<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 1998
---------------------------
[ ] 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 Small Business Issuer 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
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(Address of Principal Executive Offices)
(334) 821-9200
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(Issuer's Telephone Number, Including Area Code)
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(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, 1998: 3,924,573 shares of common stock, $.01
---------------------------------------
par value per share
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Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1 Financial Information
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Earnings for
the Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Changes in
Stockholders' Equity for the Nine Months Ended
September 30, 1998 and the Year Ended
December 31, 1997 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998
and 1997 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
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Item 5 Other Events 16
Item 6 Exhibits 17
2
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 9/30/98 12/31/97
----------------------------------- ------------- -------------
<S> <C> <C>
Cash and due from banks $ 10,268,727 $ 12,268,412
Federal funds sold and securities purchased under agreements to resell 450,000 2,615,000
------------- -------------
Cash and cash equivalents 10,718,727 14,883,412
Interest bearing deposits with other banks 1,106,320 1,722,982
Investment securities held to maturity (fair value of $8,802,695 and
$14,401,723 at September 30, 1998 and December 31, 1997,
respectively):
Taxable 7,441,004 12,885,396
Tax-exempt 1,204,713 1,478,866
------------- -------------
Total Investment Securities Held to Maturity 8,645,717 14,364,262
Investment securities available for sale
Taxable 51,918,556 39,965,856
Tax-exempt 849,266 480,000
------------- -------------
Total Investment Securities Available for Sale 52,767,822 40,445,856
Loans:
Loans, less unearned income of $19,500 at September 30, 1998
and $36,706 at December 31, 1997 210,059,753 185,493,178
Less allowance for loan losses (2,779,688) (2,125,104)
------------- -------------
Loans, net 207,280,065 183,368,074
Premises and equipment, net 3,484,658 3,520,542
Rental property, net 1,781,381 1,807,359
Other assets 5,199,068 4,621,187
------------- -------------
Total assets $ 290,983,758 $ 264,733,674
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Deposits:
Noninterest bearing $ 33,554,666 $ 32,638,352
Interest bearing 189,434,699 191,339,635
------------- -------------
Total Deposits 222,989,365 223,977,987
Federal funds purchased and securities sold under agreements
to repurchase 6,854,153 1,273,507
Other borrowed funds 31,035,781 11,138,850
Accrued expenses and other liabilities 1,810,822 2,238,989
Employee Stock Ownership Plan debt 56,934 56,934
------------- -------------
Total liabilities 262,747,055 238,686,267
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 at September 30, 1998 and December 31, 1997,
respectively 39,571 39,571
Surplus 3,707,472 3,707,472
Retained earnings 24,354,268 22,396,461
------------- -------------
28,101,311 26,143,504
Accumulated other comprehensive income 406,925 175,436
Treasury stock, 32,562 shares at September 30, 1998 and
December 31, 1997, at cost (214,599) (214,599)
Employee Stock Ownership Plan debt (56,934) (56,934)
------------- -------------
Total stockholders' equity 28,236,703 26,047,407
------------- -------------
Total liabilities and stockholders' equity $ 290,983,758 $ 264,733,674
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Statements of Earnings
For The Three Months and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,430,212 $ 3,947,687 $ 12,903,967 $ 11,309,289
Interest and dividends on investment securities held to maturity:
Taxable 157,228 216,112 570,419 764,522
Tax-exempt 15,662 24,830 55,924 75,295
------------ ------------ ------------ ------------
Total interest and dividends on investment securities-HTM 172,890 240,942 626,343 839,817
Interest and dividends on investment securities available for sale:
Taxable 850,422 751,782 2,240,546 2,226,765
Tax-exempt 8,191 5,948 20,086 17,843
------------ ------------ ------------ ------------
Total interest and dividends on investment securities-AFS 858,613 757,730 2,260,632 2,244,608
Interest on federal funds sold 68,113 86,870 216,291 281,989
Interest on interest-bearing deposits with other banks 38,669 22,852 100,423 61,121
