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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 SEPTEMBER 30, 1996
----------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period to
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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 October 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
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1 Financial Information
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for
the Three Months and Nine Months
Ended September 30, 1996 and 1995 4
Consolidated Statements of Changes in
Stockholders' Equity for September 30, 1996
and December 31, 1995 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 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
</TABLE>
PART II. OTHER INFORMATION
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<S> <C>
Item 6 Exhibits 18
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2
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<TABLE>
<CAPTION>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
ASSETS 9/30/96 12/31/95
----------------------------------------------- ------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash and due from banks 9,007,433 8,175,545
Federal funds sold securities purchased under agreements to resell 13,175,000 10,575,000
------------- -------------
Cash and cash equivalents 22,182,433 18,750,545
Interest bearing deposits with other banks 23,839 7,110
Investment securities held to maturity (fair value of $18,867,455 and
$26,084,159 at September 30, 1996 and December 31, 1995, respectively):
Taxable 18,670,280 24,195,972
Tax-exempt 1,544,665 1,564,609
------------- -------------
Total Investment Securities Held to Maturity 20,214,945 25,760,581
Investment securities available for sale, net (unrealized holding
losses of $558,580 and unrealized holding gains of $154,130
at September 30, 1996 and December 31, 1995, respectively)
Taxable 42,530,699 30,773,639
Tax-exempt 480,000 --
------------- -------------
Total Investment Securities Available for Sale 43,010,699 30,773,639
Loans & Lease Receivables:
Loans & Lease Receivables, less unearned income of $106,528 at
September 30, 1996 and $156,935 at December 31, 1995 161,980,453 140,470,965
Less allowance for loan & lease losses (including valuation reserve
for impaired loans) (2,089,273) (2,012,133)
------------- -------------
Loans & Lease Receivables, net 159,891,180 138,458,832
Premises and equipment, net 3,519,248 3,626,943
Rental property, net 1,908,984 1,978,192
Other assets 3,398,596 2,841,630
------------- -------------
Total assets $254,149,924 $222,197,472
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
-----------------------------------------------
Deposits:
Non-interest bearing 28,672,910 25,491,056
Interest bearing 180,289,380 160,311,472
------------- -------------
Total Deposits 208,962,290 185,802,528
Federal funds purchased and repurchase agreements 9,086,829 7,010,098
Other short term borrowings 1,272,708 472,195
Other borrowed funds 10,938,660 6,029,138
Accrued expenses and other liabilities 1,534,325 1,443,905
Employee Stock Ownership Plan debt 170,946 170,946
------------- -------------
Total liabilities 231,965,758 200,928,810
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 September 30, 1996 and December 31, 1995,
respectivley 13,190 13,190
Surplus 3,691,099 3,685,488
Retained earnings 19,323,685 17,749,910
------------- -------------
23,027,974 21,448,588
Less: Unrealized loss on mutual funds and investment securities
available for sale, net of taxes (368,853) 90,775
Treasury stock, 15,974 shares and 5,820 shares at
September 30, 1996 and December 31, 1995, respectively,
at cost (304,009) (99,755)
Employee Stock Ownership Plan debt (170,946) (170,946)
------------- -------------
Net stockholders' equity 22,184,166 21,268,662
Commitments --- ---
------------- -------------
Total liabilities and stockholders' equity $254,149,924 $222,197,472
============ ============
</TABLE>
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<TABLE>
<CAPTION>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Statements of Earnings
For The Three Months and Nine Months Ended September 30, 1996 and 1995
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ----------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $3,391,918 $3,078,369 $9,636,596 $9,136,670
Interest and dividends on investment
securities held to maturity:
Taxable 323,993 546,596 1,097,980 1,688,854
Tax-exempt 26,098 31,373 78,917 109,627
-------------- -------------- -------------- ----------------
Total interest and dividends on
investment securities-HTM 350,091 577,969 1,176,897 1,798,481
