SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended September 30, 2001
[_] 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 CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of October 30, 2001: 3,901,423 shares of common stock, $.01
par value per share
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
- --------------------------------------------------------------------------------------------------
Item 1 Financial Information
Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000............................... 3
Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 2001 and 2000 ............... 4
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the Nine Months
Ended September 30, 2001 .............................................. 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 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 ..................... 15
PART II. OTHER INFORMATION
- ---------------------------
Item 5 Other Events ................................................................... 15
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
(Unaudited)
Assets 9/30/2001 12/31/2000
------------- -------------
Cash and due from banks $ 16,242,568 8,709,097
Federal funds sold 27,955,000 9,210,000
------------- -------------
Cash and cash equivalents 44,197,568 17,919,097
------------- -------------
Interest-earning deposits with other banks 1,821,604 446,144
Investment securities held to maturity (fair value
of $18,371,555 and $27,208,911 at September 30, 2001
and December 31, 2000, respectively) 17,687,109 26,899,565
Investment securities available for sale 112,107,799 84,830,843
Loans 261,087,128 262,529,057
Less allowance for loan losses (4,720,023) (3,634,442)
------------- -------------
Loans, net 256,367,105 258,894,615
------------- -------------
Premises and equipment, net 3,251,657 3,126,145
Rental property, net 1,590,448 1,594,168
Other assets 17,946,481 10,978,676
------------- -------------
Total assets $ 454,969,771 404,689,253
============= =============
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 47,344,618 43,292,446
Interest-bearing 310,607,230 272,348,748
------------- -------------
Total deposits 357,951,848 315,641,194
Securities sold under agreements to repurchase 2,317,050 4,388,561
Other borrowed funds 53,614,601 48,720,540
Accrued expenses and other liabilities 5,175,550 4,133,901
------------- -------------
Total liabilities 419,059,049 372,884,196
------------- -------------
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 30,997,632 28,187,466
Accumulated other comprehensive income 1,634,209 85,147
Less treasury stock, 55,712 and 32,562 shares at September 30, 2001
and December 31, 2000, respectively, at cost (468,162) (214,599)
------------- -------------
Total stockholders' equity 35,910,722 31,805,057
------------- -------------
Total liabilities and stockholders' equity $ 454,969,771 404,689,253
============= =============
See accompanying notes to consolidated financial statements.
3
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Earnings
For the Three Months and Nine Months Ended September 30, 2001 and 2000
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ----------- ---------- ----------
Interest and dividend income:
Loans, including fees $5,284,416 5,705,495 16,614,648 16,917,822
Investment securities:
Taxable 1,912,816 1,794,903 5,630,561 4,874,960
Tax-exempt 30,308 14,068 57,118 42,236
Federal funds sold 190,195 119,777 393,983 463,033
Interest-earning deposits with other banks 30,390 36,859 81,272 126,947
---------- ---------- ---------- ----------
Total interest and dividend income 7,448,125 7,671,102 22,777,582 22,424,998
---------- ---------- ---------- ----------
Interest expense:
Deposits 3,231,770 3,829,358 10,198,498 10,948,516
Securities sold under agreements to repurchase 19,571 57,492 99,134 204,668
Other borrowings 710,555 615,045 2,060,440 1,837,387
---------- ---------- ---------- ----------
Total interest expense 3,961,896 4,501,895 12,358,072 12,990,571
---------- ---------- ---------- ----------
Net interest income 3,486,229 3,169,207 10,419,510 9,434,427
Provision for loan losses 425,000 1,353,000 2,035,000 2,163,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 3,061,229 1,816,207 8,384,510 7,271,427
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 334,196 358,644 1,102,066 1,002,026
Investment securities (losses) gains, net (4,170) 25,032 1,524,468 45,941
Other 724,296 656,974 2,236,288 1,746,230
---------- ---------- ---------- ----------
Total noninterest income 1,054,322 1,040,650 4,862,822 2,794,197
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and benefits 1,080,085 929,215 3,166,230 2,954,144
Net occupancy expense 263,661 279,909 804,955 833,839
Other 1,230,798 1,147,562 3,566,348 3,029,146
---------- ---------- ---------- ----------
Total noninterest expense 2,574,544 2,356,686 7,537,533 6,817,129
---------- ---------- ---------- ----------
Earnings before income taxes 1,541,007 500,171 5,709,799 3,248,495
