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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended MARCH 31, 1999
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period __________ to __________
Commission file number 0-26486
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AUBURN NATIONAL BANCORPORATION, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 63-0885779
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
165 EAST MAGNOLIA AVENUE, SUITE 203, AUBURN, ALABAMA 36830
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(Address of Principal Executive Offices)
(334) 821-9200
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO_____
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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, 1999: 3,924,573 SHARES OF COMMON STOCK, $.01 PAR
-------------------------------------------
VALUE PER SHARE
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Transitional Small Business Disclosure Format (check one):
YES_____ NO X
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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1 Financial Information
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Earnings for
the Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in
Stockholders' Equity for the Three Months Ended March 31, 1999
and the Year Ended December 31, 1998 5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999
and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
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Item 5 Other Events 16
Item 6 Exhibits 17
2
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
ASSETS 3/31/99 12/31/9
------------------------------------------ -------------------- ---------------------
Cash and due from banks $ 10,160,704 $ 9,220,225
Federal funds sold 2,200,000 260,000
-------------------- ---------------------
Cash and cash equivalents 12,360,704 9,480,225
Interest-earning deposits with other banks 700,588 133,600
Investment securities held to maturity (fair value of $7,202,755 and
$8,227,385 at March 31, 1999 and December 31, 1998,
respectively): 7,100,102 8,094,283
Investment securities available for sale 64,035,043 63,585,573
Loans:
Loans, less unearned income of $11,134 at March 31, 1999
and $15,494 at December 31, 1998, respectively 230,437,128 218,686,991
Less allowance for loan losses (2,744,803) (2,808,307)
-------------------- ---------------------
Loans, net 227,692,325 215,878,684
Premises and equipment, net 3,520,894 3,434,964
Rental property, net 1,735,391 1,760,294
Other assets 6,088,220 5,506,649
-------------------- ---------------------
TOTAL ASSETS $323,233,267 $307,874,272
==================== =====================
LIABILITIES & STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
Deposits:
Noninterest-bearing $ 36,401,957 $ 34,724,182
Interest-bearing 214,962,700 198,780,568
-------------------- ---------------------
Total deposits 251,364,657 233,504,750
Securities sold under agreements to repurchase 4,788,685 12,944,004
Other borrowed funds 35,966,010 31,000,458
Accrued expenses and other liabilities 1,940,236 1,481,564
-------------------- ---------------------
TOTAL LIABILITIES 294,059,588 278,930,776
Stockholders' equity:
Preferred stock of $.01 par value; authorized 200,000 shares;
issued shares-none --- ---
Common stock of $.01 par value; authorized 8,500,000 shares;
issued 3,957,135 shares 39,571 39,571
Additional paid-in capital 3,707,472 3,707,472
Retained earnings 25,792,914 25,077,126
Accumulated other comprehensive income (loss) (151,679) 333,926
Less:
Treasury stock, 32,562 shares at March 31, 1999 and
December 31, 1998, at cost (214,599) (214,599)
-------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 29,173,679 28,943,496
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $323,233,267 $307,874,272
==================== =====================
See accompanying notes to consolidated financial statements.
