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 March 31, 2001
---------------
[ ] 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
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(334) 821-9200
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(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 April 30, 2001: 3,907,573 shares of common stock, $.01 par
-------------------------------------------
value per share
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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
- -------------------------------------------------------------------------------
Item 1 Financial Information
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 3
Consolidated Statements of Earnings for the Three Months
Ended March 31, 2001 and 2000 4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Three Months Ended March 31, 2001
and the Years Ended December 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000 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 14
PART II. OTHER INFORMATION
- --------------------------
Item 5 Other Events 14
2
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000
(Unaudited)
3/31/01 12/31/00
---------- ----------
Assets
Cash and due from banks $ 13,499,627 8,709,097
Federal funds sold 6,094,000 9,210,000
------------ ------------
Cash and cash equivalents 19,593,627 17,919,097
------------ ------------
Interest-earning deposits with other banks 638,488 446,144
Investment securities held to maturity (fair value
of $21,684,441 and $27,208,911 for March 31, 2001
and December 31, 2000, respectively) 21,010,124 26,899,565
Investment securities available for sale 93,640,996 84,830,843
Loans 270,128,891 262,529,057
Less allowance for loan losses (4,542,521) (3,634,442)
------------ ------------
Loans, net 265,586,370 258,894,615
------------ ------------
Premises and equipment, net 3,203,283 3,126,145
Rental property, net 1,567,407 1,594,168
Other assets 9,707,833 10,978,676
------------ ------------
Total assets $414,948,128 404,689,253
============ ============
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 41,613,231 43,292,446
Interest-bearing 278,977,023 272,348,748
------------ ------------
Total deposits 320,590,254 315,641,194
Securities sold under agreements to repurchase 8,105,152 4,388,561
Other borrowed funds 48,685,246 48,720,540
Accrued expenses and other liabilities 4,014,753 4,133,901
------------ ------------
Total liabilities 381,395,405 372,884,196
------------ ------------
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 29,511,917 28,187,466
Accumulated other comprehensive income 691,016 85,147
Less treasury stock, 49,562 and 32,562 shares at March 31, 2001
and December 31, 2000, respectively, at cost (397,253) (214,599)
------------ ------------
Total stockholders' equity 33,552,723 31,805,057
------------ ------------
Total liabilities and stockholders' equity $414,948,128 404,689,253
============ ============
See accompanying notes to consolidated financial statements.
3
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
For the Three Months Ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended March 31,
2001 2000
---------- -----------
Interest and dividend income:
Loans, including fees $5,743,017 5,613,263
Investment securities:
Taxable 1,913,515 1,436,406
Tax-exempt 12,751 14,092
Federal funds sold 98,988 166,330
Interest-earning deposits with other banks 19,897 53,104
---------- ----------
Total interest and dividend income 7,788,168 7,283,195
---------- ----------
Interest expense:
Deposits 3,662,101 3,420,185
Securities sold under agreements to repurchase 49,063 81,220
Other borrowings 671,922 613,470
---------- ----------
Total interest expense 4,383,086 4,114,875
---------- ----------
Net interest income 3,405,082 3,168,320
Provision for loan losses 1,235,000 315,000
---------- ----------
Net interest income after provision
for loan losses 2,170,082 2,853,320
---------- ----------
Noninterest income:
Service charges on deposit accounts 392,575 310,565
Investment securities gains, net 1,557,951 20,909
Other 872,517 527,652
---------- ----------
Total noninterest income 2,823,043 859,126
---------- ----------
Noninterest expense:
Salaries and benefits 1,064,241 1,091,928
Net occupancy expense 280,959 301,039
Other 1,208,203 914,197
---------- ----------
Total noninterest expense 2,553,403 2,307,164
---------- ----------
Earnings before income taxes 2,439,722 1,405,282
Income tax expense 864,490 481,213
---------- ----------
Earnings before cumulative effect of a
change in accounting principle 1,575,232 924,069
Cumulative effect of a change in accounting principle, net of tax 141,677 -
---------- ----------
Net earnings $1,716,909 924,069
========== ==========
Basic earnings per share:
Earnings before cumulative effect of a change in accounting principle $ 0.40 0.24
Cumulative effect of a change in accounting principle, net of tax 0.04 -
---------- ----------
Net earnings $ 0.44 0.24
========== ==========
Weighted-average shares outstanding 3,920,323 3,924,573
========== ==========
See accompanying notes to consolidated financial statements.
