<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
(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, 2000
--------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period to
---------- ----------
Commission file number 0-26486
------------------
Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 63-0885779
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
165 East Magnolia Avenue, Suite 203, Auburn, Alabama 36830
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(334) 821-9200
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of October 30, 2000: 3,924,573 shares of common stock, $.01
---------------------------------------
par value per share
-------------------
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Item 1 Financial Information
<S> <C> <C>
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Earnings for the Three and
Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 2000 and
the Years Ended December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
------------------------------------
Item 5 Other Events 15
Item 6 Exhibits 16
</TABLE>
2
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
ASSETS 9/30/00 12/31/99
---------------- ----------------- ------------------
<S> <C> <C>
Cash and due from banks $ 11,892,919 $ 11,662,397
Federal funds sold 4,850,000 15,710,000
------------ ------------
Cash and cash equivalents 16,742,919 27,372,397
Interest-earning deposits with other banks 207,059 1,269,771
Investment securities held to maturity (fair
value of $27,666,740 and $9,689,067 at
September 30, 2000 and December 31, 1999,
respectively): 28,046,434 10,068,454
Investment securities available for sale 84,904,410 67,799,218
Loans:
Loans, less unearned income of $4,918 at September 30, 2000
and $7,105 at December 31, 1999, respectively 257,704,829 260,606,260
Less allowance for loan losses (3,666,942) (3,774,523)
------------ ------------
Loans, net 254,037,887 256,831,737
Premises and equipment, net 3,126,456 3,348,217
Rental property, net 1,616,699 1,667,604
Other assets 10,774,191 9,160,924
------------ ------------
Total assets $399,456,055 $377,518,322
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
--------------------------------------
Deposits:
Noninterest-bearing $ 43,948,378 $ 38,867,703
Interest-bearing 274,786,802 255,854,051
------------ ------------
Total deposits 318,735,180 294,721,754
Securities sold under agreements to repurchase 4,492,484 5,866,385
Other borrowed funds 43,755,317 46,861,045
Accrued expenses and other liabilities 2,582,896 1,627,541
------------ ------------
Total liabilities 369,565,877 349,076,725
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 27,714,180 26,743,281
Accumulated other comprehensive income (loss) (1,356,446) (1,834,128)
Less:
Treasury stock, 32,562 shares at September 30, 2000 and
December 31, 1999, at cost (214,599) (214,599)
------------ ------------
Total stockholders' equity 29,890,178 28,441,597
------------ ------------
Total liabilities and stockholders' equity $399,456,055 $377,518,322
============ ============
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,705,495 $5,388,481 $16,917,822 $15,016,575
Interest and dividends on investment securities:
Taxable 1,794,903 1,080,000 4,874,960 3,279,436
Tax-exempt 14,068 18,599 42,236 59,261
---------- ---------- ----------- -----------
Total interest and dividends on investment
securities 1,808,971 1,098,599 4,917,196 3,338,697
Interest on federal funds sold 119,777 50,043 463,033 164,484
Interest on interest-bearing deposits with other banks 36,859 24,035 126,947 77,544
---------- ---------- ----------- -----------
Total interest income 7,671,102 6,561,158 22,424,998 18,597,300
Interest expense:
Interest on deposits 3,829,358 2,770,276 10,948,516 7,783,103
Interest on federal funds purchased and securities sold
under agreements to repurchase 57,492 56,315 204,668 268,842
Interest on other borrowings 615,046 560,191 1,837,387 1,500,596
---------- ---------- ----------- -----------
Total interest expense 4,501,896 3,386,782 12,990,571 9,552,541
---------- ---------- ----------- -----------
Net interest income 3,169,206 3,174,376 9,434,427 9,044,759
Provision for loan losses 1,353,000 1,142,310 2,163,000 1,474,327
---------- ---------- ----------- -----------
Net interest income after provision for loan
losses 1,816,206 2,032,066 7,271,427 7,570,432
Noninterest income:
Service charges on deposit accounts 358,644 300,172 1,002,026 846,059
Investment securities gains/(losses), net 25,032 (6,022) 45,941 151
Other 656,841 415,980 1,746,161 1,264,186
---------- ---------- ----------- -----------
Total noninterest income 1,040,517 710,130 2,794,128 2,110,396
Noninterest expense:
Salaries and benefits 929,080 955,638 2,954,075 2,788,805
Net occupancy expense 279,909 292,257 833,839 844,950
Other 1,147,562 795,781 3,029,146 2,313,998
---------- ---------- ----------- -----------
Total noninterest expense 2,356,551 2,043,676 6,817,060 5,947,753
Earnings before income tax expense 500,172 698,520 3,248,495 3,733,075
Income tax expense 154,501 214,923 1,100,224 1,325,828
---------- ---------- ----------- -----------
Net earnings $ 345,671 $ 483,597 $ 2,148,271 $ 2,407,247
========== ========== ============ ===========
Basic and diluted earnings per share $ 0.09 $ 0.12 $ 0.55 $ 0.61
