10-Q/A 1 0001.txt AMENDMENT NO 1 TO THE FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QA (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2000 -------------------------------- [ ] Transition report under Section 13 or 15(d) of the Exchange Act For the transition period to ---------- ---------- Commission file number 0-26486 ------------------ Auburn National Bancorporation, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 63-0885779 (State or Other Jurisdiction of (I.R.S.Employer Incorporation or Organization) Identification No.) 165 East Magnolia Avenue, Suite 203, Auburn, Alabama 36830 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (334) 821-9200 -------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of securities under a plan confirmed by a court. Yes No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of October 30, 2000: 3,924,573 shares of common stock, $.01 --------------------------------------- par value per share ------------------- AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page ------------------------------------------------------------------------------
Item 1 Financial Information Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3 Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2000 and the Years Ended December 31, 1999 and 1998 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION ------------------------------------ Item 5 Other Events 15 Item 6 Exhibits 16
2 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (Unaudited) ASSETS 9/30/00 12/31/99 ---------------- ----------------- ------------------ Cash and due from banks $ 11,892,919 $ 11,662,397 Federal funds sold 4,850,000 15,710,000 ------------ ------------ Cash and cash equivalents 16,742,919 27,372,397 Interest-earning deposits with other banks 207,059 1,269,771 Investment securities held to maturity (fair value of $27,666,740 and $9,689,067 at September 30, 2000 and December 31, 1999, respectively): 28,046,434 10,068,454 Investment securities available for sale 84,904,410 67,799,218 Loans: Loans, less unearned income of $4,918 at September 30, 2000 and $7,105 at December 31, 1999, respectively 257,704,829 260,606,260 Less allowance for loan losses (3,666,942) (3,774,523) ------------ ------------ Loans, net 254,037,887 256,831,737 Premises and equipment, net 3,126,456 3,348,217 Rental property, net 1,616,699 1,667,604 Other assets 10,774,191 9,160,924 ------------ ------------ Total assets $399,456,055 $377,518,322 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY -------------------------------------- Deposits: Noninterest-bearing $ 43,948,378 $ 38,867,703 Interest-bearing 274,786,802 255,854,051 ------------ ------------ Total deposits 318,735,180 294,721,754 Securities sold under agreements to repurchase 4,492,484 5,866,385 Other borrowed funds 43,755,317 46,861,045 Accrued expenses and other liabilities 2,582,896 1,627,541 ------------ ------------ Total liabilities 369,565,877 349,076,725 Stockholders' equity: Preferred stock of $.01 par value; authorized 200,000 shares; issued shares-none --- --- Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares 39,571 39,571 Additional paid-in capital 3,707,472 3,707,472 Retained earnings 27,714,180 26,743,281 Accumulated other comprehensive income (loss) (1,356,446) (1,834,128) Less: Treasury stock, 32,562 shares at September 30, 2000 and December 31, 1999, at cost (214,599) (214,599) ------------ ------------ Total stockholders' equity 29,890,178 28,441,597 ------------ ------------ Total liabilities and stockholders' equity $399,456,055 $377,518,322 ============ ============
See accompanying notes to consolidated financial statements. 3 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES Consolidated Statements of Earnings For The Three Months and Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ----------- ----------- Interest income: Interest and fees on loans $5,705,495 $5,388,481 $16,917,822 $15,016,575 Interest and dividends on investment securities: Taxable 1,794,903 1,080,000 4,874,960 3,279,436 Tax-exempt 14,068 18,599 42,236 59,261 ---------- ---------- ----------- ----------- Total interest and dividends on investment securities 1,808,971 1,098,599 4,917,196 3,338,697 Interest on federal funds sold 119,777 50,043 463,033 164,484 Interest on interest-bearing deposits with other banks 36,859 24,035 126,947 77,544 ---------- ---------- ----------- ----------- Total interest income 7,671,102 6,561,158 22,424,998 18,597,300 Interest expense: Interest on deposits 3,829,358 2,770,276 10,948,516 7,783,103 Interest on federal funds purchased and securities sold under agreements to repurchase 57,492 56,315 204,668 268,842 Interest on other borrowings 615,046 560,191 1,837,387 1,500,596 ---------- ---------- ----------- ----------- Total interest expense 4,501,896 3,386,782 12,990,571 9,552,541 ---------- ---------- ----------- ----------- Net interest income 3,169,206 3,174,376 9,434,427 9,044,759 Provision for loan losses 1,353,000 1,142,310 2,163,000 1,474,327 ---------- ---------- ----------- ----------- Net interest income after provision for loan losses 1,816,206 2,032,066 7,271,427 7,570,432 Noninterest income: Service charges on deposit accounts 358,644 300,172 1,002,026 846,059 Investment securities gains/(losses), net 25,032 (6,022) 45,941 151 Other 656,841 415,980 1,746,161 1,264,186 ---------- ---------- ----------- ----------- Total noninterest income 1,040,517 710,130 2,794,128 2,110,396 Noninterest expense: Salaries and benefits 929,080 955,638 2,954,075 2,788,805 Net occupancy expense 279,909 292,257 833,839 844,950 Other 1,147,562 795,781 3,029,146 2,313,998 ---------- ---------- ----------- ----------- Total noninterest expense 2,356,551 2,043,676 6,817,060 5,947,753 Earnings before income tax expense 500,172 698,520 3,248,495 3,733,075 Income tax expense 154,501 214,923 1,100,224 1,325,828 ---------- ---------- ----------- ----------- Net earnings $ 345,671 $ 483,597 $ 2,148,271 $ 2,407,247 ========== ========== ============ =========== Basic and diluted earnings per share $ 0.09 $ 0.12 $ 0.55 $ 0.61 ========== ========== ============ =========== Weighted average shares outstanding 3,924,573 3,924,573 3,924,573 3,924,573 ========== ========== ============ =========== Dividends per share $ 0.10 $ 0.10 $ 0.30 $ 0.22 ========== ========== ============ ===========
