Auburn National Bancorporation, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, compared primarily with 2015. The company is a bank holding company operating mainly through AuburnBank in East Alabama.
Business context and key financial metrics
AuburnBank provides commercial, residential mortgage and consumer lending, deposit, and related banking services, primarily in Lee County and nearby communities.
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets, year-end | $831.9 million | $817.2 million |
| Total deposits, year-end | $739.1 million | $723.6 million |
| Loans, net of unearned income, year-end | $430.9 million | $426.4 million |
| GAAP net interest income | $22.7 million | $22.7 million |
| Tax-equivalent net interest income | $24.0 million | $24.1 million |
| Net interest margin (tax-equivalent) | 3.05% | 3.17% |
| Net earnings | $8.15 million | $7.86 million |
| Basic and diluted earnings per share | $2.24 | $2.16 |
| Cash dividends per share | $0.90 | $0.88 |
- Total revenue, as presented by management using tax-equivalent net interest income plus noninterest income, was $26.1 million, down from $27.3 million. Noninterest income was $3.4 million, versus $4.5 million; noninterest expense was $15.3 million, versus $16.4 million.
- Net cash provided by operating activities was $10.5 million, compared with $10.9 million. Investing activities used $12.6 million, primarily reflecting securities purchases; financing activities provided $9.4 million. Cash and cash equivalents ended the year at $121.3 million, up from $113.9 million.
- Stockholders’ equity was $82.2 million, compared with $79.9 million. Regulatory capital ratios at year-end included a 10.27% Tier 1 leverage ratio, 16.44% CET1 ratio, and 17.95% total risk-based capital ratio. The company and Bank were reported as well capitalized.
- Long-term debt fell to $3.2 million from $7.2 million; short-term borrowings were $3.4 million. The Bank reported $251.4 million of available FHLB credit and $41.0 million of federal funds lines, with none drawn on the latter at year-end.
Material changes versus 2015
- Net earnings rose 3.7% to $8.15 million, while EPS increased from $2.16 to $2.24. Net interest income was broadly flat; the reported 2015 figure included $0.2 million of interest recoveries on previously impaired loans.
- Average loans increased 5% to $430.8 million and average deposits increased 3% to $734.7 million. Year-end loans grew about 1%, while deposits rose about 2%.
- Net interest margin declined 12 basis points to 3.05%, as yields on earning assets fell faster than funding costs. Management cited competitive loan pricing, lower securities yields, and a larger balance of short-term interest-earning assets.
- Noninterest income decreased $1.1 million, reflecting lower mortgage lending income, no repeat of 2015 bank-owned life insurance death benefits, and $221,000 of net securities losses in 2016 versus $16,000 of gains in 2015.
- Noninterest expense declined $1.0 million. Major drivers included a $790,000 gain on early debt extinguishment in 2016 versus a $362,000 loss in 2015, and lower OREO expense; salary and benefit costs rose $533,000.
- Credit metrics improved overall: nonperforming assets were $2.5 million, or 0.30% of assets, versus $3.0 million, or 0.36%. Nonaccrual loans were $2.4 million, or 0.55% of loans, versus $2.7 million, or 0.64%.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or growth guidance was provided. Management described efforts to grow loans, focus on deposit pricing, and reduce higher-cost wholesale funding. The filing said the Federal Reserve had begun interest-rate normalization and management expected gradual-to-moderate increases, while warning that the timing and effects were uncertain.
- Credit results benefited from a $1.2 million recovery on the payoff of a previously nonperforming construction and land development loan. Excluding that recovery, net charge-offs were 0.08% of average loans; reported net recoveries were 0.19%. The allowance for loan losses was $4.6 million, or 1.08% of loans, versus $4.3 million, or 1.01%.
- Management refined its allowance methodology in the fourth quarter, extending the historical loss look-back from 20 to 31 quarters and widening the range for qualitative adjustments. The company estimated that without these refinements its calculated allowance would have been approximately $0.9 million lower.
- Commercial real estate is a significant concentration: CRE loans, as defined by the Federal Reserve, were 60.7% of the portfolio, up from 57.8%. The filing reported $212.1 million of CRE loans excluding owner-occupied properties, equal to 238.2% of Bank risk-based capital, and stated the supervisory CRE concentration guidance was not triggered in 2015 or 2016.
- Key risks include local economic weakness and exposure to cyclical auto manufacturing, CRE and real estate valuation changes, credit losses and reserve-estimate uncertainty, interest-rate and funding-cost movements, mortgage regulation and servicing or repurchase claims, competition, and cybersecurity or service-provider disruptions. The company also warned that regulatory changes and the forthcoming CECL credit-loss standard could affect costs or results; CECL was scheduled to take effect for the company in 2020.
- Mortgage origination income fell to $947,000 from $1.44 million; management attributed the decline partly to lower production, fewer mortgage originators, and implementation of TRID requirements. The company serviced $338.4 million of loans sold, reported one $196,000 repurchase during 2016, and had no pending representation-and-warranty repurchase requests at year-end.
- The company purchased $4.0 million par value of its trust preferred securities in October 2016, resulting in a $790,000 pretax debt-extinguishment gain and reducing related junior subordinated debt to $3.2 million. The remaining debentures mature in 2033.
- At year-end, unfunded loan commitments were $46.0 million and standby letters of credit were $7.4 million. Management said available liquidity was adequate for known obligations and expected requirements over the next 12 months. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- Operational changes included a planned May 2017 closure of the Opelika Wal-Mart in-store branch and a planned move of the TigerTown Kroger branch to a freestanding location when its lease expires in July 2017.
Important facts for investors to verify
- Whether recurring earnings and net interest margin can improve as loan growth, deposit pricing, and interest-rate changes interact; distinguish the one-time debt-extinguishment gain and loan recovery from ongoing performance.
- How CRE exposure, borrower credit quality, the allowance methodology, and potential problem loans develop. Potential problem loans were $5.8 million, or 1.4% of loans, at year-end.
- Whether mortgage production and related income recover, and whether mortgage servicing, investor repurchase, or regulatory compliance costs increase.
- Capital and liquidity at both the holding company and Bank, including limits on Bank dividends available to the parent; the filing reported $10.1 million of additional Bank dividends could be declared without prior regulatory approval at year-end.
- Implementation effects of CECL and other pending accounting standards, and any changes in regulation or local economic conditions that could affect credit, funding, or profitability.