------------ ------------ ------------ ------------
Total interest income 5,568,497 5,056,081 16,107,656 14,736,824
Interest expense:
Interest on deposits 2,440,198 2,436,750 7,208,347 7,098,583
Interest on federal funds purchased and securities sold under
agreements to repurchase 41,238 18,991 115,994 121,606
Interest on other borrowings 444,420 163,445 974,056 495,914
------------ ------------ ------------ ------------
Total interest expense 2,925,856 2,619,186 8,298,397 7,716,103
------------ ------------ ------------ ------------
Net interest income 2,642,641 2,436,895 7,809,259 7,020,721
Provision for loan losses 180,000 78,837 656,030 192,776
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,462,641 2,358,058 7,153,229 6,827,945
Noninterest income:
Service charges on deposit accounts 258,303 218,557 703,653 639,730
Investment securities gains/(losses), net 7,417 0 14,277 (40,060)
Other 372,460 339,804 1,075,517 923,479
------------ ------------ ------------ ------------
Total noninterest income 638,180 558,361 1,793,447 1,523,149
Noninterest expense:
Salaries and benefits 821,049 741,466 2,296,520 2,292,181
Net occupancy expense 246,152 245,993 748,284 728,826
Other 714,400 550,210 2,027,891 1,680,334
------------ ------------ ------------ ------------
Total noninterest expense 1,781,601 1,537,669 5,072,695 4,701,341
Earnings before income tax expense 1,319,220 1,378,750 3,873,981 3,649,753
Income tax expense 305,716 516,815 1,353,652 1,332,605
------------ ------------ ------------ ------------
Net earnings $ 1,013,504 $ 861,935 $ 2,520,329 $ 2,317,148
============ ============ ============ ============
Basic earnings per share $ 0.26 $ 0.22 $ 0.64 $ 0.59
============ ============ ============ ============
Weighted average shares outstanding 3,924,573 3,916,724 3,924,573 3,913,270
============ ============ ============ ============
Dividends per share $ 0.05 $ 0.04 $ 0.14 $ 0.12
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Common Stock Surplus Earnings Income
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 13,190 3,691,099 19,942,980 (146,528)
Net earnings -- -- 3,080,043 --
Cash dividends paid ($0.16 per share) -- -- (626,562) --
Change in accumulated other comprehensive income -- -- -- 321,964
Payment of Employee Stock Ownership Plan Debt -- -- -- --
Sale of treasury stock (5,488 shares) -- 42,754 -- --
Purchase of treasury stock (368 shares) -- -- -- --
Three for one stock split effected in form of dividend,
subsequent to December 31, 1997 (note 4) 26,381 (26,381) -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 39,571 3,707,472 22,396,461 175,436
Through SEPTEMBER 30, 1998:
Net earnings -- -- 2,520,329 --
Cash dividends paid ($0.14 per share) -- -- (562,522) --
Change in accumulated other comprehensive income -- -- -- 231,489
----------- ----------- ----------- -----------
Balance at September 30, 1998 $ 39,571 3,707,472 24,354,268 406,925
=========== =========== =========== ===========
<CAPTION>
Employee Stock
Ownership Treasury
Plan debt Stock Total
----------- ----------- -----------
<S> <C> <C> <C>
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)
Change in accumulated other comprehensive income -- -- 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)
Three for one stock split effected in form of dividend,
subsequent to December 31, 1997 (note 4) -- -- --
----------- ----------- -----------
Balance at December 31, 1997 (56,934) (214,599) 26,047,407
Through SEPTEMBER 30, 1998:
Net earnings -- -- 2,520,329
Cash dividends paid ($0.14 per share) -- -- (562,522)
Change in accumulated other comprehensive income -- -- 231,489
----------- ----------- -----------
Balance at September 30, 1998 (56,934) (214,599) 28,236,703
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,520,329 $ 2,317,148
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 529,801 475,253
Accretion of investment discounts & loan fees (220,094) (95,158)
Provision for loan losses 656,030 192,776
Loss on sale of premises & equipment 1,181 6,126
Loss on sale of other real estate -- 3,687
Increase in interest receivable (85,398) (617,917)
Increase in other assets (538,338) (31,439)
Increase in interest payable 5,314 11,006
(Decrease)/increase in other liabilities (587,807) 890,501
------------ ------------
Net cash provided by operating activities 2,281,018 3,151,983
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 6,283,202 3,680,272
Purchases of investment securities held to maturity (425,000) (3,366,275)
Proceeds from maturities/calls/paydowns of investment
securities available for sale 9,771,821 5,843,600
Proceeds from sale of investment securities available for sale 4,970,458 10,870,613