========== ========== ============ ===========
Weighted average shares outstanding 3,924,573 3,924,573 3,924,573 3,924,573
========== ========== ============ ===========
Dividends per share $ 0.10 $ 0.10 $ 0.30 $ 0.22
========== ========== ============ ===========
</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, 1999 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
Accumulated
Additional Other
Paid-In Retained Comprehensive
Common Stock Capital Earnings Income(Loss)
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ 39,571 3,707,472 22,396,461 175,436
Net earnings --- --- 3,439,417 ---
Cash dividends paid ($0.19 per share) --- --- (758,752) ---
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- --- 158,490
Payment of Employee Stock Ownership Plan Debt --- --- --- ---
-------- --------- ---------- ----------
Balance at December 31, 1998 $ 39,571 3,707,472 25,077,126 333,926
Net earnings --- --- 2,922,018 ---
Cash dividends paid ($0.32 per share) --- --- (1,255,863) ---
Other comprehensive loss due to unrealized
gain (loss) on investment securities available
for sale, net --- --- --- (2,168,054)
-------- --------- ---------- ----------
Balance at December 31, 1999 $ 39,571 3,707,472 26,743,281 (1,834,128)
Net earnings --- --- 2,148,271 ---
Cash dividends paid ($0.30 per share) --- --- (1,177,372) ---
Other comprehensive gain due to unrealized
gain (loss) on investment securities available
for sale, net --- --- --- 477,682
-------- --------- ---------- ----------
Balance at September 30, 2000 $ 39,571 3,707,472 27,714,180 (1,356,446)
======== ========= ========== ==========
</TABLE>
<TABLE>
Employee Stock
Ownership Treasury
Plan Debt Stock Total
-------------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997 (56,934) (214,599) 26,047,407
Net earnings --- --- 3,439,417
Cash dividends paid ($0.19 per share) --- --- (758,752)
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- 158,490
Payment of Employee Stock Ownership Plan Debt 56,934 --- 56,934
-------- -------- ----------
Balance at December 31, 1998 0 (214,599) 28,943,496
Net earnings --- --- 2,922,018
Cash dividends paid ($0.32 per share) --- --- (1,255,863)
Other comprehensive loss due to unrealized
gain (loss) on investment securities available
for sale, net --- --- (2,168,054)
-------- -------- ----------
Balance at December 31, 1999 0 (214,599) 28,441,597
Net earnings --- --- 2,148,271
Cash dividends paid ($0.30 per share) --- --- (1,177,372)
Other comprehensive gain due to unrealized
gain (loss) on investment securities available
for sale, net --- --- 477,682
-------- -------- ----------
Balance at September 30, 2000 0 (214,599) 29,890,178
========= ========= ==========
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,148,271 $ 2,407,247
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 449,617 446,471
Accretion of investment discounts & loan fees (465,905) (9,382)
Provision for loan losses 2,163,000 1,474,327
Loss on disposal of premises & equipment 11,466 57,609
Gain on sale of investment securities (45,941) (151)
Increase in interest receivable (496,591) (577,242)
Increase in other assets (1,503,949) (939,805)
Increase in interest payable 409,917 281,253
Increase in other liabilities 545,437 451,042
------------ ------------
Net cash provided by operating activities 3,215,322 3,591,369
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 4,708,455 2,083,458
Purchases of investment securities held to maturity (22,251,496) (4,363,642)
Proceeds from maturities/calls/paydowns of investment
securities available for sale 6,978,502 16,458,477
Proceeds from sale of investment securities available for sale 2,979,308 -
Purchases of investment securities available for sale (26,189,957) (17,441,846)
Net decrease/(increase) in loans 630,850 (40,834,787)
Purchases of premises and equipment (97,293) (418,480)
Proceeds from sale of premises and equipment - 5,951
Purchases of rental property (22,306) (5,070)
Net decrease/(increase) in interest-earning deposits with
other banks 1,062,712 (2,043,699)
------------ ------------
Net cash used in investing activities (32,201,225) (46,559,638)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW accounts and savings accounts 19,164,577 30,004,217
Net increase in certificates of deposit 4,848,849 23,559,471
Net decrease in securities sold under agreements
to repurchase (1,373,901) (9,665,369)
Net (decrease)/increase in borrowings from FHLB (3,088,687) 12,911,313
Net decrease in other long-term debt (17,041) (15,672)
Dividends paid (1,177,372) (863,406)
------------ ------------
Net cash provided by financing activities 18,356,425 55,930,554
------------ ------------
Net (decrease)/increase in cash and cash equivalents (10,629,478) 12,962,285
Cash and cash equivalents at beginning of period 27,372,397 9,480,225
------------ ------------
Cash and cash equivalents at end of period $ 16,742,919 $ 22,442,510
============ ============
Supplemental information on cash payments:
Interest paid $ 12,580,654 $ 9,271,288
============ ============
Income taxes paid $ 770,411 $ 1,623,229
============ ============
</TABLE>
6
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2000
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-K for the year ended
December 31, 1999.
