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

For the quarterly period ended March 31, 2004
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 March 31, 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 April 30, 2004: 3,878,367 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 March 31, 2004 and December 31, 2003

   3
   

Consolidated Statements of Earnings for the Three Months Ended March 31, 2004 and 2003

   4
   

Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2004

   5
   

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003

   6
   

Notes to Consolidated Financial Statements

   7

Item 2

 

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

   8

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

   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 6

 

Exhibits and Reports on Form 8-K

   18

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

 

Consolidated Balance Sheets

 

March 31, 2004 and December 31, 2003

 

(Unaudited)

 

     3/31/2004

    12/31/2003

 
Assets               

Cash and due from banks

   $ 9,128,322     12,270,957  

Federal funds sold

     24,294,000     14,067,000  
    


 

Cash and cash equivalents

     33,422,322     26,337,957  
    


 

Interest-earning deposits with other banks

     1,044,897     265,729  

Investment securities held to maturity (fair value of $1,138,377 and $1,276,720 at March 31, 2004 and December 31, 2003, respectively)

     1,107,610     1,237,764  

Investment securities available for sale

     292,073,135     284,081,123  

Loans

     259,218,203     257,092,056  

Less allowance for loan losses

     (4,395,570 )   (4,312,554 )
    


 

Loans, net

     254,822,633     252,779,502  
    


 

Premises and equipment, net

     2,823,816     2,876,052  

Rental property, net

     1,399,965     1,427,285  

Other assets

     21,618,510     21,109,501  
    


 

Total assets

   $ 608,312,888     590,114,913  
    


 

Liabilities and Stockholders’ Equity               

Deposits:

              

Noninterest-bearing

   $ 61,923,372     60,507,145  

Interest-bearing

     389,399,001     373,534,995  
    


 

Total deposits

     451,322,373     434,042,140  

Securities sold under agreements to repurchase

     2,077,388     6,654,332  

Other borrowed funds

     98,362,146     98,372,188  

Note payable to Trust

     7,217,000     7,217,000  

Accrued expenses and other liabilities

     5,608,239     3,421,369  
    


 

Total liabilities

     564,587,146     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

     3,715,564     3,712,246  

Retained earnings

     39,141,626     38,092,829  

Accumulated other comprehensive income/(loss)

     1,661,357     (828,816 )

Less treasury stock at cost, 75,248 and 64,947 shares at March 31, 2004 and December 31, 2003, respectively

     (832,376 )   (607,946 )
    


 

Total stockholders’ equity

     43,725,742     40,407,884  
    


 

Total liabilities and stockholders’ equity

   $ 608,312,888     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 Months March Ended 31, 2004 and 2003

 

(Unaudited)

 

     Three Months Ended March 31,

     2004

    2003

Interest and dividend income:

            

Loans, including fees

   $ 3,856,959     4,239,102

Investment securities:

            

Taxable

     2,587,425     2,086,438

Tax-exempt

     297,887     48,184

Federal funds sold

     26,544     35,617

Interest-earning deposits with other banks

     1,124     2,976
    


 

Total interest and dividend income

     6,769,939     6,412,317
    


 

Interest expense:

            

Deposits

     2,104,922     2,229,580

Securities sold under agreements to repurchase

     10,326     7,769

Other borrowings

     1,022,385     727,738
    


 

Total interest expense

     3,137,633     2,965,087
    


 

Net interest income

     3,632,306     3,447,230

Provision for loan losses

     150,000     225,000
    


 

Net interest income after provision for loan losses

     3,482,306     3,222,230
    


 

Noninterest income:

            

Service charges on deposit accounts

     360,995     363,102

Investment securities (losses)/gains, net

     (2,404 )   15,639

Other

     1,354,640     1,325,989
    


 

Total noninterest income

     1,713,231     1,704,730
    


 

Noninterest expense:

            

Salaries and benefits

     1,444,261     1,344,884

Net occupancy expense

     305,712     313,157

Other

     1,372,355     1,379,210
    


 

Total noninterest expense

     3,122,328     3,037,251
    


 