See accompanying notes to consolidated financial statements. 4 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (Unaudited) Accumulated Additional Other Paid-In Retained Comprehensive Common Stock Capital Earnings Income(Loss) ------------ ---------- ---------- ------------- Balance at December 31, 1997 $ 39,571 3,707,472 22,396,461 175,436 Net earnings --- --- 3,439,417 --- Cash dividends paid ($0.19 per share) --- --- (758,752) --- Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- --- 158,490 Payment of Employee Stock Ownership Plan Debt --- --- --- --- -------- --------- ---------- ---------- Balance at December 31, 1998 $ 39,571 3,707,472 25,077,126 333,926 Net earnings --- --- 2,922,018 --- Cash dividends paid ($0.32 per share) --- --- (1,255,863) --- Other comprehensive loss due to unrealized gain (loss) on investment securities available for sale, net --- --- --- (2,168,054) -------- --------- ---------- ---------- Balance at December 31, 1999 $ 39,571 3,707,472 26,743,281 (1,834,128) Net earnings --- --- 2,148,271 --- Cash dividends paid ($0.30 per share) --- --- (1,177,372) --- Other comprehensive gain due to unrealized gain (loss) on investment securities available for sale, net --- --- --- 477,682 -------- --------- ---------- ---------- Balance at September 30, 2000 $ 39,571 3,707,472 27,714,180 (1,356,446) ======== ========= ========== ==========
Employee Stock Ownership Treasury Plan Debt Stock Total -------------- ---------- ---------- Balance at December 31, 1997 (56,934) (214,599) 26,047,407 Net earnings --- --- 3,439,417 Cash dividends paid ($0.19 per share) --- --- (758,752) Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- 158,490 Payment of Employee Stock Ownership Plan Debt 56,934 --- 56,934 -------- -------- ---------- Balance at December 31, 1998 0 (214,599) 28,943,496 Net earnings --- --- 2,922,018 Cash dividends paid ($0.32 per share) --- --- (1,255,863) Other comprehensive loss due to unrealized gain (loss) on investment securities available for sale, net --- --- (2,168,054) -------- -------- ---------- Balance at December 31, 1999 0 (214,599) 28,441,597 Net earnings --- --- 2,148,271 Cash dividends paid ($0.30 per share) --- --- (1,177,372) Other comprehensive gain due to unrealized gain (loss) on investment securities available for sale, net --- --- 477,682 -------- -------- ---------- Balance at September 30, 2000 0 (214,599) 29,890,178 ========= ========= ==========
See accompanying notes to consolidated financial statements. 5 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 2000 and 1999 (Unaudited)
2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,148,271 $ 2,407,247 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and Amortization 449,617 446,471 Accretion of investment discounts & loan fees (465,905) (9,382) Provision for loan losses 2,163,000 1,474,327 Loss on disposal of premises & equipment 11,466 57,609 Gain on sale of investment securities (45,941) (151) Increase in interest receivable (496,591) (577,242) Increase in other assets (1,503,949) (939,805) Increase in interest payable 409,917 281,253 Increase in other liabilities 545,437 451,042 ------------ ------------ Net cash provided by operating activities 3,215,322 3,591,369 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities/calls/paydowns of investment securities held to maturity 4,708,455 2,083,458 Purchases of investment securities held to maturity (22,251,496) (4,363,642) Proceeds from maturities/calls/paydowns of investment securities available for sale 6,978,502 16,458,477 Proceeds from sale of investment securities available for sale 2,979,308 - Purchases of investment securities available for sale (26,189,957) (17,441,846) Net decrease/(increase) in loans 630,850 (40,834,787) Purchases of premises and equipment (97,293) (418,480) Proceeds from sale of premises and equipment - 5,951 Purchases of rental property (22,306) (5,070) Net decrease/(increase) in interest-earning deposits with other banks 1,062,712 (2,043,699) ------------ ------------ Net cash used in investing activities (32,201,225) (46,559,638) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in non-interest bearing deposits, NOW accounts and savings accounts 19,164,577 30,004,217 Net increase in certificates of deposit 4,848,849 23,559,471 Net decrease in securities sold under agreements to repurchase (1,373,901) (9,665,369) Net (decrease)/increase in borrowings from FHLB (3,088,687) 12,911,313 Net decrease in other long-term debt (17,041) (15,672) Dividends paid (1,177,372) (863,406) ------------ ------------ Net cash provided by financing activities 18,356,425 55,930,554 ------------ ------------ Net (decrease)/increase in cash and cash equivalents (10,629,478) 12,962,285 Cash and cash equivalents at beginning of period 27,372,397 9,480,225 ------------ ------------ Cash and cash equivalents at end of period $ 16,742,919 $ 22,442,510 ============ ============ Supplemental information on cash payments: Interest paid $ 12,580,654 $ 9,271,288 ============ ============ Income taxes paid $ 770,411 $ 1,623,229 ============ ============
6 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 Note 1 - General The consolidated financial statements in this report have not been audited. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations are not necessarily indicative of the results of operations which the Company may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1999. Note 2 - Comprehensive Income In September 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose statements. The Company adopted Statement 130 effective January 1, 1998. The primary component of the differences between net income and comprehensive income for the Company is unrealized gains/losses on available for sale securities. Total comprehensive income for the three months ended September 30, 2000 was $1,086,000 compared to $233,000 for the three months ended September 30, 1999. Total comprehensive income for the nine months ended September 30, 2000 was $2,626,000 compared to $1,009,000 for the nine months ended September 30, 1999. Note 3 - Derivatives Disclosure As part of its overall interest rate risk management activities, the Company utilizes off-balance sheet derivatives to modify the repricing characteristics of on-balance sheet assets and liabilities. The primary instruments utilized by the Company are interest rate swaps and interest rate floor and cap arrangements. The fair value of these off-balance sheet derivative financial instruments are based on dealer quotes and third party financial models. Note 4 - Accounting Pronouncements In September 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133" (Statement 137). Statement 133 is effective for financial statements for the first fiscal quarters of the fiscal years beginning after June 15, 2000. The Company has not completed its evaluation of the expected impact of Statement 133 on its financial statements upon adoption on January 1, 2001. