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AUBURN NATIONAL BANCORPORATION, INC - Quarter Report: 2006 September (Form 10-Q)

Form 10-Q
Table of Contents

As filed with the Securities and Exchange Commission on November 14, 2006


UNITED STATES

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 September 30, 2006

 

¨ 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

(334) 821-9200

(Address and telephone number of principal executive offices)

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 31, 2006

Common Stock, $.01 par value per share   3,766,582 shares

 



Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY

INDEX

 

     PAGE

PART I. FINANCIAL INFORMATION

  
Item 1    Financial Statements   
  

Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2006 and December 31, 2005

   3
  

Condensed Consolidated Statements of Earnings (Unaudited) for the Three and Nine Months Ended September 30, 2006 and 2005

   4
  

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the Nine Months Ended September 30, 2006

   5
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2006 and 2005

   6
  

Notes to Condensed 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    18
Item 4    Controls and Procedures    18

PART II. OTHER INFORMATION

  
Item 1A    Risk Factors    19
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds    19
Item 6    Exhibits    19

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Condensed Consolidated Balance Sheets

September 30, 2006 and December 31, 2005

(Unaudited)

 

     9/30/2006     12/31/2005  
Assets     

Cash and due from banks

   $ 13,808,603     13,704,096  

Federal funds sold

     17,797,000     10,237,409  
              

Cash and cash equivalents

     31,605,603     23,941,505  
              

Interest-earning deposits with other banks

     673,363     2,140,856  

Investment securities held to maturity (fair value of $544,027 and $636,962 at September 30, 2006 and December 31, 2005, respectively)

     542,874     633,478  

Investment securities available for sale

     287,160,331     274,327,424  

Loans held for sale

     3,874,082     1,400,269  

Loans

     283,746,144     282,059,247  

Less allowance for loan losses

     (4,038,231 )   (3,843,374 )
              

Loans, net

     279,707,913     278,215,873  
              

Premises and equipment, net

     2,230,802     2,428,619  

Rental property, net

     3,622,185     1,236,583  

Other assets

     26,569,541     23,829,154  
              

Total assets

   $ 635,986,694     608,153,761  
              
Liabilities and Stockholders’ Equity     

Deposits:

    

Noninterest-bearing

   $ 74,840,815     70,784,282  

Interest-bearing

     404,428,413     384,211,006  
              

Total deposits

     479,269,228     454,995,288  

Securities sold under agreements to repurchase

     6,987,362     1,731,391  

Other borrowed funds

     93,191,568     98,205,256  

Note payable to Trust

     7,217,000     7,217,000  

Accrued expenses and other liabilities

     2,296,402     2,050,348  
              

Total liabilities

     588,961,560     564,199,283  
              

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

     3,738,559     3,734,425  

Retained earnings

     50,142,191     46,918,896  

Accumulated other comprehensive loss, net

     (3,574,342 )   (3,981,772 )

Less treasury stock at cost, 185,567 and 162,119 shares at September 30, 2006 and December 31, 2005, respectively

     (3,320,845 )   (2,756,642 )
              

Total stockholders’ equity

     47,025,134     43,954,478  
              

Total liabilities and stockholders’ equity

   $ 635,986,694     608,153,761  
              

See accompanying notes to condensed consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Earnings

For the Three and Nine Months Ended September 30, 2006 and 2005

(Unaudited)

 

     Three Months Ended September 30,    Nine Months Ended September 30,
   2006     2005    2006    2005

Interest and dividend income:

          

Loans, including fees

   $ 5,502,002     4,782,539    15,774,361    13,347,025

Investment securities:

          

Taxable

     2,775,851     2,332,541    8,044,215    7,116,596

Tax-exempt

     482,822     472,385    1,521,338    1,361,323

Federal funds sold

     77,067     74,234    249,959    185,220

Interest-earning deposits with other banks

     11,735     7,160    25,321    27,559
                      

Total interest and dividend income

     8,849,477     7,668,859    25,615,194    22,037,723
                      

Interest expense:

          

Deposits

     3,833,053     2,797,771    10,735,231    7,473,361

Securities sold under agreements to repurchase

     74,208     24,042    229,159    56,707

Other borrowings

     1,160,240     1,178,673    3,452,312    3,525,811
                      

Total interest expense

     5,067,501     4,000,486    14,416,702    11,055,879
                      

Net interest income

     3,781,976     3,668,373    11,198,492    10,981,844

Provision for loan losses

     85,000     120,000    295,000    420,000
                      

Net interest income after provision for loan losses

     3,696,976     3,548,373    10,903,492    10,561,844
                      

Noninterest income:

          

Service charges on deposit accounts

     355,502     383,460    1,047,596    1,130,615

Investment securities gains (losses), net

     (37,746 )   4,131    5,679    11,306

Other

     815,246     1,455,194    2,378,998    4,073,302
                      

Total noninterest income

     1,133,002     1,842,785    3,432,273    5,215,223
                      

Noninterest expense:

