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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-26486
Auburn National Bancorporation, Inc.
(Name of small business issuer in its charter)
Delaware 63-0885779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 East Magnolia Avenue, Suite 203
Auburn, Alabama 36830
(334) 821-9200
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock of $.01 par value
(Title of class)
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 [_]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $20,009,300.
The aggregate market value of the common stock held by non-affiliates of
registrant as of February 20, 1997, computed by reference to the price at which
the stock was sold as of such date, was $21,935,316.
As of February 20, 1997, there were issued and outstanding 1,319,045 shares of
the registrant's $.01 par value common stock.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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PART I
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Annual Report may constitute forward-looking statements for purpose of the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended and as such may involve known and unknown risks, uncertainties and
other factors may cause the actual results, performance or achievements
expresses or implied by such forward-looking statements. The Company's actual
results may differ materially from the results anticipated in these
forward-looking statements including those described under interest rate
management, due to a variety of factors, including, without limitation: the
effects of future economic conditions; government monetary and fiscal policies,
as well as interest rate risks; the effect of competition from other commercial
banks, thrifts, mortgage banking firms, consumer finance companies, credit
unions, securities brokerage firms, insurance companies, money market and other
mutual funds and other financial institutions operating in the Company's market
area and elsewhere, including institutions operating locally, regionally,
nationally and internationally, together with such competitions offering
banking products and services by mail, telephone, and computer and the
Internet; and the failure of assumptions underlying the establishment of
reserves for possible loan losses and estimations of values of collateral and
various financial assets and liabilities. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by these Cautionary Statements.
ITEM 1. BUSINESS
Auburn National Bancorporation, Inc. ("the Company") is a bank holding
company registered with the Board of Governors of the Federal Reserve System
(the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). The Company was incorporated in Delaware in 1990, and in 1994
it succeeded its Alabama predecessor as the bank holding company controlling
AuburnBank, an Alabama state bank with its principal office in Auburn, Alabama
(the "Bank"). The Company and its predecessor have controlled the Bank since
1984. As a bank holding company, the Company facilitates the Bank's ability to
serve its customers' requirements for financial services. The holding company
structure permits diversification by the Company into a broader range of
financial services and other business activities than currently are permitted
to the Bank under applicable law. The holding company structure also provides
greater financial and operating flexibility than is presently permitted to the
Bank. The Company also owns 100% of the stock of ANB Systems, Inc., an
inactive subsidiary ("ANB Systems," and collectively with the Bank, the
"Subsidiaries").
The Bank has operated continuously since 1907 and conducts its business in
East Alabama, including Lee County and surrounding areas. In April 1995, in
order to gain flexibility and reduce certain regulatory burdens, the Bank
converted from a national bank to an Alabama state bank that is a member of the
Federal Reserve System (the "Charter Conversion"). Upon consummation of the
Charter Conversion, the Bank's primary regulator changed from the Office of
the Comptroller of the Currency (the "OCC") to the Federal Reserve and the
Alabama Superintendent of Banks (the "Alabama Superintendent"). The Bank has
been a member of the Federal Home Loan Bank of Atlanta (the "FHLB-Atlanta")
since 1991.
General
The Company's business is conducted primarily through the Bank. The Bank's
business consists of (i) accepting demand, savings, and time deposits; (ii)
making loans to consumers, businesses, and other institutions; (iii)
investments of money market instruments, U.S. government and agency
obligations, and state, county, and municipal bonds; and (iv) other financial
services. Although it has no immediate plans to conduct any other business,
the Company may engage directly or indirectly in a number of activities which
the Federal Reserve had determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Services
The Bank offers checking, savings, negotiable order of withdrawal ("NOW")
accounts, money market deposit accounts ("MMDAs") and certificates of deposit,
and is an active residential mortgage lender in its primary service area
("PSA"). The Bank also offers commercial, financial, agricultural, real estate
construction and consumer loan products. During 1995, the Bank sold its credit
card portfolio and began providing credit cards, including MasterCard/(R)/,
MasterCard Gold, Visa/(R)/, and Visa Gold through an agent bank arrangement
with Columbus Bank & Trust Company in Columbus, Georgia. The Bank is one of the
largest providers of automated teller services in East Alabama with 11
locations and was one of the nine original founders and a 12.5% owner of
Alert/(R)/, an Alabama ATM network that processes more than 18 million
transactions annually. As of December 31, 1996, the Bank owned 12.5% of the
stock of Alert. On January 1, 1997, the merger of Alert, Internet, Inc., and
Southeast Switch, Inc. became effective. The Company was a one eighth owner of
the Alabama Network, Inc. At December 31, 1996, the Company was paid a one time
special dividend of $150,000 from Alert, in connection with the merger of these
ATM networks. Other considerations in the merger agreement were an equity
position in the surviving entity, Honor Technologies, Inc., equal to 0.3125% of
combined total equity and a 30 month fee waiver in Honor Technologies, Inc.
The Bank's Tiger Teller ATM cards can be used internationally through the
Cirrus/(R)/ network.
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Competition
The banking business in Alabama, including Lee County, is highly
competitive with respect to loans, deposits, and other services, and is
dominated by a number of major banks and bank holding companies which have
numerous offices and affiliates operating over wide geographic areas. The Bank
competes for deposits, loans, and other business with these banks, as well as
with credit unions, mortgage companies, insurance companies, and other local
and nonlocal financial institutions, including services offered through the
mail, by telephone and over the Internet. Among the advantages that certain of
these institutions have vis-a-vis the Bank are their ability to finance
extensive advertising campaigns and to allocate and diversify their assets
among loans and securities of the highest yield and in locations with the
greatest demand.
Many of the major commercial banks operating in the Bank's service area, or
their affiliates, offer services, such as international banking and investment
services, which are not presently offered directly by the Bank. Such
competitors, because of their greater capitalization, also have substantially
higher lending limits than the Bank.
The Bank faces further competition for loans and deposits from a wide
variety of local and nonlocal financial institutions. As more and different
kinds of businesses enter the market for financial services, competition from
nonbank financial intermediaries such as thrifts, credit unions, mortgage
companies, insurance companies, and other financial institution intermediaries
may be expected to intensify further. Community banks also have experienced
significant competition for deposits from mutual funds, insurance companies,
and other investment companies, and money center banks' offerings of high-yield
investments and deposits. Certain of these competitors are not subject to the
same regulatory restrictions as the Bank. In addition, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal
Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisition of banks by bank holding
companies, such that any bank holding company located outside Alabama may
presently acquire any bank based in Alabama or any other state, regardless of
state law to the contrary, subject to certain deposit-percentage, aging
requirements, and other restrictions. Alabama has also opted in to the
provisions of the Riegle-Neal Act which permit national and state-chartered
banks to branch interstate through acquisitions of banks in other states after
May 31, 1997. See "Supervision and Regulation."
AuburnBank has received approval from the State Banking Department and the
Federal Reserve Bank to open a full service branch inside the Winn-Dixie
Marketplace located on the south side of Auburn. The branch is tentatively
scheduled to open April 3, 1997. The Bank's initial investment in fixed assets
will be approximately $300,000. In the first year of operation, the Bank
estimates that income will be reduced by approximately $200,000, due to various
factors such as: depreciation expense, start-up costs, and operating costs.
Selected Economic Data
The Bank's primary service area ("PSA") includes the cities of Auburn and
Opelika, Alabama and nearby surrounding areas in East Alabama, primarily in Lee
County. Lee County's population is approximately 94,000, which ranks it 11th
in the state. The 1993 per capita income in Lee County was $14,786, which
ranks it 32nd in the state. Unemployment has been relatively low in Lee County,
and during 1996, the County had average unemployment of 1.7%, which was the
second lowest in the State of Alabama.
Approximately 71% of the land in Lee County is devoted to agriculture, with
91% comprised of forests. An estimated 10% is urban or developed. Timber and
timber products, greenhouses and horticulture, beef cattle, and cotton are the
major agricultural products. Principal manufactured products in the Company's
PSA include exercise equipment, magnetic recording tapes, tires, textiles,
small gasoline engines, and hardware. The largest employers in the area are
Auburn University, East Alabama Medical Center, Roadmaster, Ampex Corporation,
Uniroyal-Goodrich, West Point Stevens, Briggs & Straton, and Master Lock.
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Loans and Loan Concentrations
The Bank makes loans for commercial, financial, and agricultural purposes,
as well as for real estate mortgage, real estate construction, and consumer
purposes. While there are certain risk factors unique to each type of lending,
management believes that there is more risk associated with commercial, real
estate construction, agricultural, and consumer lending than with real estate
mortgage loans. To help manage these risk factors, the Bank has established
underwriting standards, which are substantially similar for each type of loan,
used in evaluating each extension of credit on an individual basis. These
standards include a review of the economic conditions affecting the borrower,
the borrower's financial strength and capacity to repay the debt, the
underlying collateral, and the borrower's past credit performance. These
standards are used to determine the creditworthiness of the borrower at the
time a loan is made and are monitored periodically throughout the life of the
loan.
The Bank has loans outstanding to borrowers in all industries within its
PSA. Any adverse economic or other conditions affecting these industries would
also likely have an adverse effect on the local workforce, other local
businesses, and individuals in the community that have entered into loans with
the Bank. However, management believes that due to the diversified mix of
industries located within the Bank's PSA, adverse changes in one industry may
not necessarily affect other area industries to the same degree or within the
same time frame. Management realizes that the Bank's PSA is also subject to
both local and national economic fluctuations.
Employees
At December 31, 1996, the Company had two full-time equivalent employees,
both of which are officers, and the Bank had 100 full-time equivalent
employees, including 12 officers.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal
and state law. This discussion is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the Company's and the Bank's business. Supervision, regulation,
and examination of the Company and the Bank and their respective Subsidiaries
by the bank regulatory agencies are intended primarily for the protection of
depositors rather than holders of Company capital stock. Any change in
applicable law or regulation may have a material effect on the Company's
business.
Bank Holding Company Regulation
The Company, as a bank holding company, is subject to supervision and
regulation by the Federal Reserve under the BHC Act. The Company is required
to file with the Federal Reserve periodic reports and such other information as
the Federal Reserve may request. The Federal Reserve examines the Company, and
may examine the Subsidiaries. The State of Alabama does not regulate bank
holding companies.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
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The Company is a legal entity separate and distinct from the Bank and its
other subsidiary. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company or its non-bank subsidiary. The
Company and the Bank are also subject to Section 23A of the Federal Reserve
Act, which defines "covered transactions," which include extensions of credit,
and limits a bank's covered transactions with any affiliate to 10% of such
bank's capital and surplus. All covered and exempt transactions between a bank
and its affiliates must be on terms and conditions consistent with safe and
sound banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Finally, Section 23A
requires that all of a bank's extensions of credit to an affiliate be
appropriately secured by acceptable collateral, generally United States
government or agency securities. The Company and the Bank also are subject to
Section 23B of the Federal Reserve Act, which generally limits covered and
other transactions among affiliates to terms and under circumstances, including
credit standards, that are substantially the same or at least as favorable to
the bank or its subsidiary as prevailing at the time for transactions with
unaffiliated companies.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Act, which became effective on September 29, 1995, repealed the
prior statutory restrictions on interstate acquisition of banks by bank holding
companies, such that the Company and any other bank holding company located in
Alabama may now acquire a bank located in any other state, and any bank holding
company located outside Alabama may lawfully acquire any bank based in Alabama
or any other state, regardless of state law to the contrary, in either case
subject to certain deposit-percentages, aging requirements, and other
restrictions. The Riegle-Neal Act also generally provides that after May 31,
1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability to "opt in" and accelerate the date after which
interstate branching is permissible or "opt out" and prohibit interstate
branching altogether. Alabama has adopted legislation opting into interstate
branching, effective May 31, 1997. Alabama has also adopted legislation, which
became effective on September 29, 1995, that allows Alabama banks to establish
a branch in any other state, territory, or country in accordance with federal
law or the law of such other state, territory, or country and upon prior
approval of the Alabama Superintendent.
