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AUBURN NATIONAL BANCORPORATION, INC - Quarter Report: 2004 June (Form 10-Q)

Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended June 30, 2004

 

¨ Transition report pursuant to 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

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

100 N. Gay Street, 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 registrant (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  ¨

 

Check whether the registrant is an accelerated filer.    Yes  ¨    No  x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of July 30, 2004: 3,873,452 shares of common stock, $.01 par value per share

 



Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY

 

INDEX

 

        PAGE

PART I. FINANCIAL INFORMATION

   

Item 1

 

Financial Information

   
   

Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003

  3
   

Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2004 and 2003

  4
   

Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the Six Months Ended June 30, 2004

  5
   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003

  6
   

Notes to Consolidated Financial Statements

  7

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  7

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  17

Item 4

 

Controls and Procedures

  17

PART II. OTHER INFORMATION

   

Item 2

 

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

  18

Item 4

 

Submission of Matters to a Vote of Security Holders

  18

Item 6

 

Exhibits and Reports on Form 8-K

  19

 

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Table of Contents

AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

 

Consolidated Balance Sheets

 

June 30, 2004 and December 31, 2003

 

(Unaudited)

 

     6/30/2004

    12/31/2003

 
Assets               

Cash and due from banks

   $ 10,874,462     12,270,957  

Federal funds sold

     13,455,000     14,067,000  
    


 

Cash and cash equivalents

     24,329,462     26,337,957  
    


 

Interest-earning deposits with other banks

     1,042,058     265,729  

Investment securities held to maturity (fair value of $976,790 and $1,276,720 at June 30, 2004 and December 31, 2003, respectively)

     956,914     1,237,764  

Investment securities available for sale

     286,522,535     284,081,123  

Loans

     264,033,665     257,092,056  

Less allowance for loan losses

     (4,451,645 )   (4,312,554 )
    


 

Loans, net

     259,582,020     252,779,502  
    


 

Premises and equipment, net

     2,752,815     2,876,052  

Rental property, net

     1,372,814     1,427,285  

Other assets

     23,782,809     21,109,501  
    


 

Total assets

   $ 600,341,427     590,114,913  
    


 

Liabilities and Stockholders’ Equity               

Deposits:

              

Noninterest-bearing

   $ 64,814,930     60,507,145  

Interest-bearing

     388,985,820     373,534,995  
    


 

Total deposits

     453,800,750     434,042,140  

Securities sold under agreements to repurchase

     1,661,034     6,654,332  

Other borrowed funds

     98,232,630     98,372,188  

Note payable to Trust

     7,217,000     7,217,000  

Accrued expenses and other liabilities

     2,554,861     3,421,369  
    


 

Total liabilities

     563,466,275     549,707,029  
    


 

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

     3,717,912     3,712,246  

Retained earnings

     40,156,442     38,092,829  

Accumulated other comprehensive loss

     (6,045,125 )   (828,816 )

Less treasury stock at cost, 82,683 and 64,567 shares at June 30, 2004 and December 31, 2003, respectively

     (993,648 )   (607,946 )
    


 

Total stockholders’ equity

     36,875,152     40,407,884  
    


 

Total liabilities and stockholders’ equity

   $ 600,341,427     590,114,913  
    


 

 

See accompanying notes to consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

 

Consolidated Statements of Earnings

 

For the Three and Six Months Ended June 30, 2004 and 2003

 

(Unaudited)

 

    

Three Months Ended

June 30,


  

Six Months Ended

June 30,


     2004

   2003

   2004

   2003

Interest and dividend income:

                     

Loans, including fees

   $ 3,837,960    4,135,996    7,694,919    8,375,098

Investment securities:

                     

Taxable

     2,528,676    1,937,107    5,116,101    4,023,545

Tax-exempt

     306,538    48,592    604,425    96,776

Federal funds sold

     15,224    34,643    41,768    70,260

Interest-earning deposits with other banks

     1,740    3,536    2,864    6,512
    

  
  
  

Total interest and dividend income

     6,690,138    6,159,874    13,460,077    12,572,191
    

  
  
  

Interest expense:

                     

Deposits

     2,009,966    2,186,013    4,114,888    4,415,593

Securities sold under agreements to repurchase

     6,876    7,268    17,202    15,037

Other borrowings

     1,026,534    627,132    2,048,919    1,354,870
    

  
  
  

Total interest expense

     3,043,376    2,820,413    6,181,009    5,785,500
    

  
  
  

Net interest income

     3,646,762    3,339,461    7,279,068    6,786,691

Provision for loan losses

     150,000    175,000    300,000    400,000
    

  
  
  

Net interest income after provision for loan losses

     3,496,762    3,164,461    6,979,068    6,386,691
    

  
  
  

Noninterest income:

                     

Service charges on deposit accounts

     368,228    371,089    729,223    734,191

Investment securities gains, net

     20,496    734,045    18,092    749,684

Other

     1,063,041    1,178,217    2,288,499    2,353,762
    

  
  
  

Total noninterest income

     1,451,765    2,283,351    3,035,814    3,837,637
    

  
  
  

Noninterest expense:

                     

Salaries and benefits

     1,271,934    1,124,358    2,587,013    2,318,798

Net occupancy expense

     314,729    313,591    620,441    626,748

Other

     1,309,678    2,127,091    2,682,033    3,506,301
    

  
  
  

