<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 1999
--------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period to
---------- ----------
Commission file number 0-26486
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Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 63-0885779
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
165 East Magnolia Avenue, Suite 203, Auburn, Alabama 36830
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(Address of Principal Executive Offices)
(334) 821-9200
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of October 30, 1999: 3,924,573 shares of common stock, $.01
---------------------------------------
par value per share
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Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PART I. FINANCIAL INFORMATION
- --------------------------------
Item 1 Financial Information
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Earnings for
the Three Months and Nine Months Ended
September 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1999 and
the Years Ended December 31, 1998 and 1997 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999
and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
- --------------------------------
Item 5 Other Events 14
Item 6 Exhibits 16
</TABLE>
2
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 9/30/99 12/31/98
----------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Cash and due from banks $ 12,942,510 $ 9,220,225
Federal funds sold 9,500,000 260,000
---------------- ----------------
Cash and cash equivalents 22,442,510 9,480,225
Interest-earning deposits with other banks 2,177,299 133,600
Investment securities held to maturity (fair value of $10,384,173
and $8,227,385 at September 30, 1999 and December 31, 1998,
respectively): 10,421,942 8,094,283
Investment securities available for sale 62,200,725 63,585,573
Loans:
Loans, less unearned income of $8,541 at September 30, 1999
and $15,494 at December 31, 1998, respectively 259,130,936 218,686,991
Less allowance for loan losses (3,891,792) (2,808,307)
---------------- ----------------
Loans, net 255,239,144 215,878,684
Premises and equipment, net 3,452,439 3,434,964
Rental property, net 1,692,005 1,760,294
Other assets 7,697,521 5,506,649
---------------- ----------------
Total assets $ 365,323,585 $ 307,874,272
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 39,583,976 $ 34,724,182
Interest-bearing 247,484,462 198,780,568
---------------- ----------------
Total deposits 287,068,438 233,504,750
Securities sold under agreements to repurchase 3,278,635 12,944,004
Other borrowed funds 43,896,099 31,000,458
Accrued expenses and other liabilities 1,991,241 1,481,564
---------------- ----------------
Total liabilities 336,234,413 278,930,776
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
issued shares-none --- ---
Common stock of $.01 par value; authorized 8,500,000 shares;
issued 3,957,135 shares 39,571 39,571
Additional paid-in capital 3,707,472 3,707,472
Retained earnings 26,620,967 25,077,126
Accumulated other comprehensive income (loss) (1,064,239) 333,926
Less:
Treasury stock, 32,562 shares at September 30, 1999 and
December 31, 1998, at cost (214,599) (214,599)
---------------- ----------------
Total stockholders' equity 29,089,172 28,943,496
---------------- ----------------
Total liabilities and stockholders' equity $ 365,323,585 $ 307,874,272
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Statements of Earnings
For The Three Months and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,388,482 $4,430,213 $15,016,576 $12,903,967
Interest and dividends on investment securities:
Taxable 1,080,000 1,007,649 3,279,436 2,810,965
Tax-exempt 18,598 23,853 59,260 76,010
---------- ---------- ----------- -----------
Total interest and dividends on investment
securities 1,098,598 1,031,502 3,338,696 2,886,975
Interest on federal funds sold 50,043 68,113 164,484 216,291
Interest on interest-bearing deposits with other
other banks 24,035 38,669 77,544 100,423
---------- ---------- ----------- -----------
Total interest income 6,561,158 5,568,497 18,597,300 16,107,656
Interest expense:
Interest on deposits 2,770,276 2,440,198 7,783,103 7,208,347
Interest on federal funds purchased and securities
sold under agreements to repurchase 56,315 41,238 268,842 115,994
Interest on other borrowings 560,192 444,419 1,500,596 974,056
---------- ---------- ----------- -----------
Total interest expense 3,386,783 2,925,855 9,552,541 8,298,397
---------- ---------- ----------- -----------
Net interest income 3,174,375 2,642,642 9,044,759 7,809,259
Provision for loan losses 1,142,310 180,000 1,474,327 656,030
---------- ---------- ----------- -----------
Net interest income after provision for
loan losses 2,032,065 2,462,642 7,570,432 7,153,229
Noninterest income:
Service charges on deposit accounts 300,172 258,303 846,059 703,653
Investment securities gains/(losses), net (6,022) 7,417 151 14,277
Other 416,072 368,995 1,264,670 1,075,517
---------- ---------- ----------- -----------
Total noninterest income 710,222 634,715 2,110,880 1,793,447
Noninterest expense:
Salaries and benefits 955,728 817,584 2,789,288 2,296,520
Net occupancy expense 292,257 246,152 844,950 748,284
Other 795,783 714,401 2,313,999 2,027,891
---------- ---------- ----------- -----------
Total noninterest expense 2,043,768 1,778,137 5,948,237 5,072,695
Earnings before income tax expense 698,519 1,319,220 3,733,075 3,873,981