Earnings before income taxes

     2,073,209     1,889,709

Income tax expense

     538,574     547,573
    


 

Net earnings

   $ 1,534,635     1,342,136
    


 

Basic and diluted earnings per share:

   $ 0.39     0.34
    


 

Weighted-average shares outstanding, basic

     3,888,119     3,894,818
    


 

Weighted-average shares outstanding, diluted

     3,889,295     3,895,130
    


 

 

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 Three Months Ended March 31, 2004

 

(Unaudited)

 

     Comprehensive
income


   Common stock

   Additional
paid-in
capital


   Retained
earnings


    Accumulated
other
comprehensive
income/(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 income:

                                                 

Net earnings

   $ 1,534,635    —        —      —      1,534,635     —       —        1,534,635  

Other comprehensive income due to change in unrealized gain on investment securities available for sale, net

     2,490,173    —        —      —      —       2,490,173     —        2,490,173  
    

                                          

Total comprehensive income

   $ 4,024,808                                           
    

                                          

Cash dividends paid ($0.125 per share)

          —        —      —      (485,838 )   —       —        (485,838 )

Purchase of treasury stock (11,301 shares)

          —        —      —      —       —       (228,460 )    (228,460 )

Sale of treasury stock (620 shares)

          —        —      3,318    —       —       4,030      7,348  
           
  

  
  

 

 

  

Balances at March 31, 2004

          3,957,135    $ 39,571    3,715,564    39,141,626     1,661,357     (832,376 )    43,725,742  
           
  

  
  

 

 

  

 

See accompanying notes to consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

 

Consolidated Statements of Cash Flows

 

For the Three Months Ended March 31, 2004 and 2003

 

(Unaudited)

 

     2004

    2003

 

Cash flows from operating activities:

              

Net earnings

   $ 1,534,635     1,342,136  

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

              

Depreciation and amortization

     130,205     172,121  

Net amortization of premiums/discounts on investment securities

     336,779     329,408  

Provision for loan losses

     150,000     225,000  

Loss on disposal of premises and equipment

     —       (5,550 )

Investment securities losses/(gains)

     2,404     (15,639 )

Increase in interest receivable

     (245,969 )   (261,936 )

(Increase)/decrease in other assets

     (747,592 )   488,915  

Increase/(decrease) in interest payable

     96,014     (100,489 )

Increase in accrued expenses and other liabilities

     896,830     361,525  
    


 

Net cash provided by operating activities

     2,153,306     2,535,491  
    


 

Cash flows from investing activities:

              

Proceeds from sales of investment securities available for sale

     31,455,277     27,624,004  

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

     130,131     5,761,786  

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

     11,332,230     27,366,045  

Purchases of investment securities available for sale

     (46,968,410 )   (74,424,731 )

Net (increase)/decrease in loans

     (2,193,131 )   555,896  

Purchases of premises and equipment

     (32,167 )   (115,160 )

Proceeds from the sale of premises and equipment

     —       5,550  

Net increase in interest-earning deposits with other banks

     (779,168 )   (109,246 )
    


 

Net cash used in investing activities

     (7,055,238 )   (13,335,856 )
    


 

Cash flows from financing activities:

              

Net increase in noninterest-bearing deposits

     1,416,227     4,345,694  

Net increase in interest-bearing deposits

     15,864,006     8,588,803  

Net decrease in securities sold under agreements to repurchase

     (4,576,944 )   (9,225,007 )

Repayments to FHLB

     (4,562 )   (29,563 )

Repayments of other borrowed funds

     (5,480 )   (5,972 )

Sale of treasury stock

     7,348     —    

Purchase of treasury stock

     (228,460 )   —    

Dividends paid

     (485,838 )   (467,378 )
    


 

Net cash provided by financing activities

     11,986,297     3,206,577  
    


 

Net increase/(decrease) in cash and cash equivalents

     7,084,365     (7,593,788 )

Cash and cash equivalents at beginning of period

     26,337,957     34,796,285  
    


 

Cash and cash equivalents at end of period

   $ 33,422,322     27,202,497  
    


 

Supplemental information on cash payments:

              

Interest paid

   $ 3,041,619     3,065,576  
    


 

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

March 31, 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 gain for the three months ended March 31, 2004 was $4,025,000 compared to $944,000 for the three months ended March 31, 2003.