Total noninterest expense

     2,896,341    3,565,040    5,889,487    6,451,847
    

  
  
  

Earnings before income taxes

     2,052,186    1,882,772    4,125,395    3,772,481

Income tax expense

     552,971    565,388    1,091,545    1,112,961
    

  
  
  

Net earnings

   $ 1,499,215    1,317,384    3,033,850    2,659,520
    

  
  
  

Basic and diluted earnings per share:

   $ 0.39    0.34    0.78    0.68
    

  
  
  

Weighted-average shares outstanding, basic

     3,877,371    3,894,956    3,882,744    3,894,887
    

  
  
  

Weighted-average shares outstanding, diluted

     3,878,506    3,895,463    3,883,849    3,895,277
    

  
  
  

 

See accompanying notes to consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

 

Consolidated Statement of Stockholders’ Equity and Comprehensive Income

 

For the Six Months Ended June 30, 2004

 

(Unaudited)

 

   

Comprehensive
income/(loss)


    Common stock

 

Additional

paid-in
capital


 

Retained
earnings


   

Accumulated

other

comprehensive
loss


   

Treasury
stock


   

Total


 
    Shares

  Amount

         

Balances at December 31, 2003

          3,957,135   $ 39,571   3,712,246   38,092,829     (828,816 )   (607,946 )   40,407,884  

Comprehensive loss:

                                             

Net earnings

  $ 3,033,850     —       —     —     3,033,850     —       —       3,033,850  

Other comprehensive loss due to change in unrealized loss on investment securities available for sale and derivatives, net

    (5,216,309 )   —       —     —     —       (5,216,309 )   —       (5,216,309 )
   


                                     

Total comprehensive loss

  $ (2,182,459 )                                      
   


                                     

Cash dividends paid ($0.25 per share)

          —       —     —     (970,237 )   —       —       (970,237 )

Purchase of treasury stock (19,191 shares)

          —       —     —     —       —       (392,690 )   (392,690 )

Sale of treasury stock (1,075 shares)

          —       —     5,666   —       —       6,988     12,654  
           
 

 
 

 

 

 

Balances at June 30, 2004

          3,957,135   $ 39,571   3,717,912   40,156,442     (6,045,125 )   (993,648 )   36,875,152  
           
 

 
 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

 

Consolidated Statements of Cash Flows

 

For the Six Months Ended June 30, 2004 and 2003

 

(Unaudited)

 

     2004

    2003

 

Cash flows from operating activities:

              

Net earnings

   $ 3,033,850     2,659,520  

Adjustments to reconcile net earnings to net cash provided by operating activities:

              

Depreciation and amortization

     254,426     286,975  

Net amortization of premiums/discounts on investment securities

     694,958     758,765  

Provision for loan losses

     300,000     400,000  

Gain on disposal of premises and equipment

     —       (5,550 )

Investment securities gains

     (18,092 )   (749,684 )

Increase in interest receivable

     (124,933 )   (156,674 )

Decrease in other assets

     780,223     628,998  

Decrease in interest payable

     (83,363 )   (125,580 )

(Decrease)/increase in accrued expenses and other liabilities

     (843,145 )   899,871  
    


 

Net cash provided by operating activities

     3,993,924     4,596,641  
    


 

Cash flows from investing activities:

              

Proceeds from sales of investment securities available for sale

     41,427,532     70,615,969  

Proceeds from maturities/calls/paydowns of investment securities held to maturity

     280,778     6,255,438  

Proceeds from maturities/calls/paydowns of investment securities available for sale

     25,093,205     60,978,401  

Purchases of investment securities available for sale

     (78,272,791 )   (175,278,838 )

Net (increase)/decrease in loans

     (7,102,518 )   568,946  

Purchases of premises and equipment

     (47,083 )   (169,241 )

Proceeds from the sale of other real estate

     119,306     —    

Proceeds from the sale of premises and equipment

     —       5,550  

Net (increase)/decrease in interest-earning deposits with other banks

     (776,329 )   356,720  
    


 

Net cash used in investing activities

     (19,277,900 )   (36,667,055 )
    


 

Cash flows from financing activities:

              

Net increase in noninterest-bearing deposits

     4,307,785     7,192,334  

Net increase in interest-bearing deposits

     15,450,825     14,631,478  

Net decrease in securities sold under agreements to repurchase

     (4,993,298 )   (7,308,863 )

Repayments of other borrowed funds

     (139,558 )   (45,092 )

Sale of treasury stock

     12,654     4,540  

Purchase of treasury stock

     (392,690 )   —    

Dividends paid

     (970,237 )   (934,780 )
    


 

Net cash provided by financing activities

     13,275,481     13,539,617  
    


 

Net decrease in cash and cash equivalents

     (2,008,495 )   (18,530,797 )

Cash and cash equivalents at beginning of period

     26,337,957     34,796,285  
    


 

Cash and cash equivalents at end of period

   $ 24,329,462     16,265,488  
    


 

Supplemental information on cash payments:

              

Interest paid

   $ 6,264,372     5,911,080  
    


 

Income taxes paid

   $ 1,321,811     1,245,598  
    


 

Supplemental information on noncash transactions:

              

Real estate acquired through foreclosure

   $ 233,605     86,000  
    


 

 

See accompanying notes to consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements

June 30, 2004

 

Note 1- General

 

The consolidated financial statements in this report have been prepared in accordance with accounting principles generally accepted in the United States and have not been audited. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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 Auburn National Bancorporation, Inc. (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, 2003.