Interest and dividends on investment
securities available for sale:
Taxable 706,088 449,757 1,965,791 1,022,374
Tax-exempt 5,947 -- 9,516 --
-------------- -------------- -------------- ----------------
Total interest and dividends on
investment securities-AFS 712,035 449,757 1,975,307 1,022,374
Interest on federal funds sold 56,306 50,999 179,244 269,564
Interest on interest-bearing deposits with
other banks 384 642 1,197 2,893
-------------- -------------- -------------- ----------------
Total interest income 4,510,734 4,157,736 12,969,241 12,229,982
Interest expense:
Interest on deposits 2,191,609 2,163,034 6,308,523 5,986,278
Interest on federal funds purchased 11,819 4,537 63,679 12,887
Interest on securities sold under agreements
to repurchase 100,525 14,900 289,001 66,454
Interest on other borrowings 167,042 127,781 388,005 549,418
-------------- -------------- -------------- ----------------
Total interest expense 2,470,995 2,310,252 7,049,208 6,615,037
-------------- -------------- -------------- ----------------
Net interest income 2,039,739 1,847,484 5,920,033 5,614,945
Provision for loan losses 44,674 0 39,977 214,080
-------------- -------------- -------------- ----------------
Net interest income after provision
for loan losses 1,995,065 1,847,484 5,880,056 5,400,865
Noninterest income:
Service charges on deposit accounts 203,172 178,995 592,262 548,193
Investment securities gains/(losses), net 0 (4) 9,639 27,199
Other 341,705 294,945 1,016,078 1,032,693
-------------- -------------- -------------- ----------------
Total noninterest income 544,877 473,936 1,617,979 1,608,085
Noninterest expense:
Salaries and benefits 726,725 709,728 2,165,514 2,259,494
Net occupancy expense 195,398 158,188 597,290 514,752
Other 595,090 577,754 1,711,116 2,047,662
-------------- -------------- -------------- ----------------
Total noninterest expense 1,517,213 1,445,670 4,473,920 4,821,908
Earnings before income tax expense 1,022,729 875,750 3,024,115 2,187,042
Income tax expense 385,403 286,041 1,033,394 758,611
-------------- -------------- -------------- ----------------
Net earnings $637,326 $589,709 $1,990,721 $1,428,431
============== ============== ============== ===============
Net earnings per share $0.49 $0.45 $1.53 $1.11
============== ============== ============== ===============
Weighted average shares outstanding 1,302,793 1,313,225 1,305,136 1,291,657
============== ============== ============== ===============
</TABLE>
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AUBURN NATIONAL BANCORPORATION & SUBSIDIARIES
CHANGES IN STOKCHOLDERS EQUITY
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
Unrealized
Gain/(Loss) on
Mutual Funds
and Securities
Retained Available for
Common Stock Surplus Earnings Sale
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 12,500 2,452,449 16,128,345 (348,663)
Issuance of Common Stock (69,045 shares) 690 1,233,039 --- ---
Net earnings --- --- 2,091,234 ---
Cash dividends paid ($0.36 per share) --- --- (469,669) ---
Change in net unrealized gain (loss) on mutual funds and
investment securities available for sale of bank
subsidiary --- --- --- 439,438
Payment of Employee Stock Ownership Plan Debt --- --- --- ---
Purchase of treasury stock (1,202 shares) --- --- --- ---
------------- ----------- ----------- ------------
Balance at December 31, 1995 $ 13,190 3,685,488 17,749,910 90,775
Through September 30, 1996 (Unaudited):
Net earnings --- --- 1,990,721 ---
Cash dividends paid ($0.32 per share) --- --- (416,946) ---
Change in net unrealized gain (loss) on mutual funds and
investment securities available for sale of bank
subsidiary --- --- --- (459,628)
Purchase of treasury stock (10,154 shares) --- 5,611 --- ---
------------- ----------- ----------- ------------
Balance at September 30, 1996 (Unaudited) $ 13,190 3,691,099 19,323,685 (368,853)
============ ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Employee Stock
Ownership Treasury
Plan debt Stock Total
- ------------ ----------- -----------
<S> <C> <C>
(227,953) (74,994) 17,941,684
--- --- 1,233,729
--- --- 2,091,234
--- --- (469,669)
--- --- 439,438
57,007 --- 57,007
--- (24,761) (24,761)
- ------------ ----------- -----------
(170,946) (99,755) 21,268,662
--- --- 1,990,721
--- --- (416,946)
--- --- (459,628)
--- (204,254) (198,643)
- ------------ ----------- -----------
(170,946) (304,009) 22,184,166
=========== ========== ==========
</TABLE>
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AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flow
For The Nine Months Ended September 30, 1996 and 1995
1996 1995
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $1,990,721 $1,428,431
