<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 March 31, 1998
------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period __________ to __________
Commission file number 0-26486
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of April 30, 1998: 1,308,191 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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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1 Financial Information
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income for
the Three Months Ended March 31, 1998
and 1997 4
Consolidated Statements of Changes in
Stockholders' Equity for March 31, 1998
and December 31, 1997 5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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 6 Exhibits 15
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 3/31/98 12/31/97
------------------------------------- --------------- ---------------
<S> <C> <C>
Cash and due from banks $ 8,864,416 $ 12,268,412
Federal funds sold and securities purchased under agreements to resell 9,815,000 2,615,000
--------------- ---------------
Cash and cash equivalents 18,679,416 14,883,412
Interest bearing deposits with other banks 3,361,412 1,722,982
Investment securities held to maturity (fair value of $13,262,484 and
$14,401,723 at March 31, 1998 and December 31, 1997,
respectively):
Taxable 12,041,981 12,885,396
Tax-exempt 1,204,906 1,478,866
--------------- ---------------
Total Investment Securities Held to Maturity 13,246,887 14,364,262
Investment securities available for sale, net
Taxable 45,320,189 39,965,856
Tax-exempt 480,000 480,000
--------------- ---------------
Total Investment Securities Available for Sale 45,800,189 40,445,856
Loans:
Loans, less unearned income of $28,027 at March 31, 1998
and $36,706 at December 31, 1997 190,959,892 185,493,178
Less allowance for loan losses (2,229,859) (2,125,104)
--------------- ---------------
Loans, net 188,730,033 183,368,074
Premises and equipment, net 3,472,595 3,520,542
Rental property, net 1,801,619 1,807,359
Other assets 4,360,884 4,621,187
--------------- ---------------
Total assets $ 279,453,035 $ 264,733,674
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
-------------------------------------
Deposits:
Noninterest bearing $ 35,843,586 $ 32,638,352
Interest bearing 190,677,259 191,339,635
--------------- ---------------
Total Deposits 226,520,845 223,977,987
Securities sold under agreements to repurchase 3,036,478 1,273,507
Other borrowed funds 21,104,960 11,138,850
Accrued expenses and other liabilities 2,032,566 2,238,989
Employee Stock Ownership Plan debt 56,934 56,934
--------------- ---------------
Total liabilities 252,751,783 238,686,267
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
issued shares-none --- ---
Common stock of $.01 par value; authorized 2,500,000 shares;
issued 1,319,045 at March 31, 1998 and December 31, 1997,
respectively 13,190 13,190
Surplus 3,733,853 3,733,853
Retained earnings 23,066,858 22,396,461
--------------- ---------------
26,813,901 26,143,504
Accumulated other comprehensive income 158,884 175,436
Treasury stock, 10,854 shares at March 31, 1998 and
December 31, 1997, at cost (214,599) (214,599)
Employee Stock Ownership Plan debt (56,934) (56,934)
--------------- ---------------
Total stockholders' equity 26,701,252 26,047,407
Total liabilities and stockholders' equity $ 279,453,035 $ 264,733,674
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Statements of Income
For The Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $4,124,000 $3,583,344
Interest and dividends on investment securities held to maturity:
Taxable 269,823 265,173
Tax-exempt 21,568 25,840
------------ ------------
Total interest and dividends on investment securities-HTM 291,391 291,013
Interest and dividends on investment securities available for sale:
Taxable 628,220 703,400
Tax-exempt 5,948 5,948
------------ ------------
Total interest and dividends on investment securities-AFS 634,168 709,348
Interest on federal funds sold 76,112 126,332
Interest on interest-bearing deposits with other banks 27,935 8,788
------------ ------------
Total interest income 5,153,606 4,718,825
Interest expense:
Interest on deposits 2,375,432 2,338,683
Interest on securities sold under agreements to repurchase 32,000 38,198
Interest on other borrowings 218,516 166,753
------------ ------------
Total interest expense 2,625,948 2,543,634
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Net interest income 2,527,658 2,175,191
Provision for loan losses 86,030 58,581
------------ ------------
Net interest income after provision for loan losses 2,441,628 2,116,610
Noninterest income:
Service charges on deposit accounts 206,486 205,626
Investment securities gains/(losses), net 7,168 (40,060)