Purchases of investment securities available for sale (26,693,874) (18,076,850)
Net increase in loans (24,568,021) (16,413,068)
Purchases of premises and equipment (283,170) (499,059)
Purchases of rental property (44,214) (1,670)
Net decrease/(increase) in interest-bearing deposits with
other banks 616,662 (636,277)
------------ ------------
Net cash used in investing activities (30,372,136) (18,598,714)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)/increase in non-interest bearing deposits,
NOW accounts and savings accounts (9,473,351) 9,120,120
Net increase/(decrease) in certificates of deposit 8,484,729 (3,831,028)
Net increase/(decrease) in securities sold under agreements
to repurchase 5,580,646 (2,507,558)
Net increase in borrowings from FHLB 19,911,313 270,976
Net decrease in other short-term borrowings -- (1,203,130)
Net decrease in other long-term debt (14,382) (15,185)
Proceeds from sale of Treasury Stock -- 84,732
Purchase of treasury stock -- (8,648)
Dividends paid (562,522) (469,580)
------------ ------------
Net cash provided by financing activities 23,926,433 1,440,699
------------ ------------
Net decrease in cash and cash equivalents (4,164,685) (14,006,032)
Cash and cash equivalents at beginning of period 14,883,412 27,172,715
------------ ------------
Cash and cash equivalents at end of period $ 10,718,727 $ 13,166,683
============ ============
Supplemental information on cash payments:
Interest paid $ 8,293,083 $ 7,705,097
============ ============
Income taxes paid $ 1,717,573 $ 822,846
============ ============
</TABLE>
-6-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
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
December 31, 1997.
Note 2 - Accounting Pronouncements
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 securities. Total
comprehensive income for the nine months ended September 30, 1998 was $2,752,000
compared to $2,543,000 for the nine months ended September 30, 1997. Total
comprehensive income for the three months ended September 30, 1998 was
$1,260,000 compared to $798,000 for the three months ended September 30, 1997.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement 133). Statement 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company has not yet determined the impact of Statement 133 on the
Company's financial statements upon adoption.
In October 1998, the FASB issued Statement of Financial Accounting
Standard No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage-Banking Enterprise,
an amendment of FASB Statement of No. 65" (SFAS 134). SFAS 134 is effective for
the first quarter beginning after December 15, 1998. The Company does not
believe the provisions of SFAS 134 will have significant impact on the financial
statements upon adoption.
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 - Stockholders' equity
On May 14, 1998, the Company's Board of Directors approved a three for one stock
split effected in the form of a dividend payable on June 25, 1998 to
shareholders of record on June 10, 1998. All share and per share information in
the accompanying financial statements has been restated to reflect the effect of
the additional shares outstanding resulting from the stock split. Common stock
and surplus have been restated also to reflect the stock split retroactively.
7
<PAGE>
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, 1998 and 1997.
Summary
Net income of $1,014,000 for the quarter ended September 30, 1998
represented an increase of $152,000 (17.6%) from the Company's net income of
$862,000 for the same period of 1997. Basic income per share increased $0.04
(18.2%) to $0.26 during the third quarter of 1998 from $0.22 for the third
quarter of 1997. Net income increased $203,000 (8.8%) to $2,520,000 for the nine
month period ended September 30, 1998 compared to $2,317,000 for the same period
of 1997. During the nine month period ended September 30, 1998 compared to the
same period of 1997, 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
remained the same at 8.21% for both the nine months ended September 30, 1998 and
September 30, 1997. The consistency of the net yield on interest earning assets
is due to an increase in the yield of investments securities held to maturity
due to paydowns, maturities and calls and an increase in interest bearing
deposits with other banks offset by a decrease in the yield of investment
securities available for sale. The increase in the Company's net income during
the third quarter of 1998 compared to the same period of 1997 is primarily due
to the increase in the interest and fees on loans. See the "CONSOLIDATED AVERAGE
BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES" table.