 

Note 3 - Derivatives

 

As part of its overall interest rate risk management activities, the Company utilizes derivatives instruments 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.

 

As of March 31, 2004, the Company had the following derivative instrument:

 

Interest Rate Swap

(In Thousands)

 

Notional

Amount


  

Estimated

fair value


   Pay Rate

   Receive
Rate


$5,000

   $8    Variable    5.68%

 

At March 31, 2004, the interest rate swap was used as a fair value hedge to convert the interest rate on a like amount of certificates of deposit with similar terms from fixed rate to variable rate. This interest rate swap matures in April 2004.

 

Note 4 – Pending Accounting Pronouncements

 

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to all entities subject to this Interpretation no later than the end of the first reporting period that end after December 15, 2004. This interpretation must be applied to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003.

 

For any variable interest entities (VIEs) that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and no controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and no controlling interest of the VIE.

 

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The Company has applied FIN 46R in accounting for Auburn National Bancorporation Capital Trust I (“Trust”), established in November 2003. Accordingly, in the accompanying balance sheet, the Company has included, in other assets, its investment in the Trust of $217,000 and also included, in subordinated debt, the balance owed the Trust of $7,217,000. The application of this Interpretation did not have a material effect on the Company’s consolidated financial statements.

 

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. The adoption of this new statement of position is not expected to have a material impact on the consolidated balance sheets or statements of earnings of the Company.

 

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 months ended March 31, 2004 and March 31, 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.

 

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;

 

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  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 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 $1,535,000 for the quarter ended March 31, 2004 represented an increase of $193,000 (14.4%) from the Company’s net income of $1,342,000 for the same period of 2003. Basic and diluted net earnings per share increased $0.05 (14.7%) to $0.39 during the first quarter of 2004 from $0.34 for the first quarter of 2003. During the three month period ended March 31, 2004 compared to the same period of 2003, the Company experienced an increase in net interest income and noninterest income and a decrease in the provision for loan losses. The net yield on total interest-earning assets decreased to 2.71% for the three months ended March 31, 2004 from 3.03% for the three months ended March 31, 2003. The decrease in the net yield on interest-earning assets is due to the reinvestment of interest-bearing liabilities 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 $608,313,000 at March 31, 2004 represented an increase of $18,198,000 (3.1%) over total assets of $590,115,000, at December 31, 2003. This increase resulted primarily from an increase of $7,992,000 in investment securities available for sale and $7,084,000 in cash and cash equivalents, the primary source of which was an increase in total deposits during the first quarter 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 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 $1,108,000 and $1,238,000 at March 31, 2004 and December 31, 2003, respectively. This decrease of $130,000 (10.5%) was primarily the result of scheduled paydowns of principal amounts. These funds were reinvested in investment securities available for sale.

 

Investment securities available for sale increased $7,992,000 (2.8%) to $292,073,000 at March 31, 2004 from $284,081,000 at December 31, 2003. This increase is a result of purchases of $10,138,000 in U.S. agency securities, $28,464,000 in mortgage backed securities, $7,441,000 in CMOs and $925,000 in state and political subdivision securities. These increases were offset by $11,332,000 of scheduled paydowns, maturities and calls of principal amounts. In addition, $9,235,000 of U.S. agency securities, $7,721,000 of CMOs, and $14,499,000 of mortgage backed securities were sold in the first three months of 2004.

 

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Federal funds sold increased to $24,294,000 at March 31, 2004 from $14,067,000 at December 31, 2003. This increase is mainly due to the Company positioning itself to meet liquidity needs in April 2004 for the maturity of $5 million in brokered certificates of deposits and $10 million in FHLB advances that were called.