-3-
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1999 1998
---------------------- ---------------------
INTEREST INCOME:
Interest and fees on loans $ 4,615,498 $ 4,124,000
Interest and dividends on investment securities:
Taxable 1,137,139 898,043
Tax-exempt 20,905 27,516
---------------------- ---------------------
Total interest and dividends on investment securities 1,158,044 925,559
Interest on federal funds sold 55,872 76,112
Interest on interest-earning deposits with other banks 29,656 27,935
---------------------- ---------------------
TOTAL INTEREST INCOME 5,859,070 5,153,606
INTEREST EXPENSE:
Interest on deposits 2,419,964 2,375,432
Interest on federal funds purchased and securities sold under
agreements to repurchase 166,099 32,000
Interest on other borrowings 438,666 218,516
---------------------- ---------------------
TOTAL INTEREST EXPENSE 3,024,729 2,625,948
---------------------- ---------------------
NET INTEREST INCOME 2,834,341 2,527,658
PROVISION FOR LOAN LOSSES 150,000 86,030
---------------------- ---------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,684,341 2,441,628
NONINTEREST INCOME:
Service charges on deposit accounts 260,374 206,486
Investment securities gains/(losses), net (1,944) 7,168
Other 414,222 349,125
---------------------- ---------------------
TOTAL NONINTEREST INCOME 672,652 562,779
NONINTEREST EXPENSE:
Salaries and benefits 928,514 722,061
Net occupancy expense 262,041 254,117
Other 667,599 642,599
---------------------- ---------------------
TOTAL NONINTEREST EXPENSE 1,858,154 1,618,777
Earnings before income tax expense 1,498,839 1,385,630
Income tax expense 547,577 532,085
---------------------- ---------------------
NET EARNINGS $ 951,262 $ 853,545
====================== =====================
BASIC EARNINGS PER SHARE $ 0.24 $ 0.22
====================== =====================
WEIGHTED AVERAGE SHARES OUTSTANDING 3,924,573 3,924,573
====================== =====================
DIVIDENDS PER SHARE $ 0.06 $ 0.05
====================== =====================
See accompanying notes to consolidated financial statements.
-4-
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE THREE MONTHS ENDED MARCH
31, 1999
(UNAUDITED)
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
COMMON STOCK SURPLUS EARNINGS INCOME
---------------- ----------- ------------ -----------------
BALANCE AT DECEMBER 31, 1996 $ 39,571 3,664,718 19,942,980 (146,528)
Net earnings --- --- 3,080,043 ---
Cash dividends paid ($0.16 per share) --- --- (626,562) ---
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- --- 321,964
Payment of Employee Stock Ownership Plan Debt --- --- --- ---
Sale of treasury stock (5,488 shares) 42,754
Purchase of treasury stock (368 shares) --- --- --- ---
------------ --------- ----------- -------------
BALANCE AT DECEMBER 31, 1997 $ 39,571 3,707,472 22,396,461 175,436
Net earnings --- --- 3,439,417 ---
Cash dividends paid ($0.19 per share) --- --- (758,752) ---
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- --- 158,490
------------ --------- ----------- -------------
BALANCE AT DECEMBER 31, 1998 $ 39,571 3,707,472 25,077,126 333,926
============ ========= =========== =============
THROUGH MARCH 31, 1999:
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Net earnings --- --- 951,262 ---
Cash dividends paid ($0.06 per share) --- --- (235,474) ---
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- --- (485,605)
------------- --------- ----------- -------------
BALANCE AT MARCH 31, 1999 39,571 3,707,472 25,792,914 (151,679)
============= ========= =========== =============
EMPLOYEE STOCK
OWNERSHIP TREASURY
PLAN DEBT STOCK TOTAL
--------------- -------------- -----------
BALANCE AT DECEMBER 31, 1996 (113,940) (304,009) 23,082,792
Net earnings --- --- 3,080,043
Cash dividends paid ($0.16 per share) --- --- (626,562)
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- 321,964
Payment of Employee Stock Ownership Plan Debt 57,006 --- 57,006
Sale of treasury stock (5,488 shares) 98,058 140,812
Purchase of treasury stock (368 shares) --- (8,648) (8,648)
--------------- -------------- -----------
BALANCE AT DECEMBER 31, 1997 (56,934) (214,599) 26,047,407
Net earnings --- --- 3,439,417
Cash dividends paid ($0.19 per share) --- --- (758,752)
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net 56,934 --- 215,424
--------------- -------------- -----------
BALANCE AT DECEMBER 31, 1998 0 (214,599) 28,943,496
=============== ============== ===========
THROUGH MARCH 31, 1999:
- -----------------------
Net earnings --- --- 951,262
Cash dividends paid ($0.06 per share) --- --- (235,474)
Other comprehensive income due to unrealized
gain (loss) on investment securities available
for sale, net --- --- (485,605)
--------------- -------------- -----------
BALANCE AT MARCH 31, 1999 0 (214,599) 29,173,679
=============== ============== ===========
See accompanying notes to consolidated financial statements.