 

Note 2- Comprehensive Income

 

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 loss for the three months ended June 30, 2004 was $6,207,000 compared to comprehensive income of $1,756,000 for the three months ended June 30, 2003. Total comprehensive loss for the six months ended June 30, 2004 was $2,182,000 compared to comprehensive income of $2,700,000 for the six months ended June 30, 2003.

 

Note 4 – Pending Accounting Pronouncements

 

In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 includes loans acquired in purchase business combinations, but does not apply to loans originated by the entity. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004 although earlier adoption is encouraged.

 

In March 2004, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The Company has adopted the requirements of this EITF.

 

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 results of operations and financial condition of the Company and its wholly-owned subsidiary, AuburnBank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2004 and June 30, 2003.

 

Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

 

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All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may”, “will”, “anticipate”, “assume”, “should”, “indicate”, “would”, “believe”, “contemplate”, “expect”, “seek”, “estimate”, “continue”, “plan”, “point to”, “project”, “predict”, “could”, “intend”, “target”, “potential”, and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

 

  future economic and business conditions;

 

  government monetary and fiscal policies;

 

  the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

 

  the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;

 

  credit risks;

 

  the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates;

 

  the risks of mergers and acquisitions, including, without limitation, the related costs and time of integrating operations as part of these transactions and the failure to achieve expected gains, revenue growth and/or expense savings from such transactions;

 

  changes in laws and regulations, including tax, banking and securities laws and regulations;

 

  changes in accounting policies, rules and practices;

 

  changes in technology or products may be more difficult or costly, or less effective than anticipated;

 

  the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and

 

  other factors and information described in any of our subsequent reports that we make with the Securities and Exchange Commission (“SEC”) under the Exchange Act.

 

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

 

Summary

 

Net income of $1,499,000 for the quarter ended June 30, 2004 represented an increase of $182,000 (13.8%) from the Company’s net income of $1,317,000 for the same period of 2003. Basic and diluted net earnings per share increased $0.05 (14.7%) to $0.39 during the second quarter of 2004 from $0.34 for the second quarter of 2003. Net income increased $374,000 (14.1%) to $3,034,000 for the six month period ended June 30, 2004 compared to $2,660,000 for the same period of 2003. Basic and diluted net earnings per share increased $0.10 (14.7%) to $0.78 during the six months ended June 30, 2004 from $0.68 for the six months ended June 30, 2003. The increase in the Company’s net income during the six month period ended June 30, 2004 compared to the same period of 2003, was primarily due to an increase in net interest income, a decrease in the provision for loan losses and noninterest expense. This was partially offset by a decrease in noninterest income. The net yield on total interest-earning assets decreased to 2.71% for the six months ended June 30, 2004 from 2.93% for the six months ended June 30, 2003. The decrease in the net yield on interest-earning assets is due to the reinvestment of interest-bearing liabilities and assets in lower yielding interest-earning assets as interest rates declined or remained at historically low levels. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Total assets of $600,341,000 at June 30, 2004 represented an increase of $10,226,000 (1.7%) over total assets of $590,115,000, at December 31, 2003. This increase resulted primarily from an increase of $6,942,000 in loans, the primary source of which was an increase in total deposits during the first six months of 2004.

 

Critical Accounting Policies

 

The accounting and financial policies of the Company conform to accounting principles generally accepted in the United States and to general practices within the banking industry. The allowance for loan losses is an accounting policy applied by the Company which is deemed critical. Critical accounting policies are defined as policies which are important to the portrayal of the Company’s financial condition and results of operations, and that require management’s most

 

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difficult, subjective or complex judgements. These estimates and judgments involve significant uncertainties, and are susceptible to change. If different conditions exist or occur, and depending upon the magnitude of the changes, then our actual financial condition and financial results could differ significantly. See “ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS.”

 

For a more detailed discussion on these critical accounting policies, see “CRITICAL ACCOUNTING POLICIES” on page 18 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Financial Condition

 

Investment Securities and Federal Funds Sold

 

Investment securities held to maturity were $957,000 and $1,238,000 at June 30, 2004 and December 31, 2003, respectively. This decrease of $281,000 (22.7%) was primarily the result of scheduled paydowns and calls of principal amounts. These funds were reinvested in investment securities available for sale.

 

Investment securities available for sale increased $2,442,000 (0.9%) to $286,523,000 at June 30, 2004 from $284,081,000 at December 31, 2003. This increase is a result of purchases of $16,583,000 in U.S. agency securities, $45,687,000 in mortgage backed securities, $7,441,000 in CMOs, $7,561,000 in state and political subdivision securities and $1,000,000 in corporate securities. These increases were offset by $25,093,000 of scheduled paydowns, maturities and calls of principal amounts. In addition, $10,749,000 of U.S. agency securities, $7,721,000 of CMOs, $21,670,000 of mortgage backed securities and $1,287,000 of state and political subdivision securities were sold in the first six months of 2004.

 

Federal funds sold decreased to $13,455,000 at June 30, 2004 from $14,067,000 at December 31, 2003. This reflects normal activity in the Bank’s funds management efforts.