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,
2000 was $1,086,000 compared to $233,000 for the three months ended September
30, 1999. Total comprehensive income for the nine months ended September 30,
2000 was $2,626,000 compared to $1,009,000 for the nine months ended September
30, 1999.
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 September 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 has not
completed its evaluation of the expected impact of Statement 133 on its
financial statements upon adoption on January 1, 2001.
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, 2000 and
1999.
Certain of the statements discussed are forward-looking statements for
purposes of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21A of 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 of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Such forward-looking statements include statements using the words
such as "may," "will," "anticipate," "should," "would," "believe,"
"evaluate," "assessment," "contemplate," "expect," "estimate," "continue,"
"intend" or similar words and expressions of the future. Our actual results may
differ significantly from the results we discuss in these forward-looking
statements.
These forward-looking statements involve risks and uncertainties and may
not be realized due to a variety of factors, including, without limitation: the
effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and other interest-sensitive assets and
liabilities; 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, regionally,
nationally, and internationally, together with such competitors offering banking
products and services by mail, telephone, computer and Internet; and the failure
of assumptions underlying the establishment of reserves for loan losses. All
written or oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by these cautionary statements.
Summary
Net income of $346,000 for the quarter ended September 30, 2000 represented
a decrease of $138,000 (28.5%) from the Company's net income of $484,000 for the
same period of 1999. Basic earnings per share decreased $0.03 (25.0%) to $0.09
during the third quarter of 2000 from $0.12 for the third quarter of 1999. Net
income decreased $259,000 (10.8%) to $2,148,000 for the nine month period ended
September 30, 2000 compared to $2,407,000 for the same period of 1999. During
the nine month period ended September 30, 2000 compared to the same period of
1999, 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 3.42% for the nine months ended September 30, 2000 from 3.84% for the nine
months ended September 30, 1999. The decrease in the net yield on interest-
earning assets is due to an overall increase in the yield on interest-earning
assets offset by a higher increase in the cost of interest-bearing liabilities.
See the "Consolidated Average Balances, Interest Income/Expense and Yields/
Rates" table.
Total assets of $399,456,000 at September 30, 2000 represents an increase
of $21,938,000 (5.8%) over total assets of $377,518,000, at December 31, 1999.
This increase resulted primarily from increases in investment securities held to
maturity and available for sale offset by a decrease in cash and cash
equivalents.
Financial Condition
Investment Securities and Federal Funds Sold
Investment securities held to maturity were $28,046,000 and $10,068,000 at
September 30, 2000 and December 31, 1999, respectively. This increase of
8
<PAGE>
$17,978,000 (178.6%) was primarily the result of purchases of $14,453,000 in
U.S. agency securities, $2,485,000 in mortgage backed securities and $5,314,000
in CMOs, offset by $4,708,000 of scheduled paydowns, maturities and calls of
principal amounts.
Investment securities available for sale increased $17,105,000 (25.2%) to
$84,904,000 at September 30, 2000 from $67,799,000 at December 31, 1999. This
increase is a result of purchases of $9,504,000 in U.S. agency securities,
$1,902,000 in mortgage backed securities, and $14,784,000 in CMOs. This increase
is offset by $6,977,000 of scheduled paydowns, maturities and calls of principal
amounts. In addition, $1,983,000 of U.S. agency securities and $997,000 of CMOs
were sold in the first quarter of 2000.
Federal funds sold decreased to $4,850,000 at September 30, 2000 from
$15,710,000 at December 31, 1999. This decrease is primarily due to the
reinvestment of federal funds sold to investment securities held to maturity and
investment securities available for sale. In addition, this reflects normal
activity in the Bank's funds management efforts.