-5-
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 951,262 $ 853,545
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 142,262 168,266
Amortization/(accretion) of investment discounts & loan fees 11,053 (85,145)
Provision for loan losses 150,000 86,030
Loss on sale of premises & equipment 7,600 ---
(Increase)/decrease in interest receivable (153,194) 139,359
(Increase)/decrease in other assets (335,674) 99,659
(Decrease)/increase in interest payable (44,971) 1,588
Increase/(decrease) in other liabilities 726,261 (196,978)
-------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,454,599 1,066,324
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 990,390 1,174,989
Proceeds from maturities/calls/paydowns of investment
securities available for sale 6,707,902 1,624,449
Purchases of investment securities available for sale (7,973,975) (7,002,277)
Net increase in loans (11,963,641) (5,447,989)
Purchases of premises and equipment (207,340) (53,363)
Proceeds from sale of premises and equipment 4,866 ---
Purchases of rental property --- (16,490)
Net increase in interest-bearing deposits with
other banks (566,988) (1,638,430)
-------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (13,008,786) (11,359,111)
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW accounts and savings accounts 21,027,756 5,632,435
Net decrease in certificates of deposit (3,167,849) (3,089,577)
Net (decrease)/increase in securities sold under agreements
to repurchase (8,155,319) 1,762,971
Net increase in borrowings from FHLB 4,970,438 9,970,438
Net decrease in other long-term debt (4,886) (4,328)
Dividends paid (235,474) (183,148)
-------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,434,666 14,088,791
-------------------- ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,880,479 3,796,004
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,480,225 14,883,412
-------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,360,704 $ 18,679,416
==================== =====================
Supplemental information on cash payments:
Interest paid $ 3,069,700 $ 2,624,360
==================== =====================
Income taxes paid $ 167,064 $ 248,198
==================== =====================
-6-
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - GENERAL
The consolidated financial statements in this report have not been
audited. In the opinion of management, all adjustments necessary to present
fairly the financial position and the results of operations for the interim
periods have been made. All such adjustments are of a normal recurring nature.
The results of operations are not necessarily indicative of the results of
operations which the Company may achieve for the entire year. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's annual report on Form 10-KSB for the year ended
31, 1998.
NOTE 2 - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose statements. The Company adopted Statement 130 effective January 1,
1998. The primary component of the differences between net income and
comprehensive income for the Company is unrealized gains/losses on available for
sale securities. Total comprehensive income for the three months ended March 31,
1999 was $466,000 compared to $837,000 for the three months ended March 31,
1998.
NOTE 3 - DERIVATIVES DISCLOSURE
As part of its overall interest rate risk management activities, the
Company utilizes off-balance sheet derivatives to modify the repricing
characteristics of on-balance sheet assets and liabilities. The primary
instruments utilized by the Company are interest rate swaps and interest rate
floor and cap arrangements. The fair value of these off-balance sheet
derivative financial instruments are based on dealer quotes and third party
financial models.
NOTE 4 - ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Statement 133 is effective
for financial statements for the first fiscal quarters of the fiscal years
beginning after June 15, 1999. The Company does not believe the provisions of
Statement 133 will have a significant impact on the financial statements upon
adoption.
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, 1999 and 1998.
SUMMARY
Net income of $951,000 for the quarter ended March 31, 1999 represented
an increase of $97,000 (11.4%) from the Company's net income of $854,000 for the
same period of 1998. Basic income per share increased $0.02 (9.1%) to $0.24
during the first quarter of 1999 from $0.22 for the first quarter of 1998.
During the three month period ended March 31, 1999 compared to the same period
of 1998, the Company experienced increases in net interest income, noninterest
income, provision for loan losses and noninterest expense due to continued
growth of the Company. The net yield on total interest-earning assets was 7.83%
for the three months ended March 31, 1999 compared to 8.32% for the three months
ended March 31, 1998. The decrease in the net yield on interest-earning assets
is due to a decrease in the yield of total loans, net of unearned income,
investments securities, interest-bearing deposits with other banks and federal
funds sold. See the "Consolidated Average Balances, Interest Income/Expense and
Yields/Rates" table.
Total assets of $323,233,000 at March 31, 1999 reflected an increase of
$15,359,000 (5.0%) over total assets of $307,874,000, at December 31, 1998.
This increase resulted primarily from increases in total loans, net of unearned
income, federal funds sold and investment securities available for sale. This
was offset by a decrease in investment securities held to maturity.