Income tax expense 480,505 154,500 1,867,953 1,100,224
---------- ---------- ---------- ----------
Earnings before cumulative effect of a
change in accounting principle 1,060,502 345,671 3,841,846 2,148,271
Cumulative effect of a change in accounting principle, net of tax -- -- 141,677 --
---------- ---------- ---------- ----------
Net earnings $1,060,502 345,671 3,983,523 2,148,271
========== ========== ========== ==========
Basic and diluted earnings per share:
Earnings before cumulative effect of a change
in accounting principle $ 0.27 0.09 0.98 0.55
Cumulative effect of a change in accounting principle, net of tax -- -- 0.04 --
---------- ---------- ---------- ----------
Net earnings $ 0.27 0.09 1.02 0.55
========== ========== ========== ==========
Weighted-average shares outstanding 3,904,498 3,924,573 3,911,443 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
For the Nine Months Ended September 30, 2001
(Unaudited)
Accumulated
Common stock Additional other
----------------------
Comprehensive paid-in Retained comprehensive
income Shares Amount capital earnings income (loss)
----------- ----------- ---------- ---------- ------------ -------------
Balances at December 31, 2000 3,957,135 $ 39,571 3,707,472 28,187,466 85,147
Comprehensive income:
Net earnings $ 3,983,523 -- -- -- 3,983,523 --
Other comprehensive income due to unrealized
gain on investment securities available for
sale, net 1,549,062 -- -- -- 1,549,062
-----------
Total comprehensive income $ 5,532,585
===========
Cash dividends paid ($0.30 per share) -- -- -- (1,173,357) --
Purchase of Treasury stock (23,150 shares) -- -- -- -- --
---------- --------- ---------- ----------- -----------
Balances at September 30, 2001 3,957,135 $ 39,571 3,707,472 30,997,632 1,634,209
========== ========= ========== =========== ===========
Treasury
stock Total
--------- -----------
Balances at December 31, 2000 (214,599) 31,805,057
Comprehensive income:
Net earnings -- 3,983,523
Other comprehensive income due to unrealized
gain on investment securities available for
sale, net -- 1,549,062
Total comprehensive income
Cash dividends paid ($0.30 per share) -- (1,173,357)
Purchase of Treasury stock (23,150 shares) (253,563) (253,563)
--------- ------------
Balances at September 30, 2001 (468,162) 35,910,722
========= ============
See accompanying notes to consolidated financial statements.
5
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
------------ ------------
Cash flows from operating activities:
Net earnings $ 3,983,523 2,148,271
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 408,068 449,617
Net accretion of discounts/premiums on
investment securities (187,193) (465,905)
Provision for loan losses 2,035,000 2,163,000
Loss on disposal of premises and equipment 12,084 11,466
Loss on sale of other real estate 43,657 10,994
Investment securities gains (1,524,468) (45,941)
Decrease (increase) in interest receivable 868,051 (496,591)
Decrease (increase) in other assets 752,785 (1,514,943)
(Decrease) increase in interest payable (472,971) 409,917
Increase in accrued expenses and other liabilities 296,809 545,437
------------ ------------
Net cash provided by operating activities 6,215,345 3,215,322
------------ ------------
Cash flows from investing activities:
Proceeds from sales of investment securities available
for sale 42,727,538 2,979,308
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 9,405,214 4,708,455
Purchases of investment securities held to maturity -- (22,251,496)
Proceeds from maturities/calls/paydowns of
investment securities available for sale 15,895,364 6,978,502
Purchases of investment securities available for sale (81,738,117) (26,189,957)
Investment in bank owned life insurance (8,500,000) --
Net decrease in loans 492,510 630,850
Purchases of premises and equipment (550,207) (97,293)
Additions to rental property -- (22,306)
Net (increase)/decrease in interest-earning deposits
with other banks (1,375,460) 1,062,712
------------ ------------
Net cash used in investing activities (23,643,158) (32,201,225)
------------ ------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 4,052,172 5,080,675
Net increase in interest-bearing deposits 38,258,482 18,932,751
Net decrease in securities sold under
agreements to repurchase (2,071,511) (1,373,901)
Net increase/(decrease) in borrowings from FHLB 4,911,313 (3,088,687)
Repayments of other borrowed funds (17,252) (17,041)
Purchase of treasury stock (253,563) --
Dividends paid (1,173,357) (1,177,372)
------------ ------------
Net cash provided by financing activities 43,706,284 18,356,425
Net increase (decrease) in cash and cash equivalents 26,278,471 (10,629,478)
Cash and cash equivalents at beginning of period 17,919,097 27,372,397
------------ ------------
Cash and cash equivalents at end of period $ 44,197,568 16,742,919
============ ============
Supplemental information on cash payments:
Interest paid $ 12,831,043 12,580,654
============ ============
Income taxes paid $ 882,087 770,411
============ ============
See accompanying notes to consolidated financial statements.