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is designed to provide a better understanding of various factors related to the Company's results of operations and financial condition. This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2000 and 1999. Certain of the statements discussed are forward-looking statements for purposes of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements include statements using the words such as "may," "will," "anticipate," "should," "would," "believe," "evaluate," "assessment," "contemplate," "expect," "estimate," "continue," "intend" or similar words and expressions of the future. Our actual results may differ significantly from the results we discuss in these forward-looking statements. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and other interest-sensitive assets and liabilities; interest rate risks; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in the Company's market area and elsewhere, including institutions operating, regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer and Internet; and the failure of assumptions underlying the establishment of reserves for loan losses. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. Summary Net income of $346,000 for the quarter ended September 30, 2000 represented a decrease of $138,000 (28.5%) from the Company's net income of $484,000 for the same period of 1999. Basic earnings per share decreased $0.03 (25.0%) to $0.09 during the third quarter of 2000 from $0.12 for the third quarter of 1999. Net income decreased $259,000 (10.8%) to $2,148,000 for the nine month period ended September 30, 2000 compared to $2,407,000 for the same period of 1999. During the nine month period ended September 30, 2000 compared to the same period of 1999, the Company experienced increases in net interest income, provision for loan losses, noninterest income and noninterest expense due to the continued growth of the Company. The net yield on total interest-earning assets declined to 3.42% for the nine months ended September 30, 2000 from 3.84% for the nine months ended September 30, 1999. The decrease in the net yield on interest- earning assets is due to an overall increase in the yield on interest-earning assets offset by a higher increase in the cost of interest-bearing liabilities. See the "Consolidated Average Balances, Interest Income/Expense and Yields/ Rates" table. Total assets of $399,456,000 at September 30, 2000 represents an increase of $21,938,000 (5.8%) over total assets of $377,518,000, at December 31, 1999. This increase resulted primarily from increases in investment securities held to maturity and available for sale offset by a decrease in cash and cash equivalents. Financial Condition Investment Securities and Federal Funds Sold Investment securities held to maturity were $28,046,000 and $10,068,000 at September 30, 2000 and December 31, 1999, respectively. This increase of 8 $17,978,000 (178.6%) was primarily the result of purchases of $14,453,000 in U.S. agency securities, $2,485,000 in mortgage backed securities and $5,314,000 in CMOs, offset by $4,708,000 of scheduled paydowns, maturities and calls of principal amounts. Investment securities available for sale increased $17,105,000 (25.2%) to $84,904,000 at September 30, 2000 from $67,799,000 at December 31, 1999. This increase is a result of purchases of $9,504,000 in U.S. agency securities, $1,902,000 in mortgage backed securities, and $14,784,000 in CMOs. This increase is offset by $6,977,000 of scheduled paydowns, maturities and calls of principal amounts. In addition, $1,983,000 of U.S. agency securities and $997,000 of CMOs were sold in the first quarter of 2000. Federal funds sold decreased to $4,850,000 at September 30, 2000 from $15,710,000 at December 31, 1999. This decrease is primarily due to the reinvestment of federal funds sold to investment securities held to maturity and investment securities available for sale. In addition, this reflects normal activity in the Bank's funds management efforts. Loans Total loans, net of unearned income, of $257,705,000 at September 30, 2000 reflected a decrease of $2,901,000 (1.1%) compared to the total loans of $260,606,000, net of unearned income, at December 31, 1999. The Bank primarily experienced growth in commercial real estate loans offset by a larger decrease in commercial, financial and agricultural and commercial real estate construction categories of loans during the first nine months of 2000. Commercial, financial and agricultural, residential real estate and commercial real estate loans represented the majority of the loan portfolio with approximately 27.44%, 26.47% and 33.53% of the Bank's total loans, net of unearned income at September 30, 2000, respectively. The net yield on loans was 8.60% for the nine months ended September 30, 2000 compared to 8.38% for the nine months ended September 30, 1999. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Allowance for Loan Losses and Risk Elements The allowance for loan losses reflects management's assessment and estimates of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management reviews the components of the loan portfolio in order to estimate the appropriate provision required to maintain the allowance at a level believed adequate in relation to anticipated future loan losses. In assessing the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as the Bank's loan loss experience, the amount of past due and nonperforming loans, specific known risks, the status, amounts, and values of nonperforming assets (including loans), underlying collateral values securing loans, current and anticipated economic conditions, and other factors, including developments anticipated by management with respect to various credits that management believes will affect the allowance for loan losses. The table below summarizes the changes in the allowance for loan losses for the nine months ended September 30, 2000 and the year ended December 31, 1999.
