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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended JUNE 30, 1996
-----------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period __________ to __________
Commission file number 0-26486
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AUBURN NATIONAL BANCORPORATION, INC.
(Exact Name of Small Business Issuers as Specified in Its Charter)
DELAWARE 63-0885779
(State of Other Jurisdiction of (I.R.S.Employer
Incorporation of Organization) Identification No.)
165 EAST MAGNOLIA AVENUE, SUITE 203, AUBURN, ALABAMA 36830
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(Address of Principal Executive Offices)
(334) 821-9200
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
YES_____ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of July 31, 1996: 1,303,071 SHARES OF COMMON STOCK, $.01 PAR
-------------------------------------------
VALUE PER SHARE
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Transitional Small Business Disclosure Format (check one):
YES NO X
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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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<S> <C> <C>
Item 1 Financial Information
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for
the Three Months and Six Months
Ended June 30, 1996 and 1995 4
Consolidated Statements of Changes in
Stockholders' Equity for June 30, 1996
and December 31, 1995 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996
and 1995 6
Notes to Consolidated Financial Statements 7
Item 2 Managements Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
- - -----------------------------
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits 18
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AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
ASSETS 6/30/96 12/31/95
--------------------------- ------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash and due from banks 8,064,167 8,175,545
Federal funds sold securities purchased under
agreements to resell 610,000 10,575,000
------------ -------------
Cash and cash equivalents 8,674,167 18,750,545
Interest bearing deposits with other banks 11,304 7,110
Investment securities held to maturity (fair value of
$21,175,194 and $26,084,159 at June 30, 1996 and
December 31, 1995, respectively):
Taxable 19,787,352 24,195,972
Tax-exempt 1,544,581 1,564,609
------------ -------------
Total Investment Securities Held to Maturity 21,331,933 25,760,581
Investment securities available for sale, net
(unrealized holding losses of $417,753 and
unrealized holding gains of $154,130 at
June 30, 1996 and December 31, 1995, respectively)
Taxable 42,769,476 30,773,639
Tax-exempt 480,000 --
------------ -------------
Total Investment Securities Available for Sale 43,249,476 30,773,639
Loans & Lease Receivables:
Loans & Lease Receivables, less unearned income
of $115,228 at June 30, 1996 and $156,935 at
December 31, 1995 150,655,284 140,470,965
Less allowance for loan & lease losses (including
valuation reserve for impaired loans) (2,028,020) (2,012,133)
------------ -------------
Loans & Lease Receivables, net 148,627,264 138,458,832
Premises and equipment, net 3,501,883 3,626,943
Rental property, net 1,932,030 1,978,192
Other assets 2,999,277 2,841,630
------------ -------------
Total assets $230,327,334 $222,197,472
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
------------------------------------------
Deposits:
Non-interest bearing 29,040,683 25,491,056
Interest bearing 159,429,640 160,311,472
------------- -------------
Total Deposits 188,470,323 185,802,528
Federal funds purchased and repurchase agreements 6,102,047 7,010,098
Other short term borrowings 1,417,136 472,195
Other borrowed funds 10,968,883 6,029,138
Accrued expenses and other liabilities 1,441,300 1,443,905
Employee Stock Ownership Plan debt 170,946 170,946
------------- -------------
Total liabilities 208,570,635 200,928,810
Stockholders' equity:
Preferred stock of $.01 par value; authorized
200,000 shares; issued shares-none -- --
Common stock of $.01 par value; authorized
1,750,000 shares; issued 1,319,045 at
June 30, 1996 and December 31, 1995,
respectivley 13,190 13,190
Surplus 3,685,488 3,685,488
Retained earnings 18,829,698 17,749,910
------------- -------------
22,528,376 21,448,588
Less: Unrealized loss on mutual funds and
investment securities available for sale,
net of taxes (279,835) 90,775
Treasury stock, 17,085 shares and 5,820 shares
at June 30, 1996 and December 31, 1995,
respectively, at cost (320,896) (99,755)
Employee Stock Ownership Plan debt (170,946) (170,946)
------------- -------------
Net stockholders' equity 21,756,699 21,268,662
Commitments --- ---
------------- -------------
Total liabilities and stockholders' equity $230,327,334 $222,197,472
============ ============
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AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Statements of Earnings
For The Three Months and Six Months Ended June 30, 1996 and 1995
Three Months Ended June 30, Six Months Ended June 30
-------------------------------- -----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
-------------- -------------- -------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Interest income:
Interest and fees on loans $3,157,880 $3,117,500 $6,244,678 $6,058,301
Interest and dividends on investment
securities held to maturity:
Taxable 369,653 570,876 773,987 1,142,258
Tax-exempt 26,235 41,186 52,819 78,254
-------------- -------------- -------------- ------------
Total interest and dividends on
investment securities-HTM 395,888 612,062 826,806 1,220,512
Interest and dividends on investment securities
available for sale:
Taxable 713,275 365,905 1,259,703 572,617
Tax-exempt 1,984 -- 3,569 --
-------------- -------------- -------------- ------------
Total interest and dividends on
investment securities-AFS 715,259 365,905 1,263,272 572,617
Interest on federal funds sold 18,022 127,246 122,938 218,565
Interest on interest-bearing deposits
with other banks 349 1,076 813 2,251
-------------- -------------- -------------- -------------
Total interest income 4,287,398 4,223,789 8,458,507 8,072,246
Interest expense:
Interest on deposits 2,049,029 2,139,136 4,116,914 3,823,244
Interest on federal funds purchased 24,061 0 51,860 8,350
Interest on securities sold under
agreements to repurchase 104,846 21,432 188,476 51,554
Interest on other borrowings 123,377 139,747 220,963 421,637
-------------- -------------- -------------- -------------
Total interest expense 2,301,313 2,300,315 4,578,213 4,304,785
-------------- -------------- -------------- -------------
Net interest income 1,986,085 1,923,474 3,880,294 3,767,461
Provision for loan losses (1,300) 124,080 (4,697) 214,080
-------------- -------------- -------------- -------------
Net interest income after provision
for loan losses 1,987,385 1,799,394 3,884,991 3,553,381
Noninterest income:
Service charges on deposit accounts 204,512 181,703 389,090 369,198
Investment securities gains/(losses), net 5,639 26,453 9,639 27,203
Other 372,447 482,303 674,373 737,748
-------------- -------------- -------------- ------------