 

Loans

 

Total loans of $259,218,000 at March 31, 2004 reflected an increase of $2,126,000 (0.8%) 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 three months ended March 31, 2004. Three loan categories represented the majority of the loan portfolio with commercial real estate mortgage loans consisting of 49.53%, commercial, financial and agricultural loans consisting of 20.93%, and residential real estate mortgage loans consisting of 15.95% of the Bank’s total loans at March 31, 2004, respectively. The net yield on loans was 6.02% for the three months ended March 31, 2004 compared to 6.60% for the three months ended March 31, 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, and which are well secured and in the process of collection, generally are not placed on nonaccrual status.

 

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

 

    

Three months
ended

March 31,
2004


  

Three months
ended

March 31,
2003


   Year ended
December 31,
2003


     (In thousands)

Balance at beginning of period, January 1,

   $ 4,313    $ 5,104    $ 5,104

Charge-offs

     183      527      1,577

Recoveries

     116      33      111
    

  

  

Net charge-offs

     67      494      1,466

Provision for loan losses

     150      225      675
    

  

  

Ending balance

   $ 4,396    $ 4,835    $ 4,313
    

  

  

 

The allowance for loan losses was $4,396,000 at March 31, 2004 compared to $4,313,000 at December 31, 2003. Management believes that the current level of allowance for loan losses (1.70% of total outstanding loans at March 31, 2004) is adequate to absorb anticipated losses identified in the portfolio at March 31, 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.

 

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During the first three months of 2004, 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, 2004, the Bank had charge-offs of $183,000 and recoveries of $116,000.

 

Nonperforming assets, comprised of nonaccrual loans, other nonperforming assets, and accruing loans 90 days or more past due, were $1,829,000 at March 31, 2004, an increase of 7.3% from the $1,704,000 of non-performing assets at December 31, 2003. This increase is mainly due to two pieces of property in OREO acquired in the first quarter of 2004. If nonaccrual loans had performed in accordance with their original contractual terms, interest income would have increased by approximately $32,000 for the three months ended March 31, 2004.

 

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

 

     March 31,
2004


    December 31,
2003


 
     (In thousands)  

Nonaccrual loans

   $ 1,595     1,704  

Other nonperforming assets (primarily other real estate owned)

     234     —    

Accruing loans 90 days or more past due

     —       —    
    


 

Total nonperforming assets

   $ 1,829     1,704  
    


 

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

     1.70 %   1.68 %

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

     240.35 %   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 March 31, 2004, 71 loans totaling $8,161,000, or 3.1% of total loans outstanding, net of unearned income, were considered potential problem loans compared to 78 loans totaling $8,876,000, or 3.5% of total loans outstanding, net of unearned income, at December 31, 2003. At March 31, 2004, the amount of impaired loans were $464,000, which included four loans to two borrowers with a total valuation allowance of approximately $301,000. 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 $17,280,000 (4.0%) to $451,322,000 at March 31, 2004, compared to $434,042,000 at December 31, 2003. Noninterest-bearing deposits increased $1,416,000 (2.3%) during the first three months of 2004, while total interest-bearing deposits increased $15,864,000 (4.2%) to $389,399,000 at March 31, 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 three months of 2004, the Bank primarily experienced an increase in money market accounts of $22,970,000 (29.1%). 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 2.23% for the three months ended March 31, 2004 compared to 2.61% 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 $43,726,000 at March 31, 2004, compared to $40,408,000 at December 31, 2003. This represents an increase of $3,318,000 (8.2%) during the first three months of 2004 primarily due to net earnings and the change in accumulated other comprehensive income as of March 31, 2004. Net earnings for the

 

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first three months of 2004 were $1,535,000 compared to $1,342,000 for the same period of 2003. In addition, the Company’s accumulated other comprehensive income was $1,661,000 at March 31, 2004 compared to an accumulated other comprehensive loss of $829,000 at December 31, 2003. This increase was due to an increase in the fair value of investment securities available for sale. During the first three months of 2004, cash dividends of $486,000 or $0.125 per share, were declared on Common Stock.