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and Amortization 626,560 611,015
Accretion of discount & loan fees (101,384) (44,645)
Provision for loan losses and adjustment for impaired
loans 39,977 214,080
Loss on sale of premises & equipment 186 3,746
Increase in interest receivable (572,426) (486,213)
Decrease in other assets 142,866 325,369
Decrease in interest payable (129,291) (136,866)
Increase in other liabilities 219,711 569,903
------------ ------------
Net cash provided by operating activities 2,216,920 2,484,820
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 5,492,133 3,947,120
Proceeds from maturities/calls/paydowns of investment
securities available for sale 2,535,075 2,298,874
Proceeds from sale of investment securities available
for sale 5,915,851 ---
Purchases of investment securities available for sale (21,387,565) (16,848,141)
Net increase in loans (21,472,325) 2,900,257
Purchases of premises and equipment (181,100) (1,303,989)
Purchases of rental property (1,310) (14,986)
Proceeds from lease of other real estate --- 3,807
Net (increase)/decrease in interest-bearing deposits with
other banks (16,729) 3,530
------------ ------------
Net cash used in investing activities (29,115,970) (9,013,528)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in Interest bearing deposits,
NOW accounts and savings accounts 17,355,524 (10,492,893)
Net increase in certificates of deposit 5,804,238 27,149,574
Net increase/(decrease) in securities sold under agreements
to repurchase 2,076,731 (2,995,546)
Increase/(decrease) in borrowings from FHLB 4,925,000 (8,075,000)
Net increase in other short-term borrowings 800,513 777,833
Net decrease in other long-term debt (15,477) (3,514,187)
Proceeds from sale of Treasury Stock 16,887 ---
Proceeds from issuance of Common Stock --- 1,233,729
Purchase of treasury stock (221,141) (24,761)
Dividends paid (411,335) (351,479)
------------ ------------
Net cash provided by financing activities 30,330,940 3,707,270
------------ ------------
Net increase/(decrease) in cash and cash equivalents 3,431,890 (2,821,438)
Cash and cash equivalents at beginning of year 18,750,543 13,115,402
------------ ------------
Cash and cash equivalents at end of period $22,182,433 $10,293,964
============ ============
Supplemental information on cash payments:
Interest paid $7,454,367 $6,478,171
============ ============
Income taxes paid $1,033,394 $738,059
============ ============
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 ($459,628) $340,403
============ ============
Non-cash Dividend from Bank Subsidiary to Parent
Company, net --- $341,092
============ ============
</TABLE>
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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.
7
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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 nine month periods ended September 30, 1996 and
1995.
SUMMARY
Net income of $637,000 for the quarter ended September 30,1996 represented
an increase of $47,000 (8.0%) from the Company's net income of $590,000 for the
same period of 1995. Earnings per average Share of Common Stock outstanding
increased $0.04 (8.9%) to $0.49 during the third quarter of 1996 from $0.45 for
the third quarter of 1995 due primarily to the increase in net income. Net
income increased $563,000 (39.4%) to $1,991,000 for the nine month period ended
September 30, 1996 compared to $1,428,000 for the same period of 1995. Earnings
per average Share of Common Stock outstanding increased $0.42 (37.8%) to $1.53
during the first nine months of 1996 from $1.11 for the first nine months of
1995. During the three month and nine month periods ended September 30, 1996
compared to the same periods of 1995, the Company experienced an increase in net
interest income, as well as an increase in noninterest income. Noninterest
expense increased for the three month period but decreased for the nine month
period ended September 30, 1996. The net yield on total interest earning assets
was 3.68% for the nine months ended September 30, 1996 compared to 3.72% for the
nine months ended September 30, 1995. While the Prime interest rate was at a
slightly lower level during the first nine months of 1996, compared to the first
nine months of 1995, this decline in the net yield on interest earning assets is
due primarily to the concentration of interest earning asset growth in
investment securities available for sale, which provided lower yields than other
interest earning assets and an increase in the average rate paid on certificates
of deposits. See the "Consolidated Average Balances, Interest Income/Expense
and Yields/Rates" table.