FINANCIAL CONDITION
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD
Investment securities held to maturity were $7,100,000 and $8,094,000
at March 31, 1999 and December 31, 1998, respectively. This decrease of $994,000
(12.3%) resulted from scheduled paydowns and calls of principal amounts. The
increase of $449,000 (0.7%) in investment securities available for sale to
$64,035,000 at March 31, 1999 from $63,586,000 at December 31, 1998, reflects an
increase in U.S. government agency securities offset by a decrease in mortgage
backed securities and a decline in the overall market value. The shift into
investment securities available for sale is a deliberate move by management to
maintain flexibility in its liquidity planning.
Federal funds sold increased $1,940,000 (746.2%) to $2,200,000 at March
31, 1999 from $260,000 at December 31, 1998. These fluctuations reflect normal
activity in the Bank's funds management efforts.
LOANS
Total loans, net of unearned income, of $230,437,000 at March 31, 1999
reflected an increase of $11,750,000 (5.4%) compared to the total loans of
$218,687,000, net of unearned income, at December 31, 1998. In addition, the
Bank experienced growth in its commercial, financial and agricultural loans and
commercial real estate construction loans during the first three months of 1999
due to strong customer demand and a stable local market. Commercial, financial
and agricultural, residential real estate and commercial real estate loans
represented the majority of the loan portfolio with approximately 30.19%, 29.85%
and 27.88% of the Bank's total loans, net of unearned income at March 31, 1999,
respectively. The net yield on loans was 8.40% for the three months ended March
31, 1999 compared to 8.93% for the three months ended March 31, 1998. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS
The allowance for loan losses represents management's assessment of the
risk associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance and the appropriate provision required to maintain the
allowance at a level
8
considered adequate to absorb inherent loan losses. In assessing the adequacy of
the allowance, management reviews the size, quality and risk of loans in the
portfolio. Management also considers such factors as the Bank's loan loss
experience, the amount of past due and nonperforming loans, specific known risk,
the status and amount of nonperforming assets, underlying collateral values
securing loans, current and anticipated economic conditions and other factors
which affect the allowance for credit losses.
The allowance for loan losses was $2,745,000 at March 31, 1999.
Management believes that this level of allowance (1.19% of total outstanding
loans, net of unearned income) is adequate to absorb known risks in the
portfolio. No assurance can be given, however, that adverse economic
circumstances will not result in increased losses in the Bank's loan portfolio.
During the first three months of 1999, the Bank made $150,000 in
provisions to the allowance for loan losses based on management's assessment of
the credit quality of the loan portfolio. For the three months ended March 31,
1999, the Bank had charge-offs of $233,000 and recoveries of $20,000.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans
and other real estate owned, and accruing loans 90 days or more past due were
$4,659,000 at March 31, 1999 compared to $4,897,000 at December 31, 1998. During
1998, management's assessment of the credit quality of the loan portfolio
indicated deterioration of a large individual credit such that management's
estimate of the necessary level of the allowance increased. This credit is
included in nonaccrual loans and the relationship continues to be monitored as
part of the Bank's overall credit administration procedures.
Other potential problem loans consist of those loans where management
has serious doubts as to the borrower's ability to comply with the present loan
repayment terms. At March 31, 1999, 70 loans totaling $2,441,000, or 1.06% of
total loans outstanding, net of unearned income, were considered potential
problem loans compared to 77 loans totaling $2,654,000, or 1.21% of total loans
outstanding, net of unearned income, at December 31, 1998. At March 31, 1999 and
December 31, 1998, respectively, the amount of impaired loans were $4,098,000,
which included 3 loans to the same borrower resulting from the relationship
mentioned above.