4
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2000, and 1999 and the
Three Months Ended March 31, 2001
(Unaudited)
Accumu- Em-
lated ployee
other stock
compre- owner-
Compre- Common Stock Additional hensive ship
hensive ------------------ paid-in Retained income plan Treasury
income Shares Amount capital earnings (loss) debt stock Total
------- ------ ------ ---------- -------- -------- -------- -------- -----
Balances at December 31,
1998 3,957,135 39,571 3,707,472 25,077,126 333,926 -- (214,599) 28,943,496
Comprehensive income:
Net earnings $ 2,922,018 -- -- -- 2,922,018 -- -- -- 2,922,018
Other comprehensive loss
due to unrealized
loss on investment
securities available for
sale, net (2,168,054) -- -- -- -- (2,168,054) -- -- (2,168,054)
-----------
Total comprehensive
income $ 753,964 --
===========
Cash dividends paid ($0.32
per share) -- -- -- (1,255,863) -- -- -- (1,255,863)
--------- ------- --------- ---------- ---------- -- -------- ----------
Balances at December 31,
1999 3,957,135 39,571 3,707,472 26,743,281 (1,834,128) -- (214,599) 28,441,597
Comprehensive income:
Net earnings $ 3,014,014 -- -- -- 3,014,014 -- -- -- 3,014,014
Other comprehensive
income due to unrealized
gain on investment
securities available for
sale, net 1,919,275 -- -- -- 1,919,275 -- -- 1,919,275
-----------
Total comprehensive
income $ 4,933,289 --
===========
Cash dividends paid ($0.40
per share) -- -- -- (1,569,829) -- -- -- (1,569,829)
--------- ------- --------- ---------- ---------- -- -------- ----------
Balances at December 31,
2000 3,957,135 $39,571 3,707,472 28,187,466 85,147 -- (214,599) 31,805,057
Comprehensive income:
Net earnings $ 1,716,909 -- -- -- 1,716,909 -- -- -- 1,716,909
Other comprehensive
income due to unrealized
gain on investment
securities available for
sale, net 605,869 -- -- -- 605,869 -- -- 605,869
-----------
Total comprehensive
income $ 2,322,778 --
===========
Cash dividends paid ($0.10
per share) -- -- -- (392,458) -- -- -- (392,458)
Purchase of Treasury stock
(17,000 shares) -- -- -- -- -- -- (182,654) (182,654)
--------- ------- --------- ---------- ---------- -- -------- ----------
Balances at March 31, 2001 3,957,135 $39,571 3,707,472 29,511,917 691,016 -- (397,253) 33,552,723
========= ======= ========= ========== ========== == ======== ==========
See accompanying notes to consolidated financial statements.