Total assets of $254,150,000 at September 30, 1996 reflected an increase of
$31,953,000 (14.4%) 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 $20,215,000 and $25,761,000 at
September 30, 1996 and December 31, 1995, respectively. This decline of
$5,546,000 (21.5%) resulted entirely from scheduled paydowns and calls of
principal. The significant increase of $12,237,000 (39.8%) in investment
securities available for sale to $43,011,000 at September 30, 1996 from
$30,774,000 at December 31, 1995, reflects the runoff from investment securities
held to maturity, the investment of the deposit growth and 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 increased $2,600,000 (24.6%) to $13,175,000 at September
30, 1996 from $10,575,000 at December 31, 1995. However, the average balance
for the nine months ended September 30,
8
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1996 declined somewhat from the average for the corresponding period in 1995.
These fluctuations reflect normal activity in the Bank's funds management
efforts.
LOANS
Total loans, net of unearned income, of $161,981,000 at September 30, 1996
reflected an increase of $21,510,000 (15.3%) 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 commercial and consumer real estate mortgage
portfolios due to strong customer demand and a stable local real estate market.
In addition, the Bank experienced some growth in its consumer installment loans
during the first nine 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. See the "Consolidated Average Balances, Interest Income/Expense
and Yields/Rates" table.
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 $2,089,000 at September 30, 1996. Management believes
that this level of reserves (1.29% 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 third quarter of 1996, a provision of $45,000 was made
to the allowance for loan and lease losses. For the nine months ended September
30, 1996, the Bank had charge-off loans of $94,000 and recoveries of $131,000.
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 September 30, 1996, 57 loans totaling approximately $1.9 million, or
1.2% of total loans outstanding, net of unearned income, were considered
potential problem loans compared to 52 loans totaling $1.4 million, or 1.0% of
total loans outstanding, net of unearned income, at December 31, 1995.
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and
other real estate owned, were $735,000 at September 30, 1996 compared to
$270,000 at December 31, 1995. This change resulted primarily from an increase
of $416,000 in accruing loans 90 days or more past due because of a large
commercial credit that has subsequently been brought current by the debtor.
DEPOSITS
Total deposits increased $23,159,000 (12.5%) to $208,962,000 at September
30, 1996, as compared to $185,803,000 at December 31, 1995. Noninterest-bearing
deposits increased $3,182,000 (12.5%) during the first
9
<PAGE>
nine months of 1996 while total interest-bearing deposits increased $19,977,000
(12.5%) to $180,289,000 at September 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 nine months ended September 30, 1996 compared
to 5.15% for the same period of 1995. During the first nine months of 1996, the
Bank experienced an increase of approximately $17,757,000 (69.25%) in its Money
Market Deposit accounts. This increase in Money Market Deposit accounts
resulted from new deposit growth and a shift of approximately $3,500,000 (15.1%)
from NOW accounts into the Bank's Money Market Index accounts. In addition,
certificates of deposits increased approximately $5,845,000 (5.8%) during the
first nine months of 1996. The Company considers the shifts in the deposit mix
and the deposit increase to be within the normal course of business and in line
with the management of the Bank's overall cost of funds. See the "Consolidated
Average Balances, Interest Income/Expense and Yields/Rates" table.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated stockholders' equity was $22,184,000 at
September 30, 1996, compared to $21,269,000 at December 31, 1995. This
represents an increase of $915,000 (4.3%) during the first nine months of 1996.
Net earnings for the first nine months of 1996 continues to exceed net earnings
for the same period of 1995. However, the Company experienced a change to an
unrealized loss, net of taxes, at September 30, 1996 from an unrealized gain,
net of taxes, at December 31, 1995 on its investment securities available for
sale. In addition, during the nine month period ended September 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 and
reissued 1,111 shares of Treasury Stock in conjunction with the Dividend
Reinvestment Plan. During the first nine months of 1996, cash dividends of
416,946, or $0.32 per Share, were declared on Common Stock.