6
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
September 30, 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- Comprehensive Income
In September 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 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, 2001 was $1,630,000 compared to $1,086,000 for the three months ended
September 30, 2000. Total comprehensive income for the nine months ended
September 30, 2001 was $5,533,000 compared to $2,626,000 for the nine months
ended September 30, 2000.
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.
In September 1999, the 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 quarters of the fiscal years 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 September 30, 2001, the Company had
the following derivative instrument:
Interest Rate Swap
(In Thousands)
Notional Estimated
Amount fair value Pay Rate Receive Rate
------ ---------- -------- ------------
$5,000 104 Variable 5.68%
At September 30, 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. In September 2001, the Bank
sold a $10 million interest rate swap for a gain of $34,000. This swap was not
specifically designated as a hedging instrument and was entered into to provide
some protection against falling interest rates on the Company's loans.
The Company realized in other income a $24,000 loss and a $238,000 gain due
to change in fair value of derivative instruments during the three and nine
months ended September 30, 2001, respectively. These amounts primarily related
to the previously held $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
Note 4 - Recent Accounting Pronouncements
In September 2000, SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued. SFAS No. 140
is effective for all transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001. The Statement is effective
for recognition and reclassification of collateral and disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Due to the nature of its activities, the Company did not
experience a material change to its results of operations as a result of
adopting SFAS No. 140.
In July 2001, SFAS No. 141, "Business Combinations" was issued and is
effective for all business combinations initiated after June 30, 2001. SFAS No.
141 requires companies to account for all business combinations using the
purchase method of accounting, recognize intangible assets if certain criteria
are met, as well as provide additional disclosures regarding business
combinations and allocation of purchase price. SFAS No. 141 is effective
immediately.
In July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 requires nonamortization of goodwill and intangible assets
that have indefinite useful lives and annual tests of impairment of those
assets. The statement also provides specific guidance about how to determine and
measure goodwill and intangible asset impairments, and requires additional
disclosure of information about goodwill and other intangible assets. The
provisions of this statement are required to be applied starting with fiscal
years beginning after December 15, 2001 and applied to all goodwill and other
intangible assets recognized in financial statements at the date of adoption.
Goodwill and intangible assets with indefinite lives acquired after June 30,
2001 will be subject to the nonamortization provisions of the statement. Since
the Company does not have any goodwill or significant intangible assets, the
Company does not expect a material change to its results of operations as a
result of adopting SFAS No. 142.
In July 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. Due to the nature of its activities, the Company did not experience a
material change to its results of operations as a result of adopting SFAS No.
143.
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". SFAS No. 144 amends accounting
and reporting standards for the disposal of segments of a business and addresses
various issues related to the accounting for impairments and disposals of long-
lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its results of operations and financial position.
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, 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-
8
looking statements attributable to the Company are expressly qualified in their
entirety by these cautionary statements.