Total noninterest income 582,598 690,459 1,073,102 1,134,149
Noninterest expense:
Salaries and benefits 703,784 780,929 1,438,789 1,549,766
Net occupancy expense 199,306 189,037 401,892 356,564
Other 605,630 788,446 1,116,026 1,469,908
-------------- -------------- -------------- ------------
Total noninterest expense 1,508,720 1,758,412 2,956,707 3,376,238
Earnings before income tax expense 1,061,263 731,441 2,001,386 1,311,292
Income tax expense 348,540 258,608 647,991 472,570
-------------- -------------- -------------- ------------
Net earnings $712,723 $472,833 $1,353,395 $838,722
============= ============= ============= ============
Net earnings per share $0.55 $0.36 $1.04 $0.65
============= ============= ============= ============
Weighted average shares outstanding 1,302,943 1,306,460 1,306,021 1,282,413
============= ============= ============= ============
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AUBURN NATIONAL BANCORPORATION & SUBSIDIARIES
CHANGES IN STOKCHOLDERS EQUITY
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND JUNE 30, 1996
Unrealized
Gain/(Loss) on
Mutual Funds Employee
and Securities Stock
Retained Available for Ownership Treasury
Common Stock Surplus Earnings Sale Plan debt Stock Total
------------ -------- ----------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 12,500 2,452,449 16,128,345 (348,663) (227,953) (74,994) 17,941,684
Issuance of Common Stock
(69,045 shares) 690 1,233,039 --- --- --- --- 1,233,729
Net earnings --- --- 2,091,234 --- --- --- 2,091,234
Cash dividends paid
($0.36 per share) --- --- (469,669) --- --- --- (469,669)
Change in net unrealized gain
(loss) on mutual funds and
investment securities available
for sale of bank subsidia --- --- --- 439,438 --- --- 439,438
Payment of Employee Stock
Ownership Plan Debt --- --- --- --- 57,007 --- 57,007
Purchase of treasury stock
(1,202 shares) --- --- --- --- --- (24,761) (24,761)
---------- ---------- ----------- ------------ --------- ---------- -----------
Balance at December 31, 1995 $ 13,190 3,685,488 17,749,910 90,775 (170,946) (99,755) 21,268,662
Through June 30, 1996 (Unaudited):
Net earnings --- --- 1,353,395 --- --- --- 1,353,395
Cash dividends paid ($0.21 per share) --- --- (273,607) --- --- --- (273,607)
Change in net unrealized gain (loss)
on mutual funds and investment
securities available for sale
of bank subsidiary --- --- --- (370,610) --- --- (370,610)
Purchase of treasury stock
(11,265 shares) --- --- --- --- (221,141) (221,141)
---------- ----------- ----------- ------------ --------- ----------- -----------
Balance at June 30, 1996
(Unaudited) $ 13,190 3,685,488 18,829,698 (279,835) (170,946) (320,896) 21,756,699
========== ========== ========== =========== ========= ========== ==========
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<CAPTION>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flow
For The Six Months Ended June 30, 1996 and 1995
1996 1995
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $1,353,395 $838,722
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 433,127 380,654
Accretion of discount & loan fees (66,438) (20,270)
Provision for loan losses and adjustment for impaired loa (4,697) 214,080
Increase in loans originated for resale (8,554,415) (2,676,625)
Proceeds from sale of loans originated for resale 3,229,448 3,709,107
Loss on sale of premises & equipment 186 668
Increase in interest receivable (169,789) (190,648)
Decrease in other assets 129,630 355,263
Increase/(decrease) in interest payable (63,414) 301,859
Increase in other liabilities 60,809 99,237
------------ ------------
Net cash (use in)/provided by operating activities (3,652,158) 3,012,047
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 4,407,167 2,488,152
Purchases of investment securities held to maturity (17,700) ---
Proceeds from maturities/calls/paydowns of investment
securities available for sale 7,826,657 1,001,611
Proceeds from sale of investment securities available
for sale 2,535,079 ---
Purchases of investment securities available for sale (23,413,803) (13,628,911)
Net increase in loans (4,838,768) (2,350,519)
Purchases of premises and equipment (67,030) (759,152)
Purchases of rental property (1,310) ---
Proceeds from lease of other real estate --- 2,269
Net (increase)/decrease in interest-bearing deposits with
other banks (4,194) 2,429
------------ ------------
Net cash used in investing activities (13,573,902) (13,244,121)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in non-interest bearing deposits,
NOW accounts and savings accounts 5,955,509 (5,253,665)
Net increase/(decrease) in certificates of deposit (3,287,714) 28,977,816
Net decrease in securities sold under agreements
to repurchase (908,051) (3,629,436)
Increase/(decrease) in borrowings from FHLB 4,950,000 (8,050,000)
Net increase in other short-term borrowings 944,941 300,653
Other net decrease in long-term debt (10,255) (9,193)
Proceeds from issuance of Common Stock --- 1,237,265
Purchase of treasury stock (221,141) (24,761)
Dividends paid (273,607) (233,287)
------------ ------------
Net cash provided by financing activities 7,149,682 13,315,392
------------ ------------
Net increase/(decrease) in cash and cash equivalents (10,076,378) 3,083,318
Cash and cash equivalents at beginning of year 18,750,545 13,115,402
------------ ------------
Cash and cash equivalents at end of period $8,674,167 $16,198,720
=========== ===========
Supplemental information on cash payments:
Interest paid $4,641,627 $4,002,926
=========== ===========
Income taxes paid $606,592 $495,474
=========== ===========
Supplemental information on noncash transactions:
Loans transferred to other real estate $90,585 $23,000
=========== ===========
Change in unrealized gain (loss) on investment
securities available for sale, net of change
in deferred tax ($370,610) $379,234
=========== ===========
Non-cash Dividend from Bank Subsidiary to Parent
Company, net --- $341,092
=========== ===========
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AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- GENERAL
The consolidated financial statements in this report have not been audited.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations for the interim periods have
been made. All such adjustments are of a normal recurring nature. The results of
operations are not necessarily indicative of the results of operations which the
Company may achieve for the entire year. For further information, refer to the
consolidated financial statements and footnotes included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1995.
NOTE 2- ACCOUNTING PRONOUNCEMENTS
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights
an amendment of FASB Statement No. 65 (SFAS No. 122). SFAS No. 122 amends SFAS
65 and required that a mortgage banking enterprise recognize as separate assets,
rights to service mortgage loans for others, however those servicing rights are
acquired. SFAS No. 122 also requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights. SFAS No. 122 is effective for financial statements issued for
fiscal years beginning after December 15, 1995. The Company adopted SFAS No.