DEPOSITS
Total deposits increased $17,860,000 (7.7%) to $251,365,000 at March
31, 1999, as compared to $233,505,000 at December 31, 1998. Noninterest-bearing
deposits increased $1,678,000 (4.8%) during the first three months of 1999 while
total interest-bearing deposits also increased $16,182,000 (8.1%) to
$214,963,000 at March 31, 1999 from $198,781,000 at December 31, 1998. The
growth in noninterest-bearing deposits is due primarily to an increase in
regular demand deposit accounts. The average rate paid on interest-bearing
deposits was 4.65% for the three months ended March 31, 1999 compared to 5.00%
for the same period of 1998. During the first three months of 1999, the Bank
experienced an significant increase in money market accounts of $15,776,000
(37.3%) and NOW accounts $3,072,000 (14.2%). These increases were offset by a
decrease in certificates of deposits less than $100,000 of $3,238,000 (4.5%)
during the first three months of 1999. The significant increase in money market
accounts is due to a $10 million increase in public funds. The Company considers
the other shifts in the deposit mix to be within the normal course of business
and in line with the management of the Bank's overall cost of funds. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated stockholders' equity was $29,174,000 at
March 31, 1999, compared to $28,943,000 at December 31, 1998. This represents an
increase of $231,000 (0.8%) during the first three months of 1999. Net earnings
for the first three months of 1999 exceeds net earnings for the same period of
1998. In addition, the Company experienced a change in accumulated other
comprehensive income to a loss of $152,000 at March 31, 1999 from a gain of
$334,000 at December 31, 1998. During the first three months of 1999, cash
dividends of $235,000, or $0.06 per share, were declared on Common Stock,
compared to $183,000, or $0.05 per share for the first three months of 1998.
The Company's Tier 1 leverage ratio was 9.07%, Tier I risk-based
capital ratio was 12.90% and Total risk-based capital ratio was 14.10% at March
31, 1999. These ratios exceed the minimum regulatory capital percentages of 3.0%
to 5.0% for Tier 1 leverage ratio, 4.0% for Tier I risk-based capital ratio and
8.0% for Total risk-based capital ratio. Based on current regulatory standards,
the Company believes it is a "well capitalized" bank.
9
The primary source of liquidity during the first three months of 1999
is through investment securities sold under agreements to repurchase, and
additional advances from the Federal Home Loan Bank of Atlanta ("FHLB-Atlanta").
The Company used these funds primarily to fund new loan growth. Under the
advance program with FHLB-Atlanta, the Bank had outstanding advances totaling
approximately $35,728,000, leaving credit available, net of advances drawn down,
of approximately $14,272,000 at March 31, 1999.
Net cash provided by operating activities of $1,455,000 for the three
months ended March 31, 1999, consisted primarily of net earnings. Net cash used
in investing activities of $13,009,000 funded loan growth and investment
securities available for sale purchases of $11,964,000 and $7,974,000,
respectively, offset by proceeds from sales, maturities, calls and paydowns of
investment securities available for sale of $6,708,000. The $14,435,000 in net
cash provided by financing activities resulted primarily from increases of
$21,028,000 in non-interest bearing deposits, NOW accounts and savings accounts
offset by a net decrease in securities sold under agreements to purchase of
$8,155,000.
INTEREST RATE SENSITIVITY MANAGEMENT
At March 31, 1999, interest sensitive assets that repriced or matured
within the next 12 months were $149,905,000, compared to interest sensitive
liabilities that reprice or mature within the same time frame totaling
$154,429,000. The cumulative GAP position (the difference between interest
sensitive assets and interest sensitive liabilities) of a negative $4,524,000,
resulted in a GAP ratio (calculated as interest sensitive assets divided by
interest sensitive liabilities) of 97.1%. This compares to a twelve month
cumulative GAP position at December 31, 1998, of a negative $31,480 and a GAP
ratio of 79.0%. A negative GAP position indicates that the Company has more
interest-bearing liabilities than interest-earning assets that reprice within
the GAP period, and that net interest income may be adversely affected in a
rising rate environment as rates earned on interest-earning assets rise more
slowly than rates paid on interest-bearing liabilities. A positive GAP position
indicates that the Company has more interest-earning assets than interest-
bearing liabilities that reprice within the GAP period. The Bank's
Asset/Liability Management Committee ("ALCO") is charged with the responsibility
of managing, to the degree prudently possible, its exposure to "interest rate
risk," while attempting to provide earnings enhancement opportunities. Based on
ALCO's alternative interest rate scenarios used by the Company in modeling for
asset/liability planning purposes and the GAP position at March 31, 1999, the
Company's asset/liability model indicated that the changes in the Company's net
interest income would be less than 5.0% over 12 months.