 

Loans

 

Total loans of $264,034,000 at June 30, 2004 reflected an increase of $6,942,000 (2.7%) compared to the total loans of $257,092,000, at December 31, 2003. The Bank primarily experienced growth in commercial real estate mortgage loans during the six months ended June 30, 2004. Three loan categories represented the majority of the loan portfolio with commercial real estate mortgage loans consisting of 50.99%, commercial, financial and agricultural loans consisting of 21.24%, and residential real estate mortgage loans consisting of 15.49% of the Bank’s total loans at June 30, 2004, respectively. The net yield on loans was 5.98% for the six months ended June 30, 2004 compared to 6.55% for the six months ended June 30, 2003. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Allowance for Loan Losses and Risk Elements

 

The allowance for loan losses reflects management’s assessment and estimates of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management reviews the components of the loan portfolio in order to estimate the appropriate provision required to maintain the allowance at a level believed adequate in relation to losses inherent in the loan portfolio. 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 Company’s policy generally is to place a loan on nonaccrual status when it is contractually past due 90 days or more as to payment of principal or interest. A loan may be placed on nonaccrual status at an earlier date when concerns exist as to the ultimate collections of principal or interest. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed and charged against current earnings. Loans that are contractually past due 90 days or more, but are well secured and in the process of collection, are generally not placed on nonaccrual status.

 

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The table below summarizes the changes in the allowance for loan losses for the six months ended June 30, 2004 and 2003 and the year ended December 31, 2003.

 

    

Six months ended
June 30,

2004


  

Six months ended
June 30,

2003


   Year ended
December 31,
2003


     (In thousands)

Balance at beginning of period, January 1,

   $ 4,313    $ 5,104    $ 5,104

Charge-offs

     359      666      1,577

Recoveries

     198      65      111
    

  

  

Net charge-offs

     161      601      1,466

Provision for loan losses

     300      400      675
    

  

  

Ending balance

   $ 4,452    $ 4,903    $ 4,313
    

  

  

 

The allowance for loan losses was $4,452,000 at June 30, 2004 compared to $4,313,000 at December 31, 2003. Management believes that the current level of allowance for loan losses (1.69% of total outstanding loans at June 30, 2004) is adequate to absorb anticipated losses identified in the portfolio at June 30, 2004. 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 six months of 2004, the Bank made $300,000 in provisions to the allowance for loan losses based on management’s assessment of the credit quality of the loan portfolio. For the six months ended June 30, 2004, the Bank had charge-offs of $359,000 and recoveries of $198,000.

 

Nonperforming assets, comprised of nonaccrual loans, other nonperforming assets, and accruing loans 90 days or more past due, were $1,302,000 at June 30, 2004, a decrease of 23.6% from the $1,704,000 of non-performing assets at December 31, 2003. This decrease is mainly due to a decrease in nonaccrual loans. If nonaccrual loans had performed in accordance with their original contractual terms, interest income would have increased by approximately $59,000 for the six months ended June 30, 2004.

 

The table below provides information concerning nonperforming assets and certain asset quality ratios.

 

     June 30,
2004


    December 31,
2003


 
     (In thousands)  

Nonaccrual loans

   $ 1,124     1,704  

Other nonperforming assets (primarily other real estate owned)

     165     —    

Accruing loans 90 days or more past due

     13     —    
    


 

Total nonperforming assets

   $ 1,302     1,704  
    


 

Ratio of allowance for loan losses as a percent of total loans outstanding

     1.69 %   1.68 %

Ratio of allowance for loan losses as a percent of nonaccrual loans and other nonperforming assets

     345.38 %   253.11 %

 

Potential problem loans consist of those loans where management has serious doubt as to the borrower’s ability to comply with the contractual loan repayment terms. At June 30, 2004, 74 loans totaling $8,723,000, or 3.3% of total loans outstanding, net of unearned income, were considered potential problem loans compared to 78 loans totaling $8,876,000, or

 

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3.5% of total loans outstanding, net of unearned income, at December 31, 2003. At June 30, 2004, the amount of impaired loans were $1,083,000, which included ten loans to four borrowers with a total valuation allowance of approximately $452,000. In comparison, at December 31, 2003, the Company had approximately $471,000 of impaired loans, which included four loans to two borrowers with a total valuation allowance of approximately $309,000.

 

Deposits

 

Total deposits increased $19,759,000 (4.6%) to $453,801,000 at June 30, 2004, compared to $434,042,000 at December 31, 2003. Noninterest-bearing deposits increased $4,308,000 (7.1%) during the first six months of 2004, while total interest-bearing deposits increased $15,451,000 (4.1%) to $388,986,000 at June 30, 2004 from $373,535,000 at December 31, 2003. The increase in noninterest-bearing deposits is due primarily to an increase in regular demand deposit accounts. During the first six months of 2004, the Bank primarily experienced an increase in money market accounts of $30,189,000 (38.3%). This was primarily offset by a decrease in certificates of deposit greater than $100,000 of $12,362,000 (11.9%). The Company considers the shifts in the deposit mix to be within the normal course of business and in line with the Bank’s funding strategy. The average rate paid on interest-bearing deposits was 2.17% for the six months ended June 30, 2004 compared to 2.55% for the same period of 2003. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Capital Resources and Liquidity

 

The Company’s consolidated stockholders’ equity was $36,875,000 at June 30, 2004, compared to $40,408,000 at December 31, 2003. This represents a decrease of $3,533,000 (8.7%) during the first six months of 2004. This is primarily due to the change in accumulated other comprehensive loss of $6,045,000 as of June 30, 2004 from an accumulated other comprehensive loss of $829,000 as of December 31, 2003. Net earnings for the first six months of 2004 were $3,034,000 compared to $2,660,000 for the same period of 2003. This increase in the accumulated other comprehensive loss was primarily due to a decrease in the fair value of investment securities available for sale. During the first six months of 2004, cash dividends of $970,000 or $0.25 per share, were declared on Common Stock.