122 effective January 1, 1996 with no material effect on its financial condition
or results of operation.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Such
instruments include stock purchase plans, stock options, restricted stock, and
stock appreciation rights. SFAS No. 123 also applies to transactions in which
an entity issues its equity instruments to acquire goods or services from
nonemployees. Those transactions are accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. SFAS No. 123 provides a choice for
accounting for employee stock compensation plans. A company can elect to use
the new fair-value-based method of accounting for employee stock compensation
plans, under which compensation cost is measured and recognized in results of
operations; or, continue to account for these plans under the current account
standards. Entities electing to remain with the present accounting standards
must make disclosures of what net income and earning per share would have been
if the fair-value-based method of accounting had been applied. The Company has
not issued any stock-based compensation, although it does have a "1994 Long-Term
Incentive Plan" pursuant to which such compensation may be granted. Upon the
granting of any stock options, the Company plans to account for employee stock
options using the present accounting standards and include the required
disclosures in the financial statements. SFAS No. 123 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of various factors related to the Company's results of operations
and financial condition. This discussion is intended to supplement and
highlight information contained in the accompanying unaudited consolidated
financial statements for the six month periods ended June 30, 1996 and 1995.
SUMMARY
Net income of $713,000 for the quarter ended June 30,1996 represented a
increase of $240,000 (50.7%) from the Company's net income of $473,000 for the
same period of 1995. Earnings per average Share of Common Stock outstanding
increased $0.19 (52.8%) to $0.55 during the second quarter of 1996 from $0.36
for the second quarter of 1995 due primarily to the increase in net income.
Net income increased $514,000 (61.3%) to $1,353,000 for the six month period
ended June 30, 1996 compared to $839,000 for the same period of 1995. Earnings
per average Share of Common Stock outstanding increased $0.39 (60.0%) to $1.04
during the first six months of 1996 from $0.65 for the first six months of 1995.
During the three month and six month periods ended June 30, 1996 compared to the
same periods of 1995, the Company experienced an increase in net interest
income, while noninterest income and noninterest expense decreased. The net
yield on total interest earning assets was 3.74% for the six months ended June
30, 1996 compared to 3.84% for the six months ended June 30, 1995. While the
Prime interest rate was at a slightly lower level during the first six months of
1996, compared to the first six months of 1995, this decline in the net yield on
interest earning assets is due primarily to the increase in the average volume
of interest earning assets outstanding. See the "Consolidated Average Balances,
Interest Income/Expense and Yields/Rates" table.
Total assets of $230,327,000 at June 30, 1996 reflected an increase of
$8,130,000 (3.7%) over total assets of $222,197,000, at December 31, 1995. This
growth resulted primarily from growth in deposits and an increase in borrowings
which were used to purchase investment securities available for sale and to fund
new loan growth.
FINANCIAL CONDITION
INVESTMENT SECURITIES
Investment securities held to maturity were $21,332,000 and $25,761,000 at
June 30, 1996 and December 31, 1995, respectively. This decline of $4,429,000
(17.2%) resulted almost entirely from scheduled paydowns and calls of principal.
The significant increase of $12,475,000 (40.5%) in investment securities
available for sale to $43,249,000 at June 30, 1996 from $30,774,000 at December
31, 1995, reflects the reinvestment of federal funds sold and the runoff from
investment securities held to maturity in addition to the investment of funds
borrowed through repurchase agreements. The shift into investment securities
available for sale is a deliberate move by management to maintain flexibility in
its liquidity planning. Management also made the decision to take advantage of
current market yields as it replaced, in advance, a portion of its maturities,
paydowns and calls that are scheduled or anticipated during 1996. These
investments were made to provide and maintain acceptable yields on the
investment portfolio while providing an appropriate level of liquidity.
Federal funds sold decreased $9,965,0000 (94.2%) to $610,000 at June 30,
1996 from $10,575,000 at December 31, 1995. This decrease resulted as the
Company reinvested these funds into higher yielding short term investment
securities available for sale.
LOANS
Total loans, net of unearned income, of $150,655,000 at June 30, 1996
reflected an increase of $10,184,000 (7.3%) compared to the total loans of
$140,471,000, net of unearned income, at December 31, 1995. This growth
continues to occur primarily in the consumer real estate mortgage portfolio and
consists almost entirely of five year adjustable rate mortgage loans ("ARMs").
These ARMs generally have caps limiting increases in the interest rate of 3% in
any five year adjustment period and 6% over the lifetime of the loan. Consumer
real estate mortgage loans represented approximately 41.0% and 38.7% of the
Bank's total loan portfolio at June 30, 1996 and December 31, 1995,
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respectively. In addition, the Bank experienced some growth in its commercial
real estate construction and consumer installment loans during the first six
months of 1996 after experiencing declines during 1995 as a result of the Bank's
decision to sell its entire credit card and student loan portfolios. The net
yield on loans and lease receivables was 8.76% for the six months ended June 30,
1996 compared to 8.59% for the six months ended June 30, 1995. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
The Company continues to originate residential mortgage loans for sale in
the secondary market. During the first quarter of 1996, the Bank sold originated
first mortgage real estate loans, totaling $1,569,000, with the Bank maintaining
the servicing on these loans and $1,661,000, with the servicing released. The
Bank sold no loans in the secondary market during the second quarter of 1996.
At June 30, 1996, the Bank had approximately $7,541,000 in first mortgage real
estate loans it anticipates holding until secondary market rates are more
favorable for the sale of these loans.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights an amendment of FASB Statement No. 65 (SFAS No. 122). SFAS No. 122
amends SFAS No. 65 and requires that a mortgage banking enterprise recognize as
separate assets, rights to service mortgage loans for others, however those
rights are acquired. SFAS No. 122 also requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. The Company adopted SFAS No. 122 effective
January 1, 1996. At June 30, 1996, the Company had no capitalized purchased
mortgage servicing rights and had capitalized cost of servicing rights acquired
through its loan origination activities of an insignificant amount.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses represents management's assessment
of the risk associated with extending credit and its evaluation of the quality
of the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance and the appropriate provision required to maintain a
level considered adequate to absorb anticipated loan and lease losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans and leases in the portfolio. Management also considers such
factors as the Bank's loan and lease loss experience, the amount of past due and
nonperforming loans and leases, specific known risk, the status and amount of
nonperforming assets, underlying collateral values securing loans and leases,
current and anticipated economic conditions and other factors which affect the
allowance for potential credit losses.
The allowance for loan and lease losses, including the valuation reserve
for impaired loans, was $2,028,000 at June 30, 1996. Management believes that
this level of reserves (1.35% of total outstanding loans, net of unearned
income) is adequate to absorb known risks in the portfolio. No assurance can be
given, however, that adverse economic circumstances will not result in increased
losses in the Bank's loan portfolio.
During the first six months of 1996, the Bank made no monthly provisions to
the allowance for loan and lease losses based on management's assessment of the
credit quality of the loan portfolio, coupled with the relatively low level of
net charge-offs. However, as loan demand began to increase and the loan
portfolio grew during the second quarter of 1996, management has decided to
restart monthly accruals, in the amount of $15,000, to the allowance for loan
and lease losses beginning in July of 1996. As of June 30, 1996, the Bank had
charge-off loans of $87,000 and recoveries of $108,000.