Loans
Total loans, net of unearned income, of $257,705,000 at September 30, 2000
reflected a decrease of $2,901,000 (1.1%) compared to the total loans of
$260,606,000, net of unearned income, at December 31, 1999. The Bank primarily
experienced growth in commercial real estate loans offset by a larger decrease
in commercial, financial and agricultural and commercial real estate
construction categories of loans during the first nine months of 2000.
Commercial, financial and agricultural, residential real estate and commercial
real estate loans represented the majority of the loan portfolio with
approximately 27.44%, 26.47% and 33.53% of the Bank's total loans, net of
unearned income at September 30, 2000, respectively. The net yield on loans was
8.60% for the nine months ended September 30, 2000 compared to 8.38% for the
nine months ended September 30, 1999. 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 and
estimates of the risks associated with extending credit and its evaluation of
the quality of the loan portfolio. Management reviews the components of the
loan portfolio in order to estimate the appropriate provision required to
maintain the allowance at a level believed adequate in relation to anticipated
future 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, amounts, and values of
nonperforming assets (including loans), underlying collateral values securing
loans, current and anticipated economic conditions, and other factors, including
developments anticipated by management with respect to various credits that
management believes will affect the allowance for loan losses.
The table below summarizes the changes in the allowance for loan losses for
the nine months ended September 30, 2000 and the year ended December 31, 1999.
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
2000 1999
---------------------- ------------------------
(In thousands)
<S> <C> <C>
Balance at beginning of period, January 1, $3,775 $2,808
Charge-offs 2,410 1,632
Recoveries 139 93
------ ------
Net charge-offs 2,271 1,539
Provision for loan losses 2,163 2,506
------ ------
Ending balance $3,667 $3,775
</TABLE>
9
<PAGE>
The allowance for loan losses was $3,667,000 (1.42% of total outstanding
loans, net of unearned income) at September 30, 2000 compared to $3,775,000
(1.45% of total outstanding loans, net of unearned income) at December 31, 1999.
The Company has been engaged in a detailed, ongoing loan review program with an
outside loan reviewer. In November and early December 2000, management and the
board of directors completed an extensive review of the loan reviewer's findings
and the credits identified as having problems or potential problems. As a
result, an additional provision of $600,000 was made to the allowance for loan
losses as of September 30, 2000 and the financial statements as of and for the
period then ended have been restated to reflect such additional provision. This
provision reflects, in part, an increase in the percentage of the Company's loan
portfolio reviewed by the independent consultant in 2000, as well as
management's more detailed evaluations, estimates and judgements regarding
various identified credits. In addition, the Board has contracted with another
independent loan review services provider to undertake and complete a review of
the Bank's portfolio and adequacy of its allowance for loan losses prior to
December 31, 2000.
Consistent with its methodology for calculating the adequacy of the
allowance for loan losses, management believes the provisions made during the
third quarter, including the additional $600,000 referred to above, are adequate
to absorb anticipated risks identified in the portfolio. No assurance can be
given, however, that adverse economic circumstances, generally, including a
slowing economy, or other events, including additional loan review or
examination findings or changes in borrowers' financial conditions, will not
result in increased losses in the Bank's loan portfolio or in additional
provision to the allowance for loan losses.
During the first nine months of 2000, the Bank made $2,163,000 in
provisions to the allowance for loan losses based on management's assessment of
the credit quality of the loan portfolio, including anticipated improvements in
certain credits. The increase in the provision is based upon internal and
external reviews of the loan portfolio, including a second quarter regulatory
examination, and estimates of deterioration in the credit quality of certain
loans. For the nine months ended September 30, 2000, the Bank had charge-offs of
$2,410,000 and recoveries of $139,000.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans,
other nonperforming assets, and accruing loans 90 days or more past due were
$8,420,000 at September 30, 2000 up 22.9% from the $6,853,000 of non-performing
assets at December 31, 1999. This increase is primarily due to additional
nonaccrual loans identified in the third quarter relating to four relationships
totaling approximately $907,000. Also, other nonperforming assets increased due
to additional foreclosed property of approximately $1.1 million resulting from
four relationships. If nonaccrual loans had performed in accordance with their
original contractual terms, interest income would have increased approximately
$513,000 for the nine months ended September 30, 2000.