5
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000
(Unaudited)
2001 2000
------------ ---------
Cash flows from operating activities:
Net earnings $ 1,716,909 924,069
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 141,147 162,844
Net accretion of investment security
discounts/premiums (157,100) (140,188)
Provision for loan losses 1,235,000 315,000
Loss on disposal of premises and equipment 10,295 424
Investment securities gains (1,557,951) (20,909)
Decrease (increase) in interest receivable 409,956 (341,479)
Decrease (increase) in other assets 372,347 (428,690)
(Decrease) increase in interest payable (557,837) 101,851
Increase in accrued expenses and other liabilities 438,689 333,631
------------ -----------
Net cash provided by operating activities 2,051,455 906,553
------------ -----------
Cash flows from investing activities:
Proceeds from sales of investment securities available
for sale 30,120,391 2,979,308
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 6,030,963 3,271,766
Purchases of investment securities held to maturity -- (17,897,751)
Proceeds from maturities/calls/paydowns of
investment securities available for sale 2,528,976 4,033,597
Purchases of investment securities available for sale (38,815,140) (2,969,531)
Net increase in loans (7,926,755) (4,097,495)
Purchases of premises and equipment (178,261) (58,019)
Additions to rental property -- (13,725)
Net increase in interest-earning deposits
with other banks (192,344) (953,536)
------------ -----------
Net cash used in investing activities (8,432,170) (15,705,386)
------------ -----------
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits (1,679,215) 1,160,294
Net increase in interest-bearing deposits 6,628,275 23,924,413
Net increase in securities sold under
agreements to repurchase 3,716,591 879,900
Net decrease in borrowings from FHLB (29,562) (3,029,563)
Repayments of other borrowed funds (5,732) (5,486)
Purchase of treasury stock (182,654) --
Dividends paid (392,458) (392,459)
------------ -----------
Net cash provided by financing activities 8,055,245 22,537,099
------------ -----------
Net increase in cash and cash equivalents 1,674,530 7,738,266
------------ -----------
Cash and cash equivalents at beginning of period 17,919,097 27,372,397
------------ -----------
Cash and cash equivalents at end of period $ 19,593,627 35,110,663
============ ===========
Supplemental information on cash payments:
Interest paid $ 4,940,923 4,013,024
============ ===========
See accompanying notes to consolidated financial statements.
6
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2001
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, 2000.
Note 2 - 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 3 - Recent 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 now effective for financial statements for the first fiscal
quarter of the fiscal year beginning after June 15, 2000. The Company adopted
Statement 133 on January 1, 2001. The adoption of Statement 133 resulted in a
$142,000 cumulative effect of a change in accounting principle, net of tax. As
of March 31, 2001, the Company had the following derivative instruments:
Interest Rate Swaps
(In Thousands)
Notional Estimated
Amount fair value Pay Rate Receive Rate
-------- ---------- -------- ------------
$10,000 427 Prime 9.80%
5,000 81 Variable 5.68%
At March 31, 2001, the $5 million interest rate swap was used as a fair
value hedge to convert the interest rate on a like amount of certificates of
deposit with similar terms from fixed to variable. While not specifically
designated as a hedging instrument, the $10 million interest rate swap was
entered into to provide some protection against falling interest rates on the
Company's loans.
The Company realized a $170,000 gain during the three months ended March
31, 2001 due to the increase in the fair value of the $10 million interest rate
swap. The effect on net income of other derivative instruments that existed at
January 1, 2001, but terminated during the three months ended March 31, 2001 was
not material.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of various factors related to the Company's results of operations
and financial condition. This discussion is intended to supplement and
highlight information contained in the accompanying unaudited consolidated
financial statements for the three months ended March 31, 2001 and 2000.
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 $1,717,000 for the quarter ended March 31, 2001 represented
an increase of $793,000 (85.8%) from the Company's net income of $924,000 for
the same period of 2000. Basic net earnings per share increased $0.20 (83.3%)
to $0.44 during the first quarter of 2001 from $0.24 for the first quarter of
2000. During the three month period ended March 31, 2001 compared to the same
period of 2000, the Company experienced increases in net interest income,
provision for loan losses, noninterest income and noninterest expense. The net
yield on total interest-earning assets increased to 3.60% for the three months
ended March 31, 2001 from 3.49% for the three months ended March 31, 2000. The
increase in the net yield on interest-earning assets is due to an overall
increase in the yield on interest-earning assets offset by an increase in the
cost of interest-bearing liabilities. See the "Consolidated Average Balances,
Interest Income/Expense and Yields/Rates" table.
Total assets of $414,948,000 at March 31, 2001 represents an increase of
$10,259,000 (2.5%) over total assets of $404,689,000, at December 31, 2000.
This increase resulted primarily from increases in investment securities
available for sale and loans offset by a decrease in investment securities held
to maturity.