RESULTS OF OPERATIONS
NET INCOME
Net income increased $97,000 (11.4%) to $951,000 for the three month
period ended March 31, 1999 compared to $854,000 for the same period of 1998.
Basic income per share was $0.24 and $0.22 for the first quarter of 1999 and
1998, respectively, an increase of 9.1%. During the three month period ended
March 31, 1999 compared to the same period of 1998, the Company experienced
increases in net interest income, noninterest income, provision for loan losses
and noninterest expense due to continued growth of the Company.
NET INTEREST INCOME
Net interest income was $2,834,000 for the first quarter of 1999. The
increase of $306,000 (12.1%) over $2,528,000 for the same period of 1998,
resulted primarily from the increase in interest and fees on loans and interest
and dividends from investment securities offset by increases in interest on
deposits and interest on other borrowings. Such increases resulted from overall
growth in the Company's average interest-earning assets offset by a decrease in
net taxable yield on the Company's interest-earning assets during the first
three months of 1999 compared to the same period of 1998. During the first
quarter of 1999, the Company's GAP position became less liability sensitive to
changes in interest rates as compared to December 31, 1998. The Company
continues to regularly review and manage its asset/liability position in an
effort to reduce 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.
10
INTEREST INCOME
Interest income is a function of the volume of interest earning assets
and their related yields. Interest income was $5,859,000 and $5,154,000 for the
three months ended March 31, 1999 and 1998, respectively. This represents an
increase of $705,000 (13.7%) for the first quarter of 1999. This change for the
first three months of 1999 resulted as the average volume of interest earning
assets outstanding increased $51,902,000 (20.6%) over the same period of 1998,
while the Company's yield on interest earning assets decreased 49 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 $4,615,000 and $4,124,000 for the first quarter of 1999 and
1998, respectively. This reflects an increase of $491,000 (11.9%) during the
three months ended March 31, 1999 over the same period of 1998. The average
volume of loans increased $35,529,000 (19.0%) as of March 31, 1999 compared to
the same period of 1998, while the Company's yield on loans decreased 53 basis
points comparing these same periods.
For the three month period ended March 31, 1999, interest income on
investment securities increased $232,000 (25.1%) to $1,158,000 from $926,000 for
the same period of 1998. The Company's average volume of investment securities
increased by $16,028,000 (27.9%) for the first three months of 1999, compared to
the same period of 1997, while the net yield on these average balances decreased
19 basis points. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" table.
INTEREST EXPENSE
Total interest expense increased $399,000 (15.2%) to $3,025,000 for the
first quarter of 1999 compared to $2,626,000 for the same period of 1998. This
change resulted as the Company's average interest-bearing liabilities increased
22.6% while the rates paid on these liabilities decreased 30 basis points during
the first three months of 1999 compared to the same period of 1998. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
Interest on deposits, the primary component of total interest expense,
increased $45,000 (1.9%) to $2,420,000 for the first quarter of 1999 compared to
$2,375,000 for the same period of 1998. The increase for the three month period
ended March 31, 1999 is due to a 9.6% increase in the average volume offset by a
35 basis point decrease in the rate paid on interest-bearing deposits.
Interest expense on other borrowed funds, was $439,000 and $219,000 for
the first quarter of 1999 and 1998, respectively. This represents an increase of
$220,000 or 100.5%. This increase for the three month period ended March 31,
1999 is due to a 118.6% increase in the average volume offset by a 46 basis
point decrease in the rate paid on other borrowed funds. The increase in the
average volume is primarily from the increase in FHLB-Atlanta advances.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on management's assessment of
the risk in the loan portfolio, the growth of the loan portfolio and the amount
of recent loan losses. The provision for loan losses was $150,000 for the three
months ended March 31, 1999 compared to $86,000 for the three months ended March
31, 1998. The increase in the provision for loan losses during the first three
months of 1999 compared to the same period of 1998, is to reflect the
significant growth in the loan portfolio. See "---Allowance for Loan Losses AND
RISK ELEMENTS."