The table below provides information concerning nonperforming assets and
certain asset quality ratios at September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------- ----------------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $6,830 6,075
Renegotiated loans -- --
Other nonperforming assets (primarily
other real estate) 1,575 509
Accruing loans 90 days or more past due 15 269
------ -----
Total nonperforming assets $8,420 6,853
====== =====
Allowance as a percent of total loans 1.42% 1.45%
outstanding
Allowance as a percent of nonaccrual,
renegotiated and other nonperforming assets 43.63% 57.34%
</TABLE>
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, 2000, 126 loans totaling $8,614,000, or 3.34% of total
loans outstanding, net of unearned income, were considered potential problem
loans compared to 92
10
<PAGE>
loans totaling $10,798,000, or 4.41% of total loans outstanding, net of unearned
income, at December 31, 1999. The decrease in the amount of potential problem
loans is due to improvements in one large loan totaling approximately $3
million. At September 30, 2000 the amount of impaired loans were $7,050,000,
which included 42 loans to 12 borrowers with a total valuation allowance of
approximately $523,000. In comparison, at December 31, 1999, the Company had
approximately $5,177,000 of impaired loans, which included 7 loans to 2
borrowers with a total valuation allowance of approximately $345,000.
Deposits
Total deposits increased $24,013,000 (8.2%) to $318,735,000 at
September 30, 2000, as compared to $294,722,000 at December 31, 1999.
Noninterest-bearing deposits increased $5,080,000 (13.1%) during the first nine
months of 2000, while total interest-bearing deposits increased $18,933,000
(7.4%) to $274,787,000 at September 30, 2000 from $255,854,000 at December 31,
1999. The growth in noninterest-bearing deposits is due primarily to an increase
in regular demand deposit accounts. During the first nine months of 2000, the
Bank also experienced significant increases in money market accounts of
$12,040,000 (20.3%), and certificates of deposits less than $100,000 of
$7,181,000 (9.9%). 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. The average rate paid on interest-bearing deposits
was 5.37% for the nine months ended September 30, 2000 compared to 4.65% for the
same period of 1999. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" table.
Capital Resources and Liquidity
The Company's consolidated stockholders' equity was $29,890,000 at
September 30, 2000, compared to $28,442,000 at December 31, 1999. This
represents an increase of $1,448,000 (5.1%) during the first nine months of
2000. Net earnings for the first nine months of 2000 were $2,155,000 compared to
$2,407,000 for the same period of 1999. In addition, the Company experienced a
decrease in accumulated other comprehensive loss to $1,356,000 at September 30,
2000 from $1,834,000 at December 31, 1999 due to an increase in market value of
investment securities available for sale. During the first nine months of 2000,
cash dividends of $1,177,000, or $0.30 per share, were declared on Common Stock,
compared to $863,000, or $0.22 per share for the first nine months of 1999.
Certain financial ratios for the Company as of September 30, 2000 and
December 31, 1999 are presented in the following table:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
<S> <C> <C>
Return on average assets - annualized 0.73% 0.85%
Return on average equity - annualized 9.92% 9.86%
</TABLE>
The Company's Tier 1 leverage ratio was 7.81%, Tier I risk-based capital
ratio was 11.67% and Total risk-based capital ratio was 12.81% at September 30,
2000. These ratios exceed the minimum regulatory capital percentages of 4.0% for
Tier 1 leverage ratio, 4.0% for Tier I risk-based capital ratio and 8.0% for
Total risk-based capital ratio. Based on current regulatory standards, the
Company believes it is a "well capitalized" bank.
The primary source of liquidity during the first nine months of 2000 was
deposit growth. The Company used these funds primarily in the purchase of
investment securities. In addition, an advance of $3 million matured from the
Federal Home Loan Bank of Atlanta ("FHLB-Atlanta"). Under the advance program
with FHLB-Atlanta, the Bank had outstanding advances totaling approximately
$43,551,000, leaving credit available, net of advances drawn down, of
approximately $6,449,000 at September 30, 2000.
Net cash provided by operating activities of $3,215,000 for the nine months
ended September 30, 2000, consisted primarily of net earnings. Net cash used in
investing activities of $32,201,000 funded investment securities purchases of
$48,441,000 offset by proceeds from maturities, calls and paydowns of investment
securities and proceeds from sale of investment securities available for sale of
$11,687,000 and $2,979,000, respectively. The $18,356,000 in net cash provided
by financing activities resulted primarily from increases of $19,165,000 in non-
interest bearing deposits, NOW accounts and savings accounts, and increases in
certificates of deposit of $4,849,000
11
<PAGE>
offset by a decrease in borrowings from FHLB of $3,089,000, a decrease in
securities sold under agreements to repurchase of $1,374,000 and dividends paid
of $1,177,000.