Income tax expense 214,922 305,716 1,325,828 1,353,652
---------- ---------- ----------- -----------
Net earnings $ 483,597 $1,013,504 $ 2,407,247 $ 2,520,329
========== ========== =========== ===========
Basic and diluted earnings per share $0.12 $0.26 $0.61 $0.64
========== ========== =========== ===========
Weighted average shares outstanding 3,924,573 3,924,573 3,924,573 3,924,573
========== ========== =========== ===========
Dividends per share $0.10 $0.05 $0.22 $0.14
========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Employee
Additional Other Stock
Common Paid-In Retained Comprehensive Ownership Treasury
Stock Capital Earnings Income/(Loss) Plan debt Stock Total
-------- ---------- ----------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 39,571 3,664,718 19,942,980 (146,528) (113,940) (304,009) 23,082,792
Net earnings --- --- 3,080,043 --- --- --- 3,080,043
Cash dividends paid ($0.16 per share) --- --- (626,562) --- --- --- (626,562)
Other comprehensive income due to unrealized
gain (loss) on investment securities
available for sale, net --- --- --- 321,964 --- --- 321,964
Payment of Employee Stock Ownership
Plan Debt --- --- --- --- 57,006 --- 57,006
Sale of treasury stock (5,488 shares) 42,754 98,058 140,812
Purchase of treasury stock (368 shares) --- --- --- --- --- (8,648) (8,648)
-------- ---------- ----------- -------------- ---------- --------- -----------
Balance at December 31, 1997 $ 39,571 3,707,472 22,396,461 175,436 (56,934) (214,599) 26,047,407
Net earnings --- --- 3,439,417 --- --- --- 3,439,417
Cash dividends paid ($0.19 per share) --- --- (758,752) --- --- --- (758,752)
Other comprehensive income due to unrealized
gain (loss) on investment securities
available for sale, net --- --- --- 158,490 --- --- 158,490
Payment of Employee Stock Ownership
Plan Debt --- --- --- --- 56,934 --- 56,934
-------- ---------- ----------- -------------- ---------- --------- -----------
Balance at December 31, 1998 $ 39,571 3,707,472 25,077,126 333,926 0 (214,599) 28,943,496
Through SEPTEMBER 30, 1999:
Net earnings --- --- 2,407,247 --- --- --- 2,407,247
Cash dividends paid ($0.22 per share) --- --- (863,406) --- --- --- (863,406)
Other comprehensive income due to unrealized
gain (loss) on investment securities
available for sale, net --- --- --- (1,398,165) --- --- (1,398,165)
-------- ---------- ----------- -------------- ---------- --------- -----------
Balance at September 30, 1999 $ 39,571 3,707,472 26,620,967 (1,064,239) 0 (214,599) 29,089,172
======== ========== ========== ============= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $2,407,247 $2,520,329
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 446,471 529,801
Accretion of investment discounts & loan fees (9,382) (220,094)
Provision for loan losses 1,474,327 656,030
Loss on sale of premises & equipment 57,609 1,181
Increase in interest receivable (577,242) (85,398)
Increase in other assets (939,805) (538,338)
Increase in interest payable 281,253 5,314
Increase/(decrease) in other liabilities 451,042 (587,807)
------------ ------------
Net cash provided by operating activities 3,591,520 2,281,018
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 2,083,458 6,283,202
Purchases of investment securities held to maturity (4,363,642) (425,000)
Proceeds from maturities/calls/paydowns of investment
securities available for sale 16,458,326 9,771,821
Proceeds from sale of investment securities available for sale --- 4,970,458
Purchases of investment securities available for sale (17,441,846) (26,693,874)
Net increase in loans (40,834,787) (24,568,021)
Purchases of premises and equipment (418,480) (283,170)
Proceeds from sale of premises and equipment 5,951 ---
Purchases of rental property (5,070) (44,214)
Net (increase)/decrease in interest-bearing deposits with
other banks (2,043,699) 616,662
------------ ------------
Net cash used in investing activities (46,559,789) (30,372,136)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in non-interest bearing deposits,
NOW accounts and savings accounts 30,004,217 (9,473,351)
Net increase in certificates of deposit 23,559,471 8,484,729
Net (decrease)/increase in securities sold under agreements
to repurchase (9,665,369) 5,580,646
Net increase in borrowings from FHLB 12,911,313 19,911,313
Net decrease in other long-term debt (15,672) (14,382)
Dividends paid (863,406) (562,522)
------------ ------------
Net cash provided by financing activities 55,930,554 23,926,433
------------ ------------
Net increase/(decrease) in cash and cash equivalents 12,962,285 (4,164,685)
Cash and cash equivalents at beginning of period 9,480,225 14,883,412
------------ ------------
Cash and cash equivalents at end of period $22,442,510 $10,718,727
============ ============
Supplemental information on cash payments:
Interest paid $ 9,271,288 $ 8,293,083
============ ============
Income taxes paid $ 1,623,229 $ 1,717,573
============ ============
</TABLE>
6
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBISIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
Note 1 - General
The consolidated financial statements in this report have not been audited.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations for the interim periods have
been made. All such adjustments are of a normal recurring nature. The results of
operations are not necessarily indicative of the results of operations which the
Company may achieve for future interim periods or the entire year. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1998.