 

Certain financial ratios for the Company are presented in the following table:

 

     June 30,
2004


    December 31,
2003


 

Return on average assets – annualized

   1.02 %   1.05 %

Return on average equity – annualized

   14.28 %   13.47 %

 

The Company’s Tier I leverage ratio was 9.17%, Tier I risk-based capital ratio was 15.12% and Total risk-based capital ratio was 16.37% at June 30, 2004. These ratios exceed the minimum regulatory capital percentages of 4.0% for Tier I 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 “well capitalized.”

 

The primary source of liquidity during the first six months of 2004 was deposit growth and sales of investment securities available for sale. The Company used these funds primarily to purchase additional investment securities available for sale. Under the advance program with Federal Home Loan Bank of Atlanta (“FHLB-Atlanta”), the Bank had outstanding advances totaling approximately $98,233,000 at June 30, 2004, under total FHLB-Atlanta facilities of 30% of the Bank’s total assets or $179,359,000 as of June 30, 2004.

 

Net cash provided by operating activities of $3,994,000 for the six months ended June 30, 2004 consisted primarily of net earnings. Net cash used in investing activities of $19,278,000 principally resulted from investment securities purchases of $78,273,000, offset by proceeds from maturities, calls and paydowns of investment securities available for sale and held to maturity of $25,374,000 and proceeds from sales of investment securities available for sale of $41,428,000. The $13,275,000 in net cash provided by financing activities resulted primarily from an increase of $15,451,000 in interest bearing deposits and an increase of $4,308,000 in non-interest bearing deposits. In addition, securities sold under agreements to repurchase decreased by $4,993,000 and the Company paid cash dividends of $970,000.

 

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Note Payable to Trust

 

In November 2003, the Company formed a wholly owned Delaware statutory trust, Auburn National Bancorporation Capital Trust I. This unconsolidated subsidiary issued approximately $7 million in trust preferred securities, guaranteed by the Company on a subordinated basis. The Company obtained these proceeds through a note payable to the trust (junior subordinated debentures). Approximately $5 million of proceeds to the Company were contributed to the Bank in the form of a capital contribution. This additional capital allowed the Bank to borrow additional funds from the FHLB-Atlanta. These funds along with some brokered CDs were used to buy additional investment securities available for sale as part of a leverage transaction. The remaining $2 million was used for the stock repurchase program. As of June 30, 2004, $7,217,000 of the note payable to trust was classified as Tier 1 Capital for regulatory purposes. For regulatory purposes, the trust preferred securities represent a minority investment in a consolidated subsidiary, which is currently included in Tier 1 Capital so long as it does not exceed 25% of total Tier 1 capital. Under Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46) and Revised Amendment to FIN 46 (FIN 46R), however, the trust subsidiary must be deconsolidated for accounting purposes. As a result, the Federal Reserve Board in May 2004 issued proposed changes to its capital adequacy rules that would permit the Company to continue to treat its outstanding trust preferred securities as Tier 1 Capital. The Company cannot predict the term of the Federal Reserve’s final rule, but presently do not believe it will materially and adversely affect the Company and the Bank’s regulatory capital.

 

Off-Balance Sheet Commitments

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments involve elements of credit risk in excess of the amounts recognized in the consolidated financial statements.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

The financial instruments whose contract amounts represent credit risk as of June 30, 2004 are as follows:

 

Commitments to extend credit

   $ 39,743,000

Standby letters of credit

     4,417,000

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. All guarantees expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary.

 

Interest Rate Sensitivity Management

 

At June 30, 2004, interest sensitive assets that reprice or mature within the next 12 months were $202,080,000 compared to interest sensitive liabilities that reprice or mature within the same time frame totaling $327,455,000. The cumulative GAP position (the difference between interest sensitive assets and interest sensitive liabilities) of a negative $125,375,000 resulted in a GAP ratio (calculated as interest sensitive assets divided by interest sensitive liabilities) of 0.62%. This compares to a twelve month cumulative GAP position at December 31, 2003, of a negative $167,842,000 and a GAP ratio of 0.56%. 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

 

12


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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. The Bank’s ALCO Committee realizes that GAP is limited in scope since it does not capture all the options or repricing opportunities in the balance sheet. Therefore, the ALCO Committee places its emphasis on Income at Risk and Economic Value of Equity measurements. Based on ALCO’s alternative interest rate scenarios used by the Company in modeling for asset/liability planning purposes, the GAP position at June 30, 2004 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. Economic Value of Equity would change less than 25%. Economic Value of Equity would change more than the target 25% if interest rates increased 2%. This is primarily due to a methodology change by the provider and lower total capital. The Company’s total capital declined due to unrealized losses in the investment portfolio that is an offset to capital. However, the unrealized losses are not counted against regulatory capital and the Company and the Bank continue to be well capitalized. 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 $182,000 (13.8%) to $1,499,000 for the three month period ended June 30, 2004, compared to $1,317,000 for the same period of 2003. Basic and diluted net earnings per share were $0.39 and $0.34 for the second quarters of 2004 and 2003, respectively. Net income increased $374,000 (14.1%) to $3,034,000 for the six month period ended June 30, 2004 compared to $2,660,000 for the same period of 2003. During the six month period ended June 30, 2004 compared to the same period of 2003, the Company experienced an increase in net interest income and a decrease in the provision for loan losses and noninterest expense. This was offset by a decrease in noninterest income.