 

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

 

     March 31, 2004

    December 31, 2003

 

Return on average assets – annualized

   1.04 %   1.05 %

Return on average equity – annualized

   15.00 %   13.47 %

 

The Company’s Tier I leverage ratio was 8.30%, Tier I risk-based capital ratio was 15.36% and Total risk-based capital ratio was 16.61% at March 31, 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 three 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 $98,237,000 at March 31, 2004, under total FHLB-Atlanta facilities of 30% of the Bank’s total assets or $181,680,000 as of March 31, 2004.

 

Net cash provided by operating activities of $2,153,000 for the three months ended March 31, 2004 consisted primarily of net earnings. Net cash used in investing activities of $7,055,000 principally resulted from investment securities purchases of $46,968,000, offset by proceeds from maturities, calls and paydowns of investment securities available for sale and held to maturity of $11,462,000 and proceeds from sales of investment securities available for sale of $31,455,000. The $11,986,000 in net cash provided by financing activities resulted primarily from an increase of $15,864,000 in interest bearing deposits. In addition, securities sold under agreements to repurchase decreased by $4,577,000 and the Company paid cash dividends of $486,000.

 

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 preferred trust 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 given to the Bank in the form of a dividend. This additional capital allowed the Bank to borrow additional funds from the FHLB. 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 were used for the stock repurchase program. As of March 31, 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 is reconsidering its treatment of trust preferred securities as Tier 1 capital and could determine that trust preferred securities will no longer be classified as Tier 1 Capital, or that a smaller percentage of Tier 1 Capital may be composed of trust preferred securities. Although management cannot predict the ultimate resolution of this issue, management believes the Company and Bank’s capital ratios will remain at an adequate level to allow the Company and Bank to continue to be “well capitalized” under applicable banking regulations.

 

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.

 

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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 March 31, 2004 are as follows:

 

Commitments to extend credit

   $ 33,547,000

Standby letters of credit

     4,672,000

 

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.

 

Borrowed Funds and Contractual Obligations

 

During the first quarter of 2004, there were no material changes in contractual obligations as shown in the Company’s Form 10-K for the year ended December 31, 2003.

 

Interest Rate Sensitivity Management

 

At March 31, 2004, interest sensitive assets that reprice or mature within the next 12 months were $246,041,000 compared to interest sensitive liabilities that reprice or mature within the same time frame totaling $344,620,000. The cumulative GAP position (the difference between interest sensitive assets and interest sensitive liabilities) of a negative $98,579,000 resulted in a GAP ratio (calculated as interest sensitive assets divided by interest sensitive liabilities) of 0.71%. 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 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 March 31, 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%. 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 $193,000 (14.4%) to $1,535,000 for the three month period ended March 31, 2004 compared to $1,342,000 for the same period of 2003. Basic and diluted net earnings per share were $0.39 and $0.34 for the first quarters of 2004 and 2003, respectively. During the three month period ended March 31, 2004 compared to the same period of 2003, the Company experienced an increase in net interest income and noninterest income and a decrease in the provision for loan losses. This was offset by an increase in noninterest expense.

 

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Net Interest Income

 

Net interest income was $3,632,000 for the first quarter of 2004, an increase of $185,000 (5.4%) from $3,447,000 for the same period of 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 first quarter of 2004, the Company’s GAP position remained less liability sensitive to changes in interest rates. The Company continues to regularly review and manage its asset/liability position in an effort to manage the negative effects of changing rates. See 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 $6,770,000 and $6,412,000 for the three months ended March 31, 2004 and 2003, respectively. This represents an increase of $358,000 (5.6%) for the first quarter of 2004 compared to the first quarter of 2003. This change for the first three months of 2004 resulted as the average volume of interest-earning assets outstanding increased $95,953,000 (20.6%) over the same period of 2003 but the Company’s yield on interest-earning assets decreased 65 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 $3,857,000 and $4,239,000 for the first quarters of 2004 and 2003, respectively. This reflects a decrease of $382,000 (9.0%) during the three months ended March 31, 2004 from the same period of 2003. The average volume of loans decreased $2,595,000 (1.0%) for the three months ended March 31, 2004 compared to the same period for 2003, while the Company’s yield on loans also decreased by 58 basis points.