          

Salaries and benefits

     1,419,747     1,407,373    4,201,474    4,130,409

Net occupancy expense

     269,005     275,000    803,435    832,216

Other

     859,686     1,506,719    2,543,708    4,497,284
                      

Total noninterest expense

     2,548,438     3,189,092    7,548,617    9,459,909
                      

Earnings before income taxes

     2,281,540     2,202,066    6,787,148    6,317,158

Income tax expense

     620,891     576,532    1,749,265    1,577,630
                      

Net earnings

   $ 1,660,649     1,625,534    5,037,883    4,739,528
                      

Basic and diluted earnings per share:

   $ 0.44     0.42    1.33    1.23
                      

Weighted-average shares outstanding, basic

     3,775,649     3,827,894    3,781,918    3,838,459
                      

Weighted-average shares outstanding, diluted

     3,776,023     3,828,795    3,782,363    3,839,358
                      

See accompanying notes to condensed consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss)

For the Nine Months Ended September 30, 2006

(Unaudited)

 

          Common stock   

Additional

paid-in
Capital

  

Retained
earnings

   

Accumulated

other

comprehensive
income (loss)

   

Treasury
stock

   

Total

 
     Comprehensive
income
   Shares    Amount            

Balances at December 31, 2005

      3,957,135    $ 39,571    3,734,425    46,918,896     (3,981,772 )   (2,756,642 )   43,954,478  

Comprehensive income:

                    

Net earnings

   $ 5,037,883    —        —      —      5,037,883     —       —       5,037,883  

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

     407,430    —        —      —      —       407,430     —       407,430  
                        

Total comprehensive income

   $ 5,445,313                  
                        

Cash dividends paid ($0.48 per share)

      —        —      —      (1,814,588 )   —       —       (1,814,588 )

Purchase of treasury stock (24,048 shares)

      —        —      —      —       —       (568,103 )   (568,103 )

Sale of treasury stock (600 shares)

      —        —      4,134    —       —       3,900     8,034  
                                            

Balances at September 30, 2006

      3,957,135    $ 39,571    3,738,559    50,142,191     (3,574,342 )   (3,320,845 )   47,025,134  
                                            

See accompanying notes to condensed consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2006 and 2005

(Unaudited)

 

     Nine Months Ended September 30,  
     2006     2005  

Cash flows from operating activities:

    

Net earnings

   $ 5,037,883     4,739,528  

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

    

Depreciation and amortization

     296,668     339,490  

Net amortization of premiums/discounts on investment securities

     388,175     760,308  

Provision for loan losses

     295,000     420,000  

Gain on disposal of premises and equipment

     (2,821 )   (1,028 )

Investment securities gains

     (5,679 )   (11,306 )

Net (increase) decrease in loans held for sale

     (2,473,813 )   2,208,721  

Increase in interest receivable

     (231,210 )   (312,785 )

Net (increase) decrease in other assets

     (2,723,151 )   56,120  

Increase in interest payable

     380,648     225,847  

Net decrease in accrued expenses and other liabilities

     (126,594 )   (1,811,795 )
              

Net cash provided by operating activities

     835,106     6,613,100  
              

Cash flows from investing activities:

    

Proceeds from sales of investment securities available for sale

     19,259,095     33,346,426  

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

     90,537     141,300  

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

     21,897,379     29,750,853  

Purchases of investment securities available for sale

     (53,700,760 )   (62,558,943 )

Net increase in loans

     (2,062,640 )   (27,600,547 )

Purchases of premises and equipment

     (89,259 )   (63,242 )

Proceeds from the sale of other real estate

     278,579     72,916  

Proceeds from the sale of premises and equipment

     4,494     1,200  

Purchase of rental property

     (2,457,492 )   —    

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

     1,467,493     (812,537 )
              

Net cash used in investing activities

     (15,312,574 )   (27,722,574 )
              

Cash flows from financing activities:

    

Net increase in noninterest-bearing deposits

     4,056,533     12,071,744  

Net increase in interest-bearing deposits

     20,217,407     21,402,307  

Net increase (decrease) in securities sold under agreements to repurchase

     5,255,971     (3,534,818 )

Repayments of other borrowed funds

     (5,013,688 )   (13,687 )

Sale of treasury stock

     8,034     4,540  

Purchase of treasury stock

     (568,103 )   (568,250 )

Dividends paid

     (1,814,588 )   (1,669,214 )
              

Net cash provided by financing activities

     22,141,566     27,692,622  
              

Net increase in cash and cash equivalents

     7,664,098     6,583,148  

Cash and cash equivalents at beginning of period

     23,941,505     26,431,412  
              

Cash and cash equivalents at end of period

   $ 31,605,603     33,014,560  
              

Supplemental information on cash payments:

    

Interest paid

   $ 14,036,055     6,829,545  
              

Income taxes paid

   $ 3,768,211     2,047,825  
              

Supplemental information on noncash transactions:

    

Real estate acquired through foreclosure

   $ 275,600     221,547  
              

See accompanying notes to condensed consolidated financial statements.

