-----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, KAjyyG+Dpkq7YS43XsBxOTTWqB3yTDbBwa2jGQRswDysNZdYJJbs72JqZBr/T21O 1k2D9MsOZuU27JNloqqNgg== 0000950109-99-004026.txt : 19991115 0000950109-99-004026.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950109-99-004026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748138 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 September 30, 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 October 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 SUBSIDIARIES INDEX
PAGE ------ PART I. FINANCIAL INFORMATION - -------------------------------- Item 1 Financial Information Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Earnings for the Three Months and Nine Months Ended September 30, 1999 and 1998 4 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 1999 and the Years Ended December 31, 1998 and 1997 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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 14 Item 6 Exhibits 16
2 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES Consolidated Balance Sheets September 30, 1999 and December 31, 1998 (Unaudited)
ASSETS 9/30/99 12/31/98 ----------------------------------------------------- ---------------- ---------------- Cash and due from banks $ 12,942,510 $ 9,220,225 Federal funds sold 9,500,000 260,000 ---------------- ---------------- Cash and cash equivalents 22,442,510 9,480,225 Interest-earning deposits with other banks 2,177,299 133,600 Investment securities held to maturity (fair value of $10,384,173 and $8,227,385 at September 30, 1999 and December 31, 1998, respectively): 10,421,942 8,094,283 Investment securities available for sale 62,200,725 63,585,573 Loans: Loans, less unearned income of $8,541 at September 30, 1999 and $15,494 at December 31, 1998, respectively 259,130,936 218,686,991 Less allowance for loan losses (3,891,792) (2,808,307) ---------------- ---------------- Loans, net 255,239,144 215,878,684 Premises and equipment, net 3,452,439 3,434,964 Rental property, net 1,692,005 1,760,294 Other assets 7,697,521 5,506,649 ---------------- ---------------- Total assets $ 365,323,585 $ 307,874,272 ================ ================ LIABILITIES & STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 39,583,976 $ 34,724,182 Interest-bearing 247,484,462 198,780,568 ---------------- ---------------- Total deposits 287,068,438 233,504,750 Securities sold under agreements to repurchase 3,278,635 12,944,004 Other borrowed funds 43,896,099 31,000,458 Accrued expenses and other liabilities 1,991,241 1,481,564 ---------------- ---------------- Total liabilities 336,234,413 278,930,776 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 26,620,967 25,077,126 Accumulated other comprehensive income (loss) (1,064,239) 333,926 Less: Treasury stock, 32,562 shares at September 30, 1999 and December 31, 1998, at cost (214,599) (214,599) ---------------- ---------------- Total stockholders' equity 29,089,172 28,943,496 ---------------- ---------------- Total liabilities and stockholders' equity $ 365,323,585 $ 307,874,272 ================ ================
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, 1999 and 1998 (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ----------- Interest income: Interest and fees on loans $5,388,482 $4,430,213 $15,016,576 $12,903,967 Interest and dividends on investment securities: Taxable 1,080,000 1,007,649 3,279,436 2,810,965 Tax-exempt 18,598 23,853 59,260 76,010 ---------- ---------- ----------- ----------- Total interest and dividends on investment securities 1,098,598 1,031,502 3,338,696 2,886,975 Interest on federal funds sold 50,043 68,113 164,484 216,291 Interest on interest-bearing deposits with other other banks 24,035 38,669 77,544 100,423 ---------- ---------- ----------- ----------- Total interest income 6,561,158 5,568,497 18,597,300 16,107,656 Interest expense: Interest on deposits 2,770,276 2,440,198 7,783,103 7,208,347 Interest on federal funds purchased and securities sold under agreements to repurchase 56,315 41,238 268,842 115,994 Interest on other borrowings 560,192 444,419 1,500,596 974,056 ---------- ---------- ----------- ----------- Total interest expense 3,386,783 2,925,855 9,552,541 8,298,397 ---------- ---------- ----------- ----------- Net interest income 3,174,375 2,642,642 9,044,759 7,809,259 Provision for loan losses 1,142,310 180,000 1,474,327 656,030 ---------- ---------- ----------- ----------- Net interest income after provision for loan losses 2,032,065 2,462,642 7,570,432 7,153,229 Noninterest income: Service charges on deposit accounts 300,172 258,303 846,059 703,653 Investment securities gains/(losses), net (6,022) 7,417 151 14,277 Other 416,072 368,995 1,264,670 1,075,517 ---------- ---------- ----------- ----------- Total noninterest income 710,222 634,715 2,110,880 1,793,447 Noninterest expense: Salaries and benefits 955,728 817,584 2,789,288 2,296,520 Net occupancy expense 292,257 