At June 30, 1996, the Company had 10 credits, totaling approximately
$631,000, that were identified as impaired. Loans, totaling $544,000, had no
associated valuation allowance due to the estimated value of related collateral
in excess of the carrying value. Two credits, totaling $87,000, resulted in a
valuation allowance of approximately $69,000. This decline of approximately
$5,000 (6.8%) in the amount of valuation allowance for impaired loans over
December 31, 1995 was due primarily to scheduled paydowns of the principal
balances on impaired loans and was realized through a credit to the provision
for loan and lease losses. See "---Provision for Loan and Lease Losses."
The Company has made no change in the way it recognizes income on impaired
loans. During the first six months of 1996, the Company recognized and
collected approximately $30,000 in interest income on impaired loans.
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Potential problem loans consist of those loans where management has serious
doubts as to the borrower's ability to comply with the present loan repayment
terms. At June 30, 1996, 43 loans totaling approximately $1,140,000 were
considered potential problem loans. This level is slightly lower than the level
at December 31, 1995.
NONPERFORMING ASSETS
Nonperforming assets were $346,000 at June 30, 1996 compared to $270,000
at December 31, 1995. This change resulted primarily from increases of $26,000
and $60,000 in nonaccrual loans and accruing loans 90 days or more past due,
respectively.
If nonaccrual loans had performed in accordance with their original
contractual terms, interest income would have increased approximately $3,000 and
$2,000 for the six months ended June 30, 1996 and 1995, respectively. Net
income included approximately $2,000 and $3,000 of interest income earned and
collected on certain loans that were subsequently placed on nonaccrual status
during the first six months of 1996 and 1995, respectively.
DEPOSITS
Total deposits increased $2,667,000 (1.4%) to $188,470,000 at June 30,
1996, as compared to $185,803,000 at December 31, 1995. Noninterest-bearing
deposits increased $3,550,000 (13.9%) during the first six months of 1996 while
total interest-bearing deposits decreased $882,000 (0.6%) to $159,430,000 at
June 30, 1996 from $160,312,000 at December 31, 1995. The growth in
noninterest-bearing deposits is due primarily to an increase in commercial
demand deposits. The average rate paid on interest-bearing deposits was 5.22%
for the six months ended June 30, 1996 compared to 5.04% for the same period of
1995. During the first six months of 1996, the Bank experienced an increase of
approximately $6,266,000 (16.9%) in its Money Market Deposit accounts. This
increase Money Market Deposit accounts resulted from new deposit growth and a
shift of approximately $4,250,000 (18.3%) from NOW accounts into the Bank's
Money Market Index accounts. In addition, certificates of deposits under
$100,000 decreased approximately $2,710,000 (3.5%) during the first six months
of 1996. This decline resulted from funds being withdrawn as the Bank allowed
the rates on the one year, special rate certificates of deposit, offered in the
first quarter of 1995, to adjust downward to its current market interest rates.
The Company considers the shifts in the deposit mix and the deposit runoff to be
within the normal course of business and in line with the management of the
Bank's overall cost of funds. See the "Consolidated Average Balances, Interest
Income/Expense and Yields/Rates" table.
CAPITAL RESOURCES
The Company's consolidated stockholders' equity was $21,757,000 at June 30,
1996, compared to $21,269,000 at December 31, 1995. This represents an increase
of $488,000 (2.3%) during the first six months of 1996. Net earnings for the
first six months of 1996 continues to run ahead of net earnings for the same
period of 1995. However, 1996 earnings have been partially offset as the
Company experienced a change to an unrealized loss, net of taxes, at June 30,
1996 from an unrealized gain, net of taxes, at December 31, 1995 on its
investment securities available for sale. In addition, during the six month
period ended June 30, 1996, the Company purchased 11,265 shares of Treasury
Stock from the Employee Stock Ownership Plan ("ESOP") as a result of terminating
ESOP participants.
During the first six months of 1996, cash dividends of $274,000, or $0.21
per Share, were declared on Common Stock. While the cash dividends per share
increased slightly over 1995, the Company's dividend payout ratio declined to
20.2% for the six months period ended June 30, 1996 from 31.0% for the same
period of 1995. This decline in the dividend payout ratio is due primarily to
the increase in the earnings per share for the first six months of 1996. The
Board of Directors evaluates trends in the Company's earnings in establishing
the level of dividends declared.
The Company implemented its Dividend Reinvestment Plan (the "Plan") during
the second quarter of 1996. This plan provides shareholders with a convenient
and economical method of reinvesting cash dividends for the purchase of
additional shares of Common Stock. Plan participants who are customers of the
Bank, also may, at their option, purchase additional shares of Common Stock
through automatic deduction from their eligible Bank deposit accounts through
the Plan's Customer Optional Cash Purchase feature. Synovus Financial Corp.,
the Company's designated independent agent (the "Agent"), serves as the
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<PAGE>
administrator of the Plan. Shares of Common Stock that may be purchased under
the Plan may be newly-issued shares, shares held in treasury of the Company or
shares purchased in the market or by negotiated transactions and may be on such
terms as to price, delivery and otherwise as the Agent may determine. Proceeds
from any sale of Common Stock by the Company will be immediately available to
the Company for general corporate purposes.
The Company's risk-weighted assets were $135,000,000 at June 30, 1996.
Risk-weighted capital guidelines require the capital strength of the Company to
be measured using Tier I and Tier II capital. The Company's Tier I capital
consists of common equity, adjusted for unrealized gains and losses on debt
securities available for sale. Tier II capital components include qualifying
allowance for loan and lease losses. Total Qualifying Capital, consisting of
Tier I capital plus Tier II capital components, was $23,680,000 at June 30,
1996. The Company's Leverage capital ratio was 9.55%, Tier I capital ratio was
16.28% and Total Capital ratio was 17.53% at June 30, 1996. These ratios exceed
the minimum regulatory capital percentages of 3.0% to 5.0% leverage capital,
4.0% Tier I capital and 8.0% Total Capital. Based on current regulatory
standards, the Company believes it is a "well capitalized" bank.
LIQUIDITY
The primary source of liquidity during the first six months of 1996
continues to be through maturities, calls and paydowns of investment
securities, investment securities sold under agreements to repurchase, coupled
with an additional advance from the Federal Home Loan Bank of Atlanta ("FHLB-
Atlanta"). The Company used these funds primarily to purchase investment
securities available for sale and to fund new loan growth. Under the advance
program with FHLB-Atlanta, the Bank had outstanding advances totaling
approximately $10,700,000, leaving credit available, net of advances drawn down,
of approximately $14,300,000 at June 30, 1996.
Net cash used in operating activities of $3,652,000 for the six months
ended June 30, 1996, consisted primarily of net earnings offset by a net
increase in loans originated for resale. Net cash used in investing activities
of $13,574,000 consisted primarily of a net increases of $8,663,000 in
investment securities and $4,839,000 loans. The $7,150,000 in net cash provided
by financing activities resulted from net increases of $2,668,000 in deposits
and $4,950,000 in advances from the FHLB-Atlanta.