The Company's Leverage capital ratio was 8.91%, Tier I capital ratio was
13.82% and Total Capital ratio was 15.07% at September 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.
The primary sources of liquidity during the first nine months of 1996
continues to be through deposit growth, sales, maturities, calls and paydowns
of investment securities, investment securities sold under agreements to
repurchase, coupled with advances 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 September 30, 1996.
Net cash provided by operating activities of $2,217,000 for the nine months
ended September 30, 1996, consisted primarily of net earnings. Net cash used in
investing activities of $29,116,000 funded investment securities available for
sale purchases and loan growth of $21,388,000 and 21,472,000, respectively,
offset by proceeds from investment sales, maturities, calls and paydowns of
$13,943,000. The $30,331,000 in net cash provided by financing activities
resulted from net increases of $23,160,000 in total deposits and $4,925,000 in
advances from the FHLB-Atlanta.
INTEREST RATE SENSITIVITY MANAGEMENT
At September 30, 1996, interest sensitive assets that repriced or matured
within the next 12 months were $123,623,000, compared to interest sensitive
liabilities that reprice or mature within the same time frame totaling
$190,532,000. This cumulative GAP position of a negative $66,909,000, resulted
in a GAP ratio of 65.0%. This compares to a cumulative GAP position at December
31, 1995 of a negative $6,802,000 and 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
10
<PAGE>
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. Based on the
Bank's Asset/Liability Management Committee's alternative interest rate
scenarios used by the Company in modeling for asset/liability planning purposes
and the GAP position at September 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% over the next 12 months.
RESULTS OF OPERATIONS
NET INCOME
Net income increased $47,000 (8.0%) to $637,000 for the three month period
ending September 30, 1996 compared to $590,000 for the same period of 1995.
Earnings per average Share of Common Stock outstanding was $0.49 and $0.45 for
the third quarter of 1996 and 1995, respectively, an increase of 8.9%. Net
Income was $1,991,000 and $1,428,000 for the nine month period ending September
30, 1996 and 1995, respectively. This represents an increase of $563,000
(39.4%). The increases for the three month and nine month periods ending
September 30, 1996, compared to the same periods of 1995, resulted primarily
from an increase in net interest income, reduction in the provision for loan and
lease losses and reduction in noninterest expenses due to declines in salary and
benefits expense, insurance assessments by the Federal Deposit Insurance
Corporation ("FDIC"), loan related expenses and marketing expenses, offset by an
increase in net occupancy expense. For the three month period ended September
30, 1996, noninterest income increased somewhat but was relatively unchanged for
the nine months ended September 30, 1996.
NET INTEREST INCOME
Net interest income was $2,040,000 for the third quarter of 1996. The
increase of $193,000 (10.5%) over $1,847,000 for the same period of 1995
resulted as interest income increased and interest expense remained flat. Net
interest income increased $305,000 (5.4%) to $5,920,000 for the nine months
ended September 30, 1996, compared to $5,615,000 for the same period of 1995 as
the increase in average interest earning assets over average interest bearing
liabilities offset the slight decline in net yield on interest earning assets of
.04% from 3.72% to 3.68%, due primarily to the concentration of interest earning
asset growth in investment securities available for sale, which provided lower
yields than other interest earning assets, and an increase in the average rate
paid on certificates of deposits.