246,152 844,950 748,284 Other 795,783 714,401 2,313,999 2,027,891 ---------- ---------- ----------- ----------- Total noninterest expense 2,043,768 1,778,137 5,948,237 5,072,695 Earnings before income tax expense 698,519 1,319,220 3,733,075 3,873,981 Income tax expense 214,922 305,716 1,325,828 1,353,652 ---------- ---------- ----------- ----------- Net earnings $ 483,597 $1,013,504 $ 2,407,247 $ 2,520,329 ========== ========== =========== =========== Basic and diluted earnings per share $0.12 $0.26 $0.61 $0.64 ========== ========== =========== =========== Weighted average shares outstanding 3,924,573 3,924,573 3,924,573 3,924,573 ========== ========== =========== =========== Dividends per share $0.10 $0.05 $0.22 $0.14 ========== ========== =========== ===========
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, 1998 AND 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (Unaudited)
Accumulated Employee Additional Other Stock Common Paid-In Retained Comprehensive Ownership Treasury Stock Capital Earnings Income/(Loss) Plan debt Stock Total -------- ---------- ----------- -------------- ---------- --------- ----------- Balance at December 31, 1996 $ 39,571 3,664,718 19,942,980 (146,528) (113,940) (304,009) 23,082,792 Net earnings --- --- 3,080,043 --- --- --- 3,080,043 Cash dividends paid ($0.16 per share) --- --- (626,562) --- --- --- (626,562) Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- --- 321,964 --- --- 321,964 Payment of Employee Stock Ownership Plan Debt --- --- --- --- 57,006 --- 57,006 Sale of treasury stock (5,488 shares) 42,754 98,058 140,812 Purchase of treasury stock (368 shares) --- --- --- --- --- (8,648) (8,648) -------- ---------- ----------- -------------- ---------- --------- ----------- Balance at December 31, 1997 $ 39,571 3,707,472 22,396,461 175,436 (56,934) (214,599) 26,047,407 Net earnings --- --- 3,439,417 --- --- --- 3,439,417 Cash dividends paid ($0.19 per share) --- --- (758,752) --- --- --- (758,752) Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- --- 158,490 --- --- 158,490 Payment of Employee Stock Ownership Plan Debt --- --- --- --- 56,934 --- 56,934 -------- ---------- ----------- -------------- ---------- --------- ----------- Balance at December 31, 1998 $ 39,571 3,707,472 25,077,126 333,926 0 (214,599) 28,943,496 Through SEPTEMBER 30, 1999: Net earnings --- --- 2,407,247 --- --- --- 2,407,247 Cash dividends paid ($0.22 per share) --- --- (863,406) --- --- --- (863,406) Other comprehensive income due to unrealized gain (loss) on investment securities available for sale, net --- --- --- (1,398,165) --- --- (1,398,165) -------- ---------- ----------- -------------- ---------- --------- ----------- Balance at September 30, 1999 $ 39,571 3,707,472 26,620,967 (1,064,239) 0 (214,599) 29,089,172 ======== ========== ========== ============= ========== ========= ==========
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, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $2,407,247 $2,520,329 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and Amortization 446,471 529,801 Accretion of investment discounts & loan fees (9,382) (220,094) Provision for loan losses 1,474,327 656,030 Loss on sale of premises & equipment 57,609 1,181 Increase in interest receivable (577,242) (85,398) Increase in other assets (939,805) (538,338) Increase in interest payable 281,253 5,314 Increase/(decrease) in other liabilities 451,042 (587,807) ------------ ------------ Net cash provided by operating activities 3,591,520 2,281,018 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities/calls/paydowns of investment securities held to maturity 2,083,458 6,283,202 Purchases of investment securities held to maturity (4,363,642) (425,000) Proceeds from maturities/calls/paydowns of investment securities available for sale 16,458,326 9,771,821 Proceeds from sale of investment securities available for sale --- 4,970,458 Purchases of investment securities available for sale (17,441,846) (26,693,874) Net increase in loans (40,834,787) (24,568,021) Purchases of premises and equipment (418,480) (283,170) Proceeds from sale of premises and equipment 5,951 --- Purchases of rental property (5,070) (44,214) Net (increase)/decrease in interest-bearing deposits with other banks (2,043,699) 616,662 ------------ ------------ Net cash used in investing activities (46,559,789) (30,372,136) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase/(decrease) in non-interest bearing deposits, NOW accounts and savings accounts 30,004,217 (9,473,351) Net increase in certificates of deposit 23,559,471 8,484,729 Net (decrease)/increase in securities sold under agreements to repurchase (9,665,369) 5,580,646 Net increase in borrowings from FHLB 12,911,313 19,911,313 Net decrease in other long-term debt (15,672) (14,382) Dividends paid (863,406) (562,522) ------------ ------------ Net cash provided by financing activities 55,930,554 23,926,433 ------------ ------------ Net increase/(decrease) in cash and cash equivalents 12,962,285 (4,164,685) Cash and cash equivalents at beginning of period 9,480,225 14,883,412 ------------ ------------ Cash and cash equivalents at end of period $22,442,510 $10,718,727 ============ ============ Supplemental information on cash payments: Interest paid $ 9,271,288 $ 8,293,083 ============ ============ Income taxes paid $ 1,623,229 $ 1,717,573 ============ ============
