adequacy and the transition to CECL.
- Whether the 2019 loan-growth outlook translated into higher net interest income without further pressure on the efficiency ratio or margins.
- The final accounting and cash effects of the insurance settlement for the asset-misappropriation loss.
- Dividend sustainability, given reliance on Bank dividends, regulatory limits, and the $8.0 million of additional Bank dividends available without prior regulatory approval at year-end.