INTEREST RATE SENSITIVITY MANAGEMENT
At June 30, 1996, interest sensitive assets that repriced or matured within
the next 12 months were $104,523,000, compared to interest sensitive liabilities
that reprice or mature within the same time frame totaling $141,035,000. The
cumulative GAP position at the end of the first six months of 1996, including
the effect of off balance sheet items, was a negative $51,512,000, resulting in
a GAP ratio of 67.0%. This compares to a cumulative GAP position at December
31, 1995, including the effect of off balance sheet items, of a negative
$6,802,000, resulting in a GAP ratio of 94.3%. A negative GAP position means
that the Company has more interest-bearing liabilities than interest earning
assets maturing during the GAP period. The increase in the negative GAP
position is due primarily to growth in the Bank's Money Market Deposit accounts
and a shortening in the maturity structure of the certificates of deposit less
than $100,000 as the two year, special rate certificates of deposit, offered in
February 1995, are scheduled to mature during the first quarter of 1997. A
negative GAP position provides benefits during a falling interest rate
environment. Due to balance sheet growth and the current interest rate
environment, the Bank's Asset/Liability Management Committee ("ALCO") revised
its guidelines for changes in net interest income due to changes in interest
rates from 3.0% to 5.0% in the 12 month GAP period. Based on ALCO's alternative
interest rate scenarios used by the Company in modeling for asset/liability
planning purposes and the GAP position at June 30, 1996, the Company's
asset/liability model indicated that the changes in the Company's net interest
income would be less than 5.0% for the 12 months ending June 30, 1997.
The Bank had an interest rate swap, with a notional value of $5,000,000,
that matured in June 1996. This contract was used to reduce the Bank's cost of
funds on its two year 6% certificates of deposit. The Bank replaced this
contract with another, $5,000,000 notional value, two year interest rate swap
where the Bank receives interest at a rate of 6.37% and pays interest at a rate
based on the three month LIBOR. This contract is also used to reduce the Bank's
cost-of-funds on its two year certificates of deposit.
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<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income increased $240,000 (50.7%) to $713,000 for the three month
period ending June 30, 1996 compared to $473,000 for the same period of 1995.
Earnings per average Share of Common Stock outstanding was $0.55 and $0.36 for
the second quarter of 1996 and 1995, respectively, an increase of 52.8%. Net
Income was $1,353,000 and $839,000 for the six month period ending June 30, 1996
and 1995, respectively. This represents an increase of $514,000 (61.3%). The
increases for the three month and six month periods ending June 30, 1996,
compared to the same periods of 1995, resulted primarily from expense reductions
in the provision for loan and lease losses and in noninterest expenses due to
declines in salary and benefits expense, insurance assessments by the Federal
Deposit Insurance Corporation ("FDIC"), expenses associated with other real
estate owned ("OREO") and marketing expenses. During the same periods, the
Company also experienced a decrease in noninterest income. The return on
average equity was 12.6% for the first six months of 1996, compared to 8.8% for
the same period of 1995.
NET INTEREST INCOME
Net interest income is the difference between the interest the Company
earns on its loans, investment securities and other earning assets and the
interest cost of its deposits, borrowed funds and other interest-bearing
liabilities. This is the primary component of the Company's earning. Net
interest income was $1,986,000 for the second quarter of 1996. The increase of
$63,000 (3.3%) over $1,923,000 for the same period of 1995 resulted as interest
income increased and interest expense remained flat. Net income increased
$113,000 (3.0%) to $3,880,000 for the six months ended June 30, 1996, compared
to $3,767,000 for the same period of 1995. During the first six months of 1996,
the average volume of earning assets and the average volume of interest-bearing
liabilities were up approximately 4.9% and 3.8%, respectively, over the same
period of 1995. The net taxable equivalent yield on the Company's interest
earning assets declined 10 basis points during the first six months of 1996,
compared to the same period of 1995. This change was due primarily to the
growth in earning assets. However, this net yield on earning assets is
basically unchanged from year-end 1995. During the first quarter of 1996, the
Prime interest rate declined to 8.25% and remained at that level through the
first six months of 1996. This prime rate is slightly lower than its level for
the first six months of 1995. During the first quarter of 1996, the Company's
GAP position became more liability sensitive to changes in interest rates as
compared to December 31, 1995. The Company continues to regularly review and
manage its asset/liability position in an effort to reduce the negative effects
of changing rates. See "Financial Condition - Interest Rate Sensitivity
Management" and the "Consolidated Average Balances, Interest Income/Expense and
Yields/Rates" table.
The Company continues to use interest rate protection contracts, primarily
interest rate swaps, caps and floors, to protect the yields on earning assets
and the rates paid on interest-bearing liabilities. The income and expense
associated with interest rate swaps, caps and floors are ultimately reflected as
adjustments to the interest income or expense of the underlying assets or
liabilities. For the six months ended June 30, 1996, the effect of such
interest rate protection contracts resulted in a net increase of $2,000 in
interest income and a net decrease of $15,000 in interest expense. As a result,
the effect on the yields on interest earning assets were negligible, while the
rates paid on interest-bearing liabilities declined 1 basis point during the
first six months of 1996.
INTEREST INCOME
Interest income is a function of the volume of interest earning assets and
their related yields. Interest income was $4,287,000 and $4,224,000 for the
three months ended June 30, 1996 and 1995, respectively. This represents an
increase of $63,000 (1.5%) for the second quarter of 1996. For the six months
ended June 30, 1996, interest income was $8,459,000, an increase of $387,000
(4.8%) compared to $8,072,000 for the same period of 1995. This change for the
first six months of 1996 resulted as the average volume of interest earning
assets outstanding increased $9,903,000 (4.9%) while the fully taxable
equivalent yields on these assets declined 5 basis points. See the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table.
Loans and lease receivables are the main component of the Bank's earning
assets. Interest and fees on loans and lease receivables was $3,158,000 and
$3,118,000 for the second quarter of 1996 and 1995, respectively. This reflects
an increase of $40,000 (1.3%) during the three months ended June 30, 1996 over
the same period of 1995. For the six month period ending June 30, 1996, interest
and fees on loans and lease receivables increased $187,000 (3.1%) to $6,245,000
from $6,058,000 for the first six months of 1995. The average volume of loans
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<PAGE>
and lease receivables increased slightly during the first six months of 1996
compared to the same period of 1995, while the Company's yield on loans and
lease receivables increased 17 basis points comparing these same periods.