6 AUBURN NATIONAL BANCORPORATION, INC. AND SUBISIDIARIES Notes to the Consolidated Financial Statements September 30, 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 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-KSB for the year ended December 31, 1998. 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, 1999 was $233,000 compared to $1,260,000 for the three months ended September 30, 1998. Total comprehensive income for the nine months ended September 30, 1999 was $1,009,000 compared to $2,752,000 for the nine months ended September 30, 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 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 can not predict whether the provisions of Statement 133 as amended by Statement 137 will have a significant impact on its 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 and nine months ended September 30, 1999 and 1998. Certain of the matters discussed are forward-looking statements for purposes of the Securities Act of 1933, as amended (the "Securities Act") and 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 to differ from those expressed or implied by such forward-looking statements. The Company's actual results may differ materially from the results anticipated in these forward- looking statements including those described under interest rate management, due to a variety of factors, including, without limitation: the effects of future economic conditions; governmental monetary and fiscal policies, as well as 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 locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; and the failure of assumptions underlying the establishment of allowances for loan losses and estimations of values of collateral and various financial assets and liabilities. All forward-looking statements attributable to the Company are expressly qualified in their entirety by these Cautionary Statements. Summary Net income of $484,000 for the quarter ended September 30, 1999 represented a decrease of $530,000 (52.3%) from the Company's net income of $1,014,000 for the same period of 1998. Basic earnings per share decreased $0.14 (53.8%) to $0.12 during the third quarter of 1999 from $0.26 for the third quarter of 1998. Net income decreased $113,000 (4.5%) to $2,407,000 for the nine month period ended September 30, 1999 compared to $2,520,000 for the same period of 1998. During the nine month period ended September 30, 1999 compared to the same period of 1998, 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 7.87% for the nine months ended September 30, 1999 from 8.21% for the nine months ended September 30, 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, investment 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 $365,324,000 at September 30, 1999 increased of $57,450,000 (18.7%) over total assets of $307,874,000, at December 31, 1998. This increase resulted primarily from increases in total loans, net of unearned income, and cash and cash equivalents. Financial Condition Investment Securities and Federal Funds Sold Investment securities held to maturity were $10,422,000 and $8,094,000 at September 30, 1999 and December 31, 1998, respectively. This increase of $2,328,000 (28.8%) was primarily the result of purchase of a U.S. government agency security for $4,364,000, offset by $2,083,000 of scheduled paydowns, maturities and calls of principal amounts. Investment securities available for sale decreased $1,385,000 (2.2%) to $62,201,000 at September 30, 1999 from $63,586,000 at December 31, 1998. This reflects a decline in the overall market value and a decrease in CMOs. This decrease is offset by an increase in U.S. government agency and mortgage backed securities. Federal funds sold increased to $9,500,000 at September 30, 1999 from $260,000 at December 31, 1998. This increase is primarily due to approximately $5 million of deposits. In addition, this reflects normal activity in the Bank's funds management efforts. 