 

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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARY

Notes to the Condensed Consolidated Financial Statements

September 30, 2006

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 that Auburn National Bancorporation, Inc. (the “Company”) and its subsidiary 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, 2005.

Note 2- Comprehensive Income

The primary component of the differences between net earnings and comprehensive income for the Company is unrealized gains/losses on available for sale securities and derivative. Total comprehensive income for the three months ended September 30, 2006 was $3,777,000 compared to comprehensive income of $1,270,000 for the three months ended September 30, 2005. Total comprehensive income for the nine months ended September 30, 2006 was $5,445,000 compared to comprehensive income of $3,280,000 for the nine months ended September 30, 2005.

Note 3 – Pending and New Accounting Pronouncements

In December 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2005), “Share-Based Payment(“SFAS 123R”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation.” This statement supercedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees(“APB 25”). SFAS 123R addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of earnings. The Company adopted SFAS 123R effective January 1, 2006, which did not have a material effect on the consolidated balance sheets or statements of earnings for the Company as all options outstanding were fully vested at that date.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS 155 is an amendment of SFAS 133 and SFAS 140. SFAS 155 permits companies to elect, on a deal-by-deal basis, to apply a fair-value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. The Company will be required to apply the provisions of SFAS 155 to all financial instruments acquired or issued after January 1, 2007. The Company does not expect the adoption of SFAS 155 will have a material effect on the consolidated financial statements of the Company.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement 140.” SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to the accounting for separately recognized servicing assets and liabilities. SFAS 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like accounting. SFAS 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 156 will have a material effect on the consolidated financial statements of the Company.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect of this Interpretation and its effect on the consolidated financial statements of the Company.

 

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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The statement does not require any new fair value measurements, however, does clarify the proper measurement of fair value as the hypothetical price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or receive the assumed liability (an entry price) at the measurement date. The Corporation will be required to adopt this standard beginning January 1, 2008. The Company does not expect the adoption of SFAS 157 will have a material effect on the consolidated financial statements of the Company.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 is an amendment to Part 211 of Title 17 of the Code of Federal Regulations. SAB 108 provides guidance on the consideration of the effects of prior-year misstatements in quantifying current-year misstatements for the purpose of a materiality assessment. The bulletin recommends registrants quantify the effect of correcting all misstatements, including both the carryover and the reversing effects of prior-year misstatements, on the current-year financial statements. SAB 108 is effective no later than December 31, 2006. Management is currently evaluating this statement and its effect on the consolidated financial statements 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 and nine months ended September 30, 2006 and September 30, 2005.

Certain of the statements made herein under the caption “MANAGEMENTS 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;

 

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

 

    uncertainties regarding 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;

 

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    changes in accounting policies, rules and practices;

 

    changes in technology or products, which 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 in this report and other filings that we make with the SEC under the Exchange Act, including our annual report on Form 10-K for the year ended December 31, 2005 and subsequent quarterly and current reports. See Part II, Item 1A, “RISK FACTORS.”

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.

Business

Auburn National Bancorporation, Inc. (the “Company”) is a one-bank holding company established in 1984, and incorporated under the laws of the State of Delaware. AuburnBank (the “Bank”), the Company’s principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches in Auburn, Opelika, Hurtsboro and Notasulga, Alabama. In-store branches are located in the Auburn Kroger store, as well as Wal-Mart SuperCenter stores in Auburn, Opelika and Phenix City, Alabama. Mortgage loan offices are located in Phenix City, Valley and Orange Beach, Alabama. A new in-store branch is planned to open in 2007 at the Kroger supermarket to be located in the Tiger Town shopping center in Opelika, Alabama.

Summary

Net earnings of $1,661,000 for the quarter ended September 30, 2006 represented an increase of $35,000 (2.2%) from the Company’s net earnings of $1,626,000 for the same period of 2005. Basic and diluted net earnings per share increased $0.02 (4.8%) to $0.44 during the third quarter of 2006 from $0.42 for the third quarter of 2005. Net earnings increased $298,000 (6.3%) to $5,038,000 for the nine months ended September 30, 2006 compared to $4,740,000 for the same period of 2005. Basic and diluted net earnings per share increased $0.10 (8.1%) to $1.33 during the nine months ended September 30, 2006 from $1.23 for the nine months ended September 30, 2005. The increase in the Company’s net earnings during the nine months ended September 30, 2006 compared to the same periods of 2005 was primarily due to an increase in net interest income and a decrease in noninterest expense and provision for loan losses. This was partially offset by a decrease in noninterest income. The net yield on total interest-earning assets decreased to 2.74% for the nine months ended September 30, 2006 from 2.77% for the same period of 2005. The decrease in the net yield on interest-earning assets is due to a larger increase in the cost of funds compared to the increase in yield on interest-earning assets. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