Nine months ended Year ended September 30, December 31, 2000 1999 ---------------------- ------------------------ (In thousands) Balance at beginning of period, January 1, $3,775 $2,808 Charge-offs 2,410 1,632 Recoveries 139 93 ------ ------ Net charge-offs 2,271 1,539 Provision for loan losses 2,163 2,506 ------ ------ Ending balance $3,667 $3,775
9 The allowance for loan losses was $3,667,000 (1.42% of total outstanding loans, net of unearned income) at September 30, 2000 compared to $3,775,000 (1.45% of total outstanding loans, net of unearned income) at December 31, 1999. The Company has been engaged in a detailed, ongoing loan review program with an outside loan reviewer. In November and early December 2000, management and the board of directors completed an extensive review of the loan reviewer's findings and the credits identified as having problems or potential problems. As a result, an additional provision of $600,000 was made to the allowance for loan losses as of September 30, 2000 and the financial statements as of and for the period then ended have been restated to reflect such additional provision. This provision reflects, in part, an increase in the percentage of the Company's loan portfolio reviewed by the independent consultant in 2000, as well as management's more detailed evaluations, estimates and judgements regarding various identified credits. In addition, the Board has contracted with another independent loan review services provider to undertake and complete a review of the Bank's portfolio and adequacy of its allowance for loan losses prior to December 31, 2000. Consistent with its methodology for calculating the adequacy of the allowance for loan losses, management believes the provisions made during the third quarter, including the additional $600,000 referred to above, are adequate to absorb anticipated risks identified in the portfolio. No assurance can be given, however, that adverse economic circumstances, generally, including a slowing economy, or other events, including additional loan review or examination findings or changes in borrowers' financial conditions, will not result in increased losses in the Bank's loan portfolio or in additional provision to the allowance for loan losses. During the first nine months of 2000, the Bank made $2,163,000 in provisions to the allowance for loan losses based on management's assessment of the credit quality of the loan portfolio, including anticipated improvements in certain credits. The increase in the provision is based upon internal and external reviews of the loan portfolio, including a second quarter regulatory examination, and estimates of deterioration in the credit quality of certain loans. For the nine months ended September 30, 2000, the Bank had charge-offs of $2,410,000 and recoveries of $139,000. Nonperforming assets, comprised of nonaccrual loans, renegotiated loans, other nonperforming assets, and accruing loans 90 days or more past due were $8,420,000 at September 30, 2000 up 22.9% from the $6,853,000 of non-performing assets at December 31, 1999. This increase is primarily due to additional nonaccrual loans identified in the third quarter relating to four relationships totaling approximately $907,000. Also, other nonperforming assets increased due to additional foreclosed property of approximately $1.1 million resulting from four relationships. If nonaccrual loans had performed in accordance with their original contractual terms, interest income would have increased approximately $513,000 for the nine months ended September 30, 2000. The table below provides information concerning nonperforming assets and certain asset quality ratios at September 30, 2000 and December 31, 1999.