Summary
Net income of $1,061,000 for the quarter ended September 30, 2001
represented an increase of $715,000 (206.7%) from the Company's net income of
$346,000 for the same period of 2000. Basic net earnings per share increased
$0.18 (200.0%) to $0.27 during the third quarter of 2001 from $0.09 for the
third quarter of 2000. Net income increased $1,836,000 (85.5%) to $3,984,000 for
the three and nine month period ended September 30, 2001 compared to $2,148,000
for the same period of 2000. During the nine month period ended September 30,
2001 compared to the same period of 2000, the Company experienced increases in
net interest income, noninterest income and noninterest expense due to the
continued growth of the Company. 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 received ownership in a publicly
traded entity whose shares were issued to the Company in exchange for its
ownership interest in Star Systems, Inc. network. The net yield on total
interest-earning assets increased to 3.51% for the nine months ended September
30, 2001 from 3.42% for the nine months ended September 30, 2000. The increase
in the net yield on interest-earning assets is due to a decrease in the cost of
interest-bearing liabilities. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" Table.
Total assets of $454,970,000 at September 30, 2001 represent an increase of
$50,281,000 (12.4%) over total assets of $404,689,000, at December 31, 2000.
This increase resulted primarily from increases in cash and cash equivalents,
investment securities available for sale and other assets offset by a decrease
in investment securities held to maturity.
Financial Condition
Investment Securities and Federal Funds Sold
Investment securities held to maturity were $17,687,000 and $26,900,000 at
September 30, 2001 and December 31, 2000, respectively. This decrease of
$9,213,000 (34.3%) was primarily the result of $9,405,000 of scheduled paydowns,
maturities and calls of principal amounts.
Investment securities available for sale increased $27,277,000 (32.2%) to
$112,108,000 at September 30, 2001 from $84,831,000 at December 31, 2000. This
increase is a result of purchases of $33,250,000 in U.S. agency securities,
$32,276,000 in mortgage backed securities, $13,019,000 in CMOs, $1,292,000 in
asset-backed securities and $1,901,000 in state and political subdivision
securities. This increase is offset by $15,895,000 of scheduled paydowns,
maturities and calls of principal amounts. In addition, $34,311,000 of U.S.
agency securities, $6,777,000 of CMOs and $1,640,000 of mortgage backed
securities were sold in the first three quarters of 2001.
Federal funds sold increased to $27,955,000 at September 30, 2001 from
$9,210,000 at December 31, 2000. This increase is primarily due to the
investment in federal funds sold from the increase in deposits. In addition,
this reflects normal activity in the Bank's funds management efforts.
Loans
Total loans of $261,087,000 at September 30, 2001 reflected a decrease of
$1,442,000 (0.6%) compared to the total loans of $262,529,000, at December 31,
2000. Overall, most of the loan categories decreased slightly; however, the Bank
did experience growth in commercial real estate loans during the first nine
months of 2001. Commercial, financial and agricultural, residential real estate
and commercial real estate loans represented the majority of the loan portfolio
with approximately 26.77%, 21.63% and 40.08% of the Bank's total loans at
September 30, 2001, respectively. The net yield on loans was 8.34% for the nine
months ended September 30, 2001 compared to 8.60% for the nine months ended
September 30, 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
9
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 nine months ended September 30, 2001 and the year ended December 31, 2000.
Nine months
ended Year ended
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
Balance at beginning of period, January 1, $ 3,634 $ 3,775
Charge-offs 1,019 3,115
Recoveries 70 352
------------- -------------
Net charge-offs 949 2,763
Provision for loan losses 2,035 2,622
------------- -------------
Ending balance $ 4,720 $ 3,634
============= =============
The allowance for loan losses was $4,720,000 at September 30, 2001 compared
to $3,634,000 at December 31, 2000. Management believes that the current level
of allowance (1.81% of total outstanding loans, net of unearned income, at
September 30, 2001) is adequate 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.
Consistent with its methodology for calculating the adequacy of the
allowance for loan losses, management believes the provisions made during the
third quarter will place the allowance at a level sufficient to absorb
identified potential loan losses in the portfolio as of September 30, 2001. No
assurance can be given, however, that adverse 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 nine months of 2001, the Bank made $2,035,000 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 and estimates of deterioration in certain loans determined by recent
analyses. For the nine months ended September 30, 2001, the Bank had charge-offs
of $1,019,000 and recoveries of $70,000.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans,
other nonperforming assets, and accruing loans 90 days or more past due were
$10,112,000 at September 30, 2001 an increase of 16.3% from the $8,695,000 of
non-performing assets at December 31, 2000. This increase is primarily due to an
increase in nonaccrual loans. If nonaccrual loans had performed in accordance
with their original contractual terms, interest income would have increased
approximately $378,000 for the nine months ended September 30, 2001.