Total assets of $635,987,000 at September 30, 2006 represented an increase of $27,833,000 (4.6%) over total assets of $608,154,000 at December 31, 2005. This increase resulted primarily from an increase of $7,560,000 in federal funds sold and an increase of $12,833,000 in investment securities available for sale. The primary source of increases in federal funds sold and investment securities available for sale were an increase in total deposits of $24,274,000.

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 22 of the Company’s annual report on Form 10-K for the year ended December 31, 2005.

 

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Financial Condition

Investment Securities and Federal Funds Sold

Investment securities held to maturity were $543,000 at September 30, 2006 and $633,000 at December 31, 2005. This decrease of $90,000 (14.2%) 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 $12,833,000 (4.7%) to $287,160,000 at September 30, 2006 from $274,327,000 at December 31, 2005. This increase is a result of purchases of $28,855,000 in U.S. agency securities, $9,133,000 in mortgage-backed securities, $7,850,000 in collateralized mortgage obligations, $6,805,000 in state and political subdivision securities and $1,057,000 in corporate securities. These purchases were offset by $21,897,000 in scheduled paydowns, maturities and issuer calls of principal amounts. In addition, $4,918,000 of U.S. agency securities, $3,769,000 of collateralized mortgage obligations and $10,572,000 of state and political subdivision securities were sold in the first nine months of 2006.

Federal funds sold increased $7,560,000 (73.8%) to $17,797,000 at September 30, 2006 from $10,237,000 at December 31, 2005. This reflects normal activity in the Bank’s funds management efforts.

Loans

Total loans of $283,746,000 at September 30, 2006 reflected an increase of $1,687,000 (0.6%) compared to the total loans of $282,059,000 at December 31, 2005. Three loan categories represented the majority of the loan portfolio with commercial real estate mortgage loans consisting of 52.3%, residential real estate mortgage loans consisting of 22.4% and commercial, financial and agricultural loans consisting of 17.4%, of the Bank’s total loans at September 30, 2006. The net yield on loans was 7.33% for the nine months ended September 30, 2006 compared to 6.52% for the nine months ended September 30, 2005 primarily due to an increase in interest rates. 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 assessments 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 affect 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 in payment of principal or interest. A loan may be placed on nonaccrual status at an earlier date if concerns exist as to the ultimate collectability 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, which 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 nine months ended September 30, 2006 and 2005 and the year ended December 31, 2005.

 

     Nine months
ended
September 30,
2006
   Nine months
ended
September 30,
2005
   Year ended
December 31,
2005
          (In thousands)     

Balance at beginning of period, January 1,

   $ 3,843    $ 3,456    $ 3,456

Charge-offs

     150      308      356

Recoveries

     50      244      258
                    

Net charge-offs (recoveries)

     100      64      98

Provision for loan losses

     295      420      485
                    

Ending balance

   $ 4,038    $ 3,812    $ 3,843
                    

The allowance for loan losses increased $195,000 (5.1%) to $4,038,000 at September 30, 2006 from $3,843,000 at December 31, 2005. Management believes that the current level of allowance for loan losses (1.42% of total outstanding loans at September 30, 2006) is adequate to absorb anticipated losses identified in the portfolio at September 30, 2006. No assurance can be given, however, that adverse economic circumstances or other events, including additional loan review or examination findings or changes in borrowers’ financial conditions, will not result in increased losses in the Bank’s loan portfolio or in additional provision to the allowance for loan losses.

During the first nine months of 2006, the Bank made $295,000 in provisions to the allowance for loan losses based on management’s assessment of the credit quality of the loan portfolio. For the nine months ended September 30, 2006, the Bank had charge-offs of $150,000 and recoveries of $50,000.

Nonperforming assets, comprised of nonaccrual loans, other nonperforming assets, and accruing loans 90 days or more past due, were $17,000 at September 30, 2006, a decrease of 84.3% from $108,000 at December 31, 2005. 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 $3,000 for the nine months ended September 30, 2006.

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

 

     September 30,
2006
    December 31,
2005
 
     (In thousands)  

Nonaccrual loans

   $ 17     108  

Other nonperforming assets (primarily other real estate owned)

     —       —    
              

Accruing loans 90 days or more past due

     —       —    
              

Total nonperforming assets

   $ 17     108  
              

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

     1.42 %   1.36 %

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

     23,752.94 %   3,558.33 %

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 September 30, 2006, 57 loans totaling $4,833,000, or 1.7% of total loans outstanding, net of unearned income, were considered potential problem loans compared to 65 loans totaling $5,365,000, or 1.9% of total loans outstanding, net of unearned income, at December 31, 2005. At September 30, 2006 and December 31, 2005, the Company had no impaired loans.