Federal Reserve policy requires a bank holding company to act as a source
of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. In addition, under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), where a bank holding
company has more than one bank or thrift subsidiary, each of the bank holding
company's subsidiary depository institutions are responsible for any losses to
the Federal Deposit Insurance Corporation (the "FDIC") as a result of an
affiliated depository institution's failure. As a result, a bank holding
company may be required to loan money to its subsidiaries in the form of
capital notes or other instruments which qualify as capital under regulatory
rules. However, any loans from the holding company to such subsidiary banks
likely will be unsecured and subordinated to such bank's depositors and perhaps
to other creditors of the bank.
On February 20, 1997, the Federal Reserve adopted, effective April 21,
1997, amendments to its Regulation Y implementing certain provisions of The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"),
which was signed into law on September 30, 1996. Among other things, these
amendments to Federal Reserve Regulation Y reduce the notice and application
requirements applicable to bank and nonbank acquisitions and de novo expansion
by well-capitalized and well-managed bank holding companies; expand the list of
nonbanking activities permitted under Regulation Y; reduce certain limitations
on previously permitted activities; and amend Federal Reserve anti-tying
restrictions to allow banks greater flexibility to package products and
services with their affiliates.
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Bank Regulation Generally
The Bank is subject to supervision, regulation, and examination by the
Federal Reserve and the Alabama Superintendent, which monitors all areas of the
operations of the Bank, including reserves, loans, mortgages, issuances
of securities, payment of dividends, establishment of branches, and capital. In
addition, the Federal Reserve is responsible for conducting special, periodic
examinations for compliance with federal regulations. The Bank is a member of
the FDIC Bank Insurance Fund ("BIF") and, as such, its deposits are insured by
the FDIC to the maximum extent provided by law. See "Supervision and
Regulation - FDIC Insurance Assessments."
The powers of Alabama chartered banks include certain provisions designed
to provide such banks with competitive equality to the powers of national banks
regulated by the Office of the Comptroller of the Currency ("OCC").
In December 1996, the Federal Reserve adopted the Federal Financial
Institutions Examination Council's ("FFIEC") updated statement of policy
entitled "Uniform Financial Institutions Rating System" ("UFIRS") effective
January 1, 1997. UFIRS is an internal rating system used by the federal and
state regulators for assessing the soundness of financial institutions on a
uniform basis and for identifying those institutions requiring special
supervisory attention. Under the previous UFIRS, each financial institution was
assigned a confidential composite rating based on an evaluation and rating of
five essential components of an institution's financial condition and
operations including Capital adequacy, Asset quality, Management, Earnings, and
Liquidity. The major changes include an increased emphasis on the quality of
risk management practices and the addition of a sixth component for Sensitivity
to market risk. For most institutions, the FFIEC has indicated that market risk
primarily reflects exposures to changes in interest rates. When regulators
evaluate this component, consideration is expected to be given to: management's
ability to identify, measure, monitor, and control market risk; the
institution's size; the nature and complexity of its activities and its risk
profile; and the adequacy of its capital and earnings in relation to its level
of market risk exposure. Market risk is rated based upon, but not limited to,
an assessment of the sensitivity of the financial institution's earnings or the
economic value of its capital to adverse changes in interest rates, foreign
exchange rates, commodity prices, or equity prices; management's ability to
identify, measure, monitor, and control exposure to market risk and the nature
and complexity of interest rate risk exposure arising from nontrading
positions.
Under the Community Reinvestment Act of 1977 (the "CRA"), the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, is required to assess the bank's record in meeting the credit needs of
the community serviced by the bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to, among other things, establish a new branch office that will
accept deposits, relocate an existing office, or merge or consolidate with or
acquire the assets or assume the liabilities of a federally regulated financial
institution. An unsatisfactory CRA record may constitute grounds for denial of
the bank's application.
Under new CRA regulations, effective January 1, 1996, the process-based CRA
assessment factors have been replaced with a new evaluation system that rates
institutions based on their actual performance in meeting community credit
needs. The evaluation system used to judge an institution's CRA performance
consists of three tests: a lending test; an investment test; and a service
test. Each of these tests are applied by the institutions's primary federal
regulator taking into account such factors as: (i) demographic data about the
community; (ii) the institution's capacity and constraints; (iii) the
institution's product offerings and business strategy; and (iv) data on the
prior performance of the institution and similarly-situated lenders. The new
lending test - the most important of the three tests for all institutions other
than wholesale and limited purpose (e.g. credit card) banks - will evaluate an
institution's lending activities as measured by its home mortgage loans, small
business and farm loans, community development loans, and, at the option of the
institution, its consumer loans.
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Each of these lending categories are weighed to reflect its relative
importance to the institution's overall business and, in the case of community
development loans, the characteristics and needs of the institution's service
area and the opportunities available for this type of lending. Assessment
criteria for the lending test includes: (i) geographic distribution of the
institution's lending; (ii) distribution of the institution's home mortgage and
consumer loans among different economic segments of the community; (iii) the
number and amount of small business and small farm loans made by the
institution; (iv) the number and amount of community development loans
outstanding; and (v) the institution's use of innovative or flexible lending
practices to meet the needs of low-to-moderate income individuals and
neighborhoods. At the election of an institution, or if particular
circumstances so warrant, the banking agencies take into account in making
their assessments lending by the institution's affiliates as well as community
development loans made by the lending consortia and other lenders in which the
institution has invested. As part of the new regulation, all financial
institutions are required to report data on their small business and small farm
loans as well as their mortgage loans, which are currently required to be
reported under the Home Mortgage Disclosure Act.
The investment test focuses on the institution's qualified investments
within it service area that (i) benefit low-to-moderate income individuals and
small business or farms, (ii) address affordable housing needs, or (iii)
involve donations of branch offices to minority or women's depository
institutions. Assessment of an institution's performance under the investment
test is based upon the dollar amount of the institution's qualified
investments, its use of innovative or complex techniques to support community
development initiatives, and its responsiveness to credit and community
development needs.
The service test evaluates an institution's systems for delivering retail
banking services, taking into account such factors as: (i) the geographic
distribution of the institution's branch offices and ATMs; (ii) the
institution's record of opening and closing branch offices and ATMs; and (iii)
the availability of alternative product delivery systems such as home banking
and loan production offices in low-to-moderate income areas. The federal
regulators also consider an institution's community development service as part
of the service test. A separate community development test is applied to
wholesale or limited purpose financial institutions.
In addition, a financial institution has the option of having its CRA
performance evaluated based on a strategic plan of up to five years in length
that it has developed in cooperation with local community groups. In order to
be rated under a strategic plan, the institution will be required to obtain the
prior approval of its federal regulator.
The interagency CRA regulations provide that an institution evaluated under
a given test will receive one of five ratings for that test: outstanding, high
satisfactory, low satisfactory, needs to improve, or substantial noncompliance.
An institution will receive a certain number of points for its rating on each
test, and the points are combined to produce an overall composite rating of
either outstanding, satisfactory, needs to improve, or substantial
noncompliance. Under the agencies' rating guidelines, an institution that
receives an "outstanding" rating on the lending test will receive an overall
rating of at least "satisfactory", and no institution can receive an overall
rating of "satisfactory" unless it receives a rating of at least "low
satisfactory" on its lending test. In addition, evidence of discriminatory or
other illegal credit practices would adversely affect an institution's overall
rating. Under the new regulations, an institution's CRA rating will continue
to be taken into account by its primary federal regulator in considering
various types of applications. As a result of the Bank's most recent CRA
examination in August 1996, the Bank received an "outstanding" CRA rating.
The Bank is also subject to the provisions of the Equal Credit Opportunity
Act (the "ECOA") and the Fair Housing Act (the "FHA"), both of which prohibit
discrimination based on race or color, religion, national origin, sex, and
familial status in any aspect of a consumer or commercial credit or residential
real estate transaction. Based on recently heightened concerns that some
prospective home buyers and other borrowers may be experiencing discriminatory
treatment in their efforts to obtain loans, the Department of Housing and Urban
Development, the Department of Justice (the "DOJ"), and all of the federal
banking agencies in April 1994 issued an Interagency Policy Statement on
Discrimination in Lending in order to provide guidance to financial
institutions as to what the agencies
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consider in determining whether discrimination exists, how the agencies will
respond to lending discrimination, and what steps lenders might take to prevent
discriminatory lending practices. The DOJ has also recently increased its
efforts to prosecute what it regards as violations of the ECOA and FHA.
Payment of Dividends
The Company is a legal entity separate and distinct from its banking and
other subsidiaries. The prior approval of the Federal Reserve and/or the
Alabama Superintendent is required if the total of all dividends declared by a
state member bank (such as the Bank) in any calendar year will exceed the sum
of such bank's net profits for the year and its retained net profits for the
preceding two calendar years, less any required transfers to surplus. Federal
law also prohibits any state member or national bank from paying dividends that
would be greater than such bank's undivided profits after deducting statutory
bad debt in excess of such bank's allowance for loan losses. During 1996, the
Bank paid cash dividends of $265,000 to the Company.
In addition, the Company and the Bank are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal regulatory and state authorities are authorized to
determine, under certain circumstances relating to the financial condition of a
national or state member bank or a bank holding company, that the payment of
dividends would be an unsafe or unsound practice and to prohibit payment
thereof. The Federal Reserve and the Alabama Superintendent have indicated
that paying dividends that deplete a state member bank's capital base to an
inadequate level would be an unsound and unsafe banking practice. The Federal
Reserve and the Alabama Superintendent have indicated that financial depository
institutions should generally pay dividends only out of current operating
earnings.
Capital
The Federal Reserve has adopted final risk-based capital guidelines for
bank holding companies and state member banks. As fully phased-in at the end of
1992, the guideline for a minimum ratio of capital to risk-weighted assets
(including certain off-balance-sheet activities, such as standby letters of
credit) is 8%. At least half of the total capital must consist of common
equity, retained earnings and a limited amount of qualifying preferred stock,
less goodwill ("Tier 1 capital"). The remainder may consist of subordinated
debt, non qualifying preferred stock and a limited amount of any loan loss
allowance ("Tier 2 capital" and, together with Tier 1 capital, "Total
Capital").
In addition, the federal agencies have established minimum leverage ratio
guidelines for bank holding companies and state member banks which provide for
a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets
("leverage ratio") equal to 3%, plus an additional cushion of 100 to 200 basis
points (i.e., 1%-2%) if the institution has less than the highest regulatory
rating. The guidelines also provide that institutions experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve's
guidelines indicate that the Federal Reserve will continue to consider a
"tangible Tier 1 leverage ratio" (deducting all intangibles) in evaluating
proposals for expansion or new activity. The Federal Reserve has not advised
the Company or the Bank of any specific minimum leverage ratio or tangible
Tier 1 leverage ratio applicable to them.
The Federal Deposit Insurance Corporation Improvement Act of 1992
("FDICIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution's capital tier will depend upon how its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation.
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All of the federal banking agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. The relevant capital
measures are the Total Capital ratio, Tier 1 capital ratio, and the leverage
ratio. Under the regulations, a state member bank will be (i) well capitalized
if it has a Total Capital ratio of 10% or greater, a Tier 1 capital ratio of 6%
or greater, and a leverage ratio of 5% or greater and is not subject to any
order or written directive by a federal regulatory agency to meet and maintain
a specific capital level for any capital measure, (ii) adequately capitalized
if it has a Total Capital ratio of 8% or greater, a Tier 1 capital ratio of 4%
or greater, and a leverage ratio of 4% or greater (3% in certain
circumstances), (iii) undercapitalized if it has a Total Capital ratio of less
than 8%, a Tier 1 capital ratio and a leverage ratio of less than 4% (3% in
certain circumstances), or (iv) critically undercapitalized if its tangible
equity is equal to or less than 2% of average quarterly tangible assets. Under
the current guidelines, the Company and the Bank are considered well
capitalized.
As of December 31, 1996, the consolidated capital ratios of the Company
were as follows:
<TABLE>
<CAPTION>
Regulatory
Minimum Company Bank
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<S> <C> <C> <C>
Tier 1 Capital ratio 4.0% 14.1% 12.8%
Total Capital ratio 8.0% 15.4% 14.0%
Leverage ratio 3.0-5.0% 9.0% 8.0%
</TABLE>
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
growth limitations and are required to submit a capital restoration plan for
approval. For a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution comply
with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of 5% of the depository institution's
total assets at the time it became undercapitalized and the amount necessary to
bring the institution into compliance with applicable capital standards. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. If the controlling holding company fails
to fulfill its obligations under FDICIA and files (or has filed against it) a
petition under the federal Bankruptcy Code, the claim would be entitled to a
priority in such bankruptcy proceeding over third party creditors of the bank
holding company. Because the Company and the Bank exceed applicable capital
requirements, the respective managements of the Company and the Bank do not
believe that the provisions of FDICIA had any material impact on the Company
and the Bank or their respective operations.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
Bank regulators continue to indicate their desire to base capital
requirements upon the riskiness of the activities conducted and have long
discussed proposals to add an interest rate-risk component to risk-based
capital requirements.
