-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9NHbn10gxpOOMoWR8omaquXQmGjEgi66tFeEwVy9PF1dIxP8RGtIHYgP6aDZJPo SxWISY5L2ae6KcJSYpvksw== 0000950109-99-001834.txt : 19990517 0000950109-99-001834.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950109-99-001834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUBURN NATIONAL BANCORPORATION INC CENTRAL INDEX KEY: 0000750574 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 630885779 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26486 FILM NUMBER: 99622234 BUSINESS ADDRESS: STREET 1: 100 N GAY ST STREET 2: P O DRAWER 3110 CITY: AUBURN STATE: AL ZIP: 36831-3110 BUSINESS PHONE: 3348219200 MAIL ADDRESS: STREET 1: 100 NORTH GAY STREET STREET 2: P O DRAWER 3110 CITY: AUBURN STATE: AL ZIP: 36831 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended MARCH 31, 1999 --------------- [ ] 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 April 30, 1999: 3,924,573 SHARES OF COMMON STOCK, $.01 PAR ------------------------------------------- VALUE PER SHARE - --------------- Transitional Small Business Disclosure Format (check one): YES_____ NO X ----- AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY INDEX
PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1 Financial Information Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3 Consolidated Statements of Earnings for the Three Months Ended March 31, 1999 and 1998 4 Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION - ---------------------------------------- Item 5 Other Events 16 Item 6 Exhibits 17
2 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND DECEMBER 31, 1998 (UNAUDITED)
ASSETS 3/31/99 12/31/9 ------------------------------------------ -------------------- --------------------- Cash and due from banks $ 10,160,704 $ 9,220,225 Federal funds sold 2,200,000 260,000 -------------------- --------------------- Cash and cash equivalents 12,360,704 9,480,225 Interest-earning deposits with other banks 700,588 133,600 Investment securities held to maturity (fair value of $7,202,755 and $8,227,385 at March 31, 1999 and December 31, 1998, respectively): 7,100,102 8,094,283 Investment securities available for sale 64,035,043 63,585,573 Loans: Loans, less unearned income of $11,134 at March 31, 1999 and $15,494 at December 31, 1998, respectively 230,437,128 218,686,991 Less allowance for loan losses (2,744,803) (2,808,307) -------------------- --------------------- Loans, net 227,692,325 215,878,684 Premises and equipment, net 3,520,894 3,434,964 Rental property, net 1,735,391 1,760,294 Other assets 6,088,220 5,506,649 -------------------- --------------------- TOTAL ASSETS $323,233,267 $307,874,272 ==================== ===================== LIABILITIES & STOCKHOLDERS' EQUITY - ----------------------------------------------------------- Deposits: Noninterest-bearing $ 36,401,957 $ 34,724,182 Interest-bearing 214,962,700 198,780,568 -------------------- --------------------- Total deposits 251,364,657 233,504,750 Securities sold under agreements to repurchase 4,788,685 12,944,004 Other borrowed funds 35,966,010 31,000,458 Accrued expenses and other liabilities 1,940,236 1,481,564 -------------------- --------------------- TOTAL LIABILITIES 294,059,588 278,930,776 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 25,792,914 25,077,126 Accumulated other comprehensive income (loss) (151,679) 333,926 Less: Treasury stock, 32,562 shares at March 31, 1999 and December 31, 1998, at cost (214,599) (214,599) -------------------- --------------------- TOTAL STOCKHOLDERS' EQUITY 29,173,679 28,943,496 -------------------- --------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $323,233,267 $307,874,272 ==================== =====================
See accompanying notes to consolidated financial statements. -3- AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 1999 1998 ---------------------- --------------------- INTEREST INCOME: Interest and fees on loans $ 4,615,498 $ 4,124,000 Interest and dividends on investment securities: Taxable 1,137,139 898,043 Tax-exempt 20,905 27,516 ---------------------- --------------------- Total interest and dividends on investment securities 1,158,044 925,559 Interest on federal funds sold 55,872 76,112 Interest on interest-earning deposits with other banks 29,656 27,935 ---------------------- --------------------- TOTAL INTEREST INCOME 5,859,070 5,153,606 INTEREST EXPENSE: Interest on deposits 2,419,964 2,375,432 Interest on federal funds purchased and securities sold under agreements to repurchase 166,099 32,000 Interest on other borrowings 438,666 218,516 ---------------------- --------------------- TOTAL INTEREST EXPENSE 3,024,729 2,625,948 ---------------------- --------------------- NET INTEREST INCOME 2,834,341 2,527,658 PROVISION FOR LOAN LOSSES 150,000 86,030 ---------------------- --------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,684,341 2,441,628 NONINTEREST INCOME: Service charges on deposit accounts 260,374 206,486 Investment securities gains/(losses), net (1,944) 7,168 Other 414,222 349,125 ---------------------- --------------------- TOTAL NONINTEREST INCOME 672,652 562,779 NONINTEREST EXPENSE: Salaries and benefits 928,514 722,061 Net occupancy expense 262,041 254,117 Other 667,599 642,599 ---------------------- --------------------- TOTAL NONINTEREST EXPENSE 1,858,154 1,618,777 Earnings before income tax expense 1,498,839 1,385,630 Income tax expense 547,577 532,085 ---------------------- --------------------- NET EARNINGS $ 951,262 $ 853,545 ====================== ===================== BASIC EARNINGS PER SHARE $ 0.24 $ 0.22 ====================== ===================== WEIGHTED AVERAGE SHARES OUTSTANDING 3,924,573 3,924,573 ====================== ===================== DIVIDENDS PER SHARE $ 0.06 $ 0.05 ====================== =====================
See accompanying notes to consolidated financial statements. -4- AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
ACCUMULATED OTHER RETAINED COMPREHENSIVE COMMON STOCK SURPLUS EARNINGS INCOME ---------------- ----------- ------------ ----------------- BALANCE AT DECEMBER 31, 1996 $ 39,571 3,664,718 19,942,980 (146,528) Net earnings --- --- 3,080,043 --- Cash dividends paid ($0.16 per share) --- --- (626,562) --- Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- --- 321,964 Payment of Employee Stock Ownership Plan Debt --- --- --- --- Sale of treasury stock (5,488 shares) 42,754 Purchase of treasury stock (368 shares) --- --- --- --- ------------ --------- ----------- ------------- 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 ------------ --------- ----------- ------------- BALANCE AT DECEMBER 31, 1998 $ 39,571 3,707,472 25,077,126 333,926 ============ ========= =========== ============= THROUGH MARCH 31, 1999: - ----------------------- Net earnings --- --- 951,262 --- Cash dividends paid ($0.06 per share) --- --- (235,474) --- Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- --- (485,605) ------------- --------- ----------- ------------- BALANCE AT MARCH 31, 1999 39,571 3,707,472 25,792,914 (151,679) ============= ========= =========== ============= EMPLOYEE STOCK OWNERSHIP TREASURY PLAN DEBT STOCK TOTAL --------------- -------------- ----------- BALANCE AT DECEMBER 31, 1996 (113,940) (304,009) 23,082,792 Net earnings --- --- 3,080,043 Cash dividends paid ($0.16 per share) --- --- (626,562) Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- 321,964 Payment of Employee Stock Ownership Plan Debt 57,006 --- 57,006 Sale of treasury stock (5,488 shares) 98,058 140,812 Purchase of treasury stock (368 shares) --- (8,648) (8,648) --------------- -------------- ----------- 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 56,934 --- 215,424 --------------- -------------- ----------- BALANCE AT DECEMBER 31, 1998 0 (214,599) 28,943,496 =============== ============== =========== THROUGH MARCH 31, 1999: - ----------------------- Net earnings --- --- 951,262 Cash dividends paid ($0.06 per share) --- --- (235,474) Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- (485,605) --------------- -------------- ----------- BALANCE AT MARCH 31, 1999 0 (214,599) 29,173,679 =============== ============== ===========
See accompanying notes to consolidated financial statements. -5- AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1999 1998 -------------------- --------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 951,262 $ 853,545 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and Amortization 142,262 168,266 Amortization/(accretion) of investment discounts & loan fees 11,053 (85,145) Provision for loan losses 150,000 86,030 Loss on sale of premises & equipment 7,600 --- (Increase)/decrease in interest receivable (153,194) 139,359 (Increase)/decrease in other assets (335,674) 99,659 (Decrease)/increase in interest payable (44,971) 1,588 Increase/(decrease) in other liabilities 726,261 (196,978) -------------------- --------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,454,599 1,066,324 -------------------- --------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities/calls/paydowns of investment securities held to maturity 990,390 1,174,989 Proceeds from maturities/calls/paydowns of investment securities available for sale 6,707,902 1,624,449 Purchases of investment securities available for sale (7,973,975) (7,002,277) Net increase in loans (11,963,641) (5,447,989) Purchases of premises and equipment (207,340) (53,363) Proceeds from sale of premises and equipment 4,866 --- Purchases of rental property --- (16,490) Net increase in interest-bearing deposits with other banks (566,988) (1,638,430) -------------------- --------------------- NET CASH USED IN INVESTING ACTIVITIES (13,008,786) (11,359,111) -------------------- --------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in non-interest bearing deposits, NOW accounts and savings accounts 21,027,756 5,632,435 Net decrease in certificates of deposit (3,167,849) (3,089,577) Net (decrease)/increase in securities sold under agreements to repurchase (8,155,319) 