Note 2 - Comprehensive Income
In September 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose statements. The Company adopted Statement 130 effective January 1, 1998.
The primary component of the differences between net income and comprehensive
income for the Company is unrealized gains/losses on available for sale
securities. Total comprehensive income for the three months ended September 30,
1999 was $233,000 compared to $1,260,000 for the three months ended
September 30, 1998. Total comprehensive income for the nine months ended
September 30, 1999 was $1,009,000 compared to $2,752,000 for the nine months
ended September 30, 1998.
Note 3 - Derivatives Disclosure
As part of its overall interest rate risk management activities, the
Company utilizes off-balance sheet derivatives to modify the repricing
characteristics of on-balance sheet assets and liabilities. The primary
instruments utilized by the Company are interest rate swaps and interest rate
floor and cap arrangements. The fair value of these off-balance sheet derivative
financial instruments are based on dealer quotes and third party financial
models.
Note 4 - Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 an amendment of FASB Statement No. 133" (Statement 137).
Statement 133 is effective for financial statements for the first fiscal
quarters of the fiscal years beginning after June 15, 2000. The Company can not
predict whether the provisions of Statement 133 as amended by Statement 137 will
have a significant impact on its financial statements upon adoption.
7
<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, 1999 and
1998.
Certain of the matters discussed are forward-looking statements for
purposes of the Securities Act of 1933, as amended (the "Securities Act") and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as
such may involve known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements to differ from those
expressed or implied by such forward-looking statements. The Company's actual
results may differ materially from the results anticipated in these forward-
looking statements including those described under interest rate management, due
to a variety of factors, including, without limitation: the effects of future
economic conditions; governmental monetary and fiscal policies, as well as
interest rate risks; the effects of competition from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other mutual
funds and other financial institutions operating in the Company's market area
and elsewhere, including institutions operating locally, regionally, nationally
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer and the Internet; and the failure of
assumptions underlying the establishment of allowances for loan losses and
estimations of values of collateral and various financial assets and
liabilities. All forward-looking statements attributable to the Company are
expressly qualified in their entirety by these Cautionary Statements.
Summary
Net income of $484,000 for the quarter ended September 30, 1999 represented
a decrease of $530,000 (52.3%) from the Company's net income of $1,014,000 for
the same period of 1998. Basic earnings per share decreased $0.14 (53.8%) to
$0.12 during the third quarter of 1999 from $0.26 for the third quarter of 1998.
Net income decreased $113,000 (4.5%) to $2,407,000 for the nine month period
ended September 30, 1999 compared to $2,520,000 for the same period of 1998.
During the nine month period ended September 30, 1999 compared to the same
period of 1998, the Company experienced increases in net interest income,
provision for loan losses, noninterest income and noninterest expense due to the
continued growth of the Company. The net yield on total interest-earning assets
declined to 7.87% for the nine months ended September 30, 1999 from 8.21% for
the nine months ended September 30, 1998. The decrease in the net yield on
interest-earning assets is due to a decrease in the yield of total loans, net of
unearned income, investment securities, interest-bearing deposits with other
banks and federal funds sold. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" table.
Total assets of $365,324,000 at September 30, 1999 increased of $57,450,000
(18.7%) over total assets of $307,874,000, at December 31, 1998. This increase
resulted primarily from increases in total loans, net of unearned income, and
cash and cash equivalents.
Financial Condition
Investment Securities and Federal Funds Sold
Investment securities held to maturity were $10,422,000 and $8,094,000 at
September 30, 1999 and December 31, 1998, respectively. This increase of
$2,328,000 (28.8%) was primarily the result of purchase of a U.S. government
agency security for $4,364,000, offset by $2,083,000 of scheduled paydowns,
maturities and calls of principal amounts.
Investment securities available for sale decreased $1,385,000 (2.2%) to
$62,201,000 at September 30, 1999 from $63,586,000 at December 31, 1998. This
reflects a decline in the overall market value and a decrease in CMOs. This
decrease is offset by an increase in U.S. government agency and mortgage backed
securities.
Federal funds sold increased to $9,500,000 at September 30, 1999 from
$260,000 at December 31, 1998. This increase is primarily due to approximately
$5 million of deposits. In addition, this reflects normal activity in the
Bank's funds management efforts.
8
<PAGE>
Loans
Total loans, net of unearned income, of $259,131,000 at September 30, 1999
reflected an increase of $40,444,000 (18.5%) compared to the total loans of
$218,687,000, net of unearned income, at December 31, 1998. The Bank primarily
experienced growth in all categories of during the first nine months of 1999 due
to strong customer demand and a growing market. Commercial, financial and
agricultural, residential real estate and commercial real estate loans
represented the majority of the loan portfolio with approximately 35.06%, 30.07%
and 35.27% of the Bank's total loans, net of unearned income at September 30,
1999, respectively. The net yield on loans was 8.38% for the nine months ended
September 30, 1999 compared to 8.80% for the nine months ended September 30,
1998. See the "Consolidated Average Balances, Interest Income/Expense and
Yields/Rates" table.