 

Net Interest Income

 

Net interest income was $3,647,000 for the second quarter of 2004, an increase of $308,000 (9.2%) from $3,339,000 for the same period of 2003. Net interest income increased $492,000 (7.2%) to $7,279,000 for the six months ended June 30, 2004, compared to $6,787,000 for the six months ended June 30, 2003. The increase in net interest income resulted primarily from an increase in the average volume outstanding despite a lower net yield on total interest-earning assets. The current low interest rate environment has compressed the Company’s margins. Through the second quarter of 2004, the Company’s GAP position was more asset 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 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 $6,690,000 and $6,160,000 for the three months ended June 30, 2004 and 2003, respectively. This represents an increase of $530,000 (8.6%) for the second quarter of 2004 compared to 2003. For the six months ended June 30, 2004 interest and dividend income was $13,460,000, an increase of $888,000 (7.1%) compared to $12,572,000 for the same period of 2003. This change for the first six months of 2004 resulted as the average volume of interest-earning assets outstanding increased $90,954,000 (19.3%) over the same period of 2003 but the Company’s yield on interest-earning assets decreased 48 basis points, reflecting historically low market interest rates. 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 $3,838,000 and $4,136,000 for the second quarters of 2004 and 2003, respectively. This reflects a decrease of $298,000 (7.2%) during the three months ended June 30, 2004 over the same period of 2003. For the six month period ended June 30, 2004, interest and fees on loans decreased $680,000 (8.1%) to $7,695,000 from $8,375,000 for the same period of 2003. The average volume of loans increased $774,000 (0.3%) for the six months ended June 30, 2004 compared to the same period for 2003, while the Company’s yield on loans decreased by 57 basis points resulting in the decrease in interest and fees on loans.

 

For the three month period ended June 30, 2004, interest income on investment securities increased $849,000 (42.7%) to $2,835,000 from $1,986,000 for the same period of 2003. Interest income on investment securities for the six month period ended June 30, 2004, increased $1,601,000 (38.9%) to $5,721,000 from $4,120,000 for the same period of

 

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2003. The Company’s average volume of investment securities increased by $93,645,000 (46.7%) for the first six months of 2004, compared to the same period of 2003, while the net yield on these average balances decreased by 7 basis points. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Interest Expense

 

Total interest expense increased $223,000 (7.9%) to $3,043,000 for the second quarter of 2004 compared to $2,820,000 for the same period of 2003. Total interest expense increased $395,000 (6.8%) to $6,181,000 from $5,786,000 for the six months ended June 30, 2004 and 2003, respectively. This change was due to an increase of 20.1% in the Company’s average interest-bearing liabilities offset by a decrease of 33 basis points in the rates paid on those liabilities during the first six months of 2004 compared to the same period of 2003. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Interest on deposits, the primary component of total interest expense, decreased $176,000 (8.1%) to $2,010,000 for the second quarter of 2004 compared to $2,186,000 for the same period of 2003. Interest on deposits were $4,115,000 and $4,416,000 for the six months ended June 30, 2004 and 2003, respectively. The decrease for the six month period ended June 30, 2004 is due to a 38 basis point decrease in the rate paid on interest-bearing deposits partially offset by a 9.3% increase in the average volume.

 

Interest expense on other borrowings, was $1,027,000 and $627,000 for the second quarters of 2004 and 2003, respectively. This represents an increase of $400,000 or 63.8%. For the six months ended June 30, 2004, interest expense on borrowed funds increased $694,000 (51.2%) to $2,049,000 from $1,355,000 for the same period of 2003. This increase for the six month period ended June 30, 2004 is due to a 106 basis point decrease in the rate paid on other borrowed funds and by a 89.8% increase in the average balance. The increase in the average balance is due to FHLB advances, with lower interest rates, drawn as part of a leverage transaction when the Company’s wholly-owned subsidiary, Auburn National Bancorporation Capital Trust I issued trust preferred securities in November 2003. Also, the decrease in the rate paid is due to the Company’s refinancing of $10 million in FHLB advances to a lower interest rate in April 2003.

 

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 $150,000 for the three months ended June 30, 2004 compared to $175,000 for the three months ended June 30, 2003. The provision for loan losses was $300,000 for the six months ended June 30, 2004 compared to $400,000 for the six months ended June 30, 2003. The decrease in the provision is due to reduced loan growth and improved performance in the loan portfolio compared to the same period last year. See “—ALLOWANCE FOR LOAN LOSS AND RISK ELEMENTS.”

 

Noninterest Income

 

Noninterest income decreased $831,000 (36.4%) to $1,452,000 for the second quarter of 2004 from $2,283,000 for the same period of 2003. Noninterest income was $3,036,000 and $3,838,000 for the six months ended June 30, 2004 and 2003, respectively. The decreases for the six month period ended June 30, 2004 is mainly due to a decrease in investment securities gains and other noninterest income.