10
The table below provides information concerning nonperforming assets and
certain asset quality ratios at September 30, 2001 and December 31, 2000.
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Nonaccrual loans $ 8,984 7,793
Renegotiated loans -- --
Other nonperforming assets (primarily
other real estate) 704 874
Accruing loans 90 days or more past due 424 28
------------- ------------
Total nonperforming assets $ 10,112 8,695
============= ============
Ratio of allowance for loan losses as a percent of 1.81% 1.38%
total loans outstanding
Ratio of allowance for loan losses as a percent of
nonaccrual loans, renegotiated loans and other 48.72% 41.93%
nonperforming assets
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, 2001, 143 loans totaling $9,416,000, or 3.6% 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 September 30,
2001, the amount of impaired loans were $9,508,000, which included 23 loans to
10 borrowers with a total valuation allowance of approximately $1,243,000. 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 $42,311,000 (13.4%) to $357,952,000 at September
30, 2001, as compared to $315,641,000 at December 31, 2000. Noninterest-bearing
deposits increased $4,052,000 (9.4%) during the first nine months of 2001, while
total interest-bearing deposits increased $38,258,000 (14.1%) to $310,607,000 at
September 30, 2001 from $272,349,000 at December 31, 2000. The increase in
noninterest-bearing deposits is due primarily to an increase in regular demand
deposit accounts. During the first nine months of 2001, the Bank primarily
experienced increases in NOW accounts of $13,265,000 (36.0%) and certificates of
deposits greater than $100,000 of $15,211,000 (19.0%). The Company considers the
shifts in the deposit mix to be within the normal course of business and in line
with the management of the Bank's overall cost of funds. The average rate paid
on interest-bearing deposits was 4.78% for the nine months ended September 30,
2001 compared to 5.37% for the same period of 2000. See the "Consolidated
Average Balances, Interest Income/Expense and Yields/Rates" table
Capital Resources and Liquidity
The Company's consolidated stockholders' equity was $35,911,000 at
September 30, 2001, compared to $31,805,000 at December 31, 2000. This
represents an increase of $4,106,000 (12.9%) during the first nine months of
2001. Net earnings for the first nine months of 2001 were $3,984,000 compared to
$2,148,000 for the same period of 2000. In addition, the Company's accumulated
other comprehensive income was $1,634,000 at September 30, 2001 compared to
$85,000 at December 31, 2000. This increase was due to an increase in the fair
value of investment securities available for sale. During the first nine months
of 2001 and 2000, cash dividends of $1,173,000, or $0.30 per share, were
declared on Common Stock.
Certain financial ratios for the Company as of September 30, 2001 and
December 31, 2000 are presented in the following table:
September 30, 2001 December 31, 2000
Return on average assets - annualized 1.27% 0.77%
Return on average equity - annualized 15.88% 10.30%
11
The Company's Tier 1 leverage ratio was 7.55%, Tier I risk-based
capital ratio was 11.68% and Total risk-based capital ratio was 12.93% at
September 30, 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 nine 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 $53,433,000 at September 30, 2001.
Net cash provided by operating activities of $6,215,000 for the nine
months ended September 30, 2001, consisted primarily of net earnings and
provision for loan losses offset by investment securities gains. Net cash used
in investing activities of $23,643,000 principally resulted from investment
securities purchases of $81,738,000, offset by proceeds from maturities, calls
and paydowns of investment securities and proceeds from sale of investment
securities available for sale of $25,301,000 and $42,728,000, respectively. In
addition, the Bank invested $8,500,000 in bank owned life insurance. The
$43,706,000 in net cash provided by financing activities resulted primarily from
an increase of $4,052,000 in non-interest bearing deposits and an increase in
interest bearing deposits of $38,258,000. In addition, securities sold under
agreements to repurchase decreased by $2,072,000, borrowings from FHLB increased
$4,911,000 and the Company paid dividends of $1,173,000.