Allowance for Loan Losses and Risk Elements
The allowance for loan losses reflects management's assessment of the risks
associated with extending credit and its evaluation of the quality of the loan
portfolio. Management analyzes the loan portfolio to determine the adequacy of
the allowance and the appropriate provision required to maintain the allowance
at a level considered adequate in relation to estimated loan losses. In
assessing the allowance, management reviews the size, quality and risk of loans
in the portfolio. Management also considers such factors as the Bank's loan
loss experience, the amount of past due and nonperforming loans, specific known
risks, the status and amount of nonperforming assets, underlying collateral
values securing loans, current and anticipated economic conditions and other
factors which affect the allowance for credit losses.
The allowance for loan losses was $3,892,000 at September 30, 1999.
Management believes that this level of allowance (1.50% of total outstanding
loans, net of unearned income) is adequate to absorb known risks in the
portfolio. No assurance can be given, however, that adverse economic
circumstances or other events will not result in increased losses in the Bank's
loan portfolio.
During the first nine months of 1999, the Bank made $1,474,000 in
provisions to the allowance for loan losses based on management's assessment of
the credit quality of the loan portfolio. This increase from the prior year
reflects an additional provision for loan losses of approximately $932,000 in
the third quarter of 1999. This provision was taken primarily as a result of a
deterioration in certain loans determined by recent analyses and loan reviews
performed during a normal independent loan review and regulatory examination
conducted in the third quarter of 1999. In June 1998, the Bank made $300,000 of
additional provision to the allowance for loan loss due to management's
assessment of the deterioration of a large individual credit. This credit in the
amount of $4,099,000 continues to be a nonperforming loan and the relationship
continues to be monitored as part of the Bank's overall credit administration
procedures. For the nine months ended September 30, 1999, the Bank had charge-
offs of $464,000 and recoveries of $74,000.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and
other real estate owned, and accruing loans 90 days or more past due were
$5,397,000 at September 30, 1999 compared to $4,897,000 at December 31, 1998.
If nonaccrual loans had performed in accordance with their original contractual
terms, interest income would have increased approximately $300,000 for the nine
months ended September 30, 1999.
Other potential problem loans consist of those loans where management has
serious doubts as to the borrower's ability to comply with the present loan
repayment terms. At September 30, 1999, 103 loans totaling $12,046,000, or
4.65% of total loans outstanding, net of unearned income, were considered
potential problem loans compared to 77 loans totaling $2,654,000, or 1.21% of
total loans outstanding, net of unearned income, at December 31, 1998. This
increase reflects increased scrutiny being given to credit quality during
examinations, and continued deterioration in certain credits. In addition, the
majority of this increase results from 7 loans totaling $6,336,000. At
September 30, 1999 and December 31, 1998, respectively, the amount of impaired
loans were $4,099,000, which included 3 loans to the same borrower resulting
from the relationship mentioned above.
Deposits
Total deposits increased $53,563,000 (22.9%) to $287,068,000 at
September 30, 1999, as compared to $233,505,000 at December 31, 1998.
Noninterest-bearing deposits increased $4,860,000 (14.0%) during the first nine
months of 1999, while total interest-bearing deposits increased $48,703,000
(24.5%) to $247,484,000 at September 30, 1999 from $198,781,000 at December 31,
1998. The growth in noninterest-bearing deposits is due primarily to an increase
in regular demand deposit accounts. The average rate paid on interest-bearing
deposits was 4.65% for the nine months ended September 30, 1999 compared to
4.99% for the same period of 1998. During the
9
<PAGE>
first nine months of 1999, the Bank experienced significant increases in
certificates of deposits greater than $100,000 of $24,656,000 (47.5%), money
market accounts of $18,042,000 (42.7%), and NOW accounts of $6,074,000 (28.1%).
The significant increase in money market accounts is due to a $18 million
increase in public funds and the increase in certificates of deposits greater
than $100,000 is due to a $16 million increase in brokered certificates of
deposits. The Company considers the other shifts in the deposit mix to be within
the normal course of business and in line with the management of the Bank's
overall cost of funds. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" table.
Capital Resources and Liquidity
The Company's consolidated stockholders' equity was $29,089,000 at
September 30, 1999, compared to $28,943,000 at December 31, 1998. This
represents an increase of $146,000 (0.5%) during the first nine months of 1999.
Net earnings for the first nine months of 1999 was $2,407,000 compared to
$2,520,000 for the same period of 1998. In addition, the Company experienced a
change in accumulated other comprehensive income to a net accumulated loss of
$1,064,000 at September 30, 1999 from a gain of $334,000 at December 31, 1998
due to overall decline in market value. During the first nine months of 1999,
cash dividends of $863,000, or $0.22 per share, were declared on Common Stock,
compared to $563,000, or $0.14 per share for the first nine months of 1998.