Other 544,513 308,921
------------ ------------
Total noninterest income 758,167 474,487
Noninterest expense:
Salaries and benefits 720,240 783,564
Net occupancy expense 254,118 224,025
Other 839,807 558,386
------------ ------------
Total noninterest expense 1,814,165 1,565,975
Earnings before income tax expense 1,385,630 1,025,122
Income tax expense 532,085 375,322
------------ ------------
Net earnings $853,545 $649,800
============ ============
Basic earnings per share $0.65 $0.50
============ ============
Weighted average shares outstanding 1,308,191 1,303,394
============ ============
Dividends per share $0.14 $0.12
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Retained
Common Stock Surplus Earnings
-------------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 13,190 3,691,099 19,942,980
Net earnings --- --- 3,080,043
Cash dividends paid ($0.48 per share) --- --- (626,562)
Change in net unrealized gain (loss) on mutual funds and
investment securities available for sale of bank subsidiary --- --- ---
Payment of Employee Stock Ownership Plan Debt --- --- ---
Sale of treasury stock (5,488 shares) 42,754
Purchase of treasury stock (368 shares) --- --- ---
-------------- ------------ ------------
Balance at December 31, 1997 $ 13,190 3,733,853 22,396,461
Through March 31, 1998 (Unaudited):
Net earnings --- --- 853,545
Cash dividends paid ($0.14 per share) --- --- (183,148)
Change in net unrealized gain (loss) on mutual funds and
investment securities available for sale of bank subsidiary --- --- ---
-------------- ------------ ------------
Balance at March 31, 1998 (Unaudited) $ 13,190 3,733,853 23,066,858
============== ============ ============
<CAPTION>
Accumulated
Other Employee Stock
Comprehensive Ownership Treasury
Income Plan debt Stock Total
-------------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (146,528) (113,940) (304,009) 23,082,792
Net earnings --- --- --- 3,080,043
Cash dividends paid ($0.48 per share) --- --- --- (626,562)
Change in net unrealized gain (loss) on mutual funds and
investment securities available for sale of bank subsidiary 321,964 --- --- 321,964
Payment of Employee Stock Ownership Plan Debt --- 57,006 --- 57,006
Sale of treasury stock (5,488 shares) 98,058 140,812
Purchase of treasury stock (368 shares) --- --- (8,648) (8,648)
-------------- --------------- ---------- ------------
Balance at December 31, 1997 175,436 (56,934) (214,599) 26,047,407
Through March 31, 1998 (Unaudited):
Net earnings --- --- --- 853,545
Cash dividends paid ($0.14 per share) --- --- --- (183,148)
Change in net unrealized gain (loss) on mutual funds and
investment securities available for sale of bank subsidiary (16,552) --- --- (16,552)
-------------- --------------- ---------- ------------
Balance at March 31, 1998 (Unaudited) 158,884 (56,934) (214,599) 26,701,252
============== =============== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $853,545 $649,800
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 168,266 179,787
Accretion of investment discounts & loan fees (85,145) (27,851)
Provision for loan losses 86,030 58,581
Loss on sale of premises & equipment --- 6,126
Loss on sale of other real estate --- 3,687
Decrease/(increase) in interest receivable 139,359 (299,421)
Decrease/(increase) in other assets 99,659 (133,874)
Increase/(decrease) in interest payable 1,588 (182,287)
(Decrease)/increase in other liabilities (196,978) 257,885
------------- -------------
Net cash provided by operating activities 1,066,324 512,433
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 1,174,989 1,143,083
Purchases of investment securities held to maturity --- (244,400)
Proceeds from maturities/calls/paydowns of investment
securities available for sale 1,624,449 3,831,217
Proceeds from sale of investment securities available for sale --- 10,870,613
Purchases of investment securities available for sale (7,002,277) (16,089,964)
Net increase in loans (5,447,989) (5,458,002)
Purchases of premises and equipment (53,363) (127,862)
Purchases of rental property (16,490) ---
Net increase in interest-bearing deposits with
other banks (1,638,430) (343,243)
------------- -------------
Net cash used in investing activities (11,359,111) (6,418,558)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW accounts and savings accounts 5,632,435 3,049,359
Net increase in certificates of deposit (3,089,577) (3,831,028)
Net (decrease)/increase in securities sold under agreements
to repurchase 1,762,971 (1,577,447)
Increase in borrowings from FHLB 9,970,438 340,000
Net decrease in other short-term borrowings --- (1,209,765)
Net decrease in other long-term debt (4,328) (4,330)
Proceeds from sale of Treasury Stock --- 19,638
Purchase of treasury stock --- ---
Dividends paid (183,148) (143,397)