Interest income on investment securities held to maturity was $396,000 and
$612,000 for the second quarter of 1996 and 1995, respectively, and represents a
decline of $216,000 (35.3%). Interest income on investment securities held to
maturity decreased $394,000 (32.3%) to $827,000 for the first six months of 1996
compared to $1,221,000 for the same period of 1995. These declines were
attributed almost entirely to the 30.5% decline in the average volume
outstanding. For the second quarter of 1996, interest income on investment
securities available for sale increased $349,000 (95.4%) to $715,000 from
$366,000 for the same period of 1995. The Company's average volume of
investment securities available for sale outstanding was $22,582,000 (140.8%)
greater for the first six months of 1996, compared to the same period of 1995,
while the fully taxable equivalent yield on these average balances declined 62
basis points. Management continues to reinvest runoff from the investment
securities held to maturity portfolio and to invest new funds into investment
securities available for sale to maintain flexibility in its liquidity planning.
See the "Consolidated Average Balances, Interest Income/Expense and
Yields/Rates" table.
Interest on federal funds sold declined $109,000 (85.8%) to $18,000 for the
second quarter of 1996 from $127,000 for the same period of 1995. For the six
months ended June 30, 1996 and 1995, interest on federal funds sold was $123,000
and $219,000, respectively. These decreases were due primarily to the declines
in the average volume outstanding as funds that were temporarily invested in
federal funds sold were shifted into higher yielding investment securities and
loans.
INTEREST EXPENSE
Total interest expense was relatively flat at $2,301,000 for the second
quarter of 1996 compared to $2,300,000 for the same period of 1995. Total
interest expense increased $273,000 (6.3%) to $4,578,000 from $4,305,000 for the
six months ended June 30, 1996 and 1995, respectively. These changes resulted
as the Company's average interest-bearing liabilities outstanding increased 3.8%
and the rates paid on these liabilities increased 12 basis points during the
first six months of 1996 compared to the same period of 1995. However, since
year-end 1995, the rates paid on interest-bearing liabilities have reflected a
slight decrease of 2 basis points. See the "Consolidated Average Balances,
Interest Income/Expense and Yields/Rates" table.
Interest on deposits, the primary component of total interest expense,
decreased $90,000 (4.2%) to $2,049,000 for the second quarter of 1996 from a
level of $2,139,000 for the same period of 1995. This decrease during the
second quarter of 1996 is attributable primarily to the adjustment downward to
current market rates on the one year, special rate certificates of deposits that
were offered by the Bank during the first quarter of 1995. Interest on deposits
was $4,117,000 and $3,823,000 for the six months ended June 30, 1996 and 1995,
respectively. This increase of $294,000 (7.7%) is due equally to increases in
the rates paid for deposits and the average volume of deposits outstanding.
While the Bank has allowed the one year, special rate certificates of deposit to
adjust downward to its current market interest rates, the Company is still
experiencing the effects of offering above market rates on its two year
certificates of deposits during the first quarter of 1995. This campaign, to
develop a larger local core deposit base and market share, is the primary factor
in the Bank's overall increased cost of funds.
Interest expense on borrowed funds, including both short term borrowing and
other borrowed funds, was $252,000 and $161,000 for the second quarter of 1996
and 1995, respectively. This increase of $91,000 (56.5%) was due primarily to
an increase in expense on investment securities sold under agreements to
repurchase. For the six months ended June 30, 1996, interest expense on
borrowed funds, including both short term borrowing and other borrowings
decrease $21,000 (4.4%) to $461,000 from $482,000 for the same period of 1995.
This decline resulted from a reduction in the expense associated with FHLB-
Atlanta advances outstanding, offset by an increase in expense on investment
securities sold under agreements to repurchase. Despite the fact that the Bank
made another $5,000,000 FHLB-Atlanta advance during the second quarter of 1996,
the cost associated with these advances is at a lower level than 1995.
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<PAGE>
<TABLE>
<CAPTION>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Six Months Ended June 30,
-------------------------------------------------------------
1996 1995
------------------------------ -----------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
--------------------------- -------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans & lease receivables, net of unearned income $ 143,643 6,258 8.76% 142,788 6,081 8.59%
Investment securities held to maturity:
Taxable 22,845 774 6.81% 33,023 1,143 6.98%
Tax-exempt 1,560 80 10.31% 2,112 116 11.08%
-------------------- --------------------
Total investment securities held to maturity 24,405 854 7.04% 35,135 1,259 7.23%
Investment securities available for sale:
Taxable 38,475 1,260 6.59% 16,035 573 7.21%
Tax-exempt 142 5 7.08% -- -- --
-------------------- --------------------
Total Investment securities availale for sale 38,617 1,265 6.59% 16,035 573 7.21%
Federal funds sold 4,207 123 5.88% 6,991 218 6.29%
Interest bearing deposits with other banks 16 1 12.57% 36 2 11.20%
-------------------- --------------------
Total interest earning assets 210,888 8,501 8.11% 200,985 8,133 8.16%
Allowance for loan & lease losses (2,040) (2,187)
Cash and due from banks 6,887 6,422
Premises and equipment 3,572 2,434
Rental property, net 1,991 1,798
Other assets 2,725 4,012
--------- ----------
Total Assets $ 224,023 213,464
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
---------------------------------------
Interest bearing liabilites:
Deposits:
Demand $ 20,652 213 2.07% 19,461 239 2.48%
Savings 37,729 709 3.78% 36,026 701 3.92%
Certificates of deposits less than $100,000 75,870 2,403 6.37% 74,254 2,194 5.96%
Certificates of deposit and other time
deposits of $100,000 or more 24,337 792 6.54% 23,384 690 5.95%
-------------------- --------------------
Total interest bearing deposits 158,588 4,117 5.22% 153,125 3,824 5.04%
Federal funds purchased and securities
sold under agreements to repurchase 8,851 240 5.45% 2,055 60 5.89%
Other short term borrowings 519 14 5.42% 3,731 146 7.89%
Other borrowed funds 7,044 201 5.74% 9,620 267 5.60%
Employee stock ownership plan debt 171 6 7.06% 228 8 7.08%
-------------------- --------------------
Total interest bearing liabilities 175,173 4,578 5.26% 168,759 4,305 5.14%
Noninterest bearing demand deposits 25,441 23,956
Accrued expenses and other liabilities 1,896 1,631
Shareholder's equity 21,513 19,118
--------- ---------
Total Liabilities and shareholder's equit $ 224,023 213,464
========= =========
Net Interest Income $3,923 $3,828
======= ======
Net Yield on Total Interest Earning Assets 3.74% 3.84%
======= ======
* Loans on nonaccrual status have been included in the computation of average balances
</TABLE>
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<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is based on management's assessment
of the risk in the loan and lease portfolios, the growth of the loan and lease
portfolios and the amount of recent loan and lease losses. The provision for
loan and lease losses was a credit of $1,000 for the three months ended June 30,
1996 compared to an expense of $124,000 for the three months ended June 30,
1995. For the six months ended June 30, 1996, the provision for loan and lease
losses was a credit of $5,000 compared to an expense of $214,000 for the same
period of 1995. Management made the decision to make no provision to the
allowance for loan and lease losses during the first six months of 1996 based on
the credit quality of the loan portfolio and the low level of net chargeoff.