The Company's Tier 1 leverage ratio was 8.25%, Tier I risk-based capital
ratio was 11.60% and Total risk-based capital ratio was 12.86% at September 30,
1999. These ratios exceed the minimum regulatory capital percentages of 3.0% to
5.0% for Tier 1 leverage ratio, 4.0% for Tier I risk-based capital ratio and
8.0% for Total risk-based capital ratio. Based on current regulatory standards,
the Company believes it is a "well capitalized" bank.
The primary sources of liquidity during the first nine months of 1999 were
deposit growth and $12,911,000 of additional advances from the Federal Home Loan
Bank of Atlanta ("FHLB-Atlanta"). The Company used these funds primarily to
fund new loan growth. Under the advance program with FHLB-Atlanta, the Bank had
outstanding advances totaling approximately $43,669,000, leaving credit
available, net of advances drawn down, of approximately $6,331,000 at
September 30, 1999.
Net cash provided by operating activities of $3,592,000 for the nine months
ended September 30, 1999, consisted primarily of net earnings and the impact of
the provision for loan losses. Net cash used in investing activities of
$46,560,000 funded loan growth and investment securities available for sale
purchases of $40,835,000 and $17,442,000, respectively, offset by proceeds from
maturities, calls and paydowns of investment securities available for sale of
$16,458,000. The $55,931,000 in net cash provided by financing activities
resulted primarily from increases of $30,004,000 in non-interest bearing
deposits, NOW accounts and savings accounts, increases in certificates of
deposit of $23,559,000 and increases in borrowings from FHLB of $12,911,000
offset by a net decrease in securities sold under agreements to purchase of
$9,665,000.
Interest Rate Sensitivity Management
At September 30, 1999, interest sensitive assets that repriced or matured
within the next 12 months were $163,785,000, compared to interest sensitive
liabilities that reprice or mature within the same time frame totaling
$166,791,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a negative $3,006,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 98.2%. This compares to a twelve month
cumulative GAP position at December 31, 1998, of a negative $31,480,000 and a
GAP ratio of 79.0%. A negative GAP position indicates that the Company has more
interest-bearing liabilities than interest-earning assets that reprice within
the GAP period, and that net interest income may be adversely affected in a
rising rate environment as rates earned on interest-earning assets rise more
slowly than rates paid on interest-bearing liabilities. A positive GAP position
indicates that the Company has more interest-earning assets than interest-
bearing liabilities that reprice within the GAP period. The Bank's
Asset/Liability Management Committee ("ALCO") is charged with the responsibility
of managing, to the degree prudently possible, its exposure to "interest rate
risk," while attempting to provide earnings enhancement opportunities. Based on
ALCO's alternative interest rate scenarios used by the Company in modeling for
asset/liability planning purposes and the GAP position at September 30, 1999 and
various assumptions and estimates, the Company's asset/liability model predicts
that the changes in the Company's net interest income would be less than 5.0%
over 12 months. Such estimates and predictions are forecasts which may or may
not be realized.
10
<PAGE>
Results of Operations
Net Income
Net income decreased $530,000 (52.3%) to $484,000 for the three month
period ended September 30, 1999 compared to $1,014,000 for the same period of
1998. Basic earnings per share was $0.12 and $0.26 for the third quarter of
1999 and 1998, respectively, a decrease of 53.8%. Net income decreased $113,000
(4.5%) to $2,407,000 for the nine month period ended September 30, 1999,
compared to $2,520,000 for the same period of 1998. During the nine month period
ended September 30, 1999 compared to the same period of 1998, the Company
experienced increases in net interest income, provision for loan losses,
noninterest income, and noninterest expense due to the continued growth of the
Company.
Net Interest Income
Net interest income was $3,174,000 for the third quarter of 1999. The
increase of $531,000 (20.1%) over $2,643,000 for the same period of 1998,
resulted primarily from the increase in interest and fees on loans and interest
and dividends from investment securities offset by increases in interest on
deposits and interest on other borrowings. Net interest income increased
$1,236,000 (15.8%) to $9,045,000 for the nine months ended September 30, 1999,
compared to $7,809,000 for the nine months ended September 30, 1998. Such
increases resulted from overall growth in the Company's average interest-earning
assets offset by a decrease in net taxable yield on the Company's interest-
earning assets during the first nine months of 1999 compared to the same period
of 1998. Through the third quarter of 1999, the Company's GAP position remained
less liability sensitive to changes in interest rates as compared to
December 31, 1998. The Company continues to regularly review and manage its
asset/liability position in an effort to manage the negative effects of changing
rates. See "Financial Condition - Interest Rate Sensitivity Management" and the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest Income
Interest income is a function of the volume of interest earning assets and
their related yields. Interest income was $6,561,000 and $5,568,000 for the
three months ended September 30, 1999 and 1998, respectively. This represents
an increase of $993,000 (17.8%) for the third quarter of 1999 compared to 1998.