 

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Deposits

Total deposits increased $24,274,000 (5.3%) to $479,269,000 at September 30, 2006, compared to $454,995,000 at December 31, 2005. Noninterest-bearing deposits increased $4,057,000 (5.7%) during the first nine months of 2006, while total interest-bearing deposits increased $20,217,000 (5.3%) to $404,428,000 at September 30, 2006 from $384,211,000 at December 31, 2005. The increase in noninterest-bearing deposits is due primarily to an increase in regular demand deposit accounts. During the first nine months of 2006, the Bank experienced an increase in certificates of deposit over $100,000 of $14,514,000 (15.1%) and money market accounts of $10,881,000 (9.4%). 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 and changes in customer preferences for interest-bearing deposits as market rates have increased. The average rate paid on interest-bearing deposits was 3.62% for the nine months ended September 30, 2006 compared to 2.67% for the same period of 2005 due to an increase in interest rates. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

Capital Resources and Liquidity

The Company’s consolidated stockholders’ equity was $47,025,000 at September 30, 2006, compared to $43,954,000 at December 31, 2005. This represents an increase of $3,071,000 (7.0%) during the first nine months of 2006 primarily due to increased net earnings for the period. Net earnings for the first nine months of 2006 were $5,038,000 compared to $4,740,000 for the same period of 2005. In addition, the Company’s accumulated other comprehensive loss was $3,574,000 at September 30, 2006 compared to an accumulated other comprehensive loss of $3,982,000 at December 31, 2005. The decrease in the accumulated other comprehensive loss is due to an increase in the fair value of investment securities available for sale. During the first nine months of 2006, cash dividends of $1,815,000 or $0.48 per share, were declared on the Company’s common stock.

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

 

     September 30, 2006     December 31, 2005  

Return on average assets – annualized

   1.08 %   1.08 %

Return on average equity – annualized

   15.28 %   14.26 %

The Company’s Tier 1 leverage ratio was 9.26%, Tier 1 risk-based capital ratio was 15.63% and Total risk-based capital ratio was 16.72% at September 30, 2006. These ratios exceed the minimum regulatory capital percentages of 4.0% for Tier 1 leverage ratio, 4.0% for Tier 1 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 nine months of 2006 was deposit growth. The Company used these funds to fund loan growth and purchases of investment securities available for sale. Under the advance program with Federal Home Loan Bank of Atlanta (“FHLB”), the Bank had outstanding advances totaling approximately $93,192,000 at September 30, 2006, under total FHLB facilities of 30% of the Bank’s total assets or $189,512,000 as of September 30, 2006.

Net cash provided by operating activities of $835,000 for the nine months ended September 30, 2006 consisted primarily of a net increase in loans held for sale and other assets offset by net earnings. Net cash used in investing activities of $15,313,000 principally resulted from investment securities purchases of $53,701,000. This is offset by proceeds from maturities, calls and paydowns of investment securities available for sale and held to maturity of $21,897,000 and proceeds from sales of investment securities available for sale of $19,259,000. The $22,142,000 in net cash provided by financing activities resulted primarily from an increase of $20,217,000 in interest-bearing deposits, an increase of $4,057,000 in non-interest bearing deposits and an increase in securities sold under agreements to repurchase of $5,256,000. This is offset by repayments of other borrowed funds of $5,014,000.

Note Payable to Trust

The Company owns all the common securities of a Delaware statutory trust, Auburn National Bancorporation Capital Trust I. This unconsolidated subsidiary issued approximately $7,000,000 million in trust preferred securities, guaranteed by the Company on a junior subordinated basis. The Company obtained these proceeds through a note payable to the trust in the form of junior subordinated debentures. As of September 30, 2006, $7,000,000 of the $7,217,000 note payable to trust was classified as Tier 1

 

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Capital for regulatory purposes. For regulatory purposes, the trust preferred securities are currently included in Tier 1 Capital so long as such securities do not exceed 25% of total Tier 1 capital. The Federal Reserve’s new trust preferred capital rules, which took effect in early April 2006, permit the Company to treat its outstanding trust preferred securities as Tier 1 Capital for the first 25 years of the 30 year term of the related junior subordinated debentures. During the last five years preceding maturity, the amount included as capital will decline 20% per year.

Off-Balance Sheet Arrangements

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 entering into conditional obligations as it does for on-balance sheet instruments.

The financial instruments with contract amounts which represent credit risk as of September 30, 2006 are as follows:

 

Commitments to extend credit

   $ 50,211,000

Standby letters of credit

     11,182,000

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. Most standby letters of credit expire within one year, but may be renewed. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitment facilities to customers. The Company may hold various assets as collateral supporting those commitments, where it determines that collateral for these obligations is appropriate.