 

For the three month period ended March 31, 2004, interest income on investment securities increased $750,000 (3.5%) to $2,885,000 from $2,135,000 for the same period of 2003. The Company’s average volume of investment securities increased by $100,003,000 (52.2%) for the first three months of 2004, compared to the same period of 2003, while the net yield on these average balances decreased by 38 basis points. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Interest Expense

 

Total interest expense increased $173,000 (5.8%) to $3,138,000 for the first quarter of 2004 compared to $2,965,000 for the same period of 2003. This change was due to an increase of 21.8% in the Company’s average interest-bearing liabilities offset by a decrease of 41 basis points in the rates paid on those liabilities during the first three months of 2004 compared to the same period of 2003. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

Interest paid on deposits, the primary component of total interest expense, decreased $125,000 (5.6%) to $2,105,000 for the first quarter of 2004 compared to $2,230,000 for the same period of 2003. The decrease for the three month period ended March 31, 2004 is due to a 38 basis point decrease in the rate paid on interest-bearing deposits partially offset by a 9.6% increase in the average volume.

 

Interest expense on other borrowings, was $1,022,000 and $728,000 for the first quarters of 2004 and 2003, respectively. This represents an increase of $294,000 or 40.4%. This increase for the three month period ended March 31, 2004 is due to a 164 basis point decrease in the rate paid on other borrowed funds and by a 97.7% 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 preferred trust 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.

 

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Table of Contents

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 March 31, 2004 compared to $225,000 for the three months ended March 31, 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 increased $8,000 (0.5%) to $1,713,000 for the first quarter of 2004 from $1,705,000 for the same period of 2003. The increases for the three month periods ended March 31, 2004 is mainly due to an increase in other noninterest income.

 

Net investment securities losses were $2,000 at March 31, 2004 compared to a net investment securities gain of $16,000 at March 31, 2003. The decrease is primarily due to the investment securities gain and losses in the normal course of business.

 

Other noninterest income increased $29,000 (2.2%) to $1,355,000 for the first quarter of 2004 from $1,326,000 for the same period of 2003. This increase was due to an increase in MasterCard/VISA discounts and fees due to an increase in transaction volume and fees and an increase in gains on the sale of mortgage loans over amounts reported in the three months ended March 31, 2003.

 

Noninterest Expense

 

Total noninterest expense increased $85,000 (2.8%) to $3,122,000 for the first quarter of 2004 from $3,037,000 for the same period of 2003. This increase was mainly due to an increase in salaries and benefits.

 

For the first quarter of 2004, salaries and benefits increased $99,000 (7.4%) to $1,444,000 from $1,345,000 for the first quarter of 2003. This increase was due to an increase in overall employee levels from the same period of 2003.

 

Income Taxes

 

Income tax expense decreased $9,000 (1.6%) to $539,000 for the first quarter of 2004 from $548,000 for the same period of 2003. These levels represent an effective tax rate on pre-tax earnings of 26.0% and 29.0% for the three months ended March 31, 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 preferred trust securities.

 

Impact of Inflation and Changing Prices

 

Virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant effect on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the price of goods and services because such prices are affected by inflation. In the current 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.

 

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AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY

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

Taxable Equivalent Basis

 

     Three Months Ended March 31,

 
     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)

   $ 257,831       3,857    6.02 %   260,426     4,239    6.60 %

Investment securities:

                                      

Taxable

     263,344       2,586    3.95 %   187,830     2,086    4.50 %

Tax-exempt (2)

     28,364       452    6.41 %   3,875     73    7.64 %
    


 

        

 
      

Total investment securities

     291,708       3,038    4.19 %   191,705     2,159    4.57 %

Federal funds sold

     10,900       27    1.00 %   11,460     36    1.27 %

Interest-earning deposits with other banks

     456       1    0.88 %   1,351     3    0.90 %
    


 

        

 
      

Total interest-earning assets

     560,895       6,923    4.96 %   464,942     6,437    5.61 %

Allowance for loan losses

     (4,330 )                (5,150 )           