Interest Rate Sensitivity Management
At September 30, 2000, interest sensitive assets that repriced or matured
within the next 12 months were $165,250,000, compared to interest sensitive
liabilities that reprice or mature within the same time frame totaling
$255,180,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a negative $89,938,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 64.76%. This compares to a twelve month
cumulative GAP position at December 31, 1999, of a negative $2,534,000 and a GAP
ratio of 99%. 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, 2000 and
various assumptions and estimates, the Company's asset/liability model predicts
that the Company's net interest income would not be negatively effected by more
than 5.0% over 12 months. Such estimates and predictions are forecasts which
may or may not be realized. See "ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK".
Results of Operations
Net Income
Net income decreased $138,000 (28.5%) to $346,000 for the three month
period ended September 30, 2000 compared to $484,000 for the same period of
1999. Basic earnings per share was $0.09 and $0.12 for the third quarter of
2000 and 1999, respectively. Net income decreased $259,000 (10.8%) to $2,148,000
for the nine month period ended September 30, 2000, compared to $2,407,000 for
the same period of 1999. During the nine month period ended September 30, 2000
compared to the same period of 1999, 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 $3,169,000 for the third quarter of 2000. The
decrease of $5,000 (0.2%) from $3,174,000 for the same period of 1999, resulted
primarily from the increase in interest on deposits offset by the increase in
interest and fees on loans and interest and dividends from investment
securities. Net interest income increased $389,000 (4.3%) to $9,434,000 for the
nine months ended September 30, 2000, compared to $9,045,000 for the nine months
ended September 30, 1999. 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
2000 compared to the same period of 1999. Through the third quarter of 2000, the
Company's GAP position remained more liability sensitive to changes in interest
rates as compared to December 31, 1999. 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 $7,671,000 and $6,561,000 for the
three months ended September 30, 2000 and 1999, respectively. This represents
an increase of $1,110,000 (16.9%) for the third quarter of 2000 compared to
1999. For the nine months ended September 30, 2000 interest income was
$22,425,000, an increase of $3,828,000 (20.6%) compared to $18,597,000 for the
same period of 1999. This change for the first nine months of 2000 resulted as
the average
12
<PAGE>
volume of interest earning assets outstanding increased $51,786,000 (16.4%) over
the same period of 1999 and the Company's yield on interest-earning assets
increased 25 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 $5,705,000 and $5,388,000 for the third quarter of 2000 and
1999, respectively. This reflects an increase of $317,000 (5.9%) during the
three months ended September 30, 2000 over the same period of 1999. For the nine
month period ended September 30, 2000, interest and fees on loans increased
$1,901,000 (12.7%) to $16,918,000 from $15,017,000 for the same period of 1999.
The average volume of loans increased $22,586,000 (9.4%) as of September 30,
2000 compared to the same period of 1999, while the Company's yield on loans
also increased by 22 basis points comparing these same periods.
For the three month period ended September 30, 2000, interest income on
investment securities increased $710,000 (64.6%) to $1,809,000 from $1,099,000
for the same period of 1999. Interest income on investment securities for the
nine month period ended September 30, 2000, increased $1,578,000 (47.3%) to
$4,917,000 from $3,339,000 for the same period of 1999. The Company's average
volume of investment securities increased by $23,237,000 (33.0%) for the first
nine months of 2000, compared to the same period of 1999, while the net yield on
these average balances also increased by 63 basis points. See the "Consolidated
Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest Expense
Total interest expense increased $1,115,000 (32.9%) to $4,502,000 for the
third quarter of 2000 compared to $3,387,000 for the same period of 1999. Total
interest expense increased $3,438,000 (36.0%) to $12,991,000 from $9,553,000 for
the nine months ended September 30, 2000 and 1999, respectively. This change
resulted as the Company's average interest-bearing liabilities increased 19.6%
and the rates paid on these liabilities increased 63 basis points during the
first nine months of 2000 compared to the same period of 1999. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest on deposits, the primary component of total interest expense,
increased $1,059,000 (38.2%) to $3,829,000 for the third quarter of 2000
compared to $2,770,000 for the same period of 1999. Interest on deposits were
$10,949,000 and $7,783,000 for the nine months ended September 30, 2000 and
1999, respectively. The increase for the nine month period ended September 30,
2000 is due to a 21.5% increase in the average volume and a 72 basis point
increase in the rate paid on interest-bearing deposits.