 

Net investment securities gains were $18,000 at June 30, 2004 compared to $750,000 at June 30, 2003. The decrease is primarily due to gains in the second quarter of 2003 on the sale of specific available for sale securities.

 

Other noninterest income decreased $115,000 (9.8%) to $1,063,000 for the second quarter of 2004 from $1,178,000 for the same period of 2003. Other noninterest income was $2,288,000 and $2,354,000 for the six months ended June 30, 2004 and 2003, respectively. This decrease of $66,000 (2.8%) for the six month period ended June 30, 2004 compared to the same period of 2003. This decrease was due to a decrease in gains on the sale of mortgage loans offset by an increase in MasterCard/VISA discounts and fees due to an increase in transaction volume and fees and amounts reported in the six months ended June 30, 2003.

 

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Table of Contents

Noninterest Expense

 

Total noninterest expense was $2,896,000 and $3,565,000 for the second quarters of 2004 and 2003, respectively, representing a decrease of $669,000 or 18.8%. For the six months ended June 30, 2004, total noninterest expense decreased $563,000 (8.7%) to $5,889,000 from $6,452,000 for the same period of 2003. This decrease was mainly due to a decrease in other noninterest expense.

 

For the second quarter of 2004, other noninterest expense decreased $817,000 (38.4%) to $1,310,000 from $2,127,000 for the second quarter of 2003. Other noninterest expense was $2,682,000 and $3,506,000 for the six months ended June 30, 2004 and 2003, respectively. This decrease is mainly due to an early prepayment penalty to refinance $10 million in FHLB advances in the second quarter of 2003. This is offset by increases in the MasterCard/VISA processing fees due to an increase in transaction volume and fees.

 

Income Taxes

 

Income tax expense was $553,000 and $565,000 for the second quarters of 2004 and 2003, respectively. For the three months ended June 30, 2004, income tax expense decreased $12,000 (2.1%). For the six months ended June 30, 2004, income tax expense decreased $21,000 (1.9%) to $1,092,000 from $1,113,000 for the six months ended June 30, 2003. These levels represent an effective tax rate on pre-tax earnings of 26.5% and 29.5% for the six months ended June 30, 2004 and 2003, respectively. The decrease in effective tax rate is mainly due to the purchase of tax-exempt securities as part of the leverage transaction when the Company’s subsidiary issued trust preferred securities.

 

Effects 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 low interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of desired performance levels. Low interest rates have adversely affected the Company’s net interest margins, however.

 

15


Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY

Consolidated Average Balances, Interest Income/Expense and Yields/Rates

Taxable Equivalent Basis

 

     Six Months Ended June 30,

 
     2004

    2003

 
     Average
Balance


    Interest

  

Yield/

Rate


    Average
Balance


    Interest

  

Yield/

Rate


 
     (Dollars in thousands)  
ASSETS         

Interest-earning assets:

                                      

Loans, net of unearned income (1)

   $ 258,749       7,695    5.98 %   257,975     8,375    6.55 %

Investment securities:

                                      

Taxable

     265,499       5,116    3.88 %   196,673     4,023    4.12 %

Tax-exempt (2)

     28,858       915    6.38 %   4,039     147    7.34 %
    


 

        

 
      

Total investment securities

     294,357       6,031    4.12 %   200,712     4,170    4.19 %

Federal funds sold

     8,513       42    0.99 %   11,743     70    1.20 %

Interest-earning deposits with other banks

     878       3    0.69 %   1,113     7    1.27 %
    


 

        

 
      

Total interest-earning assets

     562,497       13,771    4.92 %   471,543     12,622    5.40 %

Allowance for loan losses

     (4,384 )                (5,027 )           

Cash and due from banks

     10,893                  14,561             

Premises and equipment

     2,826                  3,145             

Rental property, net

     1,403                  1,492             

Other assets

     20,809                  17,683             
    


              

          

Total assets

   $ 594,044                  503,397             
    


              

          

LIABILITIES & STOCKHOLDERS’ EQUITY

                                      

Interest-bearing liabilities:

                                      

Deposits:

                                      

Demand

   $ 82,542       472    1.15 %   76,001     527    1.40 %

Savings and money market

     115,568       842    1.47 %   88,624     747    1.70 %

Certificates of deposits less than $100,000

     86,819       1,424    3.30 %   88,488     1,590    3.62 %

Certificates of deposits and other time deposits of $100,000 or more

     97,350       1,378    2.85 %   96,524     1,551    3.24 %
    


 

        

 
      

Total interest-bearing deposits

     382,279       4,116    2.17 %   349,637     4,415    2.55 %

Federal funds purchased and securities sold under agreements to repurchase

     3,526       17    0.97 %   2,581     15    1.17 %

Other borrowed funds

     101,339       2,048    4.06 %   53,405     1,355    5.12 %
    


 

        

 
      

Total interest-bearing liabilities

     487,144       6,181    2.55 %   405,623     5,785    2.88 %

Noninterest-bearing deposits

     59,823                  52,270             

Accrued expenses and other liabilities

     4,581                  5,688             

Stockholders’ equity

     42,496                  39,816             
    


              

          

Total liabilities and stockholders’ equity

   $ 594,044                  503,397             
    


              

          

Net interest income

           $ 7,590                6,837       
            

              
      