Interest Rate Sensitivity Management

At September 30, 2006, interest sensitive assets that reprice or mature within the next 12 months were $247,661,000 compared to interest sensitive liabilities that reprice or mature within the same time frame totaling $299,278,000. The cumulative GAP position (the difference between interest sensitive assets and interest sensitive liabilities) of a negative $51,617,000 resulted in a GAP ratio (calculated as interest sensitive assets divided by interest sensitive liabilities) of 0.83%. This compares to a twelve month cumulative GAP position at December 31, 2005, of a negative $32,496,000 and a GAP ratio of 0.88%. A negative GAP position indicates that the Company has more interest-bearing liabilities than interest-earning assets that reprice within the period measured, 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 period measured. The Bank’s Asset/Liability Management Committee (“ALCO”) is charged with the responsibility of managing, to the degree prudently possible, the Company’s exposure to “interest rate risk,” while attempting to provide earnings enhancement opportunities. The Bank’s ALCO realizes that GAP is limited in scope since it does not capture all the options or repricing opportunities in the balance sheet. Therefore, ALCO places its emphasis on Income at Risk and Economic Value of Equity measurements. Based on alternative interest rate scenarios used by the Company in modeling for asset/liability planning purposes, the GAP position at September 30, 2006 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 10.0% when rates are gradually increased or decreased 200 basis points over 12 months. Also, Economic Value of Equity would not change more than the target 25% if rates were shocked up and down 2%. Such estimates and predictions are forecasts which may or may not be realized. See “ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK”.

 

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Results of Operations

Net Earnings

Net earnings increased $35,000 (2.2%) to $1,661,000 for the three month period ended September 30, 2006, compared to $1,626,000 for the same period of 2005. Basic and diluted net earnings per share were $0.44 and $0.42 for the third quarters of 2006 and 2005, respectively. Net earnings increased $298,000 (6.3%) to $5,038,000 for the nine month period ended September 30, 2006 compared to $4,740,000 for the same period of 2005. During the nine month period ended September 30, 2006 compared to the same period of 2005, the Company experienced an increase in net interest income and a decrease in noninterest expense and provision for loan losses. This was offset by a decrease in noninterest income.

Net Interest Income

Net interest income was $3,782,000 for the third quarter of 2006, an increase of $114,000 (3.1%) from $3,668,000 for the same period of 2005. Net interest income increased $216,000 (2.0%) to $11,198,000 for the nine months ended September 30, 2006, compared to $10,982,000 for the nine months ended September 30, 2005. This change for the first nine months of 2006 resulted primarily from an increase in the average volume in interest-earning assets offset by a decrease in the net yield on total interest earning assets of 3 basis points to 2.74%. Through the third quarter of 2006, the Company’s GAP position was more liability sensitive to changes in interest rates. The Company continues to regularly review and manage its asset/liability position in an effort to manage the negative effects of changing rates. See 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 $8,849,000 and $7,669,000 for the three months ended September 30, 2006 and 2005, respectively. This represents an increase of $1,180,000 (15.4%) for the third quarter of 2006 compared to the third quarter of 2005. For the nine months ended September 30, 2006, interest and dividend income was $25,615,000, an increase of $3,577,000 (16.2%) compared to $22,038,000 for the same period of 2005. This change for the first nine months of 2006 resulted as the Company’s yield on interest-earning assets increased 64 basis points while the average volume of interest-earning assets outstanding increased by approximately $20,582,000 (3.7%) over the same period of 2005. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

Loans are the main component of the Bank’s earning assets. Interest and fees on loans were $5,502,000 and $4,783,000 for the third quarters of 2006 and 2005, respectively. This reflects an increase of $719,000 (15.0%) during the three months ended September 30, 2006 over the same period of 2005. For the nine month period ended September 30, 2006, interest and fees on loans increased $2,427,000 (18.2%) to $15,774,000 from $13,347,000 for the same period of 2005. The average volume of loans increased $14,333,000 (5.2%) for the nine months ended September 30, 2006 compared to the same period for 2005, while the Company’s yield on loans also increased by 81 basis points resulting in the increase in interest and fees on loans for the nine months ended September 30, 2006 compared to the same period for 2005.