Interest expense on other borrowed funds, was $615,000 and $560,000 for the
third quarters of 2000 and 1999, respectively. This represents an increase of
$55,000 or 9.8%. For the nine months ended September 30, 2000, interest expense
on borrowed funds increased $336,000 (22.4%) to $1,837,000 from $1,501,000 for
the same period of 1999. This increase for the nine month period ended September
30, 2000 is due to a 19.2% increase in the average volume and a 13 basis point
increase 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 assessments and
estimates of the risks associated with extending credit and its evaluation of
the quality of the loan portfolio. The provision for loan losses was $2,163,000
for the nine months ended September 30, 2000 compared to $1,474,000 for the nine
months ended September 30, 1999. The increase in the provision is due to results
and estimates of deterioration in certain loans determined by recent analyses
and loan reviews performed during a normal independent loan review and a second
quarter regulatory examination. See "---Allowance for Loan Loss AND RISK
ELEMENTS."
Noninterest Income
Noninterest income increased $331,000 (46.6%) to $1,041,000 for the third
quarter of 2000 from $710,000 for the same period of 1999. Noninterest income
was $2,794,000 and $2,110,000 for the nine months ended September 30, 2000 and
1999, respectively. This increase for the third quarter is mainly due to
increases in service charges on deposit accounts and other noninterest income.
13
<PAGE>
Service charges on deposit accounts for the third quarter of 2000 increased
$59,000 (19.7%) to $359,000 from $300,000 for the third quarter of 1999. Service
charges on deposit accounts were $1,002,000 and $846,000 for the nine months
ended September 30, 2000 and 1999, 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 $241,000 (57.9%) to $657,000 for the
third quarter of 2000 from $416,000 for the same period of 1999. Other
noninterest income was $1,746,000 and $1,264,000 for the nine months ended
September 30, 2000 and 1999, respectively. This increase primarily resulted from
an increase in Mastercard/VISA discounts and fees due to Auburn University's
acceptance of Mastercard/VISA for tuition, an increase in checkcard income due
to inception of the checkcard in January 1999, an increase in stock dividends
from stock owned in other companies and the loss on premises and equipment in
the prior year due primarily to computer equipment that was not Year 2000
compliant.
Noninterest Expense
Total noninterest expense was $2,357,000 and $2,044,000 for the third
quarter of 2000 and 1999, respectively, representing an increase of $313,000 or
15.3%. For the nine months ended September 30, 2000, total noninterest expense
increased $869,000 (14.6%) to $6,817,000 from $5,948,000 for the same period of
1999. This increase was due to increases in salaries and benefits expense and
other noninterest expense.
Salaries and benefits expense was $929,000 and $956,000 for the three
months ended September 30, 2000 and 1999, respectively. This represents a
decrease of $27,000 (2.8%) in the third quarter of 2000 compared to the third
quarter of 1999. For the nine months ended September 30, 2000, total salaries
and benefits expense increased $165,000 (5.9%) to $2,954,000 from $2,789,000 for
the same period of 1999. This increase is primarily due to the increase in
overall employee levels from the same period of 1999 offset by the decrease to
the officer/employee incentive plan.
Net occupancy expense was $280,000 and $292,000 for the third quarters of
2000 and 1999, respectively, representing a decrease of $12,000 or 4.1%. For the
nine month period ended September 30, 2000, net occupancy decreased $11,000
(1.3%) to $834,000 from $845,000 for the same period of 1999. This decrease is
due to a decrease in depreciation on furniture and equipment offset by an
increase in lease payments for computer equipment.
For the third quarter of 2000, other noninterest expense increased $352,000
(44.2%) to $1,148,000 from $796,000 for the third quarter of 1999. Other
noninterest expense was $3,029,000 and $2,314,000 for the nine months ended
September 30, 2000 and 1999, respectively . This increase is mainly due to the
expenses associated with Auburn University's acceptance of Mastercard/VISA for
tuition mentioned above, expenses due to the increased monitoring of nonaccrual
loans, increase in computer software amortization due to additional purchases in
1999 and an increase in assessments due to an increase in FDIC Insurance
Assessment rates and state bank assessment which did not occur in the first nine
months of 1999.
Income taxes
Income tax expense was $155,000 and $215,000 for the third quarters of 2000
and 1999, respectively. For the nine months ended September 30, 2000, income tax
expense decreased $226,000 (17.0%) to $1,100,000 from $1,326,000 for the nine
months ended September 30, 2000. These levels represent an effective tax rate
on pre-tax earnings of 33.9% for the nine months ended September 30, 2000 which
is consistent with the Company's expected annual effective rate.
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 effect 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.