8 Loans Total loans, net of unearned income, of $259,131,000 at September 30, 1999 reflected an increase of $40,444,000 (18.5%) compared to the total loans of $218,687,000, net of unearned income, at December 31, 1998. The Bank primarily experienced growth in all categories of during the first nine months of 1999 due to strong customer demand and a growing market. Commercial, financial and agricultural, residential real estate and commercial real estate loans represented the majority of the loan portfolio with approximately 35.06%, 30.07% and 35.27% of the Bank's total loans, net of unearned income at September 30, 1999, respectively. The net yield on loans was 8.38% for the nine months ended September 30, 1999 compared to 8.80% for the nine months ended September 30, 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 reflects management's assessment of the risks 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 considered adequate in relation to estimated 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 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 $3,892,000 at September 30, 1999. Management believes that this level of allowance (1.50% 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 or other events will not result in increased losses in the Bank's loan portfolio. During the first nine months of 1999, the Bank made $1,474,000 in provisions to the allowance for loan losses based on management's assessment of the credit quality of the loan portfolio. This increase from the prior year reflects an additional provision for loan losses of approximately $932,000 in the third quarter of 1999. This provision was taken primarily as a result of a deterioration in certain loans determined by recent analyses and loan reviews performed during a normal independent loan review and regulatory examination conducted in the third quarter of 1999. In June 1998, the Bank made $300,000 of additional provision to the allowance for loan loss due to management's assessment of the deterioration of a large individual credit. This credit in the amount of $4,099,000 continues to be a nonperforming loan and the relationship continues to be monitored as part of the Bank's overall credit administration procedures. For the nine months ended September 30, 1999, the Bank had charge- offs of $464,000 and recoveries of $74,000. Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and other real estate owned, and accruing loans 90 days or more past due were $5,397,000 at September 30, 1999 compared to $4,897,000 at December 31, 1998. If nonaccrual loans had performed in accordance with their original contractual terms, interest income would have increased approximately $300,000 for the nine months ended September 30, 1999. 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 September 30, 1999, 103 loans totaling $12,046,000, or 4.65% 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. This increase reflects increased scrutiny being given to credit quality during examinations, and continued deterioration in certain credits. In addition, the majority of this increase results from 7 loans totaling $6,336,000. At September 30, 1999 and December 31, 1998, respectively, the amount of impaired loans were $4,099,000, which included 3 loans to the same borrower resulting from the relationship mentioned above. Deposits Total deposits increased $53,563,000 (22.9%) to $287,068,000 at September 30, 1999, as compared to $233,505,000 at December 31, 1998. Noninterest-bearing deposits increased $4,860,000 (14.0%) during the first nine months of 1999, while total interest-bearing deposits increased $48,703,000 (24.5%) to $247,484,000 at September 30, 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 nine months ended September 30, 1999 compared to 4.99% for the same period of 1998. During the 9 first nine months of 1999, the Bank experienced significant increases in certificates of deposits greater than $100,000 of $24,656,000 (47.5%), money market accounts of $18,042,000 (42.7%), and NOW accounts of $6,074,000 (28.1%). The significant increase in money market accounts is due to a $18 million increase in public funds and the increase in certificates of deposits greater than $100,000 is due to a $16 million increase in brokered certificates of deposits. 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 $29,089,000 at September 30, 1999, compared to $28,943,000 at December 31, 1998. This represents an increase of $146,000 (0.5%) during the first nine months of 1999. Net earnings for the first nine months of 1999 was $2,407,000 compared to $2,520,000 for the same period of 1998. In addition, the Company experienced a change in accumulated other comprehensive income to a net accumulated loss of $1,064,000 at September 30, 1999 from a gain of $334,000 at December 31, 1998 due to overall decline in market value. During the first nine months of 1999, cash dividends of $863,000, or $0.22 per share, were declared on Common Stock, compared to $563,000, or $0.14 per share for the first nine months of 1998. The Company's Tier 1 leverage ratio was 8.25%, Tier I risk-based capital ratio was 11.60% and Total risk-based capital ratio was 12.86% at September 30, 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. The primary sources of liquidity during the first nine months of 1999 were deposit growth and $12,911,000 of 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 $43,669,000, leaving credit available, net of advances drawn down, of approximately $6,331,000 at September 