Total assets of $290,984,000 at September 30, 1998 reflected an
increase of $26,250,000 (9.9%) over total assets of $264,734,000, at December
31, 1997. This increase resulted primarily from increases in total loans, net of
unearned income and investment securities available for sale. This was offset by
a decrease in cash and cash equivalents and investment securities held to
maturity.
Financial Condition
Investment Securities and Federal Funds Sold
Investment securities held to maturity were $8,646,000 and $14,364,000
at September 30, 1998 and December 31, 1997, respectively. This decrease of
$5,718,000 (39.8%) resulted from scheduled paydowns and calls of principal
amounts. The increase of $12,322,000 (30.5%) in investment securities available
for sale to $52,768,000 at September 30, 1998 from $40,446,000 at December 31,
1997, reflects the purchase of U.S. government agency securities and mortgage
backed securities. The shift into investment securities available for sale is a
deliberate move by management to maintain flexibility in its liquidity planning.
Federal funds sold decreased $2,165,000 (82.8%) to $450,000 at
September 30, 1998 from $2,615,000 at December 31, 1997. These fluctuations
reflect normal activity in the Bank's funds management efforts.
Loans
Total loans, net of unearned income, of $210,060,000 at September 30,
1998 reflected an increase of $24,567,000 (13.2%) compared to the total loans of
$185,493,000, net of unearned income, at December 31, 1997. This growth
continues to occur in the commercial and consumer real estate mortgage
portfolios due to strong customer demand and a stable local real estate market.
In addition, the Bank experienced growth in its commercial, financial and
agricultural loans during the first nine months of 1998. Consumer real estate,
commercial real estate and commercial, financial and agricultural loans
represented the majority of the loan portfolio with approximately 29.81%, 29.47%
and 26.31% of the Bank's total loans, net of unearned income at September 30,
1998, respectively. The net yield on loans was 8.80% for the nine months ended
September 30, 1998 compared to 8.86% for the nine months ended September 30,
1997. See the "CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND
YIELDS/RATES" table.
8
<PAGE>
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 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 potential credit losses.
The allowance for loan losses was $2,780,000 at September 30, 1998.
Management believes that this level of reserves (1.32% 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 nine months of 1998, the Bank made $656,000 in
provisions to the allowance for loan losses based on management's assessment of
the credit quality of the loan portfolio, coupled with the relatively low level
of net charge-offs. For the nine months ended September 30, 1998, the Bank had
charge-offs of $95,000 and recoveries of $94,000; however, 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.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans
and other real estate owned, and accruing loans 90 days or more past due were
$5,271,000 at September 30, 1998 compared to $276,000 at December 31, 1997. This
change resulted mainly from an increase of $4,995,000 in nonaccrual loans due
primarily to relationship mentioned above.
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, 1998, 108 loans totaling $3,181,000, or 1.51%
of total loans outstanding, net of unearned income, were considered potential
problem loans compared to 73 loans totaling $2,681,000, or 1.45% of total loans
outstanding, net of unearned income, at December 31, 1997. At September 30,
1998, the amount of impaired loans were $4,099,000 compared to $578,000 at
December 31, 1997. This increase in impaired loans also resulted mainly from the
relationship mentioned above.