Cash and due from banks

     10,970                  16,438             

Premises and equipment

     2,850                  3,154             

Rental property, net

     1,417                  1,505             

Other assets

     20,781                  17,432             
    


              

          

Total assets

   $ 592,583                  498,321             
    


              

          
LIABILITIES & STOCKHOLDERS’ EQUITY                                       

Interest-bearing liabilities:

                                      

Deposits:

                                      

Demand

   $ 84,358       253    1.21 %   75,435     263    1.41 %

Savings and money market

     107,814       403    1.50 %   86,555     365    1.71 %

Certificates of deposits less than $100,000

     86,101       695    3.25 %   88,635     819    3.75 %

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

     101,324       754    2.99 %   95,724     782    3.31 %
    


 

        

 
      

Total interest-bearing deposits

     379,597       2,105    2.23 %   346,349     2,229    2.61 %

Federal funds purchased and securities sold under agreements to repurchase

     4,518       10    0.89 %   2,369     8    1.37 %

Other borrowed funds

     105,583       1,022    3.89 %   53,417     728    5.53 %
    


 

        

 
      

Total interest-bearing liabilities

     489,698       3,137    2.58 %   402,135     2,965    2.99 %

Noninterest-bearing deposits

     57,967                  50,866             

Accrued expenses and other liabilities

     4,004                  5,740             

Stockholders’ equity

     40,914                  39,580             
    


              

          

Total liabilities and stockholders’ equity

   $ 592,583                  498,321             
    


              

          

Net interest income

           $ 3,786                3,472       
            

              
      

Net yield on total interest-earning assets

                  2.71 %              3.03 %
                   

            


(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%.

 

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Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s market risk has increased slightly during the first quarter of 2004. The Company models economic value of equity as a measure of market risk. As of December 2003, economic value of equity would decrease 0.53% if rates decrease 200 basis points and decrease 25.24% if rates increase 200 basis points. As of March 2004, economic value of equity had become less volatile in a rising interest rate environment. If rates decrease 200 basis points, economic value of equity would decrease 5.90% and, if rates increase 200 basis points, economic value of equity would decrease 20.56%. The current market indicators indicate that the Federal Reserve might begin to tighten interest rates in the near future. The Company is preparing for the greater risk of rising interest rates and the decreased the long term volitility in a rising rate environment. However, prudent business decisions may cause an occasional increase in liability sensitivity.

 

The Company became more liability-sensitive for a 12 month forecast. The Company’s non maturity deposit base outpaced the growth of longer duration certificates of deposit and short term assets. The Company continues to invest in mortgage backed securities that repay principal on a monthly basis. However, the current asset liability modeling anticipates a larger mix of loans in forecasted asset growth. The Company measures its exposure to interest risk by modeling a 200 (+ and -) basis point ramp in interest rates. Given these conditions, the Company’s modeling projects that net interest income could decrease by 2.89% given a ramp up in interest rates of 200 basis points. For a ramp down in interest rates of 200 basis points, the modeling projects the Company’s net interest income could decrease by 1.15%. In December, the exposure in a ramp down scenario was insignificant and the ramp up exposure was (1.90%). 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 the end of the period covered by this report, 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 design and operation 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 to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, 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 control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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)

 

January 1 – January 31

   3,242    $ 19.97    3,242    $ 1,874

February 1 – February 29

   2,240    $ 19.88    2,240    $ 1,829

March 1 – March 31

   5,919    $ 20.54    5,919    $ 1,710
    
         
  

Total

   11,401           11,401    $ 1,710

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 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.

 

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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 March 31, 2004:

 

February 12, 2003 – Fourth Quarter 2004 Earnings Press Release

 

March 9, 2004 – Press Release announcing addition of four new directors to the Board.

 

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Table of Contents

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, 2004

  

By:

 

/s/ E. L. Spencer, Jr.


        

E. L. Spencer, Jr.

        

President, Chief Executive

        

Officer and Chairman of the Board

Date: May 14, 2004

  

By:

 

/s/ C. Wayne Alderman


        

C. Wayne Alderman

        

Director of Financial Operations

 

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