30, 1999. Net cash provided by operating activities of $3,592,000 for the nine months ended September 30, 1999, consisted primarily of net earnings and the impact of the provision for loan losses. Net cash used in investing activities of $46,560,000 funded loan growth and investment securities available for sale purchases of $40,835,000 and $17,442,000, respectively, offset by proceeds from maturities, calls and paydowns of investment securities available for sale of $16,458,000. The $55,931,000 in net cash provided by financing activities resulted primarily from increases of $30,004,000 in non-interest bearing deposits, NOW accounts and savings accounts, increases in certificates of deposit of $23,559,000 and increases in borrowings from FHLB of $12,911,000 offset by a net decrease in securities sold under agreements to purchase of $9,665,000. Interest Rate Sensitivity Management At September 30, 1999, interest sensitive assets that repriced or matured within the next 12 months were $163,785,000, compared to interest sensitive liabilities that reprice or mature within the same time frame totaling $166,791,000. The cumulative GAP position (the difference between interest sensitive assets and interest sensitive liabilities) of a negative $3,006,000, resulted in a GAP ratio (calculated as interest sensitive assets divided by interest sensitive liabilities) of 98.2%. This compares to a twelve month cumulative GAP position at December 31, 1998, of a negative $31,480,000 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 September 30, 1999 and various assumptions and estimates, the Company's asset/liability model predicts that the changes in the Company's net interest income would be less than 5.0% over 12 months. Such estimates and predictions are forecasts which may or may not be realized. 10 Results of Operations Net Income Net income decreased $530,000 (52.3%) to $484,000 for the three month period ended September 30, 1999 compared to $1,014,000 for the same period of 1998. Basic earnings per share was $0.12 and $0.26 for the third quarter of 1999 and 1998, respectively, a decrease of 53.8%. Net income decreased $113,000 (4.5%) to $2,407,000 for the nine month period ended September 30, 1999, compared to $2,520,000 for the same period of 1998. During the nine month period ended September 30, 1999 compared to the same period of 1998, 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 $3,174,000 for the third quarter of 1999. The increase of $531,000 (20.1%) over $2,643,000 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. Net interest income increased $1,236,000 (15.8%) to $9,045,000 for the nine months ended September 30, 1999, compared to $7,809,000 for the nine months ended September 30, 1998. 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 1999 compared to the same period of 1998. Through the third quarter of 1999, the Company's GAP position remained 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 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 $6,561,000 and $5,568,000 for the three months ended September 30, 1999 and 1998, respectively. This represents an increase of $993,000 (17.8%) for the third quarter of 1999 compared to 1998. For the nine months ended September 30, 1999 interest income was $18,597,000, an increase of $2,489,000 (15.5%) compared to $16,108,000 for the same period of 1998. This change for the first nine months of 1999 resulted as the average volume of interest earning assets outstanding increased $53,583,000 (20.4%) over the same period of 1998, while the Company's yield on interest earning assets decreased 34 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 $5,388,000 and $4,430,000 for the third quarter of 1999 and 1998, respectively. This reflects an increase of $958,000 (21.6%) during the three months ended September 30, 1999 over the same period of 1998. For the nine month period ended September 30, 1999, interest and fees on loans increased $2,113,000 (16.4%) to $15,017,000 from $12,904,000 for the same period of 1998. The average volume of loans increased $43,571,000 (22.2%) as of September 30, 1999 compared to the same period of 1998, while the Company's yield on loans decreased 42 basis points comparing these same periods. For the three month period ended September 30, 1999, interest income on investment securities increased $67,000 (6.5%) to $1,099,000 from $1,032,000 for the same period of 1998. Interest income on investment securities for the nine month period ended September 30, 1999, increased $452,000 (15.7%) to $3,339,000 from $2,887,000 for the same period of 1998. The Company's average volume of investment securities increased by $10,655,000 (17.8%) for the first nine months of 1999, compared to the same period of 1998, while the net yield on these average balances decreased 15 basis points. See the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table. 