-9-
<PAGE>
FDICIA
FDICIA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares, and such other standards as the agency deems
appropriate. These standards are not expected to have any material effect on
the Company and the Bank.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Bank, including new reporting requirements,
regulatory standards for estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch, and a
prohibition on the acceptance or renewal of brokered deposits by depository
institutions that are not well capitalized or are adequately capitalized and
have not received a waiver from the FDIC. Under regulations relating to
brokered deposits, the Bank is well capitalized and not restricted.
Because the Company and the Bank exceed applicable regulatory capital
requirements, the management of the Company and the Bank do not believe that
the capital provisions of FDICIA have any material effect on the Company and
the Bank or their respective operations.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments. The Bank's
deposits are insured by the FDIC's Bank Insurance Fund ("BIF") and it has no
deposit insured by the Savings Association Insurance Fund ("SAIF"). In 1996,
the FDIC adopted a new risk-based premium schedule which decreased the
assessment rates for BIF depository institutions. Under this schedule, which
took effect for assessment periods after January 1, 1996, the annual premiums
ranged from zero to $.27 for every $100 of deposits. Prior to January 1, 1996,
the annual premiums ranged from $.04 to $.31 for every $100 of deposits.
Each financial institution is assigned to one of three capital groups -
well capitalized, adequately capitalized or undercapitalized - and further
assigned to one of three subgroups within a capital group, on the basis of
supervisory evaluations by the institution's primary federal and, if
applicable, state regulators and other information relevant to the
institution's financial condition and the risk posed to the applicable
insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. During the years
ended December 31, 1996, 1995 and 1994 the Bank paid $2,000, $192,000, and
$347,000, respectively, in BIF deposit insurance premiums.
EGRPRA also recapitalized the FDIC's Savings Association Insurance Fund
("SAIF") in order to bring it into parity with the Bank Insurance Fund ("BIF")
of the FDIC. As part of this recapitalization, holdings of SAIF-insured
deposits were subjected to a one-time special deposit insurance assessment. The
Bank held no SAIF deposits and was not subject to such special assessment.
The FDIC's Board of Directors has retained the 1996 BIF assessment schedule
of zero to 27 basis points per annum for the first semiannual period of 1997.
In addition, the FDIC Board eliminated the $2,000 minimum annual assessment and
authorized the refund of the fourth-quarter minimum assessment of $500 paid by
certain BIF-insured institutions on September 30, 1996, by crediting such
amount against each BIF member's first semiannual assessment in 1997. EGRPRA
recapitalized the FDIC's SAIF Fund to bring it into parity with BIF. As part of
this recapitalization, The Deposit Insurance Funds Act of 1996 (the "Funds
Act") authorized FICO to levy assessments on BIF-assessable deposits at a rate
equal to one-fifth of the FICO assessment rate that is applied to deposits
assessable by SAIF. The actual annual assessment rates for FICO for 1997 have
been set at 1.30 basis points for BIF-assessable deposits and 6.48 basis points
for SAIF deposits.
-10-
<PAGE>
Community Development Act
The Community Development Act has several titles. Title I provides for the
establishment of community development financial institutions to provide equity
investments, loans and development services to financially underserved
communities. A portion of this Title also contains various provisions
regarding reverse mortgages, consumer protections for qualifying mortgages and
hearings for home equity lending, among other things. Title II provides for
small business loan securitization and securitizations of other loans,
including authorizing a study on the impact of additional securities based on
pooled obligations. Small business capital enhancement is also provided.
Title III of the Act provides for paperwork reduction and regulatory
improvement, including certain examination and call report issues, as well as
changes in certain consumer compliance requirements, certain audit requirements
and real estate appraisals, and simplification and expediting processing of
bank holding company applications, merger applications and securities filings,
among other things. It also provides for commercial mortgage-related
securities to be added to the definition of a "mortgage-related security" in
the Exchange Act. This will permit commercial mortgages to be pooled and
securitized, and permit investment in such instruments without limitation by
insured depository institutions. It also pre-empts state legal investment and
blue sky laws related to qualifying commercial mortgage securities. Title IV
deals with money laundering and currency transaction reports, and Title V
reforms the national flood insurance laws and requirements. The nature, timing,
and effect upon the Company of any changes resulting from the Community
Development Act cannot be predicted.
Legislative and Regulatory Changes
Various changes have been proposed with respect to restructuring and
changing the regulation of the financial services industry. FIRREA required a
study of the deposit insurance system. On February 5, 1991, the Department of
the Treasury released "Modernizing the Financial System; Recommendations for
Safer, More Competitive Banks." Among other matters, this study analyzed and
made recommendations regarding reduced bank competitiveness and financial
strength, overextension of deposit insurance, the fragmented regulatory system
and the undercapitalized deposit insurance fund. It proposed restoring
competitiveness by allowing banking organizations to participate in a full
range of financial services outside of insured commercial banks. Deposit
insurance coverage would be narrowed to promote market discipline. Risk based
deposit insurance premiums were proposed with feasibility tested through an
FDIC demonstration project using private reinsurers to provide market pricing
for risk based premiums.
EGRPRA streamlined the non-banking activities application process for
well-capitalized and well-managed bank holding companies. Under EGRPRA,
qualified bank holding companies may commence a regulatory approved non-banking
activity without prior notice to the Federal Reserve, and instead, written
notice is required within 10 days after commencing the activity. Under EGRPRA,
the prior notice period is reduced to 12 days in the event of any non-banking
acquisition or share purchase or de novo non-banking activity previously
approved by order of the Federal Reserve, but not yet implemented by
regulations, assuming the size of the acquisition or proposed activity does not
exceed 10% of risk-weighted assets of the acquiring bank holding company and
the consideration does not exceed 15% of Tier 1 capital.
Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks and other financial institutions and bank and bank
holding company powers are being considered by the executive branch of the
Federal government, Congress and various state governments, including Alabama.
Among other items under consideration are changes in or repeal of the
Glass-Steagall Act which separates commercial banking from investment banking,
and changes in the BHC Act to broaden the powers of "financial services"
companies to own and control depository institutions and engage in activities
not closely related to banking. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted whether any of these proposals will be
adopted, and, if adopted, how these proposals will affect the Company and the
Bank.
-11-
<PAGE>
Enforcement Policies and Actions
FIRREA and subsequent federal legislation significantly increased the
enforcement authorities of the FDIC and other federal depository institution
regulators, and authorizes the imposition of civil money penalties of up to $1
million per day. Persons who are affiliated with depository institutions can
be removed from any office held in such institution and banned for life from
participating in the affairs of any such institution. The banking regulators
have not hesitated to use the new enforcement authorities provided under
FIRREA.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply
of money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company cannot
be predicted. While the Federal Reserve increased the discount rate once in
1995 to curb inflation, it lowered the discount rate in February 1996 to avoid
a possible stalling of a period of moderate economic growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Effects of Inflation and Changing Prices" and "-- Interest Rate Sensitivity
Management."
ITEM 2. DESCRIPTION OF PROPERTY
The Bank conducts its business from its main office and two branches. The
main office is located in the center of Auburn, Alabama, in a 16,150 square
foot building that is owned by the Bank. The original building was constructed
in 1964, and an addition was completed in 1981. Portions of the building have
been renovated within the last five years in order to accommodate growth and
changes in the Bank's operational structure and to adapt to technological
changes. The main office building is surrounded on two sides by paved areas
that provide parking for 84 vehicles, including four handicapped spaces.
The Bank's Kroger branch is located in the Kroger supermarket in the Corner
Village Shopping Center in Auburn. On September 15, 1987, the Bank entered
into a 15-year lease agreement for approximately 300 square feet of space in
the supermarket. This branch offers the full line of the Bank's services, with
the exception of loans and safe deposit boxes.
The Opelika branch is located in Opelika, Alabama, in a 4,000 square foot
building. This branch is owned by the Bank and was built in 1991. This branch
offers the full line of the Bank's services and has drive-through windows and
an ATM. This branch offers parking for approximately 36 vehicles, including
two handicapped spaces.
The Bank has a drive-in facility located directly across the street from its
main office. This drive-in facility was constructed in 1979 and has five
drive-through lanes and a walk-up window. This facility is also owned by the
Bank.
In addition, the Bank leases from the Company approximately 8,300 square
feet of space in the Auburn National Center (the "Center"), which is located
next to the main office. This building, which has approximately 18,000 square
feet of space, is also leased to outside third parties. Leases between the Bank
and the Company are
-12-
<PAGE>
based on the same terms and conditions as leases to outside third parties
leasing space in the same building. The Bank's data processing activities, as
well as other operations, are located in this leased space. The parking lot
provides parking for approximately 120 vehicles, including handicapped parking.
The Bank also owns a two-story building located directly behind the main
office. The first floor of this building is leased to an outside third party,
while the second floor is used by the Bank for storage.
The Company owns a commercial office building (the "Hudson Building")
located across the street from the main office in downtown Auburn. The Hudson
Building has two floors and a basement which contain approximately 14,395
square feet of leasable space. Approximately 73.2% of this building is for
rent by third party tenants. However, the Bank occupies approximately 3,900
square feet, which includes a portion of the basement level used for storage
and office space used to house certain bank functions. The Bank pays rent to
the Company based on current market rates for such space.
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") 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. Quarterly groundwater monitoring will
continue in 1997 as required by ADEM. Samples from the eight (8) existing
monitoring wells will be collected and analyzed by Roy F. Weston, Inc. The
monitoring data will be submitted by Weston to ADEM as required. It is
estimated that the cost for monitoring and providing reporting data to ADEM for
1997 will be approximately $11,700 (unless the site is released by ADEM during
the year). The extent and cost of any further testing and remediation, if any,
cannot be predicted at this time.
Directly behind the Center is an older home that is also owned by the
Company. This building is rented as housing to university students. The rear
portion of this property is used as a parking area for approximately 20
vehicles of Bank employees.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank from time to
time are involved in legal proceedings. The Company and Bank management
believe there are no pending or threatened legal proceedings which upon
resolution are expected to have a material adverse effect upon the Company's or
the Bank's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
-13-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1996, the Company's Common Stock was held by
approximately 530 persons. Effective February 7, 1995, the Company engaged in a
public offering (the "Public Offering") of its Common Stock, at a price of
$20.00 per share, pursuant to a Registration Statement filed under the
Securities Act of 1933, as amended. Such offering price was determined solely
by the Company's Board of Directors, without negotiation or independent
evaluation. In fixing the price, the Board considered, among other things, the
Company's stockholders' equity (book value), earnings, and prospects, and the
offering prices of other bank holding company shares. The Company sold 69,045
shares of Common Stock in the Public Offering, which ended on May 31, 1995. In
addition, the Company received the necessary approval, in September 1995, from
the National Association of Securities Dealers, Inc. (the "NASD") to list its
Common Stock on the Nasdaq SmallCap Market, under the symbol AUBN. Prior to
this listing, there was no established trading market for the Common Stock,
which had been traded inactively in private transactions. Therefore, no
reliable information is available as to trades of Common Stock or as to the
prices at which such Common Stock traded prior to September 1995. Company
management has reviewed the limited information made available to it from
various purchasers and sellers as to the ranges at which such Common Stock has
been sold since January 1, 1995. The last known trade of the Company's Common
Stock during fiscal year 1996 occurred in December, when 100 shares were
purchased at a price of $23.50 per share. The following data regarding the
Common Stock is provided for informational purposes only and should not be
viewed as indicative of the actual or market value of the Common Stock.