Deposits
Total deposits decreased $989,000 (0.4%) to $222,989,000 at September
30, 1998, as compared to $223,978,000 at December 31, 1997. Noninterest-bearing
deposits increased $917,000 (2.8%) during the first nine months of 1998 while
total interest-bearing deposits decreased $1,905,000 (1.0%) to $189,435,000 at
September 30, 1998 from $191,340,000 at December 31, 1997. 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 4.99%
for the nine months ended September 30, 1998 compared to 5.05% for the same
period of 1997. During the first nine months of 1998, the Bank experienced an
increase in certificates of deposits over $100,000 of $8,093,000 (21.9%). This
increase was offset by a decrease in money market accounts of $8,669,000 (17.1%)
during the first nine months of 1998. The Company considers the 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 $28,237,000 at
September 30, 1998, compared to $26,047,000 at December 31, 1997. This
represents an increase of $2,190,000 (8.4%) during the first nine months of
1998. Net earnings for the first nine months of 1998 continues to exceed net
earnings for the same period of 1997. In addition, the Company experienced a
change in accumulated other comprehensive income to $407,000 at September 30,
1998 from $175,000 at December 31, 1997. During the first nine months of 1998,
cash dividends of
9
<PAGE>
$563,000, or $0.14 per share, were declared on Common Stock, compared to
$470,000, or $0.12 per share for the first nine months of 1997. On May 14, 1998
the Company declared a three for one stock split effected in the form of a 200
percent stock dividend for all shareholders of record on June 10, 1998 (see note
4).
The Company's Tier 1 leverage ratio was 9.51%, Tier I risk-based
capital ratio was 13.36% and Total risk-based capital ratio was 14.61% at
September 30, 1998. 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 source of liquidity during the first nine months of 1998 is
through federal funds purchased, investment securities sold under agreements to
repurchase, additional advances from the Federal Home Loan Bank of Atlanta
("FHLB-Atlanta"). The Company used these funds primarily to purchase investment
securities available for sale and to fund new loan growth. Under the advance
program with FHLB-Atlanta, the Bank had outstanding advances totaling
approximately $30,788,000, leaving credit available, net of advances drawn down,
of approximately $9,212,000 at September 30, 1998.
Net cash provided by operating activities of $2,281,000 for the nine
months ended September 30, 1998, consisted primarily of net earnings. Net cash
used in investing activities of $30,372,000 funded investment securities
available for sale purchases and loan growth of $26,694,000 and $24,568,000,
respectively, offset by proceeds from sales, maturities, calls and paydowns of
investment securities available for sale of $14,742,000. The $23,926,000 in net
cash provided by financing activities resulted primarily from increases of
$5,581,000 in securities sold under agreements to repurchase and increases of
$19,911,000 in FHLB-Atlanta advances offset by a net decrease in deposits of
$988,000.
Interest Rate Sensitivity Management
At September 30, 1998, interest sensitive assets that repriced or
matured within the next 12 months were $160,312,000, compared to interest
sensitive liabilities that reprice or mature within the same time frame totaling
$152,737,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a positive $7,575,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 105%. This compares to a twelve month
cumulative GAP position at December 31, 1997, of a positive $4,373,000 and a GAP
ratio of 104.0%. 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, 1998,
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 $152,000 (17.6%) to $1,014,000 for the three month
period ended September 30, 1998 compared to $862,000 for the same period of
1997. Basic income per share was $0.26 and $0.22 for the third quarter of 1998
and 1997, respectively, an increase of 18.2%. Net income increased $203,000
(8.8%) to $2,520,000 for the nine month period ending September 30, 1998,
compared to $2,317,000 for the same period of 1997. During the nine month period
ended September 30, 1998 compared to the same period of 1997, the Company
experienced increases in net interest income, noninterest income, provision for
loan losses and noninterest expense due to continued growth of the Company.
10
<PAGE>
Net Interest Income
Net interest income was $2,643,000 for the third quarter of 1998. The
increase of $206,000 (8.5%) over $2,437,000 for the same period of 1997,
resulted primarily from the increase in interest and fees on loans. Net interest
income increased $788,000 (11.2%) to $7,809,000 for the nine months ended
September 30, 1998, compared to $7,021,000 for the nine months ended September
30, 1997. Such increases resulted from overall growth in the Company's interest
earning assets as net taxable yield on the Company's interest earning assets is
comparable during the first nine months of 1998 compared to the same period of
1997. During the third quarter of 1998, the Company's GAP position became more
asset sensitive to changes in interest rates as compared to December 31, 1997.
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.