For the three month period ended September 30, 2006, interest income on investment securities increased $454,000 (16.2%) to $3,259,000 from $2,805,000 for the same period of 2005. Interest income on investment securities for the nine month period ended September 30, 2006, increased $1,087,000 (12.8%) to $9,565,000 from $8,478,000 for the same period of 2005. The Company’s average volume of investment securities increased by $8,173,000 (2.9%) for the first nine months of 2006 compared to the same period of 2005, while the net yield on these average balances also increased by 42 basis points. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

Interest Expense

Total interest expense increased $1,068,000 (26.7%) to $5,068,000 for the third quarter of 2006 compared to $4,000,000 for the same period of 2005. Total interest expense increased $3,361,000 (30.4%) to $14,417,000 from $11,056,000 for the nine months ended September 30, 2006 and 2005, respectively. This change was due to an increase of 74 basis points in the rates paid on those liabilities during the first nine months of 2006 compared to the same period of 2005 and a 5.1% increase in the Company’s average volume of interest-bearing liabilities. See the “CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES” table.

 

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Table of Contents

Interest on deposits, the primary component of total interest expense, increased $1,035,000 (37.0%) to $3,833,000 for the third quarter of 2006 compared to $2,798,000 for the same period of 2005. Interest on deposits was $10,735,000 and $7,473,000 for the nine months ended September 30, 2006 and 2005, respectively. The increase for the nine month period ended September 30, 2006 is due to a 95 basis point increase in the rate paid on interest-bearing deposits and a 5.8% increase in the average volume of such deposits.

Interest expense on other borrowings was $1,160,000 for the third quarter of 2006 and $1,179,000 for the same period of 2005. This represents a decrease of $19,000 (1.6%). For the nine months ended September 30, 2006, interest expense on borrowed funds decreased $74,000 (2.1%) to $3,452,000 from $3,526,000 for the same period of 2005. This decrease for the nine month period ended September 30, 2006 is mainly due to a 6 basis point decrease in the rate paid on other borrowed funds and a 0.8% decrease in the average volume of other borrowed funds. The decrease in the rate paid on other borrowed funds resulted from a restructuring of several FHLB advances in the third quarter of 2005.

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 $295,000 and $420,000 for the nine months ended September 30, 2006 and 2005, respectively. Despite loan growth, the provision for loan losses decreased for the nine month period ended September 30, 2006 compared to the same period of 2005 due to management’s judgment and estimates related to the size of the allowance for loan losses in relation to the credit quality and performance of the loan portfolio during these periods. This improved credit quality and performance resulted from a decrease in nonperforming assets. See “—Allowance for Loan Loss AND RISK ELEMENTS.”

Noninterest Income

Noninterest income decreased $710,000 (38.5%) to $1,133,000 for the third quarter of 2006 from $1,843,000 for the same period of 2005. Noninterest income was $3,432,000 and $5,215,000 for the nine months ended September 30, 2006 and 2005, respectively. This decrease is mainly due to a decrease in other noninterest income.

Other noninterest income decreased $640,000 (44.0%) to $815,000 for the third quarter of 2006 from $1,455,000 for the same period of 2005. Other noninterest income was $2,379,000 and $4,073,000 for the nine months ended September 30, 2006 and 2005, respectively. This represents a decrease of $1,694,000 (41.6%) for the nine month period ended September 30, 2006 compared to the same period of 2005. This decrease was primarily due to the Company moving its MasterCard/VISA merchant processing to a third party in mid 2005; however, the net effect of the Company moving its MasterCard/VISA merchant processing to a third party resulted in an increase in net earnings of $89,000 for the nine month period ended September 30, 2006 compared to the same period of 2005.

Noninterest Expense

Total noninterest expense was $2,548,000 and $3,189,000 for the third quarters of 2006 and 2005, respectively, representing a decrease of $641,000 (20.1%). For the nine months ended September 30, 2006, total noninterest expense decreased $1,911,000 (20.2%) to $7,549,000 from $9,460,000 for the same period of 2005. This decrease was mainly due to a decrease in other noninterest expense.

For the third quarter of 2006, other noninterest expense decreased $647,000 (42.9%) to $860,000 from $1,507,000 for the third quarter of 2005. Other noninterest expense was $2,544,000 and $4,497,000 for the nine months ended September 30, 2006 and 2005, respectively. This represents a decrease of $1,953,000 (43.4%). This decrease is primarily due to a decrease in MasterCard/VISA processing expense as a result of the Company moving its MasterCard/VISA processing to a third party in mid 2005, as mentioned above.

 

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Income Taxes

Income tax expense was $621,000 and $577,000 for the third quarters of 2006 and 2005, respectively representing an increase of $44,000 (7.6%). For the nine months ended September 30, 2006, income tax expense increased $171,000 (10.8%) to $1,749,000 from $1,578,000 for the nine months ended September 30, 2005. These levels represent an effective tax rate on pre-tax earnings of 25.8% for the nine months ended September 30, 2006 and 25.0% for the same period of 2005. The increase in effective tax rate is mainly due to a decrease in earnings on bank-owned life insurance and an overall increase in earnings before income taxes compared to the same period last year.

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 interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of desired performance levels.