For the nine months ended September 30, 1999 interest income was $18,597,000, an
increase of $2,489,000 (15.5%) compared to $16,108,000 for the same period of
1998. This change for the first nine months of 1999 resulted as the average
volume of interest earning assets outstanding increased $53,583,000 (20.4%) over
the same period of 1998, while the Company's yield on interest earning assets
decreased 34 basis points. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" table.
Loans are the main component of the Bank's earning assets. Interest and
fees on loans were $5,388,000 and $4,430,000 for the third quarter of 1999 and
1998, respectively. This reflects an increase of $958,000 (21.6%) during the
three months ended September 30, 1999 over the same period of 1998. For the nine
month period ended September 30, 1999, interest and fees on loans increased
$2,113,000 (16.4%) to $15,017,000 from $12,904,000 for the same period of 1998.
The average volume of loans increased $43,571,000 (22.2%) as of September 30,
1999 compared to the same period of 1998, while the Company's yield on loans
decreased 42 basis points comparing these same periods.
For the three month period ended September 30, 1999, interest income on
investment securities increased $67,000 (6.5%) to $1,099,000 from $1,032,000 for
the same period of 1998. Interest income on investment securities for the nine
month period ended September 30, 1999, increased $452,000 (15.7%) to $3,339,000
from $2,887,000 for the same period of 1998. The Company's average volume of
investment securities increased by $10,655,000 (17.8%) for the first nine months
of 1999, compared to the same period of 1998, while the net yield on these
average balances decreased 15 basis points. See the "Consolidated Average
Balances, Interest Income/Expense and Yields/Rates" table.
11
<PAGE>
Interest Expense
Total interest expense increased $461,000 (15.8%) to $3,387,000 for the
third quarter of 1999 compared to $2,926,000 for the same period of 1998. Total
interest expense increased $1,255,000 (15.1%) to $9,553,000 from $8,298,000 for
the nine months ended September 30, 1999 and 1998, respectively. This change
resulted as the Company's average interest-bearing liabilities increased 22.3%
while the rates paid on these liabilities decreased 30 basis points during the
first nine months of 1999 compared to the same period of 1998. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest on deposits, the primary component of total interest expense,
increased $330,000 (13.5%) to $2,770,000 for the third quarter of 1999 compared
to $2,440,000 for the same period of 1998. Interest on deposits were $7,783,000
and $7,208,000 for the nine months ended September 30, 1999 and 1998,
respectively. The increase for the nine month period ended September 30, 1999 is
due to a 15.8% increase in the average volume offset by a 34 basis point
decrease in the rate paid on interest-bearing deposits.
Interest expense on other borrowed funds, was $560,000 and $444,000 for the
third quarters of 1999 and 1998, respectively. This represents an increase of
$116,000 or 26.1%. For the nine months ended September 30, 1999, interest
expense on borrowed funds increased $527,000 (54.1%) to $1,501,000 from $974,000
for the same period of 1998. This increase for the nine month period ended
September 30, 1999 is due to a 61.6% increase in the average volume offset by a
24 basis point decrease in the rate paid on other borrowed funds. The increase
in the average volume is primarily from the increase in FHLB-Atlanta advances.
Provision for Loan Losses
The provision for loan losses is based on management's assessment of the
risk in the loan portfolio, the growth of the loan portfolio and the amount of
recent loan losses. The provision for loan losses was $1,474,000 for the nine
months ended September 30, 1999 compared to $656,000 for the nine months ended
September 30, 1998. The increase in the provision for loan losses during the
first nine months of 1999 compared to the same period of 1998, is due to an
additional provision for loan losses of $932,000 during the third quarter of
1999. This provision was taken primarily as a result of a deterioration in
certain loans determined by recent analyses and loan reviews performed during a
normal independent loan review and a recent regulatory examination. In addition,
the level of monthly provision has increased during 1999 due to loan growth. In
June 1998, an additional provision for loan losses of $300,000 was made to
reflect significant growth in the loan portfolio and the identification of
potential problem loans to a commercial customer. See "--Allowance for Loan
Losses And Risk Elements."
Noninterest Income
Noninterest income increased $75,000 (11.8%) to $710,000 for the third
quarter of 1999 from $635,000 for the same period of 1998. Noninterest income
was $2,111,000 and $1,793,000 for the nine months ended September 30, 1999 and
1998, respectively. This increase for the third quarter is due to increases in
service charges on deposit accounts and other noninterest income.
Service charges on deposit accounts for the third quarter of 1999 increased
$42,000 (16.3%) to $300,000 from $258,000 for the third quarter of 1998. Service
charges on deposit accounts were $846,000 and $704,000 for the nine months ended
September 30, 1999 and 1998, respectively. These increases are primarily due to
increases in nonsufficient funds and overdraft charges due to an increase in
nonsufficient fund items.