INTEREST INCOME
Interest income is a function of the volume of interest earning assets and
their related yields. Interest income was $4,511,000 and $4,158,000 for the
three months ended September 30, 1996 and 1995, respectively. This represents an
increase of $353,000 (8.5%) for the third quarter of 1996. For the nine months
ended September 30, 1996, interest income was $12,969,000, an increase of
$739,000 (6.0%) compared to $12,230,000 for the same period of 1995. This
change for the first nine months of 1996 resulted as the average volume of
interest earning assets outstanding increased $13,335,000 (6.6%) over the same
period of 1995 while the fully taxable equivalent yields on these assets
declined five 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 were $3,392,000 and
$3,078,000 for the third quarter of 1996 and 1995, respectively. This reflects
an increase of $314,000 (10.2%) during the three months ended September 30, 1996
over the same period of 1995. For the nine month period ending September 30,
1996, interest and fees on loans and lease receivables increased $500,000 (5.5%)
to $9,637,000 from $9,137,000 for the first nine months of 1995. The average
volume of loans and lease receivables increased somewhat during the first nine
months of 1996
11
<PAGE>
compared to the same period of 1995, while the Company's yield on loans and
lease receivables increased eleven basis points comparing these same periods.
Interest income on investment securities held to maturity decreased
$621,000 (34.5%) to $1,177,000 for the first nine months of 1996 compared to
$1,798,000 for the same period of 1995. These declines were attributed almost
entirely to the 33.2% decline in the average volume outstanding. The fully
taxable equivalent yield on these average balances declined 20 basis points.
For the nine month period ended September 30, 1996, interest income on
investment securities available for sale increased $953,000 (93.3%) to
$1,975,000 from $1,022,000 for the same period of 1995. The Company's average
volume of investment securities available for sale was $20,416,000 (103.5%)
greater for the first nine months of 1996, compared to the same period of 1995,
while the fully taxable equivalent yield on these average balances declined 35
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 EXPENSE
Total interest expense increased $161,000 (7.0%) to $2,471,000 for the
third quarter of 1996 compared to $2,310,000 for the same period of 1995. Total
interest expense increased $434,000 (6.6%) to $7,049,000 from $6,615,000 for the
nine months ended September 30, 1996 and 1995, respectively. These changes
resulted as the Company's average interest-bearing liabilities outstanding
increased 6.1% and the rates paid on these liabilities increased ten basis
points during the first nine months of 1996 compared to the same period of 1995.
See the "Consolidated Average Balances, Interest Income/Expense and
Yields/Rates" table.
Interest on deposits, the primary component of total interest expense,
remained relatively flat for the third quarter of 1996 compared to the same
period of 1995. Interest on deposits was $6,309,000 and $5,986,000 for the nine
months ended September 30, 1996 and 1995, respectively. This increase of
$323,000 (5.4%) is due to an increase in the average rates paid on deposits of
seven basis points coupled with an increase in the average volume of deposits
outstanding of $6,400,000. 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 $279,000 and $147,000 for the third quarter of 1996
and 1995, respectively. This increase of $132,000 (89.8%) was due primarily to
an increase in expense on investment securities sold under agreements to
repurchase. For the nine months ended September 30, 1996, interest expense on
borrowed funds, including both short term borrowing and other borrowings
increased $112,000 (17.81%) to $741,000 from $629,000 for the same period of
1995. This increase is due to a significant increase in average balances
outstanding offset somewhat by a decrease in the averages cost of these funds.
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 $44,700 for the three months ended September 30, 1996
compared to zero for the three months ended September 30, 1995. For the nine
months ended September 30, 1996, the provision for loan and lease losses was
$40,000 compared to $214,000 for the same period of 1995. The significant
decline in the provision for loan and lease losses during the first nine months
of 1996 is based on the credit quality of the loan portfolio and the low level
of net chargeoffs. See "---Allowance for Loan and Lease Losses."