------------- -------------
Net cash provided/(used) by financing activities 14,088,791 (3,356,970)
------------- -------------
Net (decrease)/increase in cash and cash equivalents 3,796,004 (9,263,095)
Cash and cash equivalents at beginning of period 14,883,412 27,172,715
------------- -------------
Cash and cash equivalents at end of period $18,679,416 $17,909,620
============= =============
Supplemental information on cash payments:
Interest paid $2,624,360 $2,725,921
============= =============
Income taxes paid $248,198 $36,378
============= =============
Supplemental information on noncash transactions:
Change in unrealized gain (loss) on investment securities
available for sale, net of change in deferred tax ($16,552) ($101,491)
============= =============
</TABLE>
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
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 on securities. Total comprehensive
income for the three months ended March 31, 1998 was $836,993 compared to
$548,309 for the three months ended March 31, 1997.
Note 3 - Derivatives Disclosure
In January 1997, the Securities and Exchange Commission approved rule
amendments (the Release) regarding disclosures about derivative financial
instruments, other financial instruments and derivative commodity instruments.
The Release requires inclusion in the footnotes to the financial statements of
extensive detail about the accounting for derivative financial instruments and
derivative commodity instruments. The accounting policy requirements become
effective for all registrants for filings that include financial statements for
periods ending after June 15, 1997.
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.
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<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 months ended March 31, 1998 and 1997.
Summary
Net income of $854,000 for the quarter ended March 31, 1998 represented
an increase of $204,000 (31.4%) from the Company's net income of $650,000 for
the same period of 1997. Basic income per share increased $0.15 (30.0%) to $0.65
during the first quarter of 1998 from $0.50 for the first quarter of 1997.
During the three months ended March 31, 1998 compared to the same period of
1997, the Company experienced increases in net interest income and noninterest
income offset by an increase in noninterest expense due to continued growth of
the Company. The net yield on total interest earning assets was 8.19% for the
three months ended March 31, 1998 compared to 8.11% for the three months ended
March 31, 1997. The increase in the net yield on interest earning assets is due
primarily to the yield of investment securities held to maturity. See the
"CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES" table.
Total assets of $279,453,000 at March 31, 1998 reflected an increase of
$14,719,000 (5.6%) over total assets of $264,734,000, at December 31, 1997. This
increase resulted primarily from increases in total loans, net of unearned
income, federal funds sold and securities purchased under agreement to resell
and investments available for sale. This was offset by a decrease in cash and
due from banks.
Financial Condition
Investment Securities
Investment securities held to maturity were $13,247,000 and $14,364,000
at March 31, 1998 and December 31, 1997, respectively. This decrease of
$1,117,000 (7.8%) resulted almost entirely from scheduled paydowns and calls of
principal. The increase of $5,354,000 (13.2%) in investment securities available
for sale to $45,800,000 at March 31, 1998 from $40,446,000 at December 31, 1997,
reflects the purchase of U.S. government agency 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 increased $7,200,000 (275.3%) to $9,815,000 at
March 31, 1998 from $2,615,000 at December 31, 1997. This increase is a result
of a temporary investment. These fluctuations reflect normal activity in the
Bank's funds management efforts.
Loans
Total loans, net of unearned income, of $190,860,000 at March 31, 1998
reflected an increase of $5,367,000 (2.9%) 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.
Commercial and consumer real estate mortgage loans represented the majority of
the loan portfolio with approximately 27.78% and 32.43% of the Bank's total loan
portfolio at March 31, 1998, respectively. In addition, the Bank experienced
growth in its commercial, financial and agricultural loans during the first
three months of 1998. The net yield on loans was 8.93% for the three months
ended March 31, 1998 compared to 8.86% for the three months ended March 31,
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 a level
considered adequate to absorb inherent 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 $2,230,000 at March 31, 1998.