September 30, 2000 December 31, 1999 ----------------------- ---------------------- (In thousands) Nonaccrual loans $6,830 6,075 Renegotiated loans -- -- Other nonperforming assets (primarily other real estate) 1,575 509 Accruing loans 90 days or more past due 15 269 ------ ----- Total nonperforming assets $8,420 6,853 ====== ===== Allowance as a percent of total loans 1.42% 1.45% outstanding Allowance as a percent of nonaccrual, renegotiated and other nonperforming assets 43.63% 57.34%
Potential problem loans consist of those loans where management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. At September 30, 2000, 126 loans totaling $8,614,000, or 3.34% of total loans outstanding, net of unearned income, were considered potential problem loans compared to 92 10 loans totaling $10,798,000, or 4.41% of total loans outstanding, net of unearned income, at December 31, 1999. The decrease in the amount of potential problem loans is due to improvements in one large loan totaling approximately $3 million. At September 30, 2000 the amount of impaired loans were $7,050,000, which included 42 loans to 12 borrowers with a total valuation allowance of approximately $523,000. In comparison, at December 31, 1999, the Company had approximately $5,177,000 of impaired loans, which included 7 loans to 2 borrowers with a total valuation allowance of approximately $345,000. Deposits Total deposits increased $24,013,000 (8.2%) to $318,735,000 at September 30, 2000, as compared to $294,722,000 at December 31, 1999. Noninterest-bearing deposits increased $5,080,000 (13.1%) during the first nine months of 2000, while total interest-bearing deposits increased $18,933,000 (7.4%) to $274,787,000 at September 30, 2000 from $255,854,000 at December 31, 1999. The growth in noninterest-bearing deposits is due primarily to an increase in regular demand deposit accounts. During the first nine months of 2000, the Bank also experienced significant increases in money market accounts of $12,040,000 (20.3%), and certificates of deposits less than $100,000 of $7,181,000 (9.9%). The Company considers the other shifts in the deposit mix to be within the normal course of business and in line with the management of the Bank's overall cost of funds. The average rate paid on interest-bearing deposits was 5.37% for the nine months ended September 30, 2000 compared to 4.65% for the same period of 1999. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Capital Resources and Liquidity The Company's consolidated stockholders' equity was $29,890,000 at September 30, 2000, compared to $28,442,000 at December 31, 1999. This represents an increase of $1,448,000 (5.1%) during the first nine months of 2000. Net earnings for the first nine months of 2000 were $2,155,000 compared to $2,407,000 for the same period of 1999. In addition, the Company experienced a decrease in accumulated other comprehensive loss to $1,356,000 at September 30, 2000 from $1,834,000 at December 31, 1999 due to an increase in market value of investment securities available for sale. During the first nine months of 2000, cash dividends of $1,177,000, or $0.30 per share, were declared on Common Stock, compared to $863,000, or $0.22 per share for the first nine months of 1999. Certain financial ratios for the Company as of September 30, 2000 and December 31, 1999 are presented in the following table:
September 30, 2000 December 31, 1999 Return on average assets - annualized 0.73% 0.85% Return on average equity - annualized 9.92% 9.86%
The Company's Tier 1 leverage ratio was 7.81%, Tier I risk-based capital ratio was 11.67% and Total risk-based capital ratio was 12.81% at September 30, 2000. These ratios exceed the minimum regulatory capital percentages of 4.0% for Tier 1 leverage ratio, 4.0% for Tier I risk-based capital ratio and 8.0% for Total risk-based capital ratio. Based on current regulatory standards, the Company believes it is a "well capitalized" bank. The primary source of liquidity during the first nine months of 2000 was deposit growth. The Company used these funds primarily in the purchase of investment securities. In addition, an advance of $3 million matured from the Federal Home Loan Bank of Atlanta ("FHLB-Atlanta"). Under the advance program with FHLB-Atlanta, the Bank had outstanding advances totaling approximately $43,551,000, leaving credit available, net of advances drawn down, of approximately $6,449,000 at September 30, 2000. Net cash provided by operating activities of $3,215,000 for the nine months ended September 30, 2000, consisted primarily of net earnings. Net cash used in investing activities of $32,201,000 funded investment securities purchases of $48,441,000 offset by proceeds from maturities, calls and paydowns of investment securities and proceeds from sale of investment securities available for sale of $11,687,000 and $2,979,000, respectively. The $18,356,000 in net cash provided by financing activities resulted primarily from increases of $19,165,000 in non- interest bearing deposits, NOW accounts and savings accounts, and increases in certificates of deposit of $4,849,000 11 offset by a decrease in borrowings from FHLB of $3,089,000, a decrease in securities sold under agreements to repurchase of $1,374,000 and dividends paid of $1,177,000. Interest Rate Sensitivity Management At September 30, 2000, interest sensitive assets that repriced or matured within the next 12 months were $165,250,000, compared to interest sensitive liabilities that reprice or mature within the same time frame totaling $255,180,000. The cumulative GAP position (the difference between interest sensitive assets and interest sensitive liabilities) of a negative $89,938,000, resulted in a GAP ratio (calculated as interest sensitive assets divided by interest sensitive liabilities) of 64.76%. This compares to a twelve month cumulative GAP position at December 31, 1999, of a negative $2,534,000 and a GAP ratio of 99%. A negative GAP position indicates that the Company has more interest-bearing liabilities than interest-earning assets that reprice within the GAP period, and that net interest income may be adversely affected in a rising rate environment as rates earned on interest-earning assets rise more slowly than rates paid on interest-bearing liabilities. A positive GAP position indicates that the Company has more interest-earning assets than interest- bearing liabilities that reprice within the GAP period. The Bank's Asset/Liability Management Committee ("ALCO") is charged with the responsibility of managing, to the degree prudently possible, its exposure to "interest rate risk," while attempting to provide earnings enhancement opportunities. Based on ALCO's alternative interest rate scenarios used by the Company in modeling for asset/liability planning purposes and the GAP position at September 30, 2000 and various