Interest Rate Sensitivity Management
At September 30, 2001, interest sensitive assets that repriced or
matured within the next 12 months were $193,617,000, compared to interest
sensitive liabilities that reprice or mature within the same time frame totaling
$298,649,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a negative $105,032,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 65%. 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 September 30, 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".
Results of Operations
Net Income
Net income increased $715,000 (206.7%) to $1,061,000 for the three
month period ended September 30, 2001 compared to $346,000 for the same period
of 2000. Basic net earnings per share was $0.27 and $0.09 for the third
quarters of 2001 and 2000, respectively. Net income increased $1,836,000 (85.5%)
to $3,984,000 for the nine month period ended September 30, 2001 compared to
$2,148,000 for the same period of 2000. 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 received ownership in a publicly
traded entity whose shares were issued to the Company in exchange for its
ownership interest in Star Systems, Inc. network. During the nine month period
ended September 30, 2001 compared to the same period of 2000, the Company also
experienced increases in net interest income, noninterest income, and
noninterest expense due to the continued growth of the Company.
Net Interest Income
Net interest income was $3,486,000 for the third quarter of 2001, an
increase of $317,000 (10.0%) from $3,169,000 for the same period of 2000. Net
interest income increased $986,000 (10.5%) to $10,420,000 for the nine months
ended September 30, 2001, compared to $9,434,000 for the nine months ended
September 30, 2000. These
12
increases resulted primarily from the increase in interest and dividends from
investment securities and a decrease 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 nine months of 2001 compared to the same period of 2000.
Through the third 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 and Dividend Income
Interest income is a function of the volume of interest earning assets and
their related yields. Interest and dividend income was $7,448,000 and $7,671,000
for the three months ended September 30, 2001 and 2000, respectively. This
represents a decrease of $223,000 (2.9%) for the third quarter of 2001 compared
to 2000. For the nine months ended September 30, 2001 interest and dividend
income was $22,778,000, an increase of $353,000 (1.6%) compared to $22,425,000
for the same period of 2000. This change for the first nine months of 2001
resulted as the average volume of interest earning assets outstanding increased
$28,192,000 (7.7%) over the same period of 2000 but the Company's yield on
interest-earning assets decreased 43 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 $5,284,000 and $5,705,000 for the third quarters of 2001 and
2000, respectively. This reflects a decrease of $421,000 (7.4%) during the three
months ended September 30, 2001 from the same period of 2000. For the nine month
period ended September 30, 2001, interest and fees on loans decreased $303,000
(1.8%) to $16,615,000 from $16,918,000 for the same period of 2000. The average
volume of loans increased $4,172,000 (1.6%) for the nine months ended September
30, 2001 compared to the same period for 2000, while the Company's yield on
loans decreased by 26 basis points comparing these same periods.
For the three month period ended September 30, 2001, interest income on
investment securities increased $134,000 (7.4%) to $1,943,000 from $1,809,000
for the same period of 2000. Interest income on investment securities for the
nine month period ended September 30, 2001, increased $771,000 (15.7%) to
$5,688,000 from $4,917,000 for the same period of 2000. The Company's average
volume of investment securities increased by $21,087,000 (22.5%) for the first
nine months of 2001, compared to the same period of 2000, while the net yield on
these average balances decreased by 36 basis points. See the "Consolidated
Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest Expense
Total interest expense decreased $540,000 (12.0%) to $3,962,000 for the
third quarter of 2001 compared to $4,502,000 for the same period of 2000. Total
interest expense decreased $633,000 (4.9%) to $12,358,000 from $12,991,000 for
the nine months ended September 30, 2001 and 2000, respectively. This change
resulted as the Company's average interest-bearing liabilities increased 5.4%
but the rates paid on these liabilities decreased 51 basis points during the
first nine 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,
decreased $597,000 (15.6%) to $3,232,000 for the third quarter of 2001 compared
to $3,829,000 for the same period of 2000. Interest on deposits were $10,198,000
and $10,949,000 for the nine months ended September 30, 2001 and 2000,
respectively. The decrease for the nine month period ended September 30, 2001 is
due to a 59 basis point decrease in the rate paid on interest-bearing deposits
offset by a 5.1% increase in the average volume.