<TABLE>
<CAPTION>
Estimated Estimated Cash
Number of Price Range Dividends
Shares Traded (1) Per Share (1) Declared
----------------- ------------- ---------
High Low
---- ----
<S> <C> <C> <C> <C>
1996
First quarter..................... 17,271 $ 20.25 $ 19.00 $ 0.10
Second quarter.................... 10,100 20.25 19.25 0.11
Third quarter..................... 7,542 20.50 19.25 0.11
Fourth quarter.................... 6,610 23.50 21.50 0.11
1995
First quarter (2)(3)............. 52,428 20.60 20.00 0.09
Second quarter (3)................ 17,819 20.00 20.00 0.09
Third quarter (4)................. 4,308 20.50 19.00 0.09
Fourth quarter.................... 1,600 20.25 19.75 0.09
</TABLE>
- ------------------------
(1) The number of shares traded and the price information represent actual
transactions.
(2) Substantially all of the shares traded were those shares sold in the
Public Offering at a price of $20.00 per share.
(3) Represents the shares sold in the Public Offering.
(4) Company Common Stock began trading on the Nasdaq Small Cap Market
effective September 6, 1995. All earlier data reflects only transactions
and data known to Company management and may not reflect all
transactions or prices at which shares were bought or sold.
-14-
<PAGE>
The Company has paid cash dividends on its capital stock since 1985. Prior
to this time, the Bank paid cash dividends since its organization in 1907,
except during the Depression years of 1932 and 1933. Holders of Common Stock
are entitled to receive such dividends as may be declared by the Company's
Board of Directors. The amount and frequency of cash dividends will be
determined through the judgment of the Company's Board of Directors based upon
a number of factors, including the Company's earnings, financial condition,
capital requirements, and other relevant factors. Company management presently
intends to continue its present dividend policies. See "Supervision and
Regulation."
The amount of dividends payable by the Bank is limited by law and
regulation. The need to maintain adequate capital in the Bank also limits
dividends that may be paid to the Company. Although Federal Reserve policy
could restrict future dividends on Common Stock, such policy places no current
restrictions on such dividends. See "Supervision and Regulation -- Dividends"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Such discussion and analysis should be read in
conjunction with "Business" and "Financial Statements and Related Notes."
The purpose of this discussion is to focus on significant changes in the
financial condition and results of the operations of the Company during the
three years ended December 31, 1996, 1995 and 1994. This discussion and
analysis is intended to supplement and highlight information contained in the
accompanying consolidated financial statements and the selected financial data
presented elsewhere herein.
Summary
Net earnings increased $662,000 (31.7%) to $2,753,000 during 1996 from
$2,091,000 for the year ended December 31, 1995. Net earnings per average
share of Common Stock outstanding were $2.11 and $1.61 for 1996 and 1995,
respectively, an increase of 31.1%. Comparatively, net earnings during 1995
decreased $11,000 (0.52%) from the 1994 total of $2,102,000, while net earnings
per average share of Common Stock outstanding showed a similar decrease of
$0.08 per share for 1995 from a 1994 per share total of $1.69. The increase in
net earnings for 1996 is attributable to higher net interest income and
noninterest income and lower noninterest expense for the year. The decrease
in 1995 was due to higher levels of noninterest expense as compared to 1994 and
to lower net interest income. This was particulary offset by a reduction in
provision for loan losses. See "Financial Condition -- Capital Resources" and
the "Consolidated Average Balances, Interest Income/Expense and Yields/Rates"
tables.
Total assets at December 31, 1996 and 1995 were $258,055,000 and
$222,197,000, an increase of $35,858,000 (16.1%). The Company's growth during
1996 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. See "Financial Condition--Investment Securities and
Liquidity."
Financial Condition
Investment Securities
Investment securities held to maturity were $19,051,000 and $25,761,000 at
December 31, 1996 and 1995, respectively. This decline of $6,710,000 (26.0%)
in 1996 resulted entirely from scheduled paydowns, calls and maturities. The
securities available for sale portfolio was $44,027,000 and $30,774,000 at
December 31, 1996 and 1995, respectively. This increase of $13,253,000 (43.1%)
reflects the investments from deposit growth and the
-15-
<PAGE>
reinvestment of funds provided from the paydown of investment securities held
to maturity. See "--Loans and Liquidity."
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy to provide acceptable levels of
interest income from portfolio yields while maintaining an appropriate level of
liquidity to assist with controlling the Company's interest rate position. In
recent years, the Company has invested primarily in taxable securities due to
its inability to fully realize the benefits of the preferential treatment
afforded tax-exempt securities under the tax laws. Because of their liquidity,
credit quality and yield characteristics, the majority of the purchases of
taxable securities have been in investment grade mortgage-backed securities
("MBS") and collateralized mortgage obligations ("CMOs"). The yields, values,
and durations of such MBS and CMOs generally vary with interest rates,
prepayment levels, and general economic conditions, and as a result, the values
of such instruments may be more volatile than other instruments with similar
maturities. Such MBS and CMOs also may have longer stated maturities than
other securities, which may result in further price volatility.
The following table indicates the amortized cost of the portfolio of
investment securities held to maturity at the end of the last three years:
<TABLE>
<CAPTION>
Amortized Cost
December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. government agency $ 2,028 2,054 7,140
State and political subdivisions 1,470 1,790 2,164
Mortgage-backed securities 13,663 18,887 22,763
Collateralized mortgage obligations 535 998 1,563
Other 1,355 2,032 2,701
------- ------- -------
Total investment securities
held to maturity $ 19,051 25,761 36,331
======= ======= =======
</TABLE>
The following table indicates the fair value of the portfolio of
investment securities available for sale at the end of the last three years:
<TABLE>
<CAPTION>
Total Fair Value
--------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Available for Sale:
Treasury $ -- 1,016 992
U.S. Government agency 17,873 15,084 963
State and political subdivisions 490 -- --
Mortgage-backed securities 363 2,155 1,741
Collateralized mortgage obligations 24,854 12,062 7,222
Mutual funds 447 457 420
Other -- -- 475
------- ------- -------
Total investment securities
available for sale $ 44,027 30,774 11,813
======= ======= =======
</TABLE>
-16-
<PAGE>
All are subjected to the "Stress Test" on a semi-annual basis. Securities
are tested as to their average life, average life sensitivity and price
volatility. At December 31, 1996 and 1995, all collateralized mortgage
obligations ("CMOs") passed their most recent Federal Financial Institutions
Examination Council's ("FFIEC") stress test. As a result, none were considered
high risk. There are no interest only ("I/Os") or principal only ("P/Os")
securities.
At December 31, 1996, the Bank owned CMOs with a total amortized cost of
$25,441,000. These issues were all rated AAA and backed by federal agency
guaranteed mortgages except for 3 issues in the amount of $6,289,000 which are
privately issued mortgage pass-through certificates. Fair values for the
private placement CMO's were estimated based on fair values for similar
instruments.
The MBS portfolio's total amortized cost of $14,027,609 at December 31,
1996, is a mixture of fixed rate mortgages, adjustable rate mortgages ("ARMs"),
and loans with balloon payments. At the time of purchase, the Bank looks at
various prepayment speeds and makes the purchase based on the ability to accept
the yield and average life based on both increasing and decreasing prepayment
speeds.
The following table presents the maturities and weighted average yields of
investment securities held to maturity, other than stock in the FHLB-Atlanta
and other securities with no defined maturity at December 31, 1996:
<TABLE>
<CAPTION>
Maturities of
Investment Securities
After one After five
Within through through After
one year five years 10 years 10 years
-------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. government agencies, excluding
mortgage-backed securities $2,028 -- -- --
State and political subdivision securities 45 340 455 630
Mortgage-backed securities 1,586 965 3,517 7,595
Collateralized mortgage obligations -- -- -- 535
Other securities -- 207 -- --
-------- ---------- -------- --------
Total investment securities
held to maturity $3,659 1,512 3,972 8,760
======== ========== ======== ========
<CAPTION>
Weighted average yields
After one After five
Within through through After
one year five years 10 years 10 years
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
U.S. government agencies, excluding
mortgage-backed securities 8.41% -- -- --
State and political subdivision securities 9.39% 5.92% 5.28% 8.01%
Mortgage-backed securities 6.32% 6.43% 5.99% 6.94%
Collateralized mortgage obligations -- -- -- 6.30%
Other securities -- 7.75% -- --
-------- ---------- -------- --------
Total weighted average yield 7.51% 6.16% 5.87% 6.98%
</TABLE>
-17-
<PAGE>
Loans
Total loans, net of unearned income, of $159,625,000 at December 31, 1996,
reflected an increase of $21,166,000 (15.3%), over total loans, net of unearned
income, of $138,459,000 at December 31, 1995. The primary growth during 1996
occurred in the real estate mortgage and commercial, financial and agricultural
loan area. The real estate mortgage loan component of the loan portfolio
increased $13,380,000 (15.2%) to $101,357,000 at December 31, 1996 over the
1995 balance of $87,977,000 and represented 62.7% of the total loan portfolio
at December 31, 1996, as compared to 62.6% at December 31, 1995. This growth
was attributable to the increase in commercial real estate mortgages of
$9,234,000 (27.49%) combined with an increase in residential real estate
mortgage loans of $4,146,000 (7.62%).
The commercial, financial and agricultural portfolio increased $3,413,000
(9.5%) to $39,213,000 at December 31, 1996 compared to $35,800,000 at
December 31, 1995. The increase has been due primarily to increased demand for
commercial credits. Commercial, financial and agricultural loans represented
24.2% and 25.5% of the total loans at December 31, 1996 and 1995, respectively.
The increase in residential real estate mortgage loans continues to reflect
the strong demand for these loans in the Bank's primary market area. The
increase in commercial real estate mortgage loans and commercial, financial and
agricultural loans reflects strong demand as well as management's focus on
balancing the composition of its loan portfolio by increasing the volume of
loans in these categories.
In addition to originating mortgage loans for its own portfolio, the Company
also actively originates residential mortgage loans which are sold in the
secondary market. In addition to selling real estate mortgage loans to the
Federal National Mortgage Association ("FNMA") with the Company maintaining
the servicing on these loans, the Bank has arranged with one mortgage
servicing company to originate and sell, without recourse, residential first
mortgage real estate loans, with servicing released. During 1996, the Bank sold
mortgage loans totaling approximately $11,158,000, to FNMA, with the Bank
maintaining the servicing, and sold mortgage loans, totaling approximately
$1,322,000, to mortgage servicing companies, with servicing released. At
December 31, 1996, the Bank was servicing loans totaling approximately
$53,775,000. The Bank collects monthly servicing fees of 0.25% annually to
0.375% annually of the outstanding balances of loans serviced for FNMA. See
"--Effects of Inflation and Changing Prices."
-18-
<PAGE>
The following table presents the composition of the loan portfolio by major
categories at the end of the last five years:
<TABLE>
<CAPTION>
Loan Portfolio Composition
December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 39,213 35,800 32,443 27,728 26,237
Real estate - construction:
Commercial 3,572 945 1,076 1,959 489
Residential 3,068 2,323 1,657 2,342 751
Real estate - mortgage:
Commercial 42,827 33,593 33,517 30,179 22,604
Residential 58,530 54,384 50,677 42,614 40,073
Consumer installment 14,600 13,583 21,168 19,800 18,094
Bankers' acceptances -- -- -- -- 999
Commercial paper -- -- -- -- 1,000
-------- ------- ------- ------- -------
Total loans $ 161,810 140,628 140,538 124,622 110,247
Less:
Unearned income (91) (157) (210) (138) (131)
Allowance for loan losses (2,094) (2,012) (2,100) (2,264) (1,510)
-------- ------- ------- ------- -------
Loans, net $ 159,625 138,459 138,228 122,220 108,606
======== ======= ======= ======= =======
</TABLE>
The following table presents maturities by major loan classifications and the
sensitivity of loans to changes in interest rates within each maturity category
at December 31, 1996:
<TABLE>
<CAPTION>
Loan Portfolio Maturing
After one
Within through After
one year five years five years Total
-------- ---------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 24,010 12,969 2,234 39,213
Real estate - construction 6,628 7 5 6,640
Real estate - mortgage 15,194 29,921 56,242 101,357
Consumer installment 6,925 7,286 389 14,600
------ ------ ------ -------
Total loans 52,757 50,183 58,870 161,810
====== ====== ====== =======
Variable-rate loans 22,562 6,865 51,206 80,633
Fixed-rate loans 30,195 43,318 7,664 81,177
------ ------ ------ -------
Total loans $ 52,757 50,183 58,870 161,810
====== ====== ====== =======
</TABLE>
-19-
<PAGE>
Allowance for Loan Losses and Risk Elements
Interest on loans is normally accrued from the date an advance is made.