assumptions and estimates, the Company's asset/liability model predicts that the Company's net interest income would not be negatively effected by more than 5.0% over 12 months. Such estimates and predictions are forecasts which may or may not be realized. See "ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK". Results of Operations Net Income Net income decreased $138,000 (28.5%) to $346,000 for the three month period ended September 30, 2000 compared to $484,000 for the same period of 1999. Basic earnings per share was $0.09 and $0.12 for the third quarter of 2000 and 1999, respectively. Net income decreased $259,000 (10.8%) to $2,148,000 for the nine month period ended September 30, 2000, compared to $2,407,000 for the same period of 1999. During the nine month period ended September 30, 2000 compared to the same period of 1999, the Company experienced increases in net interest income, provision for loan losses, noninterest income, and noninterest expense due to the continued growth of the Company. Net Interest Income Net interest income was $3,169,000 for the third quarter of 2000. The decrease of $5,000 (0.2%) from $3,174,000 for the same period of 1999, resulted primarily from the increase in interest on deposits offset by the increase in interest and fees on loans and interest and dividends from investment securities. Net interest income increased $389,000 (4.3%) to $9,434,000 for the nine months ended September 30, 2000, compared to $9,045,000 for the nine months ended September 30, 1999. Such increases resulted from overall growth in the Company's average interest-earning assets offset by a decrease in net taxable yield on the Company's interest-earning assets during the first nine months of 2000 compared to the same period of 1999. Through the third quarter of 2000, the Company's GAP position remained more liability sensitive to changes in interest rates as compared to December 31, 1999. The Company continues to regularly review and manage its asset/liability position in an effort to manage the negative effects of changing rates. See "Financial Condition - Interest Rate Sensitivity Management" and the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Interest Income Interest income is a function of the volume of interest earning assets and their related yields. Interest income was $7,671,000 and $6,561,000 for the three months ended September 30, 2000 and 1999, respectively. This represents an increase of $1,110,000 (16.9%) for the third quarter of 2000 compared to 1999. For the nine months ended September 30, 2000 interest income was $22,425,000, an increase of $3,828,000 (20.6%) compared to $18,597,000 for the same period of 1999. This change for the first nine months of 2000 resulted as the average 12 volume of interest earning assets outstanding increased $51,786,000 (16.4%) over the same period of 1999 and the Company's yield on interest-earning assets increased 25 basis points. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Loans are the main component of the Bank's earning assets. Interest and fees on loans were $5,705,000 and $5,388,000 for the third quarter of 2000 and 1999, respectively. This reflects an increase of $317,000 (5.9%) during the three months ended September 30, 2000 over the same period of 1999. For the nine month period ended September 30, 2000, interest and fees on loans increased $1,901,000 (12.7%) to $16,918,000 from $15,017,000 for the same period of 1999. The average volume of loans increased $22,586,000 (9.4%) as of September 30, 2000 compared to the same period of 1999, while the Company's yield on loans also increased by 22 basis points comparing these same periods. For the three month period ended September 30, 2000, interest income on investment securities increased $710,000 (64.6%) to $1,809,000 from $1,099,000 for the same period of 1999. Interest income on investment securities for the nine month period ended September 30, 2000, increased $1,578,000 (47.3%) to $4,917,000 from $3,339,000 for the same period of 1999. The Company's average volume of investment securities increased by $23,237,000 (33.0%) for the first nine months of 2000, compared to the same period of 1999, while the net yield on these average balances also increased by 63 basis points. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Interest Expense Total interest expense increased $1,115,000 (32.9%) to $4,502,000 for the third quarter of 2000 compared to $3,387,000 for the same period of 1999. Total interest expense increased $3,438,000 (36.0%) to $12,991,000 from $9,553,000 for the nine months ended September 30, 2000 and 1999, respectively. This change resulted as the Company's average interest-bearing liabilities increased 19.6% and the rates paid on these liabilities increased 63 basis points during the first nine months of 2000 compared to the same period of 1999. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Interest on deposits, the primary component of total interest expense, increased $1,059,000 (38.2%) to $3,829,000 for the third quarter of 2000 compared to $2,770,000 for the same period of 1999. Interest on deposits were $10,949,000 and $7,783,000 for the nine months ended September 30, 2000 and 1999, respectively. The increase for the nine month period ended September 30, 2000 is due to a 21.5% increase in the average volume and a 72 basis point increase in the rate paid on interest-bearing deposits. Interest expense on other borrowed funds, was $615,000 and $560,000 for the third quarters of 2000 and 1999, respectively. This represents an increase of $55,000 or 9.8%. For the nine months ended September 30, 2000, interest expense on borrowed funds increased $336,000 (22.4%) to $1,837,000 from $1,501,000 for the same period of 1999. This increase for the nine month period ended September 30, 2000 is due to a 19.2% increase in the average volume and a 13 basis point increase in the rate paid on other borrowed funds. The increase in the average volume is primarily from the increase in FHLB-Atlanta advances. Provision for Loan Losses The provision for loan losses is based on management's assessments and estimates of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The provision for loan losses was $2,163,000 for the nine months ended September 30, 2000 compared to $1,474,000 for the nine months ended September 30, 1999. The increase in the provision is due to results and estimates of deterioration in certain loans determined by recent analyses and loan reviews performed during a normal independent loan review and a second quarter regulatory examination. See "---Allowance for Loan Loss AND RISK ELEMENTS." Noninterest Income Noninterest income increased $331,000 (46.6%) to $1,041,000 for the third quarter of 2000 from $710,000 for the same period of 1999. Noninterest income was $2,794,000 and $2,110,000 for the nine months ended September 30, 2000 and 1999, respectively. This increase for the third quarter is mainly due to increases in service charges on deposit accounts and other noninterest income. 