1,762,971 Net increase in borrowings from FHLB 4,970,438 9,970,438 Net decrease in other long-term debt (4,886) (4,328) Dividends paid (235,474) (183,148) -------------------- --------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 14,434,666 14,088,791 -------------------- --------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,880,479 3,796,004 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,480,225 14,883,412 -------------------- --------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,360,704 $ 18,679,416 ==================== ===================== Supplemental information on cash payments: Interest paid $ 3,069,700 $ 2,624,360 ==================== ===================== Income taxes paid $ 167,064 $ 248,198 ==================== =====================
-6- AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 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 the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-KSB for the year ended 31, 1998. NOTE 2 - COMPREHENSIVE INCOME In June 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 March 31, 1999 was $466,000 compared to $837,000 for the three months ended March 31, 1998. 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 June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). Statement 133 is effective for financial statements for the first fiscal quarters of the fiscal years beginning after June 15, 1999. The Company does not believe the provisions of Statement 133 will have a significant impact on the financial statements upon adoption. 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 months ended March 31, 1999 and 1998. SUMMARY Net income of $951,000 for the quarter ended March 31, 1999 represented an increase of $97,000 (11.4%) from the Company's net income of $854,000 for the same period of 1998. Basic income per share increased $0.02 (9.1%) to $0.24 during the first quarter of 1999 from $0.22 for the first quarter of 1998. During the three month period ended March 31, 1999 compared to the same period of 1998, the Company experienced increases in net interest income, noninterest income, provision for loan losses and noninterest expense due to continued growth of the Company. The net yield on total interest-earning assets was 7.83% for the three months ended March 31, 1999 compared to 8.32% for the three months ended March 31, 1998. The decrease in the net yield on interest-earning assets is due to a decrease in the yield of total loans, net of unearned income, investments securities, interest-bearing deposits with other banks and federal funds sold. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Total assets of $323,233,000 at March 31, 1999 reflected an increase of $15,359,000 (5.0%) over total assets of $307,874,000, at December 31, 1998. This increase resulted primarily from increases in total loans, net of unearned income, federal funds sold and investment securities available for sale. This was offset by a decrease in investment securities held to maturity. FINANCIAL CONDITION INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD Investment securities held to maturity were $7,100,000 and $8,094,000 at March 31, 1999 and December 31, 1998, respectively. This decrease of $994,000 (12.3%) resulted from scheduled paydowns and calls of principal amounts. The increase of $449,000 (0.7%) in investment securities available for sale to $64,035,000 at March 31, 1999 from $63,586,000 at December 31, 1998, reflects an increase in U.S. government agency securities offset by a decrease in mortgage backed securities and a decline in the overall market value. The shift into investment securities available for sale is a deliberate move by management to maintain flexibility in its liquidity planning. Federal funds sold increased $1,940,000 (746.2%) to $2,200,000 at March 31, 1999 from $260,000 at December 31, 1998. These fluctuations reflect normal activity in the Bank's funds management efforts. LOANS Total loans, net of unearned income, of $230,437,000 at March 31, 1999 reflected an increase of $11,750,000 (5.4%) compared to the total loans of $218,687,000, net of unearned income, at December 31, 1998. In addition, the Bank experienced growth in its commercial, financial and agricultural loans and commercial real estate construction loans during the first three months of 1999 due to strong customer demand and a stable local market. Commercial, financial and agricultural, residential real estate and commercial real estate loans represented the majority of the loan portfolio with approximately 30.19%, 29.85% and 27.88% of the Bank's total loans, net of unearned income at March 31, 1999, respectively. The net yield on loans was 8.40% for the three months ended March 31, 1999 compared to 8.93% for the three months ended March 31, 1998. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS The allowance for loan losses represents management's assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance and the appropriate provision required to maintain the allowance at a level 8 considered adequate to absorb inherent loan losses. In assessing the adequacy of 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 risk, the status and amount of nonperforming assets, underlying collateral values securing loans, current and anticipated economic conditions and other factors which affect the allowance for credit losses. The allowance for loan losses was $2,745,000 at March 31, 1999. Management believes that this level of allowance (1.19% of total outstanding loans, net of unearned income) is adequate to absorb known risks in the portfolio. No assurance can be given, however, that adverse economic circumstances will not result in increased losses in the Bank's loan portfolio. During the first three months of 1999, the Bank made $150,000 in provisions to the allowance for loan losses based on management's assessment of the credit quality of the loan portfolio. For the three months ended March 31, 1999, the Bank had charge-offs of $233,000 and recoveries of $20,000. Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and other real estate owned, and accruing loans 90 days or more past due were $4,659,000 at March 31, 1999 compared to $4,897,000 at December 31, 1998. During 1998, management's assessment of the credit quality of the loan portfolio indicated deterioration of a large individual credit such that management's estimate of the necessary level of the allowance increased. This credit is included in nonaccrual loans and the relationship continues to be monitored as part of the Bank's overall credit administration procedures. Other 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 March 31, 1999, 70 loans totaling $2,441,000, or 1.06% of total loans outstanding, net of unearned income, were considered potential problem loans compared to 77 loans totaling $2,654,000, or 1.21% of total loans outstanding, net of unearned income, at December 31, 1998. At March 31, 1999 and December 31, 1998, respectively, the amount of impaired loans were $4,098,000, which included 3 loans to the same borrower resulting from the relationship mentioned above. DEPOSITS Total deposits increased $17,860,000 (7.7%) to $251,365,000 at March 31, 1999, as compared to $233,505,000 at December 31, 1998. Noninterest-bearing deposits increased $1,678,000 (4.8%) during the first three months of 1999 while total interest-bearing deposits also increased $16,182,000 (8.1%) to $214,963,000 at March 31, 1999 from $198,781,000 at December 31, 1998. The growth in noninterest-bearing deposits is due primarily to an increase in regular demand deposit accounts. The average rate paid on interest-bearing deposits was 4.65% for the three months ended March 31, 1999 compared to 5.00% for the same period of 1998. During the first three months of 1999, the Bank experienced an significant increase in money market accounts of $15,776,000 (37.3%) and NOW accounts $3,072,000 (14.2%). These increases were offset by a decrease in certificates of deposits less than $100,000 of $3,238,000 (4.5%) during the first three months of 1999. The significant increase in money market accounts is due to a $10 million increase in public funds. 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. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. CAPITAL RESOURCES AND LIQUIDITY The Company's consolidated stockholders' equity was $29,174,000 at March 31, 1999, compared to $28,943,000 at December 31, 1998. This represents an increase of $231,000 (0.8%) during the first three months of 1999. Net earnings for the first three months of 1999 exceeds net earnings for the same period of 1998. In addition, the Company experienced a change in accumulated other comprehensive income to a loss of $152,000 at March 31, 1999 from a gain of $334,000 at December 31, 1998. During the first three months of 1999, cash dividends of $235,000, or $0.06 per share, were declared on Common Stock, compared to $183,000, or $0.05 per share for the first three months of 1998. The Company's Tier 1 leverage ratio was 9.07%, Tier I risk-based capital ratio was 12.90% and Total risk-based capital ratio was 14.10% at March 31, 1999. These ratios exceed the minimum regulatory capital percentages of 3.0% to 5.0% 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. 