Interest Income
Interest income is a function of the volume of interest earning assets
and their related yields. Interest income was $5,568,000 and $5,056,000 for the
three months ended September 30, 1998 and 1997, respectively. This represents an
increase of $512,000 (10.1%) for the third quarter of 1998. For the nine months
ended September 30, 1998 interest income was $16,108,000, an increase of
$1,371,000 (9.3%) compared to $14,737,000 for the same period of 1997. This
change for the first nine months of 1998 resulted as the average volume of
interest earning assets outstanding increased $21,905,000 (9.1%) over the same
period of 1997. 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 $4,430,000 and $3,948,000 for the third quarter of 1998 and
1997, respectively. This reflects an increase of $482,000 (12.2%) during the
three months ended September 30, 1998 over the same period of 1997. For the nine
month period ended September 30, 1998, interest and fees on loans increased
$1,595,000 (14.1%) to $12,904,000 from $11,309,000 for the same period of 1997.
The average volume of loans increased $25,392,000 (14.9%) as of September 30,
1998 compared to the same period of 1997, while the Company's yield on loans
decreased 6 basis points comparing these same periods.
Interest income on investment securities held to maturity for the three
month period ended September 30, 1998, decreased $68,000 (28.2%) to $173,000
from $241,000 for the same period of 1997. Interest income on investment
securities held to maturity for the nine month period ended September 30, 1998,
decreased $214,000 (25.5%) to $626,000 from $840,000 for the same period of
1997. There was a 28.9% decline in the average volume of investment securities
held to maturity outstanding for the first nine months of 1998 compared to the
same period of 1997, while the net yield on these average balances increased 32
basis points. For the three month period ended September 30, 1998, interest
income on investment securities available for sale increased $101,000 (13.3%) to
$859,000 from $758,000 for the same period of 1997. For the nine months ended
September 30, 1998, interest income on investment securities available for sale
increased $16,000 (0.7%) to $2,261,000 from $2,245,000 for the same period of
1997. The Company's average volume of investment securities available for sale
increased by $2,831,000 (6.4%) for the first nine months of 1998, compared to
the same period of 1997, while the net yield on these average balances decreased
36 basis points. Management continues to reinvest runoff from the investment
securities held to maturity portfolio into investment securities available for
sale to maintain flexibility in its liquidity planning. See the "CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES" table.
Interest Expense
Total interest expense increased $307,000 (11.7%) to $2,926,000 for the
third quarter of 1998 compared to $2,619,000 for the same period of 1997. Total
interest expense increased $582,000 (7.5%) to $8,298,000 from $7,716,000 for the
nine months ended September 30, 1998 and 1997, respectively. These changes
resulted as the Company's average interest-bearing liabilities outstanding
increased 8.1% while the rates paid on these liabilities decreased 3 basis
points during the first nine months of 1998 compared to the same period of 1997.
See the "CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND
YIELDS/RATES" table.
11
<PAGE>
Interest on deposits, the primary component of total interest expense,
increased $3,000 (0.1%) to $2,440,000 for the third quarter of 1998 compared to
$2,437,000 for the same period of 1997. Interest on deposits were $7,208,000 and
$7,099,000 for the nine months ended September 30, 1998 and 1997, respectively.
Interest expense on borrowed funds, including both short term borrowing
and other borrowed funds, was $444,000 and $163,000 for the third quarter of
1998 and 1997, respectively. This represents an increase of $281,000 or 172.4%.
For the nine months ended September 30, 1998, interest expense on borrowed funds
increased $478,000 (96.4%) to $974,000 from $496,000 for the same period of
1997. These increases for the three month and nine month periods ended September
30, 1998 are due to a 107.8% increase in the average volume offset by a 18 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, federal
funds purchased and securities sold under agreements to repurchase.
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 $656,000 for the nine
months ended September 30,1998 compared to $193,000 for the nine months ended
September 30, 1997. The increase in the provision for loan losses during the
first nine months of 1998 reflects an additional provision for possible loan
losses of $300,000 in the second quarter to reflect significant growth in the
loan portfolio and the recent identification of potential problem loans to a
commercial customer. See "---ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS."