 

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Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARY

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

Taxable Equivalent Basis

 

     Nine Months Ended September 30,  
    

2006

   

2005

 
     Average
Balance
    Interest    Yield/
Rate
    Average
Balance
    Interest    Yield/
Rate
 
     (Dollars in thousands)     (Dollars in thousands)  
ASSETS               

Interest-earning assets:

              

Loans, net of unearned income (1)

   $ 287,820       15,774    7.33 %   273,487       13,347    6.52 %

Investment securities:

              

Taxable

     240,036       8,044    4.48 %   236,309       7,117    4.03 %

Tax-exempt (2)

     48,311       2,304    6.38 %   43,865       2,061    6.28 %
                                

Total investment securities

     288,347       10,348    4.80 %   280,174       9,178    4.38 %

Federal funds sold

     7,000       250    4.77 %   8,344       185    2.96 %

Interest-earning deposits with other banks

     728       25    4.59 %   1,308       28    2.86 %
                                

Total interest-earning assets

     583,895       26,397    6.04 %   563,313       22,738    5.40 %

Allowance for loan losses

     (3,944 )        (3,693 )     

Cash and due from banks

     13,250          11,858       

Premises and equipment

     2,334          2,591       

Rental property, net

     1,786          1,311       

Other assets

     25,343          22,790       
                        

Total assets

   $ 622,664          598,170       
                        
LIABILITIES & STOCKHOLDERS’ EQUITY               

Interest-bearing liabilities:

              

Deposits:

              

NOW

   $ 67,184       1,255    2.50 %   68,286       886    1.73 %

Savings and money market

     142,346       3,829    3.60 %   118,764       1,945    2.19 %

Certificates of deposits less than $100,000

     84,463       2,797    4.43 %   86,987       2,409    3.70 %

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

     102,277       2,854    3.73 %   100,391       2,233    2.97 %
                                

Total interest-bearing deposits

     396,270       10,735    3.62 %   374,428       7,473    2.67 %

Federal funds purchased and securities sold under agreements to repurchase

     6,367       229    4.81 %   2,538       57    3.00 %

Other borrowed funds

     104,587       3,452    4.41 %   105,433       3,526    4.47 %
                                

Total interest-bearing liabilities

     507,224       14,416    3.80 %   482,399       11,056    3.06 %

Noninterest-bearing deposits

     69,453          67,823       

Accrued expenses and other liabilities

     2,035          2,732       

Stockholders’ equity

     43,952          45,216       
                        

Total liabilities and stockholders’ equity

   $ 622,664          598,170       
                        

Net interest income

     $ 11,981        $ 11,682   
                      

Net yield on total interest-earning assets

        2.74 %        2.77 %
                      

(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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company models economic value of equity as a measure of market risk. As of December 2005, economic value of equity would increase 2.36% if rates decrease 200 basis points and decrease 0.95% if rates increase 200 basis points. As of September 2006, if rates decrease 200 basis points, economic value of equity would increase 7.84% and, if rates increase 200 basis points, economic value of equity would decrease 23.28%.

The Company became more liability-sensitive for a 12 month forecast. The Company’s model projection for the next 12 months reflects greater volatility in liabilities. This is primarily due to a greater volume of variable rate non-maturity deposits. 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 4.77% 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 increase by 4.97%. In December, the exposure in a ramp down scenario was a positive 2.36% and the ramp up exposure was a negative 1.38%. The Company recognizes there is uncertainty concerning the direction of future interest rates, but management believes it needs to prepare for the risk of falling interest rates. The model demonstrates the company is positioned for falling interest rates; however, the duration of assets and liabilities are fluid and driven by market conditions. As the Company does not consider this change in market sensitivity to be significant, the market rate table, as shown in the Company’s annual report on Form 10-K for the year ended December 31, 2005, has not been updated in this filing.

ITEM 4. CONTROLS AND PROCEDURES

As of September 30, 2006, 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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PART II OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

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)     

July 1 – July 31

   5,220    $ 23.71    N/A    $ 0

August 1 – August 31

   5,279    $ 24.17    N/A    $ 0

September 1 – September 30

   1,200    $ 25.10    N/A    $ 0

Total

   11,699    $ 24.06    N/A    $ 0

1 A total of 11,699 shares were purchased in privately negotiated transactions.

ITEM 6. EXHIBITS

 

Exhibit
Number
 

Description

3.1   Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*
3.2   Bylaws of Auburn National Bancorporation, Inc. **
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 September 30, 2002.

** Incorporated by reference from Registrant’s Form 8-K dated April 13, 2005.

***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.

 

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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: November 14, 2006   By:  

/s/ E. L. Spencer, Jr.

    E. L. Spencer, Jr.
    President, Chief Executive
    Officer and Chairman of the Board
Date: November 14, 2006   By:  

/s/ C. Wayne Alderman

    C. Wayne Alderman
\     Director of Financial Operations

 

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