Management believes that this level of reserves (1.17% of total outstanding
loans, net of unearned income) is adequate to absorb known risks in the
portfolio. No assurance can be given, however, that adverse economic
circumstances will not result in increased losses in the Bank's loan portfolio.
During the first three months of 1998, the Bank made $86,000 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 three months ended March 31, 1998, the Bank had
charge-offs of $2,000 and recoveries of $21,000.
Potential problem loans consist of those loans where management has
serious doubts as to the borrower's ability to comply with the present loan
repayment terms. At March 31, 1998, 89 loans totaling $2,840,000, or 1.49% 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 March 31, 1998,
the amount of impaired loans was $571,000 compared to $578,000 at December 31,
1997.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans
and other real estate owned, and accruing loans 90 days or more past due were
$856,000 at March 31, 1998 compared to $276,000 at December 31, 1997. This
change resulted primarily from a increase of $437,000 in nonaccrual loans.
Deposits
Total deposits increased $2,543,000 (1.1%) to $226,521,000 at March 31,
1998, as compared to $223,978,000 at December 31, 1997. Noninterest-bearing
deposits increased $3,206,000 (9.8%) during the first three months of 1998 while
total interest-bearing deposits decreased $663,000 (0.4%) to $190,677,000 at
March 31, 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 5.00%
for the three months ended March 31, 1998 compared to 5.14% for the same period
of 1997. During the first three months of 1998, the Bank experienced a decrease
of approximately $4,129,000 (8.2%) in its money market deposit accounts. This
decrease was offset by an increase in certificates of deposits over $100,000 of
approximately $2,445,000 (6.6%) during the first three months of 1998. The
Company considers the shifts in the deposit mix and the deposit runoff 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 $26,701,000 at
March 31, 1998, compared to $26,047,000 at December 31, 1997. This represents an
increase of $654,000 (2.5%) during the first three months of 1998. Net earnings
for the first three months of 1997 continues to exceed net earnings for the same
period of 1997. In addition, the Company experienced a change in the fair value
of its investment securities available for sale to an unrealized gain, net of
taxes, of $159,000 at March 31, 1998 from an unrealized gain, net of taxes, of
$175,000 at December 31, 1997. During the first three months of 1998, cash
dividends of $183,000, or $0.14 per share, were declared on Common Stock,
compared to $156,000, or $0.12 per share for the first three months of 1997.
-9-
<PAGE>
The Company's Tier 1 leverage ratio was 9.80%, Tier I risk-based
capital ratio was 14.33% and Total risk-based capital ratio was 15.50% at
March 31, 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 three months of 1998
continues to be through maturities, calls and paydowns of investment securities,
investment securities sold under agreements to repurchase, coupled with an
additional advance 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
$20,847,000, leaving credit available, net of advances drawn down, of
approximately $4,153,000 at March 31, 1998.
Net cash provided by operating activities of $1,066,000 for the three
months ended March 31, 1998, consisted primarily of net earnings. Net cash used
in investing activities of $11,359,000 funded investment securities available
for sale purchases and loan growth of $7,002,000 and $5,448,000, respectively,
offset by proceeds from investment sales, maturities, calls and paydowns of
$2,799,000. The $14,089,000 in net cash provided by financing activities
resulted primarily from a net increase in deposits of $2,542,000, increases of
$1,763,000 in securities sold under agreements to repurchase and $9,970,000 in
increases in FHLB-Atlanta advances.
Interest Rate Sensitivity Management
At March 31, 1998, interest sensitive assets that repriced or matured
within the next 12 months were $158,100,000, compared to interest sensitive
liabilities that reprice or mature within the same time frame totaling
$161,306,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a negative $3,206,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 98.0%. This compares to a 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-bearing assets than
interest-earning liabilities that reprice within the GAP period. The Company
entered into a $10,000,000 notional value interest rate swap during the second
quarter of 1997 to reduce the cost of funds on its 2 year 6.25% certificates of
deposit and to better match funding of variable rate assets. Based on ALCO's
alternative interest rate scenarios used by the Company in modeling for
asset/liability planning purposes and the GAP position at March 31, 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 $204,000 (31.4%) to $854,000 for the three month
period ending March 31, 1998 compared to $650,000 for the same period of 1997.