The performance of loans is evaluated primarily on the basis of a review of
each customer relationship over a period of time and the judgment of lending
officers as to the ability of borrowers to meet the repayment terms of loans.
If there is reasonable doubt as to the repayment of a loan in accordance with
the agreed terms, the loan may be placed on a nonaccrual basis pending the sale
of any collateral or a determination as to whether sources of repayment exist.
This action may be taken even though the financial condition of the borrower or
the collateral may be sufficient ultimately to reduce or satisfy the
obligation. Generally, when a loan is placed on a nonaccrual basis, all
payments are applied to reduce principal to the extent necessary to eliminate
doubt as to the repayment of the loan. Any interest income on a nonaccrual loan
is recognized only on a cash basis.
The Company's policy generally is to place a loan on nonaccrual status
when it is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collections of principal or interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed and charged against current earnings. Loans that are
contractually past due 90 days or more which are well secured or guaranteed by
financially responsible third parties and are in the process of collection
generally are not placed on nonaccrual status.
Lending officers are responsible for the ongoing review and administration
of each particular loan. As such, they make the initial identification of
loans which present some difficulty in collection or where circumstances
indicate that the probability of loss exists. The responsibilities of the
lending officers include the collection effort on a delinquent loan. To
strengthen internal controls in the collection of delinquencies, senior
management and the Loan Committee are informed of the status of delinquent and
"watch" or problem loans on a monthly basis.
Senior management reviews the allowance for loan losses and makes
recommendations to the Loan Committee as to loan charge-offs on a monthly
basis.
The allowance for loan 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 for loan losses and the appropriate provision
required to maintain a level considered adequate to absorb anticipated loan
losses. In assessing the adequacy of the allowance, management reviews the
size, quality and risk of loans in the portfolio. Management also considers
such factors as the Bank's loan loss experience, the amount of past due and
nonperforming loans, specific known risk, the status and amount of
nonperforming assets, underlying collateral values securing loans, current and
anticipated economic conditions and other factors which affect the allowance
for potential credit losses. An analysis of the credit quality of the loan
portfolio and the adequacy of the allowance for loan losses is prepared by the
Credit Administration area and presented to the Loan Committee on a quarterly
basis. In addition, the Bank has engaged an outside loan review consultant, on
an annual basis, to perform an independent review of the quality of the loan
portfolio and adequacy of the allowance.
The Bank's allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account
such factors as the methodology used to calculate the allowance for loan losses
and the size of the allowance for loan losses in comparison to a group of peer
banks identified by the regulators. During their routine examinations of
banks, the Federal Reserve and the Alabama Superintendent may require a bank to
make additional provisions to its allowance for loan losses when, in the
opinion of the regulators, credit evaluations and allowance for loan loss
methodology differ materially from those of management. See "Supervision and
Regulation."
While it is the Bank's policy to charge off in the current period the
loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
-20-
<PAGE>
loans or classes of loans. Because these risks include the state of the
economy, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise.
The following table summarizes the levels of the allowance for loan losses
at the end of the last five years and activity in the allowance during such
years:
<TABLE>
<CAPTION>
Allowance for Loan Loss Activity for year ended
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,012 2,100 2,264 1,510 1,029
Provision for loan losses 80 -- 172 222 622
Charge-offs:
Commercial, financial and agricultural 64 43 90 7 298
Real estate 1 1 164 11 11
Consumer 108 113 183 46 107
------ ------ ------ ------ ------
Total charge-offs 173 157 437 64 416
Recoveries:
Commercial, financial and agricultural 100 4 7 375 210
Real estate 5 28 34 180 11
Consumer 70 88 60 41 54
------ ------ ------ ------ ------
Total recoveries 175 120 101 596 275
------ ------ ------ ------ ------
Net charge-offs (recoveries) (2) 37 336 (532) 141
Other adjustments (1) -- (51) -- -- --
------ ------ ------ ------ ------
Balance at end of period $ 2,094 2,012 2,100 2,264 1,510
====== ====== ====== ====== ======
Ratio of allowance for loan losses to loans
outstanding, net of unearned discount 1.29% 1.43% 1.50% 1.82% 1.37%
Ratio of allowance for loan losses
to nonperforming assets 1,957.01% 1,468.61% 156.72% 249.61% 129.61%
Ratio of net charge-offs (recoveries) to average
loans outstanding, net of unearned income (0.001%) 0.03% 0.26% (0.43)% 0.13%
</TABLE>
- ---------------------------
(1) In conjunction with the sale of its credit card portfolio in 1995, the Bank
reversed the portion of the allowance for loan losses that had been
maintained to absorb losses on credit card lines.
During 1996, the Company had loan charge-offs totaling $173,000 and
recoveries of $175,000, as compared to $157,000 in charge-offs and recoveries
of $120,000 in the prior year. Management believes that the $2,094,000 in
allowance for loan losses at December 31, 1996 (1.29%) of total outstanding
loans, net of unearned income at such date 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.
The Bank does not currently allocate its provision for loan losses among its
various classifications of loans.
While management recognizes that there is more risk traditionally
associated with commercial and consumer lending as compared to real estate
mortgage lending, the Bank currently has in place a tiered approach to
determine the adequacy of its allowance for loan losses. This methodology
focuses on the specific and potential loss of certain loans classified as
problem credits and uses a three-year historical loss factor on the general
loan portfolio as opposed
-21-
<PAGE>
to allocations based on major loan categories. Level I includes specific
allowances that have been reserved for particular problem loans where
management has identified specific losses. Level II allowances are set aside to
cover potential losses associated with problem loans which possess more than a
normal degree of credit risk but where no specific losses have been identified.
These loans have been criticized or classified by the Bank's regulators,
external loan reviewers engaged by the Bank, or internally by management. The
three-year historical loss factor for Level II problem loans is applied to the
total Level II loans in determining the allocation. Level III is the
unallocated general allowance for the balance of the loan portfolio. The loans
in this tier consist of all loans that are not classified as Level I or Level
II problem credits and less risk-free loans. Risk-free loans are defined as
loans fully secured by cash or cash equivalents, readily marketable collateral,
and portions of the portfolio that are partially covered by a U.S. Government
or government agency guaranty. Adjustments are then made for local economic
conditions and anticipated loan growth. The allocation for Level III is
determined by applying the historical loss factor, derived from the prior three
years actual experience, to the adjusted outstanding balance for this
classification. The Company is currently expanding its methodology to determine
the adequacy of the allowance for loan losses by major loan types. This change
is not expected to have a material adverse effect on the financial condition or
the results of operation of the Company or the Bank.
Based on historical trends and management's assessment of the quality of
the loan portfolio, the Company presently estimates that gross loan chargeoffs
for the 12-month period ending December 31, 1997 will be approximately $79,000,
$37,000 and $105,000 for the commercial, financial and agricultural; real
estate mortgage; and consumer installment loan categories, respectively.
During this same period, the Company does not anticipate any chargeoffs in its
real estate construction loan category. There is no assurance that the actual
experience during this period will not be materially different from these
estimates.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS
No. 114") and Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures"
("SFAS No. 118"), which amends SFAS No. 114, with no material effect on its
financial condition or results of operations. At December 31, 1996, the
Company had approximately $620,000 of impaired loans, which included 1 loan,
totaling approximately $84,000 with a valuation allowance of approximately
$64,000. No valuation allowance was deemed necessary for the remaining
$536,000 of impaired loans. In comparison, at December 31, 1995, the Company
had approximately $856,000 of impaired loans, which included three loans,
totaling approximately $91,000 with a valuation allowance of approximately
$74,000. No valuation allowance was deemed necessary for the remaining
$765,000 of impaired loans.
Nonperforming Assets
Nonperforming assets consist of loans on nonaccrual status, loans that
have been renegotiated at terms more favorable to the borrower than those for
similar credits, real estate and other assets acquired in partial or full
satisfaction of loan obligations and loans that are past due 90 days or more.
Nonperforming assets were $107,000, $137,000, and $1,340,000 at December
31, 1996, 1995, and 1994, respectively. These levels represent declines of
$30,000 (21.90%) for the year ended 1996, and $1,203,000 (89.8%) for the year
ended 1995. The decrease in 1996 is attributable to the disposal of other
nonperforming assets offset by a slight increase in nonaccrual loans. The
decrease during 1995 resulted primarily from the Bank disposing of all the
property held as other real estate owned ("OREO"). All sales were to outside
third parties with the exception of one piece of property, carried at a value
of $553,000, which was transferred from OREO in the Bank to rental property of
the parent company.
-22-
<PAGE>
An analysis of the components of nonperforming assets at the end of the
last five years is presented in the following table:
<TABLE>
<CAPTION>
Nonperforming Assets
December 31,
-----------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 107 73 27 30 252
Renegotiated loans -- -- -- -- --
Other nonperforming assets (primarily
other real estate) 0 64 1,313 877 913
----- ---- ----- ---- -----
Total nonperforming assets 107 137 1,340 907 1,165
Accruing loans 90 days or more past
due 112 133 120 32 1
----- ---- ----- ---- -----
Total nonperforming assets plus
accruing loans 90 days or more
past due $ 219 270 1,460 939 1,166
===== ==== ===== ==== =====
Nonaccrual loans and renegotiated loans
as a % of total loans 0.07% 0.05% 0.02% 0.02% 0.23%
Nonperforming assets as a percentage of total
loans, net of unearned income 0.07% 0.10% 0.95% 0.72% 1.05%
Nonperforming assets plus accruing loans
90 days or more past due as a percentage of
total loans, net of unearned income 0.14% 0.19% 1.03% 0.75% 1.06%
</TABLE>
If nonaccrual loans had performed in accordance with their original
contractual terms, interest income would have increased approximately $6,300,
$3,800, and $2,100 for the years ended December 31, 1996, 1995 and 1994,
respectively. The amount of interest income earned and collected on nonaccrual
loans which is included in net income was $2,200 for 1996, $3,800 for 1995 and
$0 for 1994.
Other Potential Problem Loans
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 December 31, 1996, 69 loans totaling approximately
$2,269,000 or 1.4% of total net loans were considered potential problem loans.
Deposits
Total deposits increased $30,924,000 (16.6%) to $216,727,000 at December
31, 1996, as compared to $185,803,000 at December 31, 1995. Noninterest-
bearing deposits were $28,407,000 and $25,491,000 while total interest-bearing
deposits were $188,320,000 and $160,311,000 at December 31, 1996 and 1995,
respectively. This positive trend is the result of management's decision to
maintain a competitive position in its deposit rate structure coupled with the
Bank's marketing efforts to attract local deposits. In addition, certificates
of deposit and other time deposits in excess of $100,000 increased 71.9% from
$23,752,000 to $40,841,000 due almost entirely to an increase in public funds.
At December 31, 1996, as a percentage of total deposits, noninterest-bearing
accounts comprised approximately 13.1%, while MMDAs, NOWs and regular savings
made up approximately 33.7%, certificates of deposit under $100,000 comprised
approximately 34.3%, and certificates of deposit and other time deposits of
$100,000 or more comprised 18.9%. At December 31, 1995, as a percentage of
total deposits, noninterest-bearing accounts comprised approximately 13.7%,
while MMDAs, NOWs and regular savings made up approximately 31.8%,
-23-
<PAGE>
certificates of deposit under $100,000 comprised approximately 41.7%, and
certificates of deposit and other time deposits of $100,000 or more comprised
12.8%.