11 Interest Expense Total interest expense increased $461,000 (15.8%) to $3,387,000 for the third quarter of 1999 compared to $2,926,000 for the same period of 1998. Total interest expense increased $1,255,000 (15.1%) to $9,553,000 from $8,298,000 for the nine months ended September 30, 1999 and 1998, respectively. This change resulted as the Company's average interest-bearing liabilities increased 22.3% while the rates paid on these liabilities decreased 30 basis points during the first nine 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 $330,000 (13.5%) to $2,770,000 for the third quarter of 1999 compared to $2,440,000 for the same period of 1998. Interest on deposits were $7,783,000 and $7,208,000 for the nine months ended September 30, 1999 and 1998, respectively. The increase for the nine month period ended September 30, 1999 is due to a 15.8% increase in the average volume offset by a 34 basis point decrease in the rate paid on interest-bearing deposits. Interest expense on other borrowed funds, was $560,000 and $444,000 for the third quarters of 1999 and 1998, respectively. This represents an increase of $116,000 or 26.1%. For the nine months ended September 30, 1999, interest expense on borrowed funds increased $527,000 (54.1%) to $1,501,000 from $974,000 for the same period of 1998. This increase for the nine month period ended September 30, 1999 is due to a 61.6% increase in the average volume offset by a 24 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 $1,474,000 for the nine months ended September 30, 1999 compared to $656,000 for the nine months ended September 30, 1998. The increase in the provision for loan losses during the first nine months of 1999 compared to the same period of 1998, is due to an additional provision for loan losses of $932,000 during the third quarter of 1999. This provision was taken primarily as a result of a deterioration in certain loans determined by recent analyses and loan reviews performed during a normal independent loan review and a recent regulatory examination. In addition, the level of monthly provision has increased during 1999 due to loan growth. In June 1998, an additional provision for loan losses of $300,000 was made to reflect significant growth in the loan portfolio and the identification of potential problem loans to a commercial customer. See "--Allowance for Loan Losses And Risk Elements." Noninterest Income Noninterest income increased $75,000 (11.8%) to $710,000 for the third quarter of 1999 from $635,000 for the same period of 1998. Noninterest income was $2,111,000 and $1,793,000 for the nine months ended September 30, 1999 and 1998, respectively. This increase for the third quarter is due to increases in service charges on deposit accounts and other noninterest income. Service charges on deposit accounts for the third quarter of 1999 increased $42,000 (16.3%) to $300,000 from $258,000 for the third quarter of 1998. Service charges on deposit accounts were $846,000 and $704,000 for the nine months ended September 30, 1999 and 1998, 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 $47,000 (12.7%) to $416,000 for the third quarter of 1999 from $369,000 for the same period of 1998. Other noninterest income was $1,265,000 and $1,076,000 for the nine months ended September 30, 1999 and 1998, respectively. 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, an increase in ATM service charges, an increase in checkcard income and an increase in stock dividends from stock owned in other companies. This increase is offset by a loss on premises and equipment primarily for computer equipment that was not Year 2000 compliant. Noninterest Expense Total noninterest expense was $2,044,000 and $1,778,000 for the third quarter of 1999 and 1998, respectively, representing an increase of $266,000 or 15.0%. For the nine months ended September 30, 1999, total 12 noninterest expense increased $875,000 (17.2%) to $5,948,000 from $5,073,000 for the same period of 1998. This increase was due to increases in salaries and benefits expense, net occupancy expense and other noninterest expense. Salaries and benefits expense was $956,000 and $818,000 for the three months ended September 30, 1999 and 1998, respectively. This represents an increase of $138,000 (16.9%) in the third quarter of 1999 compared to the third quarter of 1998. For the nine months ended September 30, 1999, total salaries and benefits expense increased $492,000 (21.4%) to $2,789,000 from $2,297,000 for the same period of 1998. This increase is primarily due to the increase in overall employee levels from the same period of 1998. Net occupancy expense was $292,000 and $246,000 for the third quarters of 1999 and 1998, respectively, representing an increase of $46,000 or 18.7%. For the nine month period ended September 30, 1999, net occupancy expense increased $97,000 (13.0%) to $845,000 from $748,000 for the same period of 1998. 