Basic income per share was $0.65 and $0.50 for the first quarter of 1998 and
1997, respectively, an increase of 30.0%. The increases for the three month
period ending March 31, 1998, compared to the same period of 1997, resulted
primarily from increases in net interest income and noninterest income offset by
increases in noninterest expense.
Net Interest Income
Net interest income was $2,528,000 for the first quarter of 1998. The
increase of $353,000 (16.2%) over $2,175,000 for the same period of 1997,
resulted primarily from the increase in interest and fees on loans. The net
taxable yield on the Company's interest earning assets increased 6 basis points
during the first three months of 1998, compared to the same period of 1997.
During the first quarter of 1998, the Company's GAP position became more
liability 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.
-10-
<PAGE>
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 $5,154,000 and $4,719,000 for the
three months ended March 31, 1998 and 1997, respectively. This represents an
increase of $435,000 (9.2%) for the first quarter of 1998. This change for the
first three months of 1997 resulted as the average volume of interest earning
assets outstanding increased $16,012,000 (6.8%) 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 $4,124,000 and $3,583,000 for the first quarter of 1998 and
1997, respectively. This reflects an increase of $541,000 (15.1%) during the
three months ended March 31, 1998 over the same period of 1997. The average
volume of loans increased $22,756,000 (13.8%) as of March 31, 1998 compared to
the same period of 1997, while the Company's yield on loans also increased
3 basis points comparing these same periods.
Interest income on investment securities held to maturity for the three
month period ended March 31, 1998, was comparable to the same period of 1997 at
$291,000. There was a 26.4% decline in the average volume outstanding, as the
net yield on these average balances increased 230 basis points. For the three
month period ended March 31, 1998, interest income on investment securities
available for sale decreased $75,000 (10.6%) to $634,000 from $709,000 for the
same period of 1997. The Company's average volume of investment securities
available for sale was $389,000 (0.9%) greater for the first three months of
1998, compared to the same period of 1997, while the net yield on these average
balances decreased 78 basis points. Management continues to reinvest runoff from
the investment securities held to maturity portfolio and to invest new funds
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 $82,000 (3.2%) to $2,626,000 for the
first quarter of 1998 compared to $2,544,000 for the same period of 1997. These
changes resulted as the Company's average interest-bearing liabilities
outstanding increased 5.2% while the rates paid on these liabilities decreased
13 basis points during the first three months of 1998 compared to the same
period of 1997. See the "CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE
AND YIELDS/RATES" table.
Interest on deposits, the primary component of total interest expense,
increased $36,000 (1.5%) to $2,375,000 for the first quarter of 1998 compared to
$2,339,000 for the same period of 1997. While the Bank has allowed the one and
two year, special rate certificates of deposit to adjust downward to its current
market interest rates, the Company is still experiencing some of the effects of
offering above market rates on its two year certificates of deposit during the
first quarter of 1995. This campaign, to develop a larger local core deposit
base and market share, is a factor on the Bank's overall increased cost of
funds. Other factors include a shift into higher yielding money market deposit
accounts, as well as increases in time deposit open accounts ("TDOA").
Interest expense on borrowed funds, including both short term borrowing
and other borrowed funds, were $219,000 and $167,000 for the first quarter of
1998 and 1997, respectively. This represents an increase of $52,000 or 31.1%.
These increases for the three month period ended March 31, 1998 are due to a
36.2% increase in the average volume offset by a 6 basis point decrease in the
rate paid on other borrowed funds. The increase is primarily from the increase
in FHLB-Atlanta advances 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 $86,000 for the three
months ended March 31,1998 compared to $59,000 for the three months ended
March 31, 1997. The increase
-11-
<PAGE>
in the provision for loan losses during the first three months of 1998, is
entirely due to the significant increases in the loan portfolio. See
"---ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS."