The composition of total deposits for the last three years is presented in
the following table:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994
---- ---- ----
% Change % Change % Change
from from from
prior prior prior
Amount year-end Amount year-end Amount year-end
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 28,407 11.44% 25,491 (4.42)% 26,671 16.46%
Interest bearing deposits:
NOWs 20,089 (13.48)% 23,220 (2.19)% 23,739 1.41%
MMDAs 42,656 66.35 % 25,643 (0.84)% 25,861 8.19%
Savings 10,257 (0.37)% 10,295 (6.15)% 10,970 11.00%
Certificates of deposit
under $100,000 74,477 (3.78)% 77,402 29.87% 59,601 20.22%
Certificates of deposit and other time
deposits of $100,000 and over 40,841 71.95% 23,752 30.46% 18,207 (13.95)%
-------- -------- ------- ------- ------- -------
Total interest bearing
deposits 188,320 17.47% 160,312 15.85% 138,378 8.17%
-------- -------- -------- ------- ------- -------
Total deposits $216,727 16.64% 185,803 12.57% 165,049 9.43%
======= ======= ======= ====== ======= =======
</TABLE>
The average balances outstanding and the average rates paid for certain
categories of deposits at the end of the last three years are disclosed in the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table
immediately following:
-24-
<PAGE>
AUBURN NATIONAL BANCORPORATION AND SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
<TABLE>
<CAPTION>
Taxable Equivalent Basis
Years Ended December 31,
----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest rate balance Interest rate
-------------------------------------- ------- -------- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned income (1) $ 150,356 13,137 8.74% 140,829 12,222 8.68%
Investment securities held to maturity:
Taxable 20,794 1,456 7.00% 31,427 2,173 6.91%
Tax-exempt (2) 1,549 158 10.20% 1,708 205 12.00%
--------------------- ------------------
Total investment securities held to maturity 22,343 1,614 7.22% 33,135 2,378 7.18%
Investment securities available for sale:
Taxable 41,020 2,690 6.56% 21,678 1,474 6.80%
Tax-exempt (2) 312 23 7.28% -- --
--------------------- ------------------
Total investment securities available for sale 41,332 2,713 6.56% 21,678 1,474 6.80%
Federal funds sold 6,249 337 5.39% 5,784 345 5.98%
Interest bearing deposits with other banks 25 2 8.00% 48 3 6.25%
--------------------- ------------------
Total interest earning assets 220,305 17,802 8.08% 201,474 16,422 8.15%
Allowance for loan losses (2,055) (2,224)
Cash and due from banks 7,207 6,346
Premises and equipment 3,530 2,876
Rental property, net 1,954 1,943
Other assets 2,905 3,533
-------- --------
Total Assets $ 233,846 213,948
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
Interest bearing liabilities:
Deposits:
Demand $ 20,042 414 2.07% 19,435 468 2.41%
Savings and Money Market 42,219 1,680 3.98% 34,555 1,317 3.81%
Certificates of deposit less than $100,000 75,139 4,998 6.65% 76,489 4,757 6.22%
Certificates of deposit and other time deposits of
$100,000 or more 28,972 1,592 5.49% 24,111 1,516 6.29%
--------------------- ------------------
Total interest bearing deposits 166,372 8,684 5.22% 154,590 8,058 5.21%
Federal funds purchased and securities sold under
agreements to repurchase 7,784 425 5.46% 2,599 150 5.77%
Other short term borrowings 602 30 4.98% 712 38 5.34%
Other borrowed funds 9,003 513 5.70% 9,708 595 6.13%
Employee stock ownership plan debt 171 12 7.02% 227 17 7.49%
--------------------- ------------------
Total interest bearing liabilities 183,932 9,664 5.25% 167,836 8,858 5.28%
Noninterest bearing demand deposits 26,131 24,350
Accrued expenses and other liabilities 1,896 1,869
Shareholders' equity 21,887 19,693
-------- -------
Total liabilities and shareholders' equity $ 233,846 213,948
======== =======
Net Interest Income $8,138 7,564
======= ======
Net Yield on Total Interest Earning Assets 3.69% 3.75%
====== ======
<CAPTION>
Years Ended December 31,
----------------------------
1994
----------------------------
ASSETS Average Yield/
-------------------------------------- Balance Interest rate
------- -------- -----
<S> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned income (1) 130,874 10,615 8.11%
Investment securities held to maturity:
Taxable 33,946 2,200 6.48%
Tax-exempt (2) 2,180 258 11.83%
-----------------
Total investment securities held to maturity 36,126 2,458 6.80%
Investment securities available for sale:
Taxable 9,901 677 6.84%
Tax-exempt (2) -- -- --
-----------------
Total investment securities available for sale 9.901 677 6.84%
Federal funds sold 2,560 102 3.98%
Interest bearing deposits with other banks 34 2 5.88%
-----------------
Total interest earning assets 179,495 13,854 7.72%
Allowance for loan and lease losses (2,211)
Cash and due from banks 6,017
Premises and equipment 2,284
Rental property, net 1,483
Other assets 3,855
--------
Total Assets 190,923
========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
Interest bearing liabilities:
Deposits:
Demand 20,814 493 2.37%
Savings and Money Market 39,683 1,368 3.45%
Certificates of deposit less than $100,000 52,985 2,547 4.81%
Certificates of deposit and other time deposits of
$100,000 or more 19,206 922 4.80%
----------------
Total interest bearing deposits 132,688 5,330 4.02%
Federal funds purchased and securities sold under
agreements to repurchase 2,724 123 4.52%
Other short term borrowings 2,194 112 5.10%
Other borrowed funds 11,407 562 4.93%
Employee stock ownership plan debt 284 17 5.99%
----------------
Total interest bearing liabilities 149,297 6,144 4.12%
Noninterest bearing demand deposits 22,740
Accrued expenses and other liabilities 1,576
Shareholders' equity 17,310
-------
Total liabilities and shareholders' equity 190,923
========
Net Interest Income 7,710
======
Net Yield on Total Interest Earning Assets 4.30%
=====
</TABLE>
___________
(1) Loans on nonaccrual status have been included in the computation of average
balances.
(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis
using an income tax rate of 34%.
-25-
<PAGE>
The following table presents the maturities of certificates of deposit
and other time deposits of $100,000 or more at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Maturities of Time Deposits over $100,000
December 31, 1996
-----------------
(In thousands)
<S> <C>
Three months or less ....................... $21,510
After three within six months .............. 6,925
After six within twelve months ............. 4,041
After twelve months ........................ 8,365
-------
Total ...................................... $40,841
=======
Weighted Average rate on time deposits
of $100,000 or more at period-end 6.24%
====
</TABLE>
Schedule of Short-term Borrowings (1)
The following table shows the maximum amount of short-term borrowings and the
average and year-end amount of borrowings, as well as interest rates.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Weighted
Maximum Average
Year ended Outstanding at Average Interest Rate Ending Interest Rate
December 31 any Month-end Balance During Year Balance at Year-end
- ----------- -------------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
1996 $12,774 $8,386 5.42% $5,856 5.13%
</TABLE>
(1) Consists of federal funds purchased, treasury tax and loan, securities sold
under agreements to repurchase, and borrowings from the FHLB-Atlanta that mature
either overnight or on a fixed maturity not to exceed three months.
-26-
<PAGE>
Capital Resources
The Company's consolidated stockholders' equity was $23,083,000 and
$21,269,000 at December 31, 1996 and 1995, respectively, an increase of
$1,814,000 (8.5%) since year end 1995. This represents a continuation of
positive trends from prior periods. The Company has been able to fund its
capital growth primarily through retained earnings.
During 1996, cash dividends of $560,000 or $0.43 per share, were declared
on the Common Stock as compared to $470,000, or $0.36 per share, in 1995,
representing an increase of $90,000 (19.2%). The increase reflects management's
decision to increase the dividend by $0.07 per share during 1996. The Company
plans to continue a dividend payout policy that provides cash returns to its
investors and allows the Company to maintain adequate capital to support future
growth and capital adequacy. Management believes that a strong capital position
is vital to the continued profitability of the Company and provides a foundation
for future growth as well as promoting depositor and investor confidence in the
institution. See "Supervision and Regulation."
In the third quarter of 1994, the Company filed a registration statement
with the Securities and Exchange Commission (the "SEC") to offer up to 172,500
shares of its Common Stock for sale in the Public Offering. While the Company
has maintained a capital position well above minimum levels required by its
regulators, management decided to pursue the Public Offering in order to further
strengthen the Company's capital position for future growth. The registration
statement was declared effective on February 7, 1995. The Company issued 69,045
shares of Common Stock pursuant to the Public Offering which resulted in a total
increase in Common Stock and Surplus, net of the cost of the Public Offering, of
approximately $1,234,000 during 1995. The Public Offering ended May 31, 1995.
Certain financial ratios for the Company for the last three years are
presented in the following table:
<TABLE>
<CAPTION>
Equity and Asset Ratios
December 31,
------------------------------------------
1996 1995 1994
--------------- ------------- ------------
<S> <C> <C> <C>
Return on average assets 1.18% 0.98% 1.10%
Return on average equity 12.58% 10.51% 12.14%
Common dividend payout ratio 20.38% 22.36% 22.49%
Average equity to average asset ratio 9.36% 9.30% 9.07%
</TABLE>
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory actions, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification of
the Bank are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Management believes, as of
December 31, 1996, that the Bank meets all capital adequacy requirements to
which it is subject.
-27-
<PAGE>
The following table sets forth the Bank's actual capital levels and the
related required capital levels at December 31, 1996:
<TABLE>
<CAPTION>
Actual Capital Required Capital
----------------------- ----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier I Risk-Based Capital $20,643 12.78 $ 6,460 > 4
-
Leverage Capital 20,643 8.09% 10,203 > 4
-
Total Qualifying Capital 22,662 14.03% 12,921 > 8
-
</TABLE>
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" an
amendment of FASB Statement No. 65 (SFAS 122). SFAS 122 requires that a mortgage
banking enterprise recognize as separate assets, rights to service mortgage
loans for others, however those servicing rights are acquired. SFAS 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
recognition criteria under SFAS 122 has not had a material impact on the
Company's consolidated financial statements.
On January 1, 1996, the Company adopted the Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). SFAS No. 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 instrument 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 it can
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting standards must make
disclosure of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. No options were granted
in 1996, though upon the granting of any stock options in future periods, the
Company plans to account for employee stock options using the present accounting
standards and to include the required disclosures in the financial statements.
Liquidity
Liquidity is the Company's ability to convert assets into cash equivalents
in order to meet daily cash flow requirements, primarily for deposit
withdrawals, loan demand, and maturing liabilities. Without proper management,
the Company could experience higher costs of obtaining funds due to insufficient
liquidity, while excessive liquidity can lead to a decline in earnings due to
the cost of foregoing alternative higher-yielding investment opportunities.
At the Bank, asset liquidity is provided primarily through cash, the
repayment and maturity of investment securities, and the sale and repayment of
loans.
Sources of liability liquidity include customer deposits, federal funds
purchased and investment securities sold under agreements to repurchase.
Although deposit growth historically has been a primary source of liquidity,
such balances may be influenced by changes in the banking industry, interest
rates available on other investments, general economic conditions, competition
and other factors. In addition to deposits and repurchase agreements, the Bank
has participated in the FHLB-Atlanta's advance program. Advances include both
fixed and variable terms and are taken out with varying maturities. The Bank can
borrow up to 75% of its mortgage loans which are backed by one to four family
residential properties, for a maximum of $25,000,000. At December 31, 1996, the
Bank had credit available from FHLB-Atlanta of $14,375,000, and had $10,625,000
in advances drawn down.
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<PAGE>
Overall, net cash provided from financing activities increased $21,416,000
(178.5%) to $33,419,000 during 1996 from the previous year's total of
$12,003,000. Net cash provided by operating activities increased $357,000
(19.5%) to $2,192,000 from $1,835,000 for the years ended December 31, 1996 and
1995, respectively. $27,189,000 of the net cash provided from operating and
financing activities was used in investing activities during 1996.
The Company depends mainly on management fees and lease payments for
building and equipment, from the Bank, for its liquidity. In addition, the Bank
makes transfers to the Company, under its Tax Sharing Agreement, for payment of
consolidated tax obligations. The Tax Sharing Agreement calls for the allocation
of the consolidated tax liability or benefit between the Company and each
Subsidiary based on their individual tax positions as if each entity filed a
separate tax return. Other sources of liquidity may include the sale of stock.
The Company provides services to the Bank for which they are paid a management
fee comparable to a 3rd party vendor. The Bank paid the Company $277,000 and
$329,000 in management fees and $180,000 and $170,000 in lease payments through
December 31, 1996 and 1995, respectively. These funds were used to pay operating
expenses and fund dividends to the Company's shareholders.
Management has made the decision to allow the Bank's capital position to
grow in order to increase its legal lending limit. As a result of this decision,
coupled with a positive cash flow from other sources, the Company received no
cash dividends from the Bank during 1994 or 1995. During 1996, the Bank paid the
Company $265,000 in cash dividends.