Financial Condition
Investment Securities and Federal Funds Sold
Investment securities held to maturity were $21,010,000 and $26,900,000 at
March 31, 2001 and December 31, 2000, respectively. This decrease of $5,890,000
(21.9%) was primarily the result of $6,031,000 of scheduled paydowns, maturities
and calls of principal amounts.
Investment securities available for sale increased $8,810,000 (10.4%) to
$93,641,000 at March 31, 2001 from $84,831,000 at December 31, 2000. This
increase is a result of purchases of $18,416,000 in U.S. agency securities,
$12,163,000 in mortgage backed securities, and $8,236,000 in CMOs. This increase
is offset by
8
$2,529,000 of scheduled paydowns, maturities and calls of principal amounts. In
addition, $24,619,000 of U.S. agency securities and $5,502,000 of CMOs were sold
in the first quarter of 2001.
Federal funds sold decreased to $6,094,000 at March 31, 2001 from
$9,210,000 at December 31, 2000. This decrease is primarily due to the
reinvestment of federal funds sold to investment securities available for sale.
In addition, this reflects normal activity in the Bank's funds management
efforts.
Loans
Total loans of $270,129,000 at March 31, 2001 reflected an increase of
$7,600,000 (2.9%) compared to the total loans of $262,529,000, at December 31,
2000. The Bank primarily experienced growth in commercial real estate loans and
in commercial, financial and agricultural loans during the first three months of
2001. Commercial, financial and agricultural, residential real estate and
commercial real estate loans represented the majority of the loan portfolio with
approximately 27.52%, 22.52% and 35.84% of the Bank's total loans at March 31,
2001, respectively. The net yield on loans was 8.75% for the three months ended
March 31, 2001 compared to 8.51% for the three months ended March 31, 2000. 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 which
management believes affects the allowance for loan losses.
The table below summarizes the changes in the allowance for loan losses for
the three months ended March 31, 2001 and the year ended December 31, 2000.
Three months Year ended
ended December 31,
March 31, 2001 2000
-------------- ------------
(In thousands)
Balance at beginning of period, January 1, $3,634 $3,775
Charge-offs 351 3,115
Recoveries 25 352
------ ------
Net charge-offs 326 2,763
Provision for loan losses 1,235 2,622
------ ------
Ending balance $4,543 $3,634
====== ======
The allowance for loan losses was $4,543,000 at March 31, 2001 compared to
$3,634,000 at December 31, 2000. Management believes that the current level of
allowance (1.68% of total outstanding loans, net of unearned income, at March
31, 2001) was adequate at that time to absorb anticipated risks identified in
the portfolio at that time. Starting in 2001, the Bank's new loan review
services provider has assisted in implementing new policies and procedures for
the loan process. The Bank's more rigorous internal reviews and changes in its
credit practices, may result in additions to the allowance for loan losses, and
the identification of additional potential problem loans.
Consistent with its methodology for calculating the adequacy of the
allowance for loan losses, management believes the provisions made during the
first quarter will place the allowance at a level sufficient to absorb
identified potential loan losses in the portfolio as of March 31, 2001. No
assurance can be given, however, that adverse
9
economic circumstances 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 three months of 2001, the Bank made $1,235,000 in
provisions to the allowance for loan losses based on management's assessment of
the credit quality of the loan portfolio. The increase in the provision is due
to results of recent loan reviews and estimates of deterioration in certain
loans determined by recent analyses. For the three months ended March 31, 2001,
the Bank had charge-offs of $351,000 and recoveries of $25,000.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans,
other nonperforming assets, and accruing loans 90 days or more past due were
$8,958,000 at March 31, 2001 an increase of 3.0% from the $8,695,000 of non-
performing assets at December 31, 2000. This increase is primarily due to a
slight increase in nonaccrual loans. If nonaccrual loans had performed in
accordance with their original contractual terms, interest income would have
increased approximately $164,000 for the three months ended March 31, 2001.