12
<PAGE>
<TABLE>
<CAPTION>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Nine Months Ended September 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 $ 147,237 9,637 8.74% 141,636 9,137 8.63%
Investment securities held to maturity:
Taxable 21,666 1,098 6.77% 32,678 1,689 6.91%
Tax-exempt 1,555 79 6.79% 1,810 110 8.13%
-------------------- --------------------
Total investment securities held to maturity 23,221 1,177 6.77% 34,488 1,799 6.97%
Investment securities available for sale:
Taxable 39,884 1,966 6.58% 19,724 1,022 6.93%
Tax-exempt 256 10 5.22% -- -- --
-------------------- --------------------
Total investment securities available for sale 40,140 1,976 6.58% 19,724 1,022 6.93%
Federal funds sold 4,373 179 5.47% 5,775 269 6.23%
Interest bearing deposits with other banks 22 1 6.07% 35 3 11.46%
-------------------- --------------------
Total interest earning assets 214,993 12,970 8.06% 201,658 12,230 8.11%
Allowance for loan & lease losses (2,045) (2,216)
Cash and due from banks 7,027 6,347
Premises and equipment 3,552 2,663
Rental property, net 1,969 1,890
Other assets 2,811 3,721
---------- ----------
Total Assets $ 228,307 214,063
=========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
-------------------------------------
Interest bearing liabilites:
Deposits:
Demand $ 20,135 311 2.06% 19,374 355 2.45%
Savings 39,860 1,164 3.90% 35,397 1,027 3.88%
Certificates of deposits less than $100,000 75,365 3,757 6.66% 75,934 3,489 6.14%
Certificates of deposit and other time deposits
of $100,000 or more 25,976 1,077 5.54% 24,257 1,115 6.15%
-------------------- --------------------
Total interest bearing deposits 161,336 6,309 5.22% 154,962 5,986 5.16%
Federal funds purchased and securities sold under
agreements to repurchase 8,569 353 5.50% 1,824 79 5.79%
Other short term borrowings 549 22 5.35% 2,809 160 7.62%
Other borrowed funds 8,357 357 5.71% 8,899 377 5.66%
Employee stock ownership plan debt 171 9 7.03% 228 13 7.62%
-------------------- --------------------
Total interest bearing liabilities 178,982 7,050 5.26% 168,722 6,615 5.24%
Noninterest bearing demand deposits 25,759 24,015
Accrued expenses and other liabilities 1,876 1,759
Shareholder's equity 21,690 19,567
---------- ----------
Total Liabilities and shareholder's equity $ 228,307 214,063
========== ==========
Net Interest Income $5,920 $5,615
======= ======
Net Yield on Total Interest Earning Assets 3.68% 3.72%
======= =====
</TABLE>
* Loans on nonaccrual status have been included in the computation of average
balances
-13-
<PAGE>
NONINTEREST INCOME
Noninterest income increased $71,000 (15.0%) to $545,000 for the third
quarter of 1996 from $474,000 for the same period of 1995. Noninterest income
increased to $1,618,000 for the nine months ended September 30, 1996 form
$1,608,000 for the nine months ended September 30, 1995. These increases are
primarily the result of increases in loan origination fee income, transaction
fees associated with the Bank's automated teller machines during 1996, and
increases in service charge income on deposits accounts, due primarily to the
increase in the average balance of such accounts in 1996. These increases were
offset by a reduction in VISA and MasterCard income, due to the sale of the
credit card portfolio in the third quarter of 1995, and a reduction in rental
revenue.
For the nine months ended September 30, 1996 compared to the corresponding
period in 1995, loan origination fees increased $98,000, ATM fees increased
$61,000 and service charges on deposit accounts increased $44,000 while credit
card income declined $129,000 and rental revenue declined $68,000.
NONINTEREST EXPENSE
Total noninterest expense was $1,517,000 and $1,446,000 for the third
quarter of 1996 and 1995, respectively, representing a decrease of $71,000 or
4.9%. For the nine months ended September 30, 1996, total noninterest expense
decreased $348,000 (7.2%) to $4,474,000 from $4,822,000 for the same period of
1995. These declines were due primarily to decreases in salaries and benefits
expense, FDIC deposit insurance premium expense, loan related expenses and
marketing expenses, offset by an increase in net occupancy expense.
Salaries and benefits expense was $727,000 and $710,000 for the three
months ended September 30, 1996 and 1995, respectively. This represents an
increase of $17,000 (2.4%) in the third quarter of 1996 compared to the third
quarter of 1995. During the nine months ended September 30, 1996, salaries and
benefits expense decreased $93,000 (4.1%) to $2,166,000 from $2,259,000 for the
nine months ended September 30, 1995. This decrease is due to declines in the
Company's incentive compensation plan and restrictions in life insurance
benefits.