Interest Rate Sensitivity Management
An integral part of the funds management of the Company and the Bank is to
maintain a reasonably balanced position between interest rate sensitive assets
and liabilities. The Bank's Asset/Liability Management Committee ("ALCO") is
charged with the responsibility of managing, to the degree prudently possible,
its exposure to "interest rate risk," while attempting to provide earnings
enhancement opportunities. The dollar difference between rate sensitive assets
and liabilities for a given period of time is referred to as the rate sensitive
gap ("GAP"). A GAP ratio is calculated by dividing rate sensitive assets by rate
sensitive liabilities. Due to the nature of the Bank's balance sheet structure
and the market approach to pricing of liabilities, management and the Board of
Directors recognize that achieving a perfectly matched GAP position in any given
time frame would be extremely rare. ALCO has determined that an acceptable level
of interest rate risk would be for net interest income to fluctuate no more than
5.0% given a change in selected interest rates of up or down 200 basis points
over any 12-month period. Using an increase of 200 basis points and a decrease
of 200 basis points, the Bank's net interest income at December 31, 1996, would
decline approximately 1.73% in a rising rate environment and increase
approximately 0.87% in a falling rate environment. Interest rate scenario models
are prepared on the Bank's Balance Sheet Information System created by Darling
Consulting Group.
For purposes of measuring interest rate sensitivity, Company management
assumes that the asset and liability balances remain constant over the 12-month
period. Deposit withdrawals are only considered in measuring liquidity. Although
demand and savings accounts are subject to immediate withdrawal, all passbook
savings and regular NOW accounts are reflected to reprice in over 5 years due to
their historically stable volume and limited repricing. High balance MMDAs and
NOW accounts are considered volatile and, as such, are shown as repricing in 1-3
months.
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<PAGE>
Interest Sensitivity Analysis
<TABLE>
<CAPTION> Over Five
One to Four to One to Years and
Three Twelve Five Non-rate
December 31, 1996 Immediate Months Months Years Sensitive Total
--------- ------ ------ ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Earning Assets:
Loans, net of unearned $ 46,639 8,463 31,199 75,509 -- 161,810
Taxable investment securities 2,565 2,999 4,375 6,493 1,149 17,581
Tax-exempt investment securities -- -- 148 1,256 66 1,470
Investment securities available for sale 2,096 7,616 16,720 16,668 927 44,027
Federal funds sold and securities
purchased under agreements to resell 11,745 -- -- -- -- 11,745
Interest bearing deposits with other banks 6 -- -- -- -- 6
------- ------- ------- ------- ------- -------
Total earning assets 63,051 19,078 52,442 99,926 2,142 236,639
------- ------- ------- ------- ------- -------
Interest bearing liabilities:
Demand deposits 2,176 -- -- -- 17,913 20,089
Savings and Money Market 35,869 4,027 -- -- 13,018 52,914
Certificates of deposit less than $100,000 5,418 26,804 23,172 19,082 -- 74,476
Certificates of deposit and other
time deposits of $100,000 or more 11,976 7,987 10,826 10,052 -- 40,841
Federal funds purchased and securities
sold under agreements to repurchase 4,653 -- -- -- -- 4,653
Other short-term borrowings 1,203 -- -- -- -- 1,203
FHLB and other borrowings 8 5,016 72 5,089 837 11,022
------- ------- ------- -------- ------- --------
Total interest bearing liabilities 61,303 43,834 34,070 34,223 31,768 205,198
Noninterest bearing sources of funds, net -- -- -- -- 28,407
Off-balance sheet items-asset/(liability) -- (15,000) -- -- (15,000)
-------- ------- ------- ------- ------- -------
Interest sensitivity gap 1,748 (39,756) 18,372 65,703 (58,033) 46,441
------- ------- ------- ------- ------- -------
Cumulative interest sensitivity gap $ -- (38,008) (19,636) 84,075 7,670 (11,592)
======= ======= ======= ======= ======= =======
</TABLE>
The interest sensitive assets at December 31, 1996, that reprice or mature
within 12 months were $134,571,000 while the interest sensitive liabilities that
reprice or mature within the same time frame were $139,207,000. At December 31,
1996, the 12 month cumulative GAP position, including the effect of off-balance
sheet items, was a negative $19,636,000, resulting in a GAP ratio of 87.3%. A
negative GAP indicates that the Company has more interest-bearing liabilities
than interest-earning assets that reprice within the GAP period, and that net
interest income may be adversely affected in a rising rate environment as rates
earned rose more slowly than rates paid on interest-bearing liabilities.
The Bank enters into interest rate protection contracts to help manage its
interest rate exposure. These contracts include interest rate swaps, caps and
floors. Interest rate swap transactions involve the exchange of fixed and
floating rate interest payment obligations based on the underlying notional
principal amounts. Interest rate caps and floors are purchased by the Bank for a
non-refundable fixed amount. The Bank receives interest based on the underlying
notional principal amount if the specified index rises above the cap rate or
falls below the floor strike rate. Notional principal amounts are used to
express the volume of these transactions, but because they are never exchanged,
the amounts subject to credit risk are much smaller. Risks associated with
interest rate contracts include interest rate
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<PAGE>
risk and creditworthiness of the counterparty. These risks are considered in the
Bank's overall asset liability management program. The Bank utilizes periodic
financial statements issued by the counterparty to analyze the creditworthiness
of the counterparty prior to entering into a contract and to monitor changes in
the financial condition of the counterparty throughout the term of the contract.
Current contracts are issued by a securities broker-dealer and by a U.S. branch
of a foreign bank and were entered into with the purpose of managing the Bank's
interest rate exposure. Although none of the interest rate protection agreements
are traded on any organized exchange, an active secondary market is available to
the Company for such contracts.
The Bank's Asset Liability Management Policy states that establishing limits
on interest rate swaps, caps, and floors can be somewhat confusing or misleading
since the notional amount by which these instruments are expressed is never
exchanged between counterparties and therefore is not "at risk." Furthermore,
since they represent off-balance sheet tools used by ALCO to manage imbalances
in the Bank's balance sheet in a prudent and cost effective manner, the
appropriate volume of swaps for the Bank is not a static variable; it changes
with elements such as the economic environment, the capital position, and the
ability to efficiently replicate hedging actions in the cash markets. The Bank
endeavors to limit outstanding notional value of off-balance sheet contracts
executed for purposes of managing net interest income to 25% of total assets as
reported in the most recent quarterly call report. Notional value of off-balance
sheet contracts executed with one counterparty are limited to 10% of total
assets as reported in the Bank's most recent quarterly call report.
The following table presents the Company's interest rate swaps, caps and
floors position as of December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Repricing
Notional Carryin Estimated Average Rate (1) Frequency
Amount Value Fair Value Received Paid (Years)
------ ----- ---------- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
December 31, 1996
Swaps:
Receive fixed:
Over one year through two years $ 5,000 -- 27 6.37% 5.61% 0.25
Caps and Floors:
Purchased:
One year or less 2,000 28 3
Over two years through five years 10,000 16 40 0.25
Over two years through five years 10,000 48 135 6.00% 5.87% 0.25
------- ------- -------
$ 27,000 92 205
======= ======= =======
</TABLE>
----------------
(1) The weighted average rates received/paid are shown only for swaps, caps
and floors for which net interest amounts were receivable or payable at the
end of each period. For caps and floors when the index rate has not been
reached, no rate is shown. Interest rates on variable rate derivative
products held by the Bank are derived from the 3 month USD-LIBOR-BBA
("British Bankers Association") rate and the USD CP-HP.15.
Effects of Inflation and Changing Prices
Inflation generally increases the costs of funds and operating
overhead, and to the extent loans and other assets bear variable rates, the
yields on such assets. Unlike most industrial companies, virtually all of the
assets and
-31-
<PAGE>
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. In
addition, inflation affects financial institutions' cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar
items. Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely affect liquidity,
earnings, and stockholders' equity. Mortgage originations and refinancings tend
to slow as interest rates increase, and likely will reduce the Company's
earnings from such activities and the income from the sale of residential
mortgage loans in the secondary market.
Results of Operations
Net Income
Net income increased $662,000 (31.7%) to $2,753,000 during 1996 from
$2,091,000 for the year ended December 31, 1995. Net earnings per average share
of Common Stock outstanding were $2.11 and $1.61 for 1996 and 1995,
respectively, an increase of 31.1%. Comparatively, net income during 1995
decreased $11,000 (0.52%) from the 1994 year end total of $2,102,000, while net
earnings per average share of Common Stock outstanding showed a similar decrease
of $0.08 per share for 1995 from a 1994 per share total of $1.69.
The increase in net income for 1996 is attributable to higher net
interest income and noninterest income and lower noninterest expense for the
year. The decrease in 1995 was due to higher levels of noninterest expense as
compared to 1994, which was offset by increases in net interest income after
provision for loan losses and noninterest income.
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 earnings. Net
interest income was $8,079,000 for the 12 months ended December 31, 1996. This
increase of $623,000 (8.4%) over 1995 is due to the increase in average interest
earning assets during 1996, which offset a decline in the net yield on earning
assets of 7 basis points.
Net interest income for 1995 was $7,456,000, $58,000 (5.6%) lower than
1994 net interest income of $7,514,000. This decrease is attributable partly to
a shift in the mix of earning assets as the credit card and student loan
portfolios were sold and a portion of the funds were temporarily reinvested in
shorter term, lower yielding assets. In addition, the Company experienced an
increase in the rates paid on interest-bearing liabilities due primarily to a
certificate of deposit marketing effort. The Company's fully taxable equivalent
yield on earning assets increased 43 basis points, while the average rates paid
on its interest-bearing liabilities increased 116 basis points.
The Company uses 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. Such contracts act as insurance
against unfavorable rate changes. 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. The
effect of such interest rate protection contracts resulted in a net increase in
interest income of $3,000 during 1996 compared to a net decrease in 1995 of
$56,000 and an increase in interest income of $52,000 during 1994. It is the
intention of the Company to continue to utilize interest rate protection
contracts to manage exposure to certain future changes in interest rate
environments. However, there can be no assurance that such transactions will
positively affect earnings. See "-- INTEREST RATE SENSITIVITY MANAGEMENT", the
"CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES" table
appearing elsewhere herein and the "RATE/VOLUME VARIANCE ANALYSIS" tables
immediately following.
-32-
<PAGE>
Rate/Volume Variance Analysis
<TABLE>
<CAPTION>
Taxable-Equivalent Basis (1)
Years Ended December 31, Change Due to
1996 Compared to 1995 Net Rate/
change Rate Volume volume
------ ---- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned income $ 915 88 832 (5)
Investment securities held to maturity:
Taxable (719) 18 (745) 8
Tax-exempt (47) (28) (16) (3)
------- ------- ------- -------
Total investment securities-HTM (766) (10) (761) 5
Investment securities available for sale:
Taxable 1,218 (99) 1,268 49
Tax-exempt 23 -- -- 23
-------- ------- ------- -------
Total investment securities-AFS 1,241 (99) 1,268 72
Federal funds sold (9) (36) 25 2
Interest bearing deposits with other banks (2) -- (2) --
------- ------- ------- -------
Total earning assets $ 1,379 (57) 1,362 74
======= ======= ======= =======
Interest bearing liabilities:
Deposits:
Demand $ (53) (69) 13 3
Savings 363 71 305 (13)
Certificates of deposit less than $100,000 241 325 (90) 6
Certificates of deposit and other time
deposits of $100,000 and more 76 (230) 267 39
------- ------- ------- -------
Total interest bearing deposits 627 97 495 35
Federal funds purchased and securities
sold under agreements to repurchase 346 88 325 (67)
Other short term borrowings (131) (4) (110) (17)
Other borrowed funds 134 133 3 (2)
------- ------- ------- -------
Total Interest Bearing Liabilities $ 976 314 713 (51)
====== ======= ======= =======
</TABLE>
-------------
(1) For analytical purposes, income for tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest from
taxable assets (assuming a 34% effective federal income tax rate).