The table below provides information concerning nonperforming assets and
certain asset quality ratios at March 31, 2001 and December 31, 2000.
March 31, December 31,
2001 2000
--------- ------------
(In thousands)
Nonaccrual loans $8,008 7,793
Renegotiated loans -- --
Other nonperforming assets (primarily
other real estate) 874 874
Accruing loans 90 days or more past due 76 28
------ -----
Total nonperforming assets $8,958 8,695
====== =====
Ratio of allowance for loan losses as a percent
of total loans outstanding 1.68% 1.38%
Ratio of allowance for loan losses as a percent of
nonaccrual loans, renegotiated loans and other
nonperforming assets 51.15% 41.93%
Potential problem loans consist of those loans where management has serious
doubts as to the borrower's ability to comply with the present loan repayment
terms. At March 31, 2001, 107 loans totaling $8,191,000, or 3.0% of total loans
outstanding, net of unearned income, were considered potential problem loans
compared to 120 loans totaling $8,826,000, or 3.4% of total loans outstanding,
net of unearned income, at December 31, 2000. At March 31, 2001, the amount of
impaired loans were $8,331,000, which included 29 loans to 11 borrowers with a
total valuation allowance of approximately $1,204,000. In comparison, at
December 31, 2000, the Company had approximately $8,356,000 of impaired loans,
which included 35 loans to 10 borrowers with a total valuation allowance of
approximately $529,000.
Deposits
Total deposits increased $4,949,000 (1.6%) to $320,590,000 at March 31,
2001, as compared to $315,641,000 at December 31, 2000. Noninterest-bearing
deposits decreased $1,679,000 (3.9%) during the first three months of 2001,
while total interest-bearing deposits increased $6,628,000 (2.4%) to
$278,977,000 at March 31, 2001 from $272,349,000 at December 31, 2000. The
decrease in noninterest-bearing deposits is due primarily to a decrease in
regular demand deposit accounts. During the first three months of 2001, the Bank
primarily experienced increases in money market accounts of $5,218,000 (8.4%),
NOW accounts of $5,485,000 (14.9%) offset by a decrease in certificates of
deposits greater than $100,000 of $5,694,000 (7.1%). 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 5.33% for the three months ended
March 31, 2001 compared to 5.10% for the same period of 2000. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
10
Capital Resources and Liquidity
The Company's consolidated stockholders' equity was $33,553,000 at March
31, 2001, compared to $31,805,000 at December 31, 2000. This represents an
increase of $1,748,000 (5.5%) during the first three months of 2001. Net
earnings for the first three months of 2001 were $1,717,000 compared to $924,000
for the same period of 2000. In addition, the Company's accumulated other
comprehensive income was $691,000 at March 31, 2001 compared to $85,000 at
December 31, 2000. This increase was due to an increase in market value of
investment securities available for sale. During the first three months of 2001
and 2000, cash dividends of $392,000, or $0.10 per share, were declared on
Common Stock.
Certain financial ratios for the Company as of March 31, 2001 and December
31, 2000 are presented in the following table:
March 31, 2001 December 31, 2000
Return on average assets - annualized 1.70% 0.77%
Return on average equity - annualized 22.40% 10.30%
The Company's Tier 1 leverage ratio was 7.92%, Tier I risk-based capital
ratio was 11.61% and Total risk-based capital ratio was 12.86% at March 31,
2001. 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 three months of 2001 was
deposit growth. The Company used these funds primarily in the purchase of
investment securities. Under the advance program with Federal Home Loan Bank of
Atlanta ("FHLB-Atlanta"), the Bank had outstanding advances totaling
approximately $48,492,000, leaving credit available, net of advances drawn down,
of approximately $15,318,000 at March 31, 2001.