NONINTEREST INCOME
Noninterest income increased $110,000 (19.5%) to $673,000 for the first
quarter of 1999 from $563,000 for the same period of 1998. This increase for the
first quarter is due to increases in service charges on deposit accounts and
other nointerest income offset by a $2,000 loss on investment securities.
Service charges on deposit accounts for the first quarter of 1999
increased $54,000 (26.2%) to $260,000 from $206,000 for the first quarter of
1998. These increases are primarily due to increases in nonsufficient funds and
overdraft charges.
11
Other noninterest income increased $65,000 (18.6%) to $414,000 for the
first quarter of 1999 from $349,000 for the same period of 1998. This increase
primarily resulted from an increase in Mastercard/VISA discounts and fees due to
the Auburn University's acceptance of Mastercard/VISA for tuition and an
increase in stock dividends from stock owned in other companies.
NONINTEREST EXPENSE
Total noninterest expense was $1,858,000 and $1,619,000 for the first
quarter of 1999 and 1998, respectively, representing an increase of $239,000 or
14.8%. This increase was due to increases in salaries and benefits expense, net
occupancy expense and other noninterest expense.
Salaries and benefits expense was $929,000 and $722,000 for the three
months ended March 31, 1999 and 1998, respectively. This represents an increase
of $207,000 (28.7%) in the first quarter of 1999 compared to the first quarter
of 1998. This increase is primarily due to the increase in overall employee
levels from the same period of 1998.
Net occupancy expense was $262,000 and $254,000 for the first quarter
of 1999 and 1998, respectively, representing an increase of $8,000 or 3.2%. The
increase is primarily due to increases in lease payments for computer equipment,
lease payments on building due to the addition of the Wal-Mart branch and
depreciation on furniture and equipment offset by a decrease in small furniture
and equipment purchases.
For the first quarter of 1999, other noninterest expense increased
$25,000 (3.9%) to $668,000 from $643,000 for the first quarter of 1998. This
increase is mainly due to the expenses associated with Auburn University's
acceptance of Mastercard/VISA for tuition mentioned above.
Income taxes
Income tax expense was $548,000 and $532,000 for the first quarter of
1999 and 1998, respectively. These levels represent an effective tax rate on
pre-tax earnings of 36.6% for the three months ended March 31, 1999 and 38.4%
for the same period of 1998.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium ("Year 2000") approaches. The
Company has conducted a comprehensive review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and has developed a
plan to resolve the mission critical modifications necessary in order to be
prepared for the new millennium. The Company has reviewed both information
technology (IT) systems and non-IT systems. All mission critical systems have
been upgraded, as needed, and tested. The majority of the remaining systems have
been tested, however, final modifications are expected to be completed by June
30, 1999. The Company has received certification of Year 2000 compliance from
their critical vendors used in the major operations of the Company. The Company
has followed the Federal Reserve guidelines for preparing for Year 2000. The
Company also reports quarterly to its Board of Directors the progress of the
Year 2000 project. Accordingly, the Company does not expect the Year 2000 issue
to pose any significant operational problems and has not discovered any Year
2000 problems with significant counter-parties that it believes will have
material effect on the financial position or results of operations of the
Company. However, the Company has not fully evaluated the effect of any Year
2000 problems on its loan and deposit customers. No assurance can be given that
potential Year 2000 problems of those with whom the Company does business will
not occur, and if they occur, that the consequences to the Company will not be
material.
The total cost of the Year 2000 project is estimated not to exceed
$250,000, of which $100,750 was expensed through 1998, and the remaining
expenses are estimated to be funded through operating cash flows. Contingency
Plans have been developed to ensure direction in the event a non-compliant
system or component is detected. The Company currently has in place a disaster
recovery plan. A business resumption plan and a remediation plan have been
developed based upon certain circumstances. Part of the business resumption
plan includes an agreement with a third-party vendor which would enable the Bank
to use the third-parties' computer systems as a worst case scenario. These
plans will provide the Company direction in the event an unforeseen circumstance
arises due to the Year 2000. The Bank has held Year 2000 Customer Awareness
Seminars, mailed Year 2000 information to all customers, requested copies of the
status of loan customers' Year 2000 plan and examined all large loan customers
for potential impacts on the customer's creditworthiness. All plans will be
finalized and implemented by September 30, 1999.