Noninterest Income
Noninterest income increased $284,000 (59.9%) to $758,000 for the first
quarter of 1998 from $474,000 for the same period of 1997. These changes are
primarily the result of gain on investment securities of $7,000, increases in
noninterest loan income and fees and increases in stock dividends from other
companies.
Service charges on deposits accounts for the first quarter of 1998 were
comparative to the first quarter of 1997 at $206,000. This however is a result
of an increases in nonsufficient funds and overdraft charges offset by a
decrease in service charges on savings accounts.
Other noninterest income increased $236,000 (76.4%) to $545,000 for the
first quarter of 1998 from $309,000 for the same period of 1997. These increases
for the three month period ended March 31, 1998 resulted from an increase in
noninterest loan income and fees due to increases in loan growth and stock
dividends from other companies.
Noninterest Expense
Total noninterest expense was $1,814,000 and $1,566,000 for the first
quarter of 1998 and 1997, respectively, representing an increase of $248,000 or
15.8%. These increases were due primarily to increases in lease payments on
furniture and equipment, VISA checkcard expenses and advertising. This is offset
by a decrease in salaries and benefits expense.
Salaries and benefits expense was $720,000 and $784,000 for the three
months ended March 31, 1998 and 1997, respectively. This represents a decrease
of $64,000 (8.2%) in the first quarter of 1998 compared to the first quarter of
1997. Overall employee levels remain consistent with a slight decrease due to
additional costs allocated to loan origination activity.
Net occupancy expense was $254,000 for the first quarter of 1998, which
represented an increase of $30,000 (13.4%) over the level of $224,000 for the
same period of 1997. These increases continue to result from increases in
depreciation expense associated with the addition of the Winn-Dixie branch and
service contracts on furniture and equipment due to the purchase of computer
equipment, coupled with a slight increase during the first three months of 1998
in small furniture and equipment purchases.
For the first quarter of 1998, other noninterest expense increased
$282,000 (50.5%) to $840,000 from $558,000 for the first quarter of 1997. This
increase is due to the VISA checkcard expenses due to the launch in 1998 and an
increase in advertising.
Income taxes
Income tax expense was $532,000 and $375,000 for the first quarter of
1998 and 1997, respectively. This represents an increase of $157,000 or 41.9%.
These levels represent an effective tax rate on pre-tax earnings of 38.4% for
the three months ended March 31, 1998 and 36.6% for the same period of 1997.
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.
-12-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------
1998
-----------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
------------------------------------ ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned income (1) $ 187,226 4,124 8.93%
Investment securities held to maturity:
Taxable 12,486 270 8.77%
Tax-exempt (2) 1,383 33 9.80%
--------------------------
Total investment securities held to maturity 13,869 303 8.87%
Investment securities available for sale:
Taxable 43,097 628 5.91%
Tax-exempt (2) 480 9 7.68%
--------------------------
Total investment securities available for sale 43,577 637 5.93%
Federal funds sold 5,634 76 5.47%
Interest bearing deposits with other banks 1,664 28 6.82%
--------------------------
Total interest earning assets 251,970 5,168 8.32%
Allowance for loan losses (2,170)
Cash and due from banks 7,682
Premises and equipment 3,515
Rental property, net 1,787
Other assets 4,065
---------------
Total Assets $ 266,849
===============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Interest bearing liabilities:
Deposits:
Demand $ 21,012 110 2.12%
Savings and Money Market 61,982 695 4.55%
Certificates of deposits less than $100,000 71,554 1,084 6.14%
Certificates of deposit and other time deposits of $100,000 or more 38,046 486 5.18%
--------------------------
Total interest bearing deposits 192,594 2,375 5.00%
Federal funds purchased and securities sold under agreements to
repurchase 2,308 32 5.62%
Other short term borrowings 0 0 0.00%
Other borrowed funds 15,066 218 5.87%
Employee stock ownership plan debt 56 1 7.24%
--------------------------
Total interest bearing liabilities 210,024 2,626 5.07%
Noninterest bearing demand deposits 28,385
Accrued expenses and other liabilities 2,165