Noninterest Income
Noninterest income increased $80,000 (14.3%) to $638,000 for the third
quarter of 1998 from $558,000 for the same period of 1997. Noninterest income
was $1,793,000 and $1,523,000 for the nine months ended September 30, 1998 and
1997, respectively.
Service charges on deposit accounts for the third quarter of 1998
increased $39,000 (17.8%) to $258,000 from $219,000 for the third quarter of
1997. Service charges on deposit accounts was $704,000 and $640,000 for the nine
months ended September 30, 1998 and 1997, respectively. These increases are
primarily due to increases in nonsufficient funds and overdraft charges.
Other noninterest income increased $32,000 (9.4%) to $372,000 for the
third quarter of 1998 from $340,000 for the same period of 1997. Other
noninterest income was $1,076,000 and $923,000 for the nine months ended
September 30, 1998 and 1997, respectively. These increases primarily resulted
from an increase in noninterest loan income and fees due to increases in loan
growth and an increase in stock dividends from other companies.
Noninterest Expense
Total noninterest expense was $1,782,000 and $1,538,000 for the third
quarter of 1998 and 1997, respectively, representing an increase of $244,000 or
15.9%. For the nine months ended September 30, 1998, total noninterest expense
increased $372,000 (7.9%) to $5,073,000 from $4,701,000 for the same period of
1997. These increases for the nine month period ended September 30, 1998 were
due to increases in salaries and benefits expense and other noninterest expense.
Net occupancy expense is comparable to the same period of 1997.
Salaries and benefits expense was $821,000 and $741,000 for the three
months ended September 30, 1998 and 1997, respectively. This represents an
increase of $80,000 (10.8%) in the third quarter of 1998 compared to the third
quarter of 1997. For the nine months ended September 30, 1998, total salaries
and benefits expense increased $5,000 (0.2%) to $2,297,000 from $2,292,000 for
the same period of 1997. Overall employee levels have increased from the same
period of 1997 offset by a slight decrease due to additional costs allocated to
loan origination activity.
12
<PAGE>
Net occupancy expense was $246,000 for the third quarter of 1998, which
is comparable to the same period of 1997. For the nine month period ended
September 30, 1998, net occupancy expense increased $19,000 (2.6%) to $748,000
from $729,000 for the same period of 1997. The nine month period increase is
primarily due to increases in expenses for furniture and equipment service
contracts.
For the third quarter of 1998, other noninterest expense increased
$164,000 (29.8%) to $714,000 from $550,000 for the third quarter of 1997. Other
noninterest expense was $2,028,000 and $1,680,000 for the nine months ended
September 30, 1998 and 1997, respectively. These increases are mainly due to the
expenses associated with the introduction of the VISA checkcard that was
launched in 1998 and professional fees associated with establishing the
Company's technology plan.
Income taxes
Income tax expense was $306,000 and $517,000 for the third quarter of
1998 and 1997, respectively. For the nine months ended September 30, 1998,
income tax expense increased $21,000 (1.6%) to $1,354,000 from $1,333,000 for
the nine months ended September 30, 1997. These levels represent an effective
tax rate on pre-tax earnings of 35.0% for the nine months ended September 30,
1998 and 36.5% for the same period of 1997.
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. 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 the Board 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, and 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 project is estimated not to exceed $250,000 and is
estimated to be funded through operating cash flows. Contingency Plans have been
or are being 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 are also being developed
based upon certain circumstances. These plans will provide the Company direction
in the event an unforeseen circumstance arises due to the Year 2000. All plans
will be finalized and implemented by September 30, 1999.
