Auburn National Bancorporation, Inc. — 2017 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2017, with comparisons to 2016. Auburn National is a bank holding company whose principal subsidiary, AuburnBank, serves East Alabama, primarily Lee County. Its business includes deposits, commercial and real estate lending, consumer loans, and residential mortgage origination and servicing.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income, GAAP | $24.5 million | $22.7 million |
| Net interest income, tax-equivalent | $25.7 million | $24.0 million |
| Total revenue, tax-equivalent basis | $28.0 million | $26.1 million |
| Net earnings | $7.8 million | $8.2 million |
| Diluted earnings per share | $2.15 | $2.24 |
| Net interest margin, tax-equivalent | 3.29% | 3.05% |
| Efficiency ratio | 57.53% | 56.03% |
| Return on average assets / equity | 0.94% / 9.17% | 0.98% / 9.65% |
- Balance sheet: Total assets were $853.4 million, up from $831.9 million. Loans, net of unearned income, grew 5% to $453.7 million; securities available-for-sale were $257.7 million.
- Funding and liquidity: Deposits increased 2.5% to $757.7 million. Cash and cash equivalents were $105.5 million, down from $121.3 million. The Bank had $244.4 million of available FHLB credit and $41.0 million in federal funds lines, with none of the latter outstanding at year-end. Management stated liquidity was adequate for known obligations and anticipated needs over the next 12 months.
- Debt and capital: Long-term debt was $3.2 million, consisting of junior subordinated debentures due 2033; short-term borrowings were $2.7 million. Shareholders’ equity was $86.9 million. The Company reported a 10.95% Tier 1 leverage ratio, 16.42% CET1 ratio, 16.98% Tier 1 risk-based ratio, and 17.91% total risk-based capital ratio; the Company and Bank were described as well capitalized.
- Cash flow: Operating activities provided $9.4 million; investing activities used $39.6 million; financing activities provided $14.5 million. Cash and cash equivalents decreased by $15.7 million during the year.
- Credit quality: The allowance for loan losses was $4.8 million, or 1.05% of loans, versus $4.6 million, or 1.08%, in 2016. Nonperforming assets rose to $3.0 million (0.35% of assets) from $2.5 million; nonaccrual loans were $3.0 million, and there was no OREO at year-end. Potential problem loans were $5.7 million, compared with $5.8 million.
Changes versus 2016
- Net interest income on a tax-equivalent basis rose $1.7 million, reflecting loan growth, higher securities income, lower deposit costs, and reduced higher-cost wholesale funding. The net interest margin increased 24 basis points.
- Net earnings declined $0.3 million, despite stronger net interest income. A $0.4 million deferred-tax remeasurement charge related to the Tax Cuts and Jobs Act was a principal factor; excluding it, management reported earnings of $8.2 million, or $2.25 per share.
- Noninterest expense increased to $16.8 million from $15.3 million. The comparison reflects the absence of the $0.8 million gain on early extinguishment of debt recorded in 2016, alongside higher professional fees and salaries.
- Loan balances increased 5%, while deposits increased $18.5 million. Nonperforming assets increased, and net recoveries fell to $0.4 million from $0.8 million in 2016.
- Net cash from operating activities declined to $9.4 million from $10.5 million; investing cash outflow increased to $39.6 million, chiefly reflecting greater net loan growth and securities activity.
Outlook, commentary, risks, and unusual items
- Management expects net interest income to increase in 2018, primarily due to higher average earning-asset volumes, especially loans. It also expects continued competition for quality loans and notes uncertainty about how tax reform may affect loan and deposit pricing. The filing provides no specific earnings or revenue forecast.
- The federal corporate tax rate fell from 34% to 21%; the 2017 remeasurement reduced the value of deferred tax assets by about $0.4 million. Management expects the lower rate to benefit future results but was still assessing other effects of tax reform.
- Commercial real estate is a major concentration: CRE loans, as defined by regulators, were 61.1% of the portfolio at year-end, versus 60.7% in 2016. The filing reports $233.3 million in non-owner-occupied CRE loans and $39.6 million in construction and land development loans. Management said the cited CRE concentration guidance did not apply to the Bank’s activity in 2017.
- Interest-rate, funding-cost, credit, local economic, and real estate risks could affect earnings and asset quality. Additional risks include regulatory and compliance costs, mortgage market and servicing changes, competition, and cyberattacks or service-provider disruptions.
- Mortgage repurchases under investor representations and warranties totaled three loans with $0.6 million aggregate principal in 2017; all were current when repurchased. There were no pending repurchase requests at year-end. About 99% of residential mortgage loans serviced for Fannie Mae were current.
- Off-balance-sheet commitments included $57.0 million of commitments to extend credit and $7.4 million of standby letters of credit. Management said commitment totals do not necessarily represent future cash needs because some may expire undrawn.
- The Company reported no material pending or threatened legal proceedings and no material subsequent events requiring disclosure. The 2017 financial statements received an unqualified audit opinion; the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether the forecast increase in 2018 net interest income materialized, and how loan growth, deposit pricing, and rate changes affected margin.
- Whether nonperforming loans and the CRE/residential real estate concentrations changed, and whether the allowance remains adequate as credit conditions evolve.
- The full effect of the 2017 Tax Act on the effective tax rate, deferred tax assets, borrower credit quality, and loan demand.
- Liquidity and funding trends, including deposit mix, cash balances, available borrowing capacity, and the timing or use of off-balance-sheet commitments.
- Any changes in mortgage repurchase claims, servicing performance, or regulatory requirements, and the eventual impact of the CECL credit-loss standard, which the filing said was effective for the Company beginning in 2020.