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. For the nine months ended September 30, 1996, BIF premium expense
declined $172,000 (99%). Loan related expenses declined $41,000 due to lower
repossession expenses and loan review costs. Marketing costs decreased $39,000
due to the Company not planning any major marketing campaigns for 1996.
Net occupancy expense was $195,000 for the third quarter of 1996, which
represented an increase of $37,000 (23.5%) over the level of $158,000 for the
same period of 1995. Net occupancy expense increased $82,000 (16.0%) to
$597,000 for the nine months ended September 30, 1996 compared to $515,000 for
the nine months ended September 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 nine months of 1996 in general furniture and equipment
repair and maintenance expense.
INCOME TAXES
Income tax expense was $385,000 and $286,000 for the third quarter of 1996
and 1995, respectively. For the nine months ended September 30, 1996, income tax
expense increased $274,000 (36.1%) to $1,033,000 from $759,000 for the nine
months ended September 30, 1995. These levels represent an effective tax rate
on pre-tax earnings of 34.2% for the nine months ended September 30, 1996 and
34.7% for the same period of 1995.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits Page
<S> <C> <C>
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 18
27 Financial Data Schedule ---
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarterly period ending September 30, 1996.
</TABLE>
- -------------------------
* Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
15
<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: November 7, 1996 By: /s/ E. L. Spencer, Jr.
-------------------------- ------------------------------------
E. L. Spencer, Jr.
President and Chief Executive officer
Date: November 7, 1996 By: /s/ Linda D. Fucci
-------------------------- -------------------------------------
Linda D. Fucci
Chief Financial Officer
16
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
<S> <C> <C>
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 18
27 Financial Data Schedule ---
</TABLE>
- --------------------
* Incorporated by reference from Registrant's Registration
Statement on Form SB-2.
17
<PAGE>
AUBURN NATIONAL BANCORPORATION INC. AND SUBSIDIARIES
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
PRIMARY:
Average shares outstanding 1,305,136 1,291,657
Dilutive Stock Options-based on the
treasury stock method using the
average market price for the period -- --
---------- ----------
Total 1,305,136 1,291,657
========== ==========
Net Income $1,990,721 $1,428,431
========== ==========
Earning per share amounts:
Disclosed (1) $ 1.53 $ 1.11
Computed $ 1.53 $ 1.11
FULLY-DILUTED:
Average shares outstanding 1,305,136 1,291,657
Dilutive Stock Options-based on the
treasury stock method using the
average market price for the period -- --
---------- ----------
Total 1,305,136 1,291,657
========== ==========
Net Income $1,990,721 $1,428,431
========== ==========
Earning per share amounts:
Disclosed (1) $ 1.53 $ 1.11
Computed $ 1.53 $ 1.11
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the 10-QSB
for September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-01-1997
<CASH> $9,007
<INT-BEARING-DEPOSITS> 24
<FED-FUNDS-SOLD> 13,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,011
<INVESTMENTS-CARRYING> 20,215
<INVESTMENTS-MARKET> 18,867
<LOANS> 159,891
<ALLOWANCE> 2,089
<TOTAL-ASSETS> 254,150
<DEPOSITS> 208,962
<SHORT-TERM> 10,360
<LIABILITIES-OTHER> 1,534
<LONG-TERM> 10,939
0
0
<COMMON> 13
<OTHER-SE> 22,171
<TOTAL-LIABILITIES-AND-EQUITY> 254,150
<INTEREST-LOAN> 9,637
<INTEREST-INVEST> 3,152
<INTEREST-OTHER> 180
<INTEREST-TOTAL> 12,969
<INTEREST-DEPOSIT> 6,309
<INTEREST-EXPENSE> 7,049
<INTEREST-INCOME-NET> 5,920
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 4,474
<INCOME-PRETAX> 3,024
<INCOME-PRE-EXTRAORDINARY> 3,024
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,991
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.53
<YIELD-ACTUAL> 3.68
<LOANS-NON> 146
<LOANS-PAST> 549
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,952
<ALLOWANCE-OPEN> 2,012
<CHARGE-OFFS> 94
<RECOVERIES> 131
<ALLOWANCE-CLOSE> 2,089
<ALLOWANCE-DOMESTIC> 2,089
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