9 The primary source of liquidity during the first three months of 1999 is through investment securities sold under agreements to repurchase, and additional advances from the Federal Home Loan Bank of Atlanta ("FHLB-Atlanta"). The Company used these funds primarily to fund new loan growth. Under the advance program with FHLB-Atlanta, the Bank had outstanding advances totaling approximately $35,728,000, leaving credit available, net of advances drawn down, of approximately $14,272,000 at March 31, 1999. Net cash provided by operating activities of $1,455,000 for the three months ended March 31, 1999, consisted primarily of net earnings. Net cash used in investing activities of $13,009,000 funded loan growth and investment securities available for sale purchases of $11,964,000 and $7,974,000, respectively, offset by proceeds from sales, maturities, calls and paydowns of investment securities available for sale of $6,708,000. The $14,435,000 in net cash provided by financing activities resulted primarily from increases of $21,028,000 in non-interest bearing deposits, NOW accounts and savings accounts offset by a net decrease in securities sold under agreements to purchase of $8,155,000. INTEREST RATE SENSITIVITY MANAGEMENT At March 31, 1999, interest sensitive assets that repriced or matured within the next 12 months were $149,905,000, compared to interest sensitive liabilities that reprice or mature within the same time frame totaling $154,429,000. The cumulative GAP position (the difference between interest sensitive assets and interest sensitive liabilities) of a negative $4,524,000, resulted in a GAP ratio (calculated as interest sensitive assets divided by interest sensitive liabilities) of 97.1%. This compares to a twelve month cumulative GAP position at December 31, 1998, of a negative $31,480 and a GAP ratio of 79.0%. 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 March 31, 1999, the Company's asset/liability model indicated that the changes in the Company's net interest income would be less than 5.0% over 12 months. RESULTS OF OPERATIONS NET INCOME Net income increased $97,000 (11.4%) to $951,000 for the three month period ended March 31, 1999 compared to $854,000 for the same period of 1998. Basic income per share was $0.24 and $0.22 for the first quarter of 1999 and 1998, respectively, an increase of 9.1%. During the three month period ended March 31, 1999 compared to the same period of 1998, the Company experienced increases in net interest income, noninterest income, provision for loan losses and noninterest expense due to continued growth of the Company. NET INTEREST INCOME Net interest income was $2,834,000 for the first quarter of 1999. The increase of $306,000 (12.1%) over $2,528,000 for the same period of 1998, resulted primarily from the increase in interest and fees on loans and interest and dividends from investment securities offset by increases in interest on deposits and interest on other borrowings. 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 three months of 1999 compared to the same period of 1998. During the first quarter of 1999, the Company's GAP position became less liability sensitive to changes in interest rates as compared to December 31, 1998. The Company continues to regularly review and manage its asset/liability position in an effort to reduce 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. 10 INTEREST INCOME Interest income is a function of the volume of interest earning assets and their related yields. Interest income was $5,859,000 and $5,154,000 for the three months ended March 31, 1999 and 1998, respectively. This represents an increase of $705,000 (13.7%) for the first quarter of 1999. This change for the first three months of 1999 resulted as the average volume of interest earning assets outstanding increased $51,902,000 (20.6%) over the same period of 1998, while the Company's yield on interest earning assets decreased 49 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 $4,615,000 and $4,124,000 for the first quarter of 1999 and 1998, respectively. This reflects an increase of $491,000 (11.9%) during the three months ended March 31, 1999 over the same period of 1998. The average volume of loans increased $35,529,000 (19.0%) as of March 31, 1999 compared to the same period of 1998, while the Company's yield on loans decreased 53 basis points comparing these same periods. For the three month period ended March 31, 1999, interest income on investment securities increased $232,000 (25.1%) to $1,158,000 from $926,000 for the same period of 1998. The Company's average volume of investment securities increased by $16,028,000 (27.9%) for the first three months of 1999, compared to the same period of 1997, while the net yield on these average balances decreased 19 basis points. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. INTEREST EXPENSE Total interest expense increased $399,000 (15.2%) to $3,025,000 for the first quarter of 1999 compared to $2,626,000 for the same period of 1998. This change resulted as the Company's average interest-bearing liabilities increased 22.6% while the rates paid on these liabilities decreased 30 basis points during the first three months of 1999 compared to the same period of 1998. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. Interest on deposits, the primary component of total interest expense, increased $45,000 (1.9%) to $2,420,000 for the first quarter of 1999 compared to $2,375,000 for the same period of 1998. The increase for the three month period ended March 31, 1999 is due to a 9.6% increase in the average volume offset by a 35 basis point decrease in the rate paid on interest-bearing deposits. Interest expense on other borrowed funds, was $439,000 and $219,000 for the first quarter of 1999 and 1998, respectively. This represents an increase of $220,000 or 100.5%. This increase for the three month period ended March 31, 1999 is due to a 118.6% increase in the average volume offset by a 46 basis point decrease 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 assessment of the risk in the loan portfolio, the growth of the loan portfolio and the amount of recent loan losses. The provision for loan losses was $150,000 for the three months ended March 31, 1999 compared to $86,000 for the three months ended March 31, 1998. The increase in the provision for loan losses during the first three months of 1999 compared to the same period of 1998, is to reflect the significant growth in the loan portfolio. See "---Allowance for Loan Losses AND RISK ELEMENTS." NONINTEREST INCOME Noninterest income increased $110,000 (19.5%) to $673,000 for the first quarter of 1999 from $563,000 for the same period of 1998. This increase for the first quarter is due to increases in service charges on deposit accounts and other nointerest income offset by a $2,000 loss on investment securities. Service charges on deposit accounts for the first quarter of 1999 increased $54,000 (26.2%) to $260,000 from $206,000 for the first quarter of 1998. These increases are primarily due to increases in nonsufficient funds and overdraft charges. 11 Other noninterest income increased $65,000 (18.6%) to $414,000 for the first quarter of 1999 from $349,000 for the same period of 1998. This increase primarily resulted from an increase in Mastercard/VISA discounts and fees due to the Auburn University's acceptance of Mastercard/VISA for tuition and an increase in stock dividends from stock owned in other companies. NONINTEREST EXPENSE Total noninterest expense was $1,858,000 and $1,619,000 for the first quarter of 1999 and 1998, respectively, representing an increase of $239,000 or 14.8%. This increase was due to increases in salaries and benefits expense, net occupancy expense and other noninterest expense. Salaries and benefits expense was $929,000 and $722,000 for the three months ended March 31, 1999 and 1998, respectively. This represents an increase of $207,000 (28.7%) in the first quarter of 1999 compared to the first quarter of 1998. This increase is primarily due to the increase in overall employee levels from the same period of 1998. Net occupancy expense was $262,000 and $254,000 for the first quarter of 1999 and 1998, respectively, representing an increase of $8,000 or 3.2%. The increase is primarily due to increases in lease payments for computer equipment, lease payments on building due to the addition of the Wal-Mart branch and depreciation on furniture and equipment offset by a decrease in small furniture and equipment purchases. For the first quarter of 1999, other noninterest expense increased $25,000 (3.9%) to $668,000 from $643,000 for the first quarter of 1998. This increase is mainly due to the expenses associated with Auburn University's acceptance of Mastercard/VISA for tuition mentioned above. Income taxes Income tax expense was $548,000 and $532,000 for the first quarter of 1999 and 1998, respectively. These levels represent an effective tax rate on pre-tax earnings of 36.6% for the three months ended March 31, 1999 and 38.4% for the same period of 1998. YEAR 2000 The Company is aware of the issues associated with the programming code in existing computer systems as the millennium ("Year 2000") approaches. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 issue and has developed a plan to resolve the mission critical modifications necessary in order to be prepared for the new millennium. The Company has reviewed both information technology (IT) systems and non-IT systems. All mission critical systems have been upgraded, as needed, and tested. The majority of the remaining systems have been tested, however, final modifications are expected to be completed by June 30, 1999. The Company has received certification of Year 2000 compliance from their critical vendors used in the major operations of the Company. The Company has followed the Federal Reserve guidelines for preparing for Year 2000. The Company also reports quarterly to its Board of Directors the progress of the Year 2000 project. Accordingly, the Company does not expect the Year 2000 issue to pose any significant operational problems and has not discovered any Year 2000 problems with significant counter-parties that it believes will have material effect on the financial position or results of operations of the Company. However, the Company has not fully evaluated the effect of any Year 2000 problems on its loan and deposit customers. No assurance can be given that potential Year 2000 problems of those with whom the Company does business will not occur, and if they occur, that the consequences to the Company will not be material. The total cost of the Year 2000 project is estimated not to exceed $250,000, of which $100,750 was expensed through 1998, and the remaining expenses