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
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
============================= ======= ======== ======== ======= ======== =======
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned income (1) $ 195,972 12,904 8.80% 170,580 11,309 8.86%
Investment securities held to maturity:
Taxable 11,279 570 6.76% 16,100 765 6.35%
Tax-exempt (2) 1,264 85 8.97% 1,547 114 9.82%
-------------------- --------------------
Total investment securities held to maturity 12,543 655 6.98% 17,647 879 6.66%
Investment securities available for sale:
Taxable 46,731 2,241 6.41% 43,956 2,227 6.77%
Tax-exempt (2) 550 30 7.37% 494 27 7.38%
-------------------- --------------------
Total investment securities available for sale 47,281 2,271 6.42% 44,450 2,254 6.78%
Federal funds sold 5,138 216 5.62% 6,672 282 5.65%
Interest bearing deposits with other banks 1,856 100 7.20% 1,536 61 5.31%
-------------------- --------------------
Total interest earning assets 262,790 16,146 8.21% 240,885 14,785 8.21%
Allowance for loan losses (2,335) (2,136)
Cash and due from banks 7,813 7,601
Premises and equipment 3,477 3,596
Rental property, net 1,796 1,868
Other assets 4,693 4,936
--------- ---------
Total Assets $ 278,234 256,750
========= =========
<CAPTION>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing liabilities:
Deposits:
Demand $ 20,720 329 2.12% 19,985 314 2.10%
Savings and Money Market 60,173 2,002 4.45% 57,826 1,932 4.47%
Certificates of deposits less than $100,000 71,486 3,309 6.19% 72,028 3,361 6.24%
Certificates of deposits and other time deposits of
$100,000 or more 40,635 1,568 5.16% 38,145 1,492 5.23%
------------------- -------------------
Total interest bearing deposits 193,014 7,208 4.99% 187,984 7,099 5.05%
Federal funds purchased and securities sold under
agreements to repurchase 3,030 116 5.12% 3,119 122 5.23%
Other short term borrowings 0 0 0.00% 276 9 4.36%
Other borrowed funds 22,883 971 5.67% 11,010 481 5.84%
Employee stock ownership plan debt 57 3 6.97% 114 6 6.89%
------------------- -------------------
Total interest bearing liabilities 218,984 8,298 5.07% 202,503 7,717 5.10%
Noninterest bearing demand deposits 29,878 27,658
Accrued expenses and other liabilities 1,604 2,565
Stockholder's equity 27,768 24,024
-------- -------
Total Liabilities and shareholder's equity $ 278,234 256,750
======== ========
Net Interest Income $7,848 7,068
========= ========
Net Yield on Total Interest Earning Assets 3.99% 3.92%
======= ======
</TABLE>
- --------------
(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%.
<PAGE>
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 13, 1998 By: /s/ E. L. Spencer, Jr.
--------------------- ------------------------------------
E. L. Spencer, Jr.
President, Chief Executive
Officer and Director
Date: November 13, 1998 By: /s/ Linda D. Fucci
--------------------- ------------------------------------
Linda D. Fucci
Chief Financial Officer and
Principal Accounting Officer
15
<PAGE>
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 1999 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, 1999.
16
<PAGE>
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 September 30, 1998:
none
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the 10-QSB
for September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,269
<INT-BEARING-DEPOSITS> 1,106
<FED-FUNDS-SOLD> 450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,768
<INVESTMENTS-CARRYING> 8,646
<INVESTMENTS-MARKET> 8,803
<LOANS> 210,060
<ALLOWANCE> 2,780
<TOTAL-ASSETS> 290,984
<DEPOSITS> 222,989
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,867
<LONG-TERM> 31,036
0
0
<COMMON> 40
<OTHER-SE> 28,196
<TOTAL-LIABILITIES-AND-EQUITY> 290,984
<INTEREST-LOAN> 12,904
<INTEREST-INVEST> 2,887
<INTEREST-OTHER> 317
<INTEREST-TOTAL> 16,108
<INTEREST-DEPOSIT> 7,208
<INTEREST-EXPENSE> 8,298
<INTEREST-INCOME-NET> 7,809
<LOAN-LOSSES> 656
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 5,073
<INCOME-PRETAX> 3,874
<INCOME-PRE-EXTRAORDINARY> 3,874
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,520
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 3.99
<LOANS-NON> 4,340
<LOANS-PAST> 931
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,181
<ALLOWANCE-OPEN> 2,125
<CHARGE-OFFS> 95
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 2,780
<ALLOWANCE-DOMESTIC> 2,780
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