Interest expense on other borrowings, was $711,000 and $615,000 for the
third quarters of 2001 and 2000, respectively. This represents an increase of
$96,000 or 15.6%. For the nine months ended September 30, 2001, interest expense
on borrowed funds increased $223,000 (12.1%) to $2,060,000 from $1,837,000 for
the same period of 2000. This increase for the nine month period ended September
30, 2001 is due to a 12.1% increase in the average volume and a 2 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.
13
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 $425,000
for the three months ended September 30, 2001 compared to $1,353,000 for the
three months ended September 30, 2000. The provision for loan losses was
$2,035,000 for the nine months ended September 30, 2001 compared to $2,163,000
for the nine months ended September 30, 2000. The decrease in the provision for
the third quarter of 2001 compared to 2000 is due less loan growth. Also, the
third quarter of 2000 provision reflects deterioration in certain loans
determined by analyses in that quarter. See "---Allowance for Loan Loss and Risk
Elements."
Noninterest Income
Noninterest income increased $13,000 (1.3%) to $1,054,000 for the third
quarter of 2001 from $1,041,000 for the same period of 2000. Noninterest income
was $4,863,000 and $2,794,000 for the nine months ended September 30, 2001 and
2000, respectively. This increase for the nine months ended September 30, 2001
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 third quarter of 2001 decreased
$25,000 (7.0%) to $334,000 from $359,000 for the third quarter of 2000. Service
charges on deposit accounts were $1,102,000 and $1,002,000 for the nine months
ended September 30, 2001 and 2000, respectively. This increase is primarily due
to increases in nonsufficient funds and overdraft charges due to an increase in
nonsufficient fund items.
Investment securities losses, net were $4,000 in the third quarter of 2001
compared to $25,000 of investment securities gains, net in the third quarter of
2000. Investment securities gains, net were $1,524,000 and $46,000 for the nine
months ended September 30, 2001 and 2000, respectively. This increase is
primarily due to a gain of $1,548,000 in the first quarter 2001 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 $67,000 (10.2%) to $724,000 for the
third quarter of 2001 from $657,000 for the same period of 2000. Other
noninterest income was $2,236,000 and $1,746,000 for the nine months ended
September 30, 2001 and 2000, respectively. 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 $2,575,000 and $2,357,000 for the third
quarters of 2001 and 2000, respectively, representing an increase of $218,000 or
9.3%. For the nine months ended September 30 2001 and 2000, total noninterest
expense increased $721,000 (10.6%) to $7,538,000 from $6,817,000 for the same
period of 2000. This increase was mainly due to an increase in salaries and
benefits expense and other noninterest expense.
Salaries and benefits expense was $1,080,000 and $929,000 for the three
months ended September 30, 2001 and 2000, respectively. This represents an
increase of $151,000 (16.3%) in the third quarter of 2001 compared to the third
quarter of 2000. For the nine months ended September 30, 2001, total salaries
and benefits expense increased $212,000 (7.2%) to $3,166,000 from $2,954,000 for
the same period of 2000. This increase is primarily due to the increase in
overall employee levels from the same period of 2000.
For the third quarter of 2001, other noninterest expense increased $83,000
(7.2%) to $1,231,000 from $1,148,000 for the third quarter of 2000. Other
noninterest expense was $3,566,000 and $3,029,000 for the nine months ended
September 30, 2001 and 2000, respectively. This increase is mainly due to the
expenses associated with Auburn University's acceptance of MasterCard/VISA for
tuition mentioned above, an increase in marketing expenses and losses from
demand accounts.
Income taxes
Income tax expense was $481,000 and $155,000 for the third quarters of 2001
and 2000, respectively. For the nine months ended September 30, 2001, income tax
expense increased $768,000 (69.8%) to $1,868,000 from $1,100,000 for the
14
nine months ended September 30, 2000. These levels represent an effective
tax rate on pre-tax earnings of 32.7% for the nine months ended September 30,
2001 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. 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 decreased during the third quarter of 2001.