Net yield on total interest-earning assets

                  2.71 %              2.93 %
                   

            


(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


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company models Economic Value of Equity as a measure of market risk. As of March 31, 2004, Economic Value of Equity would decrease 5.90% if rates decrease 200 basis points and would decrease 20.56% if rates increase 200 basis points. As of June 30, 2004, the Economic Value of Equity has become more volatile. If rates decrease 200 basis points, Economic Value of Equity would increase 16.65% and, if rates increase 200 basis points, Economic Value of Equity would decrease 30.60%. This is primarily due to a modeling change by our asset/liability provider. Depending on the rate index used in the regression analysis to calculate Economic Value of Equity, the analysis may not reflect a full 200 basis point improvement. The second factor to change the Economic Value of Equity is a reduction in beginning capital due to unrealized market value declines in the second quarter of 2004. While unrealized losses on debt securities are excluded from regulatory capital ratios, it is not excluded in the calculation of Economic Value of Equity.

 

The Company became more asset-sensitive for a 12 month forecast. The Company has restructured the repricing term of some deposits and restructured some investments to shorten their duration. The Company measures its exposure to interest rate risk by modeling a 200 basis point change (up and down) in interest rates. As of June 30, 2004, the Company’s modeling projects that net interest income could decrease by 1.40% given a ramp up in interest rates of 200 basis points. For a ramp down in interest rates of 200 basis points, as of June 30, 2004, the modeling projects the Company’s net interest income could decrease by 1.72%. As of March 31, 2004, the exposure in a ramp down scenario was (1.15%) and the ramp up exposure was (2.89%). The Company believes that it needs to prepare for the risk of rising interest rates. The Company projects a slightly liability-sensitive profile and continues to work toward 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 Form 10-K for the year ended December 31, 2003, has not been updated in this filing.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of June 30, 2004, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Director of Financial Operations (DFO), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and DFO, concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to the Company’s management, including the CEO and DFO, as appropriate, to allow timely decisions regarding disclosure.

 

During the period covered by this report, there has not been any change in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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Table of Contents

PART II OTHER INFORMATION

 

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

ISSUER PURCHASES OF EQUITY SECURITIES1

 

Period


  

Total Number of
Shares (or Units)
Purchased


  

Average Price Paid

per Share (or Unit)


  

Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs


  

Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May
Yet Be Purchased Under the
Plans or Programs


(Dollars in thousands except share data)

April 1 – April 30

   3,550    $20.81    3,550    $1,634

May 1 – May 31

   2,500    $21.17    2,500    $1,581

June 1 – June 30

   1,740    $20.28    1,740    $1,545

Total

   7,790         7,790    $1,545

1 All repurchases represented in the table above were made pursuant to a program that was publicly announced on November 3, 2003. The total expenditure approved under the program, which expires on November 4, 2004, is $2,000,000.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Annual Meeting of Shareholders of the Company was held at the AuburnBank Center in Auburn, Alabama, on Tuesday, May 11, 2004, at 3:00 p.m. This meeting was held for the purpose of considering the election of ten directors to the Board of Directors to serve one-year terms expiring at the Company’s 2005 Annual Meeting of Shareholders and until their successors have been elected and qualified.

 

As to the election of ten directors, Messers E.L Spencer, Jr., Emil F. Wright, Jr., J.E. Evans, Terry Andrus, Anne M. May, Robert W. Dumas, David E. Housel, William F. Ham, Jr., Edward Lee Spencer III, C. Wayne Alderman were all elected to the Board of Directors. The number of votes was as follows:

 

    

Votes cast for

Election


  

Votes cast to

Withhold Authority


E.L. Spencer, Jr.

   3,210,489    2,408

J.E. Evans

   3,209,589    3,308

Emil F. Wright, Jr.

   3,210,489    2,408

Terry Andrus

   3,210,189    2,708

Anne M. May

   3,210,339    2,558

Robert W. Dumas

   3,210,489    2,408

David E. Housel

   3,194,998    17,899

William F. Ham, Jr.

   3,210,489    2,408

Edward Lee Spencer III

   3,210,489    2,408

C. Wayne Alderman

   3,210,489    2,408

 

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

AUBURN NATIONAL BANCORPORATION, INC.

 

Item 6(a)

 

EXHIBIT INDEX

 

Exhibit
Number


 

Description


3.A   Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto. *
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. ***
31.1   Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.
31.2   Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by C. Wayne Alderman, Director of Financial Operations.
32.1   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board. ****
32.2   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by C. Wayne Alderman, Director of Financial Operations. ****

* Incorporated by reference from Registrant’s Form 10-Q dated June 30, 2002.
** Incorporated by reference from Registrant’s Form 8-K dated April 13, 2004.
*** Incorporated by reference from Registrant’s Registration Statement on Form SB-2.
**** The certifications attached as exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-Q and are “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

(b) Reports filed on Form 8-K for the quarter ended June 30, 2004:

 

April 22, 2004 – First Quarter 2004 Earnings Press Release

 

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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: August 16, 2004

 

By:

 

/s/ E. L. Spencer, Jr.


       

E. L. Spencer, Jr.

       

President, Chief Executive Officer and Chairman of the Board

Date: August 16, 2004

 

By:

 

/s/ C. Wayne Alderman


       

C. Wayne Alderman

       

Director of Financial Operations

 

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