13 Service charges on deposit accounts for the third quarter of 2000 increased $59,000 (19.7%) to $359,000 from $300,000 for the third quarter of 1999. Service charges on deposit accounts were $1,002,000 and $846,000 for the nine months ended September 30, 2000 and 1999, respectively. These increases are primarily due to increases in nonsufficient funds and overdraft charges due to an increase in nonsufficient fund items. Other noninterest income increased $241,000 (57.9%) to $657,000 for the third quarter of 2000 from $416,000 for the same period of 1999. Other noninterest income was $1,746,000 and $1,264,000 for the nine months ended September 30, 2000 and 1999, respectively. This increase primarily resulted from an increase in Mastercard/VISA discounts and fees due to Auburn University's acceptance of Mastercard/VISA for tuition, an increase in checkcard income due to inception of the checkcard in January 1999, an increase in stock dividends from stock owned in other companies and the loss on premises and equipment in the prior year due primarily to computer equipment that was not Year 2000 compliant. Noninterest Expense Total noninterest expense was $2,357,000 and $2,044,000 for the third quarter of 2000 and 1999, respectively, representing an increase of $313,000 or 15.3%. For the nine months ended September 30, 2000, total noninterest expense increased $869,000 (14.6%) to $6,817,000 from $5,948,000 for the same period of 1999. This increase was due to increases in salaries and benefits expense and other noninterest expense. Salaries and benefits expense was $929,000 and $956,000 for the three months ended September 30, 2000 and 1999, respectively. This represents a decrease of $27,000 (2.8%) in the third quarter of 2000 compared to the third quarter of 1999. For the nine months ended September 30, 2000, total salaries and benefits expense increased $165,000 (5.9%) to $2,954,000 from $2,789,000 for the same period of 1999. This increase is primarily due to the increase in overall employee levels from the same period of 1999 offset by the decrease to the officer/employee incentive plan. Net occupancy expense was $280,000 and $292,000 for the third quarters of 2000 and 1999, respectively, representing a decrease of $12,000 or 4.1%. For the nine month period ended September 30, 2000, net occupancy decreased $11,000 (1.3%) to $834,000 from $845,000 for the same period of 1999. This decrease is due to a decrease in depreciation on furniture and equipment offset by an increase in lease payments for computer equipment. For the third quarter of 2000, other noninterest expense increased $352,000 (44.2%) to $1,148,000 from $796,000 for the third quarter of 1999. Other noninterest expense was $3,029,000 and $2,314,000 for the nine months ended September 30, 2000 and 1999, respectively . This increase is mainly due to the expenses associated with Auburn University's acceptance of Mastercard/VISA for tuition mentioned above, expenses due to the increased monitoring of nonaccrual loans, increase in computer software amortization due to additional purchases in 1999 and an increase in assessments due to an increase in FDIC Insurance Assessment rates and state bank assessment which did not occur in the first nine months of 1999. Income taxes Income tax expense was $155,000 and $215,000 for the third quarters of 2000 and 1999, respectively. For the nine months ended September 30, 2000, income tax expense decreased $226,000 (17.0%) to $1,100,000 from $1,326,000 for the nine months ended September 30, 2000. These levels represent an effective tax rate on pre-tax earnings of 33.9% for the nine months ended September 30, 2000 which is consistent with the Company's expected annual effective rate. Impact of Inflation and changing prices Virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant effect on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the price of goods and services because such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of desired performance levels. 14 However, relatively low levels of inflation in recent years have resulted in a rather insignificant effect on the Company's operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk has increased during the first nine months of 2000. The change in interest sensitivity is due primarily to three factors. At year end 1999, the Company had intentionally allowed overnight federal funds to build up to a higher-than-normal level of $15, 710,000 as a safeguard against possible problems with date change associated with the century change (Y2K). During the first nine months of 2000, these funds have been reinvested in investment securities with longer maturities and higher yields, primarily U. S. agency securities, mortgage backed securities and CMOs. The second contributing factor is the $9,682,000 increase in high yielding money market deposit accounts, which allow the customer to make withdrawals by check or other transaction measures daily. The final factor contributing to the increase in market sensitivity is the maturing of $20,000,000 in notional value of interest rate floors, which had protected a like amount of variable loans against a possible drop in interest rates below the floor rate. All of these factors had the effect of increasing the Company's balance sheet sensitivity to changes in interest rates. The Company measures its exposure to an immediate shift in interest rates of up or down 200 basis points. Given these conditions, the bank's modeling projects that net interest income could decrease by 5.63% (the Company's policy limit is 5%) given an immediate and sustained upward movement in interest rates of 200 basis points. For an immediate drop in interest rates of 200 basis points, the modeling projects that the Company's net interest income could increase by 5.08%. Given an immediate and sustained upward movement in interest rates of 100 basis points, which the management believes to be a more likely scenario, the Bank's modeling projects that net interest income could drop by 1.39%. As the Company does not consider this change in market sensitivity to be significant, the market rate table, as shown in the Company's 1999 Annual Report filed on Form 10-K, has not been included in this filing. PART II OTHER INFORMATION ITEM 5. OTHER EVENTS The proxy statement solicited by the Company's Board of Directors with respect to the Company's 2000 Annual Meeting of Shareholders will confer discretionary authority to vote on any proposals of shareholders intended to be presented for consideration at such Annual Meeting that are submitted to the Company after February 27, 2001. 15 AUBURN NATIONAL BANCORPORATION, INC.
