Auburn National Bancorporation, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. AuburnBank, the Company’s principal subsidiary, serves East Alabama, principally Lee County and surrounding areas.
Financial performance and condition
- Earnings and revenue: Net earnings were $7.86 million, or $2.16 per diluted share, versus $7.45 million, or $2.04 per share, in 2014. GAAP net interest income was $22.72 million; noninterest income was $4.53 million; and provision for loan losses was $0.20 million.
- Margins and returns: Tax-equivalent net interest income was $24.06 million and net interest margin was 3.17%, compared with $22.74 million and 3.15% in 2014. Return on average assets was 0.98%; return on average equity was 9.98%; and the efficiency ratio was 57.26%.
- Cash flow: Operating activities provided $10.85 million; investing activities used $0.36 million; and financing activities provided $19.94 million. Cash and cash equivalents rose to $113.93 million from $83.50 million.
- Balance sheet and liquidity: Total assets were $817.19 million, up from $789.23 million. Deposits increased to $723.63 million from $693.39 million. The Bank reported $41.0 million in federal funds lines, none drawn, and $240.6 million of available FHLB credit capacity.
- Loans and credit quality: Loans, net of unearned income, grew 6% to $426.41 million. Commercial real estate (CRE) was 57.8% of the portfolio. Nonperforming loans were $2.71 million (0.64% of loans), and nonperforming assets were $2.97 million (0.36% of assets), versus $1.12 million and $1.65 million, respectively, in 2014. The allowance for loan losses was $4.29 million, or 1.01% of loans, down from $4.84 million, or 1.20%.
- Debt and capital: Long-term debt was $7.22 million, consisting of junior subordinated debentures; short-term borrowings were $2.95 million. The Company repaid a $5.0 million FHLB advance during 2015. Year-end regulatory ratios were 10.35% Tier 1 leverage, 15.28% CET1, 16.57% Tier 1 risk-based, and 17.44% total risk-based; management reported the Company and Bank as well capitalized.
- Shareholder returns: Cash dividends paid were $3.21 million, or $0.88 per share, compared with $0.86 per share in 2014. Book value per share was $21.94.
Material changes versus 2014
- Net earnings increased 5.5%; tax-equivalent net interest income rose about 5.8%, reflecting loan growth, lower deposit costs, and repayment of higher-cost wholesale funding. The increase included $0.2 million of interest recoveries on two previously impaired loans; excluding these, management reported tax-equivalent net interest income growth of 5%.
- Noninterest income rose to $4.53 million from $3.93 million, mainly because securities results improved from a $0.53 million net loss to a $0.02 million gain and bank-owned life insurance income increased. Mortgage lending income declined $0.19 million, primarily from higher servicing-right amortization.
- Noninterest expense increased to $16.37 million from $15.10 million. Drivers included a $0.36 million debt prepayment penalty, higher salaries and occupancy costs, and the absence of the prior-year $0.45 million net gain on other real estate owned (OREO).
- Net charge-offs increased to $0.75 million, or 0.18% of average loans, from $0.48 million, or 0.12%. Most 2015 gross charge-offs related to two nonperforming CRE loans. Nonperforming loans rose chiefly because of one $1.5 million CRE loan.
- Deposits grew by $30.2 million and loans by $23.5 million. Securities available-for-sale declined $25.9 million to $241.7 million, as principal repayments on mortgage-backed securities were not reinvested. The Company’s total risk-based capital ratio decreased from 18.54% to 17.44%.
Outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance is provided. Management described continued focus on loan growth, funding mix and cost control, while cautioning that margin may be pressured by low reinvestment yields, competition for quality loans, and limited room to reduce deposit costs. The Federal Reserve raised its target federal funds rate to 0.50% in December 2015.
- Key risks include CRE concentration and real-estate-market weakness; borrower credit deterioration and uncertainty in loan-loss estimates; interest-rate and liquidity changes; local economic and industry conditions; intense competition; and regulatory and compliance costs. Cybersecurity, third-party systems, mortgage servicing and mortgage repurchase exposure are also identified risks.
- Mortgage repurchase activity included two required 2015 repurchases totaling $287,000 and a $37,000 Fannie Mae make-whole reimbursement. The Company also voluntarily repurchased ten investment-property loans to one borrower with $4.0 million aggregate principal; management said the loans were current and their fair value exceeded the repurchase price. Two representation-and-warranty requests remained pending at year-end. Management considered overall exposure not material, citing historical experience and controls.
- Off-balance-sheet exposures included $52.23 million of commitments to extend credit and $8.22 million of standby letters of credit. Management said commitments may expire undrawn and believed available liquidity was sufficient for known obligations and expected needs over the next 12 months.
- Other notable items: a $0.28 million BOLI death-benefit income recognition; $0.23 million in interest recoveries on previously impaired loans; and the $0.36 million debt prepayment penalty. Management reported no material pending or threatened legal proceedings and no material subsequent events. The financial-statement audit expressed an unqualified opinion; management reported effective disclosure controls and internal control over financial reporting, with no material weaknesses reported.
Most important facts for investors to verify
- Whether the increase in nonperforming CRE loans and 2015 charge-offs is contained, and whether the $4.29 million allowance remains adequate as the portfolio grows.
- The quality, underwriting and geographic/property-type concentration of CRE exposure, including the reported 57.8% portfolio concentration.
- How much earnings growth is sustainable after excluding loan interest recoveries, BOLI death-benefit income, securities-result changes, and the one-time debt prepayment penalty.
- Whether interest-rate changes affect net interest margin, deposit pricing, mortgage originations and liquidity differently from management’s sensitivity scenarios.
- The status and potential costs of pending mortgage repurchase requests and the effectiveness of controls added for investment-property loans sold to Fannie Mae.
- Whether regulatory capital, dividend capacity and liquidity remain adequate as Basel III requirements phase in and loan commitments are funded.