However, as loan demand began to increase and the loan portfolio grew during the
second quarter of 1996, management has decided to restart monthly accruals, in
the amount of $15,000, to the allowance for loan and lease losses beginning in
July of 1996. The credit of $5,000 for the six months ended June 30, 1996, was
the result of a reversal from the valuation allowance for impaired loans due to
a decline in the amount of impairment. See "---Allowance for Loan and Lease
Losses."
NONINTEREST INCOME
Noninterest income decreased $107,000 (15.5%) to $583,000 for the second
quarter of 1996 from $690,000 for the same period of 1995. The change in the
second quarter of 1996 is due primarily to the gain on the sale of the credit
card portfolio that was recognized in the second quarter of 1995. Noninterest
income was $1,073,000 and $1,134,000 for the six months ended June 30, 1996 and
1995, respectively. This decrease of $61,000 (5.4%) is primarily a combination
of a reduction in VISA and MasterCard income associated with the recognition of
the gain on the sale of the credit card portfolio in the second quarter of 1995,
offset by increases in transaction fees associated with the Bank's automated
teller machines ("ATMs") for 1996.
Service charges on deposits accounts increased $23,000 (12.6%) to $205,000
for the second quarter of 1996 from $182,000 for the second quarter of 1995.
Service charges on deposit accounts were $389,000 and $369,000 for the six
months ended June 30, 1996 and 1995, respectively. This represents an increase
of $20,000 ( 5.4%) for the first six months of 1996. These increases are due
primarily to an increase in income on nonsufficient funds and overdraft charges
coupled with a slight general decline in regular monthly services charges on
deposit accounts.
Other noninterest income decreased $110,000 (22.8%) to $372,000 for the
second quarter of 1996 from $482,000 for the same period of 1995. Other
noninterest income was $674,000 for the six months ended June 30, 1996 and
$738,000 for the six months ended June 30, 1995. This represents a decrease of
$64,000 (8.7%) for the first six months of 1996. These decreases for both the
three months and the six months ended June 30, 1996 resulted primarily from
reductions in VISA and MasterCard income associated with the recognition of the
gain on the sale of the credit card portfolio in the second quarter of 1995 and
income on operating leases, combined with increases in VISA and MasterCard
merchant discount and fees, dividends on the Company's Alert stock and
surcharges on ATM transactions. In March of 1996, the Bank began assessing a
surcharge fee on transactions at its ATMs by customers of other banks, also
called "foreign transactions." Through June 30, 1996, these fees generated
approximately $41,000 in fee income.
NONINTEREST EXPENSE
Total noninterest expense was $1,509,000 and $1,758,000 for the second
quarter of 1996 and 1995, respectively, representing a decrease of $249,000 or
14.2%. For the six months ended June 30, 1996, total noninterest expense
decreased $419,000 (12.4%) to $2,957,000 from $3,376,000 for the same period of
1995. These declines were due primarily to decreases in salaries and benefits
expense, OREO expenses, FDIC deposit insurance premium expense, marketing
expense and VISA and MasterCard operating expenses..
Salaries and benefits expense was $704,000 and $781,000 for the three
months ended June 30, 1996 and 1995, respectively. This represents a decrease
of $77,000 (9.9%) in the second quarter of 1996 compared to the second quarter
of 1995. During the six months ended June 30, 1996, salaries and benefits
expense decreased $111,000 (7.2%) to $1,439,000 from $1,550,000 for the six
months ended June 30, 1995. These decreases are due to management's decision in
1995 to restructure and realign positions rather than replace personnel leaving
through normal attrition.
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<PAGE>
Net occupancy expense was $199,000 for the second quarter of 1996, which
represented an increase of $10,000 (5.3%) over the level of $189,000 for the
same period of 1995. Net occupancy expense increased $45,000 (12.6%) to
$402,000 for the six months ended June 30, 1996 compared to $357,000 for the six
months ended June 30, 1995. These increases continue to result from increases
in depreciation expense associated with the renovation of the Bank's main office
and Kroger branch and service contracts on furniture and equipment due to the
purchase of computer equipment, coupled with a slight decrease during the first
six months of 1996 in general furniture and equipment repair and maintenance
expense.
For the second quarter of 1996, other noninterest expense decreased
$182,000 (23.1%) to $606,000 from $788,000 for the second quarter of 1995.
Other noninterest expense was $1,116,000 and $1,470,000 for the six months ended
June 30, 1996 and 1995, respectively. This represents a decrease of $354,000
(24.1%) during 1996. These decreases were due primarily to decreases in the
Bank's FDIC deposit insurance premium expense of $179,000, OREO expense of
$84,000, marketing expense of $42,000 and VISA and MasterCard operating expenses
of $32,000. The decrease in the FDIC deposit insurance premium expense was the
result of the FDIC Board's action, in November 1995, to reduce Bank Insurance
Fund ("BIF") premiums to a range of $.00 to $.31 annually for each $100 of
deposits effective the first assessment period of 1996, with well capitalized
banks, such as the Bank, being subject to FDIC's minimum annual premium of
$2,000 payable in increments of $500 per quarter. The decrease in OREO expense
is the result of the Bank having very little expense associated with its
foreclosed property during the first six months of 1996 as compared to making
extensive repairs in the first quarter of 1995 to a piece of foreclosed property
in order to put it in marketable condition. The decrease in marketing expenses
was due to the Company not planning any major marketing campaigns for the first
quarter of 1996. The decrease in VISA and MasterCard operating expenses was due
to cost incurred in June of 1995 associated with the buy out of the processing
contract with Southeast Bankcard Association upon the sale of the Bank's credit
card portfolio.
INCOME TAXES
Income tax expense was $349,000 and $259,000 for the second quarter of 1996
and 1995, respectively. For the six months ended June 30, 1996, income tax
expense increased $175,000 (37.0%) to $648,000 from $473,000 for the six months
ended June 30, 1995. These levels represent an effective tax rate on pre-tax
earnings of 32.4% for the six months ended June 30, 1996 and 36.1% for the same
period of 1995.
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<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held at the Auburn
National Center in Auburn, Alabama, on Tuesday, May 14, 1996, at 3:00 in the
afternoon. This meeting was held for the purpose of considering the reelection
of five directors to the Board of Directors, an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's Common Stock from 1,750,000 to 2,500,000 shares, and the ratification
of the appointment of KPMG Peat Marwick LLP as independent auditors for the
Company for the fiscal year ending December 31, 1996.