Stockholder's equity 26,275
---------------
Total Liabilities and shareholder's equity $ 266,849
===============
Net Interest Income $2,542
========
Net Yield on Total Interest Earning Assets 4.09%
======
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------
1997
-----------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
------------------------------------ ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned income (1) 164,470 3,583 8.86%
Investment securities held to maturity:
Taxable 17,295 265 6.23%
Tax-exempt (2) 1,547 39 10.36%
--------------------------
Total investment securities held to maturity 18,842 304 6.57%
Investment securities available for sale:
Taxable 42,656 703 6.70%
Tax-exempt (2) 523 9 7.07%
--------------------------
Total investment securities available for sale 43,179 712 6.71%
Federal funds sold 9,218 126 5.56%
Interest bearing deposits with other banks 249 9 14.70%
--------------------------
Total interest earning assets 235,958 4,734 8.16%
Allowance for loan losses (2,104)
Cash and due from banks 7,841
Premises and equipment 3,464
Rental property, net 1,891
Other assets 4,103
---------------
Total Assets 251,153
===============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Interest bearing liabilities:
Deposits:
Demand 19,628 99 2.05%
Savings and Money Market 51,835 545 4.28%
Certificates of deposits less than $100,000 73,315 1,160 6.43%
Certificates of deposit and other time deposits of $100,000 or more 40,329 535 5.39%
--------------------------
Total interest bearing deposits 185,107 2,339 5.14%
Federal funds purchased and securities sold under agreements to
repurchase 2,973 38 5.20%
Other short term borrowings 382 9 9.58%
Other borrowed funds 11,061 165 6.07%
Employee stock ownership plan debt 114 2 7.13%
--------------------------
Total interest bearing liabilities 199,637 2,553 5.20%
Noninterest bearing demand deposits 26,403
Accrued expenses and other liabilities 1,802
Stockholder's equity 23,311
---------------
Total Liabilities and shareholder's equity 251,153
===============
Net Interest Income 2,181
========
Net Yield on Total Interest Earning Assets 3.76%
======
</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%.
-13-
<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: May 14, 1998 By: /s/ E. L. Spencer, Jr.
------------------------------ ----------------------------------
E. L. Spencer, Jr.
CEO and Director
Date: May 14, 1998 By: /s/ Linda D. Fucci
------------------------------ -----------------------------
Linda D. Fucci
Chief Financial Officer and
Principal Accounting Officer
-14-
<PAGE>
PART II OTHER INFORMATION
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
Long-term Incentive Plan. * ---
10.B Lease and Equipment Purchase Agreement, Dated
September 15, 1987. * ---
27 Financial Data Schedule 16
- --------------
*Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
(b) There were no reports filed on Form 8-K for the quarter ended March 31,
1998.
-15-
<PAGE>
PART II OTHER INFORMATION
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
Long-term Incentive Plan. * ---
10.B Lease and Equipment Purchase Agreement, Dated
September 15, 1987. * ---
27 Financial Data Schedule 16
- ------------
*Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
(b) There were no reports filed on Form 8-K for the quarter ended March 31,
1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
FOR MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,864
<INT-BEARING-DEPOSITS> 3,361
<FED-FUNDS-SOLD> 9,815
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,800
<INVESTMENTS-CARRYING> 13,247
<INVESTMENTS-MARKET> 13,262
<LOANS> 190,960
<ALLOWANCE> 2,230
<TOTAL-ASSETS> 279,453
<DEPOSITS> 226,521
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,089
<LONG-TERM> 21,105
0
0
<COMMON> 13
<OTHER-SE> 26,688
<TOTAL-LIABILITIES-AND-EQUITY> 279,453
<INTEREST-LOAN> 4,124
<INTEREST-INVEST> 925
<INTEREST-OTHER> 104
<INTEREST-TOTAL> 5,154
<INTEREST-DEPOSIT> 2,375
<INTEREST-EXPENSE> 2,626
<INTEREST-INCOME-NET> 2,528
<LOAN-LOSSES> 86
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 1,814
<INCOME-PRETAX> 1,386
<INCOME-PRE-EXTRAORDINARY> 1,386
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 854
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 4.09
<LOANS-NON> 437
<LOANS-PAST> 419
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,840
<ALLOWANCE-OPEN> 2,125
<CHARGE-OFFS> 2
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 2,230
<ALLOWANCE-DOMESTIC> 2,230
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