Net cash provided by operating activities of $2,051,000 for the three
months ended March 31, 2001, consisted primarily of net earnings and provision
for loan losses. Net cash used in investing activities of $8,432,000 funded
investment securities purchases of $38,815,000 offset by proceeds from
maturities, calls and paydowns of investment securities and proceeds from sale
of investment securities available for sale of $8,560,000 and $30,120,000,
respectively. The $8,055,000 in net cash provided by financing activities
resulted primarily from a decrease of $1,679,000 in non-interest bearing
deposits and an increase in interest bearing deposits of $6,628,000. In
addition, securities sold under agreements to repurchase increased by $3,717,000
and the Company paid dividends of $392,000.
Interest Rate Sensitivity Management
At March 31, 2001, interest sensitive assets that repriced or matured
within the next 12 months were $177,773,000, compared to interest sensitive
liabilities that reprice or mature within the same time frame totaling
$224,650,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a negative $46,877,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 79.13%. This compares to a twelve month
cumulative GAP position at December 31, 2000, of a negative $68,729,000 and a
GAP ratio of 68%. 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 March 31, 2001 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. See "ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK".
11
Results of Operations
Net Income
Net income increased $793,000 (85.8%) to $1,717,000 for the three month
period ended March 31, 2001 compared to $924,000 for the same period of 2000.
Basic net earnings per share was $0.44 and $0.24 for the first quarter of 2001
and 2000, respectively. Net income for first quarter 2001 was significantly
impacted by a $1,548,000 gain recorded upon the sale of the Star Systems, Inc.
ATM network in which the Company had ownership to a publicly traded entity whose
shares were issued to the Company in exchange for its ownership interest in Star
Systems, Inc. network. During the three month period ended March 31, 2001
compared to the same period of 2000, the Company also 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 $3,405,000 for the first quarter of 2001. The
increase of $237,000 (7.5%) from $3,168,000 for the same period of 2000,
resulted primarily from the increase in interest and dividends from investment
securities offset by an increase in interest on deposits. Such increases
resulted from overall growth in the Company's average interest-earning assets
and an increase in net taxable yield on the Company's interest-earning assets
during the first three months of 2001 compared to the same period of 2000.
Through the first quarter of 2001, the Company's GAP position remained more
liability sensitive to changes in interest rates. 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 $7,788,000 and $7,283,000 for the
three months ended March 31, 2001 and 2000, respectively. This represents an
increase of $505,000 (6.9%) for the first quarter of 2001 compared to 2000.
This change for the first three months of 2001 resulted as the average volume of
interest earning assets outstanding increased $18,693,000 (5.1%) over the same
period of 2000 and the Company's yield on interest-earning assets increased 22
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 $5,743,000 and $5,613,000 for the first quarters of 2001 and
2000, respectively. This reflects an increase of $130,000 (2.3%) during the
three months ended March 31, 2001 over the same period of 2000. The average
volume of loans increased $1,839,000 (0.7%) for the three months ended March 31,
2001 compared to the same period for 2000, while the Company's yield on loans
also increased by 24 basis points comparing these same periods.
For the three month period ended March 31, 2001, interest income on
investment securities increased $476,000 (32.8%) to $1,926,000 from $1,450,000
for the same period of 2000. The Company's average volume of investment
securities increased by $23,596,000 (27.8%) for the first three months of 2001,
compared to the same period of 2000, while the net yield on these average
balances also increased by 32 basis points. See the "Consolidated Average
Balances, Interest Income/Expense and Yields/Rates" table.
Interest Expense
Total interest expense increased $268,000 (6.5%) to $4,383,000 for the
first quarter of 2001 compared to $4,115,000 for the same period of 2000. This
change resulted as the Company's average interest-bearing liabilities increased
3.7% and the rates paid on these liabilities increased 19 basis points during
the first three months of 2001 compared to the same period of 2000. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest on deposits, the primary component of total interest expense,
increased $242,000 (7.1%) to $3,662,000 for the first quarter of 2001 compared
to $3,420,000 for the same period of 2000. The increase for the three month
period ended March 31, 2001 is due to a 3.7% increase in the average volume and
a 23 basis point increase in the rate paid on interest-bearing deposits.