14
<PAGE>
However, relatively low levels of inflation in recent years have resulted in a
rather insignificant effect on the Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has increased during the first nine months of
2000. The change in interest sensitivity is due primarily to three factors. At
year end 1999, the Company had intentionally allowed overnight federal funds to
build up to a higher-than-normal level of $15, 710,000 as a safeguard against
possible problems with date change associated with the century change (Y2K).
During the first nine months of 2000, these funds have been reinvested in
investment securities with longer maturities and higher yields, primarily U. S.
agency securities, mortgage backed securities and CMOs. The second contributing
factor is the $9,682,000 increase in high yielding money market deposit
accounts, which allow the customer to make withdrawals by check or other
transaction measures daily. The final factor contributing to the increase in
market sensitivity is the maturing of $20,000,000 in notional value of interest
rate floors, which had protected a like amount of variable loans against a
possible drop in interest rates below the floor rate. All of these factors had
the effect of increasing the Company's balance sheet sensitivity to changes in
interest rates. The Company measures its exposure to an immediate shift in
interest rates of up or down 200 basis points. Given these conditions, the
bank's modeling projects that net interest income could decrease by 5.63% (the
Company's policy limit is 5%) given an immediate and sustained upward movement
in interest rates of 200 basis points. For an immediate drop in interest rates
of 200 basis points, the modeling projects that the Company's net interest
income could increase by 5.08%. Given an immediate and sustained upward
movement in interest rates of 100 basis points, which the management believes to
be a more likely scenario, the Bank's modeling projects that net interest income
could drop by 1.39%. As the Company does not consider this change in market
sensitivity to be significant, the market rate table, as shown in the Company's
1999 Annual Report filed on Form 10-K, has not been included in this filing.
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, 2001.
15
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
<TABLE>
<CAPTION>
Item 6(a)
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
------- ----------- --------------
<S> <C> <C>
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
</TABLE>
-------------------------
* 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, 2000:
none
16
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
<TABLE>
Nine Months Ended September 30,
----------------------------------------------------------
2000 1999
----------------------------------------------------------
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) 262,130 16,918 8.60% 239,544 15,017 8.38%
Investment securities:
Taxable 92,556 4,875 7.02% 68,880 3,279 6.37%
Tax-exempt (2) 1,160 64 7.35% 1,600 90 7.50%
-------- ------ ------- ------
Total investment securities 93,716 4,939 7.02% 70,479 3,369 6.39%
Federal funds sold 10,131 463 6.09% 4,509 164 4.88%
Interest-earning deposits with other banks 2,184 127 7.74% 1,842 78 5.63%
-------- ------ ------- ------
Total interest-earning assets 368,161 22,447 8.12% 316,375 18,628 7.87%
Allowance for loan losses (3,945) (2,834)
Cash and due from banks 10,784 9,524
Premises and equipment 3,264 3,506
Rental property, net 1,628 1,742
Other assets 10,002 6,319
-------- -------
Total assets 389,893 334,631
======== =======
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Interest-bearing liabilites:
Deposits:
Demand $ 34,958 853 3.25% 25,731 452 2.35%
Savings and money market 80,042 2,967 4.94% 69,735 2,180 4.18%
Certificates of deposits less than $100,000 77,294 3,756 6.47% 70,327 3,042 5.78%
Certificates of deposits and other time deposits
of $100,000 or more 79,357 3,373 5.66% 57,788 2,109 4.88%
-------- ------ ------- ------
Total interest-bearing deposits 271,651 10,949 5.37% 223,581 7,783 4.65%
Federal funds purchased and securities sold under
agreements to repurchase 4,813 205 5.67% 7,364 269 4.88%
Other borrowed funds 44,047 1,837 5.56% 36,968 1,501 5.43%
-------- ------ ------- ------
Total interest-bearing liabilities 320,510 12,991 5.40% 267,913 9,553 4.77%
Noninterest-bearing deposits 37,541 34,734
Accrued expenses and other liabilities 2,982 2,225
Stockholders' equity 28,860 29,758
-------- ------
Total liabilities and stockholders' equity $389,893 334,631
======== =======
Net interest income $ 9,456 9,075
======= ======
Net yield on total interest-earning assets 3.42% 3.84%
===== =====
</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%.
17
<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: December 6, 2000 By: /s/ E. L. Spencer, Jr.
----------------------------- --------------------------
E. L. Spencer, Jr.
President, Chief Executive
Officer and Director
Date: December 6, 2000 By: /s/ C. Wayne Alderman
----------------------------- --------------------------
C. Wayne Alderman
Director of Financial Operations
18