The Company models economic value of equity as a measure of market risk. In
June 2001, economic value of equity would increase 11.34% if rates decrease 200
basis points and decrease 17.75% if rates increase 200 basis points. As of
September 2001, economic value of equity had become less volatile a rising rate
environment. If rates decrease 200 basis points, economic value of equity would
increase 13.79% and, if rates increase 200 basis points, economic value of
equity would decrease 12.68%. Due to the amount of interest rate cuts, the
Company is preparing for the greater risk of rising interest rates.
The Company continues to become more asset-sensitive by restructuring
the investment portfolio through "swap" transactions when possible. Agency
securities with call risk or unattractive yields are sold with the proceeds
invested in mortgage backed securities. The deposit growth continues to be
strong allowing the Company to invest in mortgage backed securities that repay
principal on a monthly basis. The Company measures its exposure to interest
risk by modeling a 200 (+ and -) basis point change in interest rates. Given
these conditions, the Bank's modeling projects that net interest income could
decrease by 0.60% given an increase in interest rates of 200 basis points. For
a decrease in interest rates of 200 basis points, the modeling projects the
company's net interest income could increase by 2.03%. The Company believes
that it needs to prepare for the risk of rising interest rates. The Company has
been liablity-sensitive and the project decrease of income in either a rising
and falling interest rate environment can be attributed to our transition to
becoming asset-sensitive. 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.
15
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Nine Months Ended September 30,
-----------------------------------------------------------------------
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) $ 266,302 16,615 8.34% 262,130 16,918 8.60%
Investment securities:
Taxable 113,205 5,630 6.65% 92,556 4,875 7.02%
Tax-exempt (2) 1,598 86 7.20% 1,160 64 7.35%
---------------------- --------------------
Total investment securities 114,803 5,716 6.66% 93,716 4,939 7.02%
Federal funds sold 13,311 394 3.96% 10,131 463 6.09%
Interest-earning deposits with other banks 1,937 81 5.59% 2,184 127 7.75%
---------------------- --------------------
Total interest-earning assets 396,353 22,806 7.69% 368,161 22,447 8.12%
Alwance for loan losses (4,354) (3,945)
Cash and due from banks 11,461 10,784
Premises and equipment 3,238 3,264
Rental property, net 1,563 1,628
Other assets 9,649 10,002
--------- --------
Total assets $ 417,910 389,894
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
==================================
Interest-bearing liabilities:
Deposits:
Demand $ 41,544 886 2.85% 34,958 853 3.25%
Savings and money market 78,308 2,231 3.81% 80,042 2,967 4.94%
Certificates of deposits less than $100,000 83,704 3,933 6.28% 77,294 3,756 6.47%
Certificates of deposits and other time
deposits of $100,000 or more 81,848 3,149 5.14% 79,357 3,373 5.66%
---------------------- --------------------
Total interest-bearing deposits 285,404 10,199 4.78% 271,651 10,949 5.37%
Federal funds purchased and securities sold
under agreements to repurchase 3,025 99 4.38% 4,813 205 5.67%
Other borrowed funds 49,361 2,060 5.58% 44,047 1,837 5.56%
---------------------- --------------------
Total interest-bearing liabilities 337,790 12,358 4.89% 320,511 12,991 5.40%
Noninterest-bearing deposits 41,233 37,541
Accrued expenses and other liabilities 5,445 2,982
Stockholders' equity 33,442 28,860
--------- --------
Total liabilities and stockholders' equity $ 417,910 389,894
========= ========
Net interest income $ 10,448 9,456
======== ========
Net yield on total interest-earning assets 3.51% 3.42%
===== ======
____________
(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
AUBURN NATIONAL BANCORPORATION, INC.
Item 6(a)
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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 September 30, 2001:
none
17
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
Date: November 13, 2001 By: /s/ E. L. Spencer, Jr.
--------------------------- -------------------------------------
E. L. Spencer, Jr.
President, Chief Executive
Officer and Director
Date: November 13, 2001 By: /s/ C. Wayne Alderman
--------------------------- -------------------------------------
C. Wayne Alderman
Director of Financial Operations
18