Interest expense on other borrowings, was $672,000 and $613,000 for the
first quarters of 2001 and 2000, respectively. This represents an increase of
$59,000 or 9.6%. This increase for the three month period ended March 31, 2001
is due to a 9.3% increase in the average volume and a 4 basis point increase in
the rate paid on other
12
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 $1,235,000
for the three months ended March 31, 2001 compared to $315,000 for the three
months ended March 31, 2000. The increase in the provision is due to loan
growth and as a result of a deterioration in certain loans determined by recent
analyses. See "---Allowance for Loan Loss AND RISK ELEMENTS."
Noninterest Income
Noninterest income increased $1,964,000 (228.6%) to $2,823,000 for the
first quarter of 2001 from $859,000 for the same period of 2000. This increase
for the first quarter is due to increases in service charges on deposit
accounts, investment securities gains, net and other noninterest income.
Service charges on deposit accounts for the first quarter of 2001 increased
$82,000 (26.4%) to $393,000 from $311,000 for the first quarter of 2000. This
increase is primarily due to increases in nonsufficient funds and overdraft
charges due to an increase in nonsufficient fund items.
Investment securities gains, net for the first quarter of 2001 increased
$1,537,000 to $1,558,000 from $21,000 for the first quarter of 2000. This
increase is primarily due to a gain of $1,548,000 resulting from the purchase of
the Company's investment in Star Systems, Inc.'s common stock by Concord EFS,
Inc. In this transaction, the Company received common shares of Concord EFS,
Inc., which is publicly traded, in exchange for its ownership in Star Systems,
Inc.
Other noninterest income increased $345,000 (65.3%) to $873,000 for the
first quarter of 2001 from $528,000 for the same period of 2000. This increase
primarily resulted from an increase in the fair value of derivatives since the
implementation of Statement 133, an increase in MasterCard/VISA discounts and
fees due to Auburn University's acceptance of MasterCard/VISA for tuition, and
an increase in the gain on the sale of mortgage loans.
Noninterest Expense
Total noninterest expense was $2,553,000 and $2,307,000 for the first
quarters of 2001 and 2000, respectively, representing an increase of $246,000 or
10.7%. This increase was mainly due to an increase in other noninterest expense
offset by a decrease in salaries and benefits expense.
Salaries and benefits expense was $1,064,000 and $1,092,000 for the three
months ended March 31, 2001 and 2000, respectively. This represents a decrease
of $28,000 (2.6%) in the first quarter of 2001 compared to the first quarter of
2000. This decrease is primarily due to the decrease in overall employee levels
from the same period of 2000.
Net occupancy expense was $281,000 and $301,000 for the first quarters of
2001 and 2000, respectively, representing a decrease of $20,000 or 6.6%. This
decrease is due to a decrease in depreciation on furniture and equipment,
service contract expense on furniture and equipment and technology lease
payments offset by an increase in computer hardware maintenance and lease
payments due to the opening of the Auburn Wal-Mart branch in late 2000.
For the first quarter of 2001, other noninterest expense increased $294,000
(32.2%) to $1,208,000 from $914,000 for the first quarter of 2000. This increase
is mainly due to the expenses associated with Auburn University's acceptance of
MasterCard/VISA for tuition mentioned above and an increase in marketing
expenses.
Income taxes
Income tax expense was $864,000 and $481,000 for the first quarters of 2001
and 2000, respectively. For the three months ended March 31, 2001, income tax
expense increased $383,000 (79.6%). These levels represent an effective tax
rate on pre-tax earnings of 35.4% for the three months ended March 31, 2001
which is consistent with the Company's expected annual effective rate.
13
Impact of Inflation and changing prices
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant 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. 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 quarter of 2001.