Other noninterest income increased $47,000 (12.7%) to $416,000 for the
third quarter of 1999 from $369,000 for the same period of 1998. Other
noninterest income was $1,265,000 and $1,076,000 for the nine months ended
September 30, 1999 and 1998, respectively. This increase primarily resulted
from an increase in Mastercard/VISA discounts and fees due to the Auburn
University's acceptance of Mastercard/VISA for tuition, an increase in ATM
service charges, an increase in checkcard income and an increase in stock
dividends from stock owned in other companies. This increase is offset by a
loss on premises and equipment primarily for computer equipment that was not
Year 2000 compliant.
Noninterest Expense
Total noninterest expense was $2,044,000 and $1,778,000 for the third
quarter of 1999 and 1998, respectively, representing an increase of $266,000 or
15.0%. For the nine months ended September 30, 1999, total
12
<PAGE>
noninterest expense increased $875,000 (17.2%) to $5,948,000 from $5,073,000 for
the same period of 1998. This increase was due to increases in salaries and
benefits expense, net occupancy expense and other noninterest expense.
Salaries and benefits expense was $956,000 and $818,000 for the three
months ended September 30, 1999 and 1998, respectively. This represents an
increase of $138,000 (16.9%) in the third quarter of 1999 compared to the third
quarter of 1998. For the nine months ended September 30, 1999, total salaries
and benefits expense increased $492,000 (21.4%) to $2,789,000 from $2,297,000
for the same period of 1998. This increase is primarily due to the increase in
overall employee levels from the same period of 1998.
Net occupancy expense was $292,000 and $246,000 for the third quarters of
1999 and 1998, respectively, representing an increase of $46,000 or 18.7%. For
the nine month period ended September 30, 1999, net occupancy expense increased
$97,000 (13.0%) to $845,000 from $748,000 for the same period of 1998. The
increase is primarily due to increases in lease payments for computer equipment,
lease payments on building due to the addition of the Wal-Mart branch and
depreciation on furniture and equipment.
For the third quarter of 1999, other noninterest expense increased $82,000
(11.5%) to $796,000 from $714,000 for the third quarter of 1998. Other
noninterest expense was $2,314,000 and $2,028,000 for the nine months ended
September 30, 1999 and 1998, respectively. This increase is mainly due to the
expenses associated with Auburn University's acceptance of Mastercard/VISA for
tuition mentioned above, professional fees for strategic tax services and legal
fees related to certain nonaccrual loans.
Income taxes
Income tax expense was $215,000 and $306,000 for the third quarters of 1999
and 1998, respectively. For the nine months ended September 30, 1999, income tax
expense decreased $28,000 (2.1%) to $1,326,000 from $1,354,000 for the nine
months ended September 30, 1998. These levels represent an effective tax rate
on pre-tax earnings of 35.5% for the nine months ended September 30, 1999 which
is consistent with the Company's annual effective rate. In addition, the
Company engaged in a tax strategy involving real estate.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The
Company has conducted a comprehensive review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and has developed a
plan to resolve the mission critical modifications necessary in order to be
prepared for the new millennium. The Company has reviewed both information
technology (IT) systems and non-IT systems. All mission critical systems have
been upgraded, as needed, and tested. The majority of the remaining systems
have been tested and modified. The Company has received certification of Year
2000 compliance from their critical vendors used in the major operations of the
Company. The Company has followed the Federal Reserve guidelines for preparing
for Year 2000. The Company also reports quarterly to its Board of Directors the
progress of the Year 2000 project. Accordingly, the Company does not expect the
Year 2000 issue to pose any significant operational problems and has not
discovered any Year 2000 problems with significant counter-parties that it
believes will have material effect on the financial position or results of
operations of the Company. However, the Company has not fully evaluated the
effect of any Year 2000 problems on its loan and deposit customers. No
assurance can be given that potential Year 2000 problems of those with whom the
Company does business will not occur, and if they occur, that the consequences
to the Company will not be material.
The total cost of the Year 2000 project is estimated not to exceed
$250,000, of which $100,750 was expensed through 1998, and the remaining
expenses are estimated to be funded through operating cash flows. Contingency
Plans have been developed to ensure direction in the event a non-compliant
system or component is detected. The Company currently has in place a disaster
recovery plan. A business resumption plan and a remediation plan have been
developed based upon certain circumstances. Part of the business resumption
plan includes an agreement with a third-party vendor which would enable the Bank
to use the third-party's computer systems as a worst case scenario. These plans
will provide the Company direction in the event an unforeseen circumstance
arises due to the Year 2000. The Bank has held Year 2000 Customer Awareness
Seminars, mailed Year 2000 information to all customers, requested copies of the
status of loan customers' Year 2000 plan and examined all large loan customers
for potential impacts on the customer's creditworthiness. All plans have been
finalized and implemented.
13
<PAGE>
Impact of Inflation and changing prices
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or with the same magnitude
as the price of goods and services because such prices are affected by
inflation. In the current interest rate environment, liquidity and the maturity
structure of the Company's assets and liabilities are critical to the
maintenance of desired performance levels. However, relatively low levels of
inflation in recent years have resulted in a rather insignificant effect on the
Company's operations.