are estimated to be funded through operating cash flows. Contingency Plans have been developed to ensure direction in the event a non-compliant system or component is detected. The Company currently has in place a disaster recovery plan. A business resumption plan and a remediation plan have been developed based upon certain circumstances. Part of the business resumption plan includes an agreement with a third-party vendor which would enable the Bank to use the third-parties' computer systems as a worst case scenario. These plans will provide the Company direction in the event an unforeseen circumstance arises due to the Year 2000. The Bank has held Year 2000 Customer Awareness Seminars, mailed Year 2000 information to all customers, requested copies of the status of loan customers' Year 2000 plan and examined all large loan customers for potential impacts on the customer's creditworthiness. All plans will be finalized and implemented by September 30, 1999. 12 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 impact 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 since 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. However, relatively low levels of inflation in recent years have resulted in a rather insignificant effect on the Company's operations. 13 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES TAXABLE EQUIVALENT BASIS
THREE MONTHS ENDED MARCH 31, --------------------------------------------------------------------- 1999 1998 ----------------------------------- ------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE ------------------------------------- ---------- -------- ------ --------- -------- --------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans, net of unearned income (1) $ 222,755 4,615 8.40% 187,226 4,124 8.93% Investment securities: Taxable 71,785 1,137 6.42% 55,583 898 6.55% Tax-exempt (2) 1,689 32 7.64% 1,863 42 9.24% ----------------------- ------------------ Total investment securities 73,474 1,169 6.45% 57,446 940 6.64% Federal funds sold 4,993 56 4.55% 5,634 76 5.47% Interest-bearing deposits with other banks 2,650 30 4.59% 1,664 28 6.82% ----------------------- ------------------ Total interest-earning assets 303,872 5,870 7.83% 251,970 5,168 8.32% Allowance for loan losses (2,863) (2,170) Cash and due from banks 8,925 7,682 Premises and equipment 3,509 3,515 Rental property, net 1,751 1,787 Other assets 5,675 4,065 ----------- --------- Total assets $ 320,869 266,849 =========== ========= LIABILITIES & STOCKHOLDERS' EQUITY ------------------------------------- Interest-bearing liabilites: Deposits: Demand $ 24,758 139 2.28% 21,012 110 2.12% Savings and money market 62,749 631 4.08% 61,982 695 4.55% Certificates of deposits less than $100,000 71,370 1,027 5.84% 71,554 1,084 6.14% Certificates of deposits and other time deposits of $100,000 or more 52,208 623 4.84% 38,046 486 5.18% ----------------------- ------------------ Total interest-bearing deposits 211,085 2,420 4.65% 192,594 2,375 5.00% Federal funds purchased and securities sold under agreements to repurchase 13,439 166 5.01% 2,308 32 5.62% Other borrowed funds 32,928 439 5.41% 15,066 218 5.87% Employee stock ownership plan debt 0 0 0.00% 56 1 7.14% ----------------------- ------------------ Total interest-bearing liabilities 257,452 3,025 4.77% 210,024 2,626 5.07% Noninterest-bearing deposits 31,963 28,385 Accrued expenses and other liabilities 2,166 2,165 Stockholders' equity 29,288 26,275 ----------- --------- Total liabilities and stockholders' equity $ 320,869 266,849 =========== ========= Net interest income $2,845 2,542 ========== ========= Net yield on total interest-earning assets 3.80% 4.09% ========== =========
________________ (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%. 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: May 14, 1999 By: /s/ E. L. Spencer, Jr. ------------------------------- ------------------------ E. L. Spencer, Jr. President, Chief Executive Officer and Director Date: May 14, 1999 By: /s/ Linda D. Fucci ------------------------------- -------------------------- Linda D. Fucci Chief Financial Officer and Principal Accounting Officer 15 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, 2000. 16 AUBURN NATIONAL BANCORPORATION, INC. Item 6(a) EXHIBIT INDEX
Exhibit Sequentially Number Description Numbered Page - ------- ----------- ------------- 4.A Certificate of Incorporation of Auburn National Bancorporation, Inc. * --- 4.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 18
- --------------- * Incorporated by reference from Registrant's Registration Statement on Form SB-2. (b) Reports filed on Form 8-K for the quarter ended March 31, 1999: none 17 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 10,161 701 2,200 0 64,035 7,100 7,203 230,437 2,745 323,233 251,365 0 1,940 35,966 0 0 40 29,134 323,233 4,615 1,158 86 5,859 2,420 3,025 2,834 150 (2) 1,858 1,499 1,499 0 0 951 0.24 0.24 3.80 4,554 105 0 2,441 2,808 233 20 2,745 2,745 0 0
-----END PRIVACY-ENHANCED MESSAGE-----