The Company's asset sensitivity has increased since year-end 2000. The
cumulative one-year GAP ratio of rate sensitive assets to rate sensitive
liabilities has increased from 68% to 79%. This indicates that for every dollar
of liabilities repricing within the next 12 months that $0.79 of assets will
reprice. Two events have impacted the cumulative GAP. First, the security
portfolio was restructured in March. The Company had $36,689,000 in securities
that were callable within the next 24 months. A bond swap was executed resulting
in the sale of $18,418,000 of these securities. The proceeds were reinvested in
$21,427,939 in FHLMC and GNMA mortgage backed securities. Mortgage backed
securities repay a portion of principal on a monthly basis, which must be
reinvested. Second, $10,000,000 in interest rate swap contracts were called by
the counterparty during the first quarter. The purpose of the swaps was to
convert $10,000,000 in fixed-rate brokered certificates of deposit to variable
to fund certain variable-rate assets. As a result of this transaction, the
Company also called the brokered certificates of deposit. 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 6.85% 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 the Company's net interest income could increase by 5.40%.
Given an immediate and sustained downward shift in interest rates of 100 basis
points, which management believes to be a more likely scenario, the Bank's
modeling projects that net interest income could increase by 3.10%. As the
Company does not consider this change in market sensitivity to be significant,
the market rate table, as shown in the Company's 2000 Form 10-K, has not been
updated 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 2001 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, 2002.
14
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.* ---
- -------------------------
* Incorporated by reference from Registrant's Registration Statement on
Form SB-2.
(b) Reports filed on Form 8-K for the quarter ended March 31, 2001:
none
15
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Three Months Ended March 31, 2001
---------------------------------------------------------
2001 2000
--------------------------- ---------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
- --------------------------------------------------- ------- -------- ------ ------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Loans, net of unearned income (1) $266,289 5,743 8.75% 264,450 5,613 8.51%
Investment securities:
Taxable 107,407 1,913 7.22% 83,694 1,436 6.88%
Tax-exempt (2) 1,037 14 5.33% 1,154 21 7.30%
-------- ------ ------- -----
Total investment securities 108,444 1,927 7.21% 84,848 1,457 6.89%
Federal funds sold 6,915 99 5.81% 11,986 166 5.56%
Interest-earning deposits with other banks 1,492 20 5.44% 3,163 53 6.72%
-------- ------ ------- -----
Total interest-earning assets 383,140 7,789 8.24% 364,447 7,289 8.02%
Allowance for loan losses (3,809) (3,877)
Cash and due from banks 11,048 11,147
Premises and equipment 3,247 3,337
Rental property, net 1,513 1,608
Other assets 9,727 9,704
-------- -------
Total assets $404,866 386,366
======== =======
LIABILITIES & STOCKHOLDERS' EQUITY
- ---------------------------------------------------
Interest-bearing liabilities:
Deposits:
Demand $ 40,562 342 3.42% 35,121 278 3.17%
Savings and money market 76,388 837 4.44% 79,693 951 4.79%
Certificates of deposits less than $100,000 82,633 1,369 6.72% 73,453 1,099 6.00%
Certificates of deposits and other time
deposits of $100,000 or more 79,182 1,114 5.71% 80,498 1,092 5.44%
-------- ------ ------- -----
Total interest-bearing deposits 278,765 3,662 5.33% 268,765 3,420 5.10%
Federal funds purchased and securities sold
under agreements to repurchase 3,673 49 5.41% 5,890 81 5.52%
Other borrowed funds 48,692 669 5.57% 44,562 614 5.53%
-------- ------ ------- -----
Total interest-bearing liabilities 331,130 4,380 5.36% 319,217 4,115 5.17%
Noninterest-bearing deposits 37,953 36,341
Accrued expenses and other liabilities 5,121 1,890
Stockholders' equity 30,662 28,918
-------- -------
Total liabilities and stockholders' equity $404,866 386,366
======== =======
Net interest income $3,409 3,174
====== =====
Net yield on total interest-earning assets 3.60% 3.49%
==== ====
- ----------
(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%.
16
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
Date: May 14, 2001 By: /s/ E. L. Spencer, Jr.
---------------------------------
E. L. Spencer, Jr.
President, Chief Executive
Officer and Director
Date: May 14, 2001 By: /s/ C. Wayne Alderman
---------------------------------
C. Wayne Alderman
Director of Financial Operations
17