12
IMPACT OF INFLATION AND CHANGING PRICES
Virtually all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or with the same magnitude
as the price of goods and services since such prices are affected by inflation.
In the current interest rate environment, liquidity and the maturity structure
of the Company's assets and liabilities are critical to the maintenance of
desired performance levels. However, relatively low levels of inflation in
recent years have resulted in a rather insignificant effect on the Company's
operations.
13
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
TAXABLE EQUIVALENT BASIS
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------- ---------- -------- ------ --------- -------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans, net of unearned income (1) $ 222,755 4,615 8.40% 187,226 4,124 8.93%
Investment securities:
Taxable 71,785 1,137 6.42% 55,583 898 6.55%
Tax-exempt (2) 1,689 32 7.64% 1,863 42 9.24%
----------------------- ------------------
Total investment securities 73,474 1,169 6.45% 57,446 940 6.64%
Federal funds sold 4,993 56 4.55% 5,634 76 5.47%
Interest-bearing deposits with other banks 2,650 30 4.59% 1,664 28 6.82%
----------------------- ------------------
Total interest-earning assets 303,872 5,870 7.83% 251,970 5,168 8.32%
Allowance for loan losses (2,863) (2,170)
Cash and due from banks 8,925 7,682
Premises and equipment 3,509 3,515
Rental property, net 1,751 1,787
Other assets 5,675 4,065
----------- ---------
Total assets $ 320,869 266,849
=========== =========
LIABILITIES & STOCKHOLDERS' EQUITY
-------------------------------------
Interest-bearing liabilites:
Deposits:
Demand $ 24,758 139 2.28% 21,012 110 2.12%
Savings and money market 62,749 631 4.08% 61,982 695 4.55%
Certificates of deposits less than $100,000 71,370 1,027 5.84% 71,554 1,084 6.14%
Certificates of deposits and other time
deposits of $100,000 or more 52,208 623 4.84% 38,046 486 5.18%
----------------------- ------------------
Total interest-bearing deposits 211,085 2,420 4.65% 192,594 2,375 5.00%
Federal funds purchased and securities sold under
agreements to repurchase 13,439 166 5.01% 2,308 32 5.62%
Other borrowed funds 32,928 439 5.41% 15,066 218 5.87%
Employee stock ownership plan debt 0 0 0.00% 56 1 7.14%
----------------------- ------------------
Total interest-bearing liabilities 257,452 3,025 4.77% 210,024 2,626 5.07%
Noninterest-bearing deposits 31,963 28,385
Accrued expenses and other liabilities 2,166 2,165
Stockholders' equity 29,288 26,275
----------- ---------
Total liabilities and stockholders' equity $ 320,869 266,849
=========== =========
Net interest income $2,845 2,542
========== =========
Net yield on total interest-earning assets 3.80% 4.09%
========== =========
________________
(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%.
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, 1999 By: /s/ E. L. Spencer, Jr.
------------------------------- ------------------------
E. L. Spencer, Jr.
President, Chief Executive
Officer and Director
Date: May 14, 1999 By: /s/ Linda D. Fucci
------------------------------- --------------------------
Linda D. Fucci
Chief Financial Officer and
Principal Accounting Officer
15
PART II OTHER INFORMATION
ITEM 5. OTHER EVENTS
The proxy statement solicited by the Company's Board of Directors with
respect to the Company's 2000 Annual Meeting of Shareholders will confer
discretionary authority to vote on any proposals of shareholders intended to be
presented for consideration at such Annual Meeting that are submitted to the
Company after February 27, 2000.
16
AUBURN NATIONAL BANCORPORATION, INC.
Item 6(a)
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
4.A Certificate of Incorporation of Auburn National Bancorporation, Inc. * ---
4.B Bylaws of Auburn National Bancorporation, Inc. * ---
10.A Auburn National Bancorporation, Inc. 1994 Long-term Incentive Plan. * ---
10.B Lease and Equipment Purchase Agreement, Dated September 15, 1987. * ---
27 Financial Data Schedule 18
- ---------------
* Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
(b) Reports filed on Form 8-K for the quarter ended March 31, 1999:
none
17