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. For the third quarter of 1999, other noninterest expense increased $82,000 (11.5%) to $796,000 from $714,000 for the third quarter of 1998. Other noninterest expense was $2,314,000 and $2,028,000 for the nine months ended September 30, 1999 and 1998, respectively. This increase is mainly due to the expenses associated with Auburn University's acceptance of Mastercard/VISA for tuition mentioned above, professional fees for strategic tax services and legal fees related to certain nonaccrual loans. Income taxes Income tax expense was $215,000 and $306,000 for the third quarters of 1999 and 1998, respectively. For the nine months ended September 30, 1999, income tax expense decreased $28,000 (2.1%) to $1,326,000 from $1,354,000 for the nine months ended September 30, 1998. These levels represent an effective tax rate on pre-tax earnings of 35.5% for the nine months ended September 30, 1999 which is consistent with the Company's annual effective rate. In addition, the Company engaged in a tax strategy involving real estate. 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 and modified. 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-party's 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 have been finalized and implemented. 13 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 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. However, relatively low levels of inflation in recent years have resulted in a rather insignificant effect on the Company's operations. 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. 14 AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES Consolidated Average Balances, Interest Income/Expense and Yields/Rates Taxable Equivalent Basis
Nine Months Ended September 30, -------------------------------------------------------------- 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) $ 239,543 15,017 8.38% 195,972 12,904 8.80% Investment securities: Taxable 68,880 3,279 6.36% 58,010 2,811 6.48% Tax-exempt (2) 1,599 89 7.47% 1,814 115 8.48% -------------------- -------------------- Total investment securities 70,479 3,368 6.39% 59,824 2,926 6.54% Federal funds sold 4,509 164 4.86% 5,138 216 5.62% Interest-bearing deposits with other banks 1,842 78 5.66% 1,856 100 7.20% -------------------- -------------------- Total interest-earning assets 316,373 18,627 7.87% 262,790 16,146 8.21% Allowance for loan losses (2,834) (2,335) Cash and due from banks 9,524 7,813 Premises and equipment 3,506 3,477 Rental property, net 1,742 1,796 Other assets 6,320 4,693 ---------- ---------- Total assets $ 334,631 278,234 ========== ========= LIABILITIES & STOCKHOLDERS' EQUITY --------------------------------------- Interest-bearing liabilites: Deposits: Demand $ 25,731 452 2.35% 20,720 329 2.12% Savings and money market 69,735 2,180 4.18% 60,173 2,002 4.45% Certificates of deposits less than $100,000 70,328 3,041 5.78% 71,486 3,309 6.19% Certificates of deposits and other time deposits of $100,000 or more 57,787 2,110 4.88% 40,635 1,568 5.16% -------------------- -------------------- Total interest-bearing deposits 223,581 7,783 4.65% 193,014 7,208 4.99% Federal funds purchased and securities sold under agreements to repurchase 7,364 269 4.88% 3,030 116 5.12% Other borrowed funds 36,968 1,501 5.43% 22,883 971 5.67% Employee stock ownership plan debt 0 0 0.00% 57 3 6.94% -------------------- -------------------- Total interest-bearing liabilities 267,913 9,553 4.77% 218,984 8,298 5.07% Noninterest-bearing deposits 34,735 29,878 Accrued expenses and other liabilities 2,225 1,604 Stockholders' equity 29,758 27,768 ---------- ---------- Total liabilities and stockholders' equity $ 334,631 278,234 ========== ========== Net interest income $ 9,074 7,848 ========= ========= Net yield on total interest-earning assets 3.83% 3.99% ========= =========
- ------------ (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%. 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 18 - ------------------------- * 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, 1999: Form 8-K dated October 1, 1999 Filed under Item 5 Other Events and relates to the press release of third quarter earnings. 16 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: November 12, 1999 By: /s/ E. L. Spencer, Jr. ----------------------------- ------------------------------------- E. L. Spencer, Jr. President, Chief Executive Officer and Director Date: November 12, 1999 By: /s/ Linda D. Fucci ----------------------------- ------------------------------------- Linda D. Fucci Chief Financial Officer and Principal Accounting Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the 10-Q for September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 12,943 2,177 9,500 0 62,201 10,422 10,384 259,131 3,892 365,324 287,068 0 1,991 43,896 0 0 40 29,049 365,324 15,017 3,339 242 18,597 7,783 9,553 9,045 1,474 0 5,948 3,733 3,733 0 0 2,407 0.61 0.61 3.83 4,867 530 0 12,046 2,808 464 74 3,892 3,892 0 0
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