PART II OTHER INFORMATION
ITEM 5. OTHER EVENTS
The proxy statement solicited by the Company's Board of Directors with
respect to the Company's 2000 Annual Meeting of Shareholders will confer
discretionary authority to vote on any proposals of shareholders intended to be
presented for consideration at such Annual Meeting that are submitted to the
Company after February 27, 2000.
14
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
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) $ 239,543 15,017 8.38% 195,972 12,904 8.80%
Investment securities:
Taxable 68,880 3,279 6.36% 58,010 2,811 6.48%
Tax-exempt (2) 1,599 89 7.47% 1,814 115 8.48%
-------------------- --------------------
Total investment securities 70,479 3,368 6.39% 59,824 2,926 6.54%
Federal funds sold 4,509 164 4.86% 5,138 216 5.62%
Interest-bearing deposits with other banks 1,842 78 5.66% 1,856 100 7.20%
-------------------- --------------------
Total interest-earning assets 316,373 18,627 7.87% 262,790 16,146 8.21%
Allowance for loan losses (2,834) (2,335)
Cash and due from banks 9,524 7,813
Premises and equipment 3,506 3,477
Rental property, net 1,742 1,796
Other assets 6,320 4,693
---------- ----------
Total assets $ 334,631 278,234
========== =========
LIABILITIES & STOCKHOLDERS' EQUITY
---------------------------------------
Interest-bearing liabilites:
Deposits:
Demand $ 25,731 452 2.35% 20,720 329 2.12%
Savings and money market 69,735 2,180 4.18% 60,173 2,002 4.45%
Certificates of deposits less than $100,000 70,328 3,041 5.78% 71,486 3,309 6.19%
Certificates of deposits and other time deposits
of $100,000 or more 57,787 2,110 4.88% 40,635 1,568 5.16%
-------------------- --------------------
Total interest-bearing deposits 223,581 7,783 4.65% 193,014 7,208 4.99%
Federal funds purchased and securities sold under
agreements to repurchase 7,364 269 4.88% 3,030 116 5.12%
Other borrowed funds 36,968 1,501 5.43% 22,883 971 5.67%
Employee stock ownership plan debt 0 0 0.00% 57 3 6.94%
-------------------- --------------------
Total interest-bearing liabilities 267,913 9,553 4.77% 218,984 8,298 5.07%
Noninterest-bearing deposits 34,735 29,878
Accrued expenses and other liabilities 2,225 1,604
Stockholders' equity 29,758 27,768
---------- ----------
Total liabilities and stockholders' equity $ 334,631 278,234
========== ==========
Net interest income $ 9,074 7,848
========= =========
Net yield on total interest-earning assets 3.83% 3.99%
========= =========
</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%.
15
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
Item 6(a)
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
3.A Certificate of Incorporation of Auburn National
Bancorporation, Inc. * ---
3.B Bylaws of Auburn National Bancorporation, Inc. * ---
10.A Auburn National Bancorporation, Inc. 1994
Long-term Incentive Plan. * ---
10.B Lease and Equipment Purchase Agreement, Dated
September 15, 1987. * ---
27 Financial Data Schedule 18
- -------------------------
* Incorporated by reference from Registrant's Registration Statement on
Form SB-2.
(b) Reports filed on Form 8-K for the quarter ended September 30, 1999:
Form 8-K dated October 1, 1999
Filed under Item 5 Other Events and relates to the press release of
third quarter earnings.
16
<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 12, 1999 By: /s/ E. L. Spencer, Jr.
----------------------------- -------------------------------------
E. L. Spencer, Jr.
President, Chief Executive
Officer and Director
Date: November 12, 1999 By: /s/ Linda D. Fucci
----------------------------- -------------------------------------
Linda D. Fucci
Chief Financial Officer and
Principal Accounting Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the 10-Q for
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,943
<INT-BEARING-DEPOSITS> 2,177
<FED-FUNDS-SOLD> 9,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,201
<INVESTMENTS-CARRYING> 10,422
<INVESTMENTS-MARKET> 10,384
<LOANS> 259,131
<ALLOWANCE> 3,892
<TOTAL-ASSETS> 365,324
<DEPOSITS> 287,068
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,991
<LONG-TERM> 43,896
0
0
<COMMON> 40
<OTHER-SE> 29,049
<TOTAL-LIABILITIES-AND-EQUITY> 365,324
<INTEREST-LOAN> 15,017
<INTEREST-INVEST> 3,339
<INTEREST-OTHER> 242
<INTEREST-TOTAL> 18,597
<INTEREST-DEPOSIT> 7,783
<INTEREST-EXPENSE> 9,553
<INTEREST-INCOME-NET> 9,045
<LOAN-LOSSES> 1,474
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,948
<INCOME-PRETAX> 3,733
<INCOME-PRE-EXTRAORDINARY> 3,733
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,407
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 3.83
<LOANS-NON> 4,867
<LOANS-PAST> 530
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12,046
<ALLOWANCE-OPEN> 2,808
<CHARGE-OFFS> 464
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 3,892
<ALLOWANCE-DOMESTIC> 3,892
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