As to the reelection of five directors, Messrs E. L. Spencer, Jr., Emil F.
Wright, Jr., Robert M. Harper, and Ms. Winifred H. Boyd and Ms. Anne M. May were
all reelected to the Board of Directors with 981,881 votes cast FOR all
nominees, except for Mr. Harper who received 979,381 votes FOR his reelection
and 900 votes cast to WITHHOLD AUTHORITY on all nominees on this matter.
Approval was given to amend to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's Common Stock to
2,500,000 with 947,241 votes cast FOR, 30,650 votes cast AGAINST and 4,890 votes
ABSTAINING on this matter.
The reappointment of KPMG Peat Marwick LLP as independent auditors for the
Company was ratified with 982,730 votes cast FOR, none cast AGAINST and 51 votes
ABSTAINING on this matter.
ITEM 5. OTHER INFORMATION
DESCRIPTION OF PROPERTY
In 1994, the Bank acquired a piece of commercial real estate located in
Auburn on U.S. Highway 29. This property, which was acquired in satisfaction of
debt previously contracted, was formerly used by a floor covering business and
contained approximately 6,045 square feet of office, showroom and warehouse
space. The Bank subsequently removed an underground storage tank ("UST")
containing petroleum products from the site. In March 1995, the Alabama
Department of Environmental Management ("ADEM") requested that the Bank submit a
Secondary Investigation Plan ("Secondary Investigation") as a result of
underground soil and water contamination of petroleum-based hydrocarbon
products. The Secondary Investigation was completed and submitted to ADEM by
Roy R. Weston, Inc. ("Weston"), an independent consultant hired by the bank.
The Secondary Investigation indicated low concentrations of soil contamination
on site and elevated concentrations of gasoline constituents both on-site and
off-site. The Secondary Investigation indicated a low risk to human receptors,
and Weston recommended to ADEM initiation of a quarterly ground water monitoring
program for one year, at which time the program would be reassessed. In
response to ADEM's Letter of Requirement dated January 18, 1996, Weston prepared
and submitted, on behalf of the Bank, a Monitoring Only Corrective Action Plan
on February 20, 1996. This plan calls for samplings to be taken from all eight
monitoring wells associated with the former UST monitoring system and tested to
assure that groundwater contamination will not pose a potential concern. These
samplings will be performed in two quarterly sampling events for a period of six
months. At the end of this period, the program will be reassessed for closure
of the site or a reduction in the number of wells and/or frequency of sampling
of the site.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Page
4.A Certificate of Incorporation of Auburn National
Bancorporation, Inc. * ---
4.B Bylaws of Auburn National Bancorporation, Inc. * ---
10.A Auburn National Bancorporation, Inc. 1994 long
Long-term Incentive Plan. * ---
10.B Lease and Equipment Purchase Agreement, Dated
September 15, 1987. * ---
11 Statement Regarding Computation of Per Share
Earnings 21
27 Financial Data Schedule ---
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarterly period ending June 30, 1996.
- - -------------------------
* Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
-18-
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
Date: August 7, 1996 By: /s/ E. L. Spencer, Jr.
---------------------------- ---------------------------------------
E. L. Spencer, Jr.
President and Chief Executive
officer
Date: August 7, 1996 By: /s/ Linda D. Fucci
----------------------------- --------------------------------------
Linda D. Fucci
Chief Financial Officer
Date: August 7, 1996 By: /s/ William E. Blackmon
----------------------------- --------------------------------------
William E. Blackmon
Controller and Chief Accounting
Officer
-19-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- - ------ ----------- -------------
4.A Certificate of Incorporation of Auburn National
Bancorporation, Inc. * ---
4.B Bylaws of Auburn National Bancorporation, Inc. * ---
10.A Auburn National Bancorporation, Inc. 1994 long
Long-term Incentive Plan. * ---
10.B Lease and Equipment Purchase Agreement, Dated
September 15, 1987. * ---
11 Statement Regarding Computation of Per Share
Earnings 21
27 Financial Data Schedule ---
- - -------------------------
* Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
-20-
<PAGE>
AUBURN NATIONAL BANCORPORATION INC. AND SUBSIDIARIES
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
PRIMARY:
Average shares outstanding 1,306,021 1,282,413
Dilutive Stock Options-based on the
treasury stock method using the
average market price for the period --- ---
---------- ----------
Total 1,306,021 1,282,413
========== ==========
Net Income $1,353,395 $ 838,722
========== ==========
Earning per share amounts:
Disclosed (1) $ 1.04 $ 0.65
Computed $ 1.04 $ 0.65
FULLY-DILUTED:
Average shares outstanding 1,306,021 1,282,413
Dilutive Stock Options-based on the
treasury stock method using the
average market price for the period --- ---
---------- ----------
Total 1,306,021 1,282,413
========== ==========
Net Income $1,353,395 $ 838,722
========== ==========
Earning per share amounts:
Disclosed (1) $ 1.04 $ 0.65
Computed $ 1.04 $ 0.65
</TABLE>
(1) The Company reserved 75,000 shares of Common Stock in May of 1994 for
issuance under stock option plans. The exercise price of such options is to
be determined at the time an option is granted. Since no options have been
granted as of the date of this filing and, therefore, no exercise price
established, no incremental shares have been included in the computation of
earnings per share in the statement of earnings under the provisions of
Accounting Principles Board Opinion Number 15. That opinion provides that
any reduction of less than 3% need not be considered as dilutive.
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
FOR JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,064
<INT-BEARING-DEPOSITS> 11
<FED-FUNDS-SOLD> 610
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,249
<INVESTMENTS-CARRYING> 21,332
<INVESTMENTS-MARKET> 21,176
<LOANS> 150,655
<ALLOWANCE> 2,028
<TOTAL-ASSETS> 230,237
<DEPOSITS> 188,470
<SHORT-TERM> 7,519
<LIABILITIES-OTHER> 1,441
<LONG-TERM> 11,140
0
0
<COMMON> 13
<OTHER-SE> 21,744
<TOTAL-LIABILITIES-AND-EQUITY> 230,327
<INTEREST-LOAN> 6,245
<INTEREST-INVEST> 2,090
<INTEREST-OTHER> 124
<INTEREST-TOTAL> 8,459
<INTEREST-DEPOSIT> 4,117
<INTEREST-EXPENSE> 4,578
<INTEREST-INCOME-NET> 3,880
<LOAN-LOSSES> (5)
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 2,957
<INCOME-PRETAX> 2,001
<INCOME-PRE-EXTRAORDINARY> 2,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,353
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.69
<LOANS-NON> 99
<LOANS-PAST> 193
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,140
<ALLOWANCE-OPEN> 2,012
<CHARGE-OFFS> 87
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 2,028
<ALLOWANCE-DOMESTIC> 2,028
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
