Auburn National Bancorporation, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with 2018. This is an annual filing, not a separate fourth-quarter earnings report. AuburnBank is the company’s principal subsidiary, serving East Alabama, primarily Lee County.
Financial performance and condition
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net interest income, GAAP | $26.1 million | $25.6 million | Up 1.9% |
| Net interest income, tax-equivalent | $26.6 million | $26.2 million | Up 2.0% |
| Net interest margin, tax-equivalent | 3.43% | 3.40% | Up 3 basis points |
| Noninterest income | $5.5 million | $3.3 million | Includes a $1.7 million loan-guarantee-program termination gain |
| Total revenue, as presented by the company | $31.6 million | $28.9 million | Up 9.2%; uses tax-equivalent net interest income |
| Net earnings | $9.7 million | $8.8 million | Up 10.3% |
| Diluted earnings per share | $2.72 | $2.42 | Up 12.4% |
| Operating cash flow | $10.9 million | $12.1 million | Down $1.3 million |
- Margins and expenses: Efficiency ratio was 61.33%, versus 60.57%. Noninterest expense rose 10.2% to $19.7 million, including higher salaries and benefits and approximately $0.5 million of headquarters redevelopment-related costs. Effective tax rate was 19.57%, compared with 19.84%.
- Balance sheet at year-end: Total assets were $827.9 million; deposits were $724.2 million; stockholders’ equity was $98.3 million. Total loans, net of unearned income, were $460.9 million, down 3.4% from 2018. Available-for-sale securities were $235.9 million.
- Credit quality: Allowance for loan losses was $4.4 million, or 0.95% of loans, versus $4.8 million, or 1.00%. The company recorded a negative provision of $0.25 million. Net charge-offs were $0.15 million, or 0.03% of average loans. Nonperforming assets were $0.19 million, or 0.04% of loans and OREO; there was no OREO at year-end. Potential problem loans declined to $4.4 million from $6.5 million.
- Funding, debt and liquidity: Deposits were essentially unchanged year over year. Cash and cash equivalents rose to $92.4 million from $65.1 million. Year-end short-term borrowings were $1.1 million, consisting of repurchase agreements; no long-term debt was outstanding. Available funding included a $246.7 million FHLB line and $41.0 million of federal funds lines, with none drawn on the latter. Management stated liquidity was adequate for known obligations and expected needs over the next 12 months.
- Capital and shareholder returns: AuburnBank was classified as well capitalized. The detailed regulatory table reports a 17.28% CET1 ratio, 17.28% Tier 1 risk-based ratio, 18.12% total risk-based ratio and 11.23% Tier 1 leverage ratio. The company paid $1.00 per share in dividends and repurchased 77,907 shares for $2.7 million.
Material changes versus 2018
- Earnings improved, supported by loan yields and growth in average loans, plus higher noninterest income. Average loans increased 4% to $474.3 million, although year-end loans declined.
- Noninterest income increased by $2.2 million, chiefly from the one-time $1.7 million state loan-guarantee-program termination payment. Mortgage lending income also rose $0.2 million as pricing improved and refinancing activity increased. A $0.3 million insurance recovery contributed to other income; securities transactions produced a $0.1 million net loss.
- Expenses increased by $1.8 million, mainly from salaries and benefits and headquarters redevelopment activity. A prospective useful-life estimate change for assets expected to be demolished reduced 2019 net earnings by $0.2 million, or $0.04 per share.
- Cash flow from investing activities was positive $24.1 million, compared with negative $12.1 million in 2018, including net loan repayments and securities activity. Financing cash outflow improved to $7.6 million from $40.5 million, reflecting less deposit contraction and no 2018 debt retirement.
- Unrealized securities gains improved other comprehensive income by $5.8 million, compared with a $3.2 million loss in 2018. Year-end equity increased to $98.3 million from $89.1 million.
Outlook, risks and contingencies
- Management expected 2020 net interest income and margin to decline, because deposit-cost reductions were expected to lag declines in earning-asset yields following 2019 rate cuts. The filing also said COVID-19-related uncertainty and lower rates could adversely affect margins, profitability, growth and asset quality; the company did not provide numerical earnings guidance.
- Commercial real estate is a significant concentration: CRE excluding owner-occupied loans was reported as 52.3% of the portfolio, up from 50.9% in 2018. The filing states CRE lending did not trigger the cited supervisory concentration guidance; construction and land development loans were 33.7% of risk-based capital and CRE loans under the guidance definition were 277.8%.
- The planned Auburn headquarters redevelopment was expected to begin in the second half of 2020. Management anticipated further project-related expense; the filing identifies construction costs and future rental income from unused space as uncertain.
- Other principal risks include local economic conditions and auto-industry cyclicality, interest-rate and funding-cost changes, borrower credit deterioration, competition, cybersecurity and operational disruptions, regulatory requirements, mortgage servicing and repurchase obligations, and adoption of CECL. CECL was scheduled to take effect for the company in 2023; its impact had not been determined.
- At year-end, the company had $60.6 million of unfunded loan commitments and $1.9 million of standby letters of credit. Management reported no material pending litigation or regulatory matters and no subsequent events requiring additional disclosure.
Important facts for investors to verify
- Capital-ratio inconsistency: The overview gives different figures—19.69% total risk-based capital and 18.78% CET1—than the detailed capital table and selected data, which report 18.12% and 17.28%, respectively. Confirm the controlling regulatory figures.
- Asset-total inconsistency: The audited balance sheet reports $827.9 million of assets at December 31, 2019, while selected financial data reports $828.6 million. Confirm the correct figure.
- Assess the durability of earnings growth excluding the $1.7 million program-termination gain and $0.3 million insurance recovery, and monitor whether 2020 margin pressure materialized.
- Review CRE exposure and underwriting, allowance adequacy, and the possible effects of local economic or real-estate weakness.
- Track redevelopment spending, dividend capacity and regulatory limits on upstream dividends from AuburnBank, as well as progress on the stock-repurchase authorization.