Item 6(a) EXHIBIT INDEX Exhibit Sequentially Number Description Numbered Page ------- ----------- -------------- 3.A Certificate of Incorporation of Auburn National Bancorporation, Inc.* --- 3.B Bylaws of Auburn National Bancorporation, Inc.* --- 10.A Auburn National Bancorporation, Inc. 1994 Long-term Incentive Plan.* --- 10.B Lease and Equipment Purchase Agreement, Dated September 15, 1987.* --- 27 Financial Data Schedule
------------------------- * Incorporated by reference from Registrant's Registration Statement on Form SB-2. (b) Reports filed on Form 8-K for the quarter ended September 30, 2000: none 16 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES Consolidated Average Balances, Interest Income/Expense and Yields/Rates Taxable Equivalent Basis Nine Months Ended September 30, ---------------------------------------------------------- 2000 1999 ---------------------------------------------------------- Average Yield/ Average Yield/ ASSETS Balance Interest Rate Balance Interest Rate ----------------------------------------------- ------- -------- ------ ------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans, net of unearned income (1) 262,130 16,918 8.60% 239,544 15,017 8.38% Investment securities: Taxable 92,556 4,875 7.02% 68,880 3,279 6.37% Tax-exempt (2) 1,160 64 7.35% 1,600 90 7.50% -------- ------ ------- ------ Total investment securities 93,716 4,939 7.02% 70,479 3,369 6.39% Federal funds sold 10,131 463 6.09% 4,509 164 4.88% Interest-earning deposits with other banks 2,184 127 7.74% 1,842 78 5.63% -------- ------ ------- ------ Total interest-earning assets 368,161 22,447 8.12% 316,375 18,628 7.87% Allowance for loan losses (3,945) (2,834) Cash and due from banks 10,784 9,524 Premises and equipment 3,264 3,506 Rental property, net 1,628 1,742 Other assets 10,002 6,319 -------- ------- Total assets 389,893 334,631 ======== ======= LIABILITIES & STOCKHOLDERS' EQUITY ---------------------------------- Interest-bearing liabilites: Deposits: Demand $ 34,958 853 3.25% 25,731 452 2.35% Savings and money market 80,042 2,967 4.94% 69,735 2,180 4.18% Certificates of deposits less than $100,000 77,294 3,756 6.47% 70,327 3,042 5.78% Certificates of deposits and other time deposits of $100,000 or more 79,357 3,373 5.66% 57,788 2,109 4.88% -------- ------ ------- ------ Total interest-bearing deposits 271,651 10,949 5.37% 223,581 7,783 4.65% Federal funds purchased and securities sold under agreements to repurchase 4,813 205 5.67% 7,364 269 4.88% Other borrowed funds 44,047 1,837 5.56% 36,968 1,501 5.43% -------- ------ ------- ------ Total interest-bearing liabilities 320,510 12,991 5.40% 267,913 9,553 4.77% Noninterest-bearing deposits 37,541 34,734 Accrued expenses and other liabilities 2,982 2,225 Stockholders' equity 28,860 29,758 -------- ------ Total liabilities and stockholders' equity $389,893 334,631 ======== ======= Net interest income $ 9,456 9,075 ======= ====== Net yield on total interest-earning assets 3.42% 3.84% ===== =====
----------- (1) Loans on nonaccrual status have been included in the computation of average balances. (2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%. 17 SIGNATURES In accordance with the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUBURN NATIONAL BANCORPORATION, INC. (Registrant) Date: December 6, 2000 By: /s/ E. L. Spencer, Jr. ----------------------------- -------------------------- E. L. Spencer, Jr. President, Chief Executive Officer and Director Date: December 6, 2000 By: /s/ C. Wayne Alderman ----------------------------- -------------------------- C. Wayne Alderman Director of Financial Operations 18