-33-
<PAGE>
Rate/Volume Variance Analysis
<TABLE>
<CAPTION>
Taxable-Equivalent Basis (1)
Years Ended December 31, Change Due to
1995 Compared to 1994 Net Rate/
change Rate Volume volume
------ ---- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned income $ 1,607 800 864 (57)
Investment securities held to maturity:
Taxable (27) 136 (174) 11
Tax-exempt (53) 3 (57) 1
------ ------- ------ ------
Total investment securities-HTM (80) 139 (231) 12
Investment securities available for sale:
Taxable 797 (8) 801 4
Tax-exempt -- -- -- --
------ ------- ------ ------
Total investment securities-AFS 797 (8) 801 4
Federal funds sold 243 115 192 (64)
Interest bearing deposits with other banks 1 -- 1 --
Total earning assets $ 2,568 1,046 1,627 (105)
====== ======= ====== ======
Interest bearing liabilities:
Deposits:
Demand $ (25) 8 (33) --
Savings (51) 126 (195) 18
Certificates of deposit less than $100,000 2,210 1,080 1,462 (332)
Certificates of deposit and other time
deposits of $100,000 and more 594 359 308 (73)
------ ------- ------ ------
Total interest bearing deposits 2,728 1,573 1,542 (387)
Federal funds purchased and securities
sold under agreements to repurchase 27 33 (7) 1
Other short term borrowings (74) 2 (79) 3
Other borrowed funds 33 120 (108) 21
------ ------- ------ ------
Total Interest Bearing Liabilities $ 2,714 1,728 1,348 (362)
====== ======= ====== ======
</TABLE>
- -----------------
(1) For analytical purposes, income for tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest from
taxable assets (assuming a 34% effective federal income tax rate).
Interest Income
Interest income is a function of the volume of interest
earning assets and their related yields. Interest income was $17,742,000,
$16,313,000, and $13,658,000 for the twelve months ended December 31, 1996,
1995, and 1994, respectively. Average interest earning assets increased
$18,831,000 (9.35%) during 1996, $21,979,000 (12.2%) during 1995, and
$13,688,000 (8.3%) during 1994, while the fully taxable equivalent yields
on average earning assets decreased 7 basis points in 1996 after increasing
43 basis points in 1995 and 15 basis points in 1994. The combination of
these factors resulted in increases in interest income of $1,429,000
(8.8%), $2,655,000 (19.4%) and $782,000 (6.1%) during 1996, 1995 and 1994,
respectively. See "--CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE
AND YIELDS/RATES" and THE "RATE/VOLUME VARIANCE ANALYSIS" tables.
Loans are the main component of the Bank's earning assets. Interest
and fees on loans were $13,137,000 $12,183,000, and $10,507,000 for the 12
months ended December 31, 1996, 1995, and 1994, respectively. These
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<PAGE>
levels reflected increases of $954,000 (7.8%) during 1996, $1,676,000
(16.0%) during 1995, and $933,000 (9.8%) during 1994 due to a combination
of steady increases in the average volume outstanding and fully taxable
equivalent yields on loans over the past three years. While the level of
average balances has grown to $150,356,000 in 1996 from $140,829,000 and
$130,874,000 for 1995 and 1994, respectively, the fully taxable equivalent
yield on loans has also shown increases of 6 basis points to 8.74% in 1996,
and 57 basis points to 8.68% in 1995 from the 1994 average yield of 8.11%.
Interest income on investment securities held to maturity
decreased $748,000 (32.4%) to $1,560,000 in 1996, following decreases of
$63,000 (2.7%) to $2,308,000 in 1995 and $865,000 (26.7%) to $2,371,000 in
1994. The 1996 decrease was due to the combination of a $10,792,000
decrease in average volume outstanding offset by a 4 basis point increase
in the fully taxable equivalent yield over 1995 levels. 1995 activity also
reflected a $2,991,000 decrease in the average balance which was offset by
a 38 basis point increase in the yield, while the decrease during 1994 was
due to both the decline in the average volume outstanding and a drop in the
yield on those balances. The decrease in average outstandings for 1996 was
from scheduled paydowns and calls of principal, while the significant
decrease in the average volume outstanding in 1994 was due primarily to the
reclassification of certain investment securities to the available for sale
portfolio in connection with the adoption of SFAS No. 115. The fully
taxable equivalent yields on investment securities held to maturity were
7.22% in 1996, 7.18% in 1995, and 6.80% in 1994.
The Company established an available for sale portfolio in
1994 with the adoption of SFAS No. 115. Interest income on such investments
was $2,705,000, $1,474,000 and $677,000 for the 12 months ended December
31, 1996, 1995 and 1994, respectively. These increases in income of
$1,231,000 (83.5%) and $797,000 (117.7%) were due almost entirely to
increases in the average volume outstanding. The average balance
outstanding of investment securities available for sale increased
$19,654,000 (90.7%) to $41,332,000 in 1996 over the 1995 average balance of
$21,678,000, which in turn represented an increase of $11,777,000 (119.0%)
over the 1994 balance of $9,901,000. Theses increases reflect management's
intention 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. The
fully taxable equivalent yield on investment securities available for sale
was 6.54% in 1996, 6.80% in 1995 and 6.84% in 1994. See "Financial
Condition--Investment Securities."
Interest Expense
Total interest expense was $9,664,000, $8,858,000 and
$6,144,000 for the years ended December 31, 1996, 1995 and 1994
respectively, representing increases of $806,000 (9.1%), $2,714,000 (44.2%)
and $385,000 (6.7%) during 1996, 1995, and 1994, respectively. Total
average balances outstanding of interest-bearing liabilities have continued
an upward trend over the last three years to $183,932,000 in 1996 from
$167,836,000 in 1995 and $149,297,000 in 1994. The rates paid on these
liabilities decreased 3 basis points in 1996 after increasing 116 basis
points to 5.28% during 1995, and 4 basis points to 4.12% during 1994.
Interest on deposits, the primary component of total interest
expense, increased $626,000 to $8,684,000 (7.8%) during 1996 from
$8,058,000 in 1995, which in turn represented a $2,728,000 (51.2%) increase
from the 1994 level of $5,330,000. The average balance outstanding of
interest-bearing deposits has increased steadily to the 1996 level of
$166,372,000 as compared to $154,590,000 in 1995 and $132,688,000 in 1994.
The current year increase is attributable to new deposit growth in money
market deposit account and certificate of deposit balances in the normal
course of business, while the prior year increase is due to increases in
certificate of deposit balances from targeted promotionals. The average
rates paid on interest-bearing deposits were 5.22%, 5.21%, and 4.02% for
1996, 1995, and 1994, respectively.
Interest expense on borrowed funds, including both short term
borrowing and other borrowed funds, was $555,000 in 1996, $650,000 in 1995,
and $691,000 in 1994. These levels represent a decrease of $95,000 (14.6%)
during 1996, a decrease of $41,000 (5.9%) during 1995, and an increase of
$436,000 (171.0%) during
-35-
<PAGE>
1994. The decrease in 1996 is due to a $5,000,000 variable rate FHLB
advance obtained in May 1996 which had a lower rate than prior advances,
while the fluctuations in 1995 and 1994 are the result of FHLB advances and
paydowns.
Provision for Loan Losses
During 1996, the Company made a total provision for loan
losses of $80,000 based on management's assessment of the risk in the loan
portfolio, the growth of the loan portfolio and historical loan loss
trends. During 1995, the Company made no provision for loan losses due to
the credit quality of the loan portfolio, coupled with the relatively low
loan growth and low level of net chargeoffs during the year, while during
1994 the provision for loan losses was $172,000. See "Financial Condition
-- Allowance for Loan Losses and Risk Elements."
Noninterest Income
Noninterest income increased $124,000 (5.8%) to $2,267,000 for
the year ended December 31, 1996 from the 1995 total of $2,143,000, which
in turn represented an increase of $290,000 (15.65%) over the $1,853,000
recognized in 1994.
Service charges on deposit accounts increased $66,000 (9.0%)
during 1996 due to increases in nonsufficient funds and overdraft charges.
Service charges decreased $70,000 (8.7%) in 1995 over the prior year's
level due primarily to decreases in both regular monthly service charges
and nonsufficient funds and overdraft charges.
During 1996, the Company experienced net gains of $26,000 on
the sale, in the ordinary course of business, of investment securities
available for sale, as compared to net gains of $37,000 in 1995 and net
losses during 1994 of $52,000. The net loss in 1994 resulted primarily from
the recognition of an other than a temporary decline in the value of the
Bank's investment in the Putnam American Government Income Fund. See "-
Investment Securities."
Other noninterest income increased $68,000 (5.0%) to
$1,439,000 in 1996 from $1,371,000 in 1995. Comparatively, 1995's total
represents an increase of $271,000 (24.6%) from $1,100,000 in 1994. The
increase in 1996 was due to a $99,000 increase in other fee income,
especially ATM transaction fees, a $90,000 increase in dividends received
from stock held in other companies due to a one time dividend paid in
connection with the sale of Alert, offset by a $33,000 decrease in
non-interest loan income and fees due to the sale of the Bank's credit card
portfolio in 1995 and a decrease in rental income of $95,000. The increase
in 1995 was attributable primarily to the gain of $125,000 on the sale of
the Bank's credit card portfolio, coupled with increases of $46,000 in
VISA/MasterCard merchant discounts and fees, $24,000 in net gains on the
sale of mortgage loans and $67,000 in other fee income.
Noninterest Expense
Total noninterest expense was $6,007,000 for 1996, $6,419,000
for 1995, and $5,979,000 for 1994 reflecting a decrease of $412,000 (6.4%)
for 1996 and increases of $440,000 (7.4%), and $519,000 (9.5%) for 1995 and
1994, respectively.
Salaries and benefits decreased $46,000 (1.5%) to $2,941,000
for the year ended December 31, 1996 from the 1995 total of $2,987,000,
which in turn represented an increase of $204,000 (7.3%) over the 1994
level of $2,783,000. At December 31, 1996, the Company had 102 full-time
equivalent employees, a decrease of two over the level at December 31,
1995. The increase for 1995 was due primarily to merit and cost-of-living
raises and the cost of benefits associated with such increases.
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<PAGE>
Net occupancy expense was $817,000, $724,000, and $613,000 for
1996, 1995 and 1994, respectively, representing increases of $93,000 in
1996 and $111,000 (18.1%) in 1995 over the previous year's levels. The 1996
increase is attributable to increases in furniture and equipment
depreciation and lease payments on equipment. The increase in 1995 is due
primarily to increases in furniture and equipment maintenance and lease
payments on equipment.
Other noninterest expense was $2,250,000 for 1996, $2,708,000
for 1995, and $2,583,000 for 1994. These levels represent a decrease of
$458,000 (16.9%) in 1996 and an increase of $125,000 (4.8%) in 1995 over
the respective previous years. The 1996 decrease resulted from a $189,000
decrease in FDIC insurance from the reassessment in the second quarter of
1995, a decrease of $180,000 in losses on sale of premises and equipment
due to one-time losses incurred in 1995, a decrease of $26,000 in loan
related expenses, and a decrease of $38,000 in sales and use taxes, offset
by increases in software expense of $60,000, in-house data processing of
$26,000 and special project expense of $18,000 The Company experienced
increases in several different components of its noninterest expenses in
1995. VISA/MasterCard processing fees increased $75,000 due to greater
activity in credit card sales, marketing expense increased $54,000 due to
additional costs associated with the Bank's conversion to a state bank
charter, OREO expense increased $46,000 for property repairs, and postage
expense increased $35,000 due primarily to a general increase in volume and
increased cost associated with the mailing of the Company's annual report.
Sales and use tax and franchise tax increased as a result of costs
associated with the Bank's name change and costs of building renovations
performed during the year. Offsetting these increases, the Bank experienced
a decrease in its deposit insurance expense as it received, in September
1995, a recapitalization refund, including interest, from the FDIC of
approximately $113,000. Also, as a well capitalized Bank, the rate paid by
the Company for FDIC insurance was reduced from $0.23 per $100 to $0.04 per
$100 effective in the second quarter of 1995. In 1996, the Company paid
FDIC insurance assessments of $2,000. In 1997, the Company anticipates
paying $25,880 in FDIC insurance assessments which include the annual FICO
charges of 1.30 basis points on average deposits. See "Supervision and
Regulation-FDIC Insurance Assessments."
Income Taxes
The Company's income tax expense was $1,505,000, $1,089,000,
and $1,114,000 in 1996, 1995 and 1994, respectively. These levels represent
an effective tax rate on pre-tax earnings of 35.3% for 1996, 34.2% for
1995, and 34.6% for 1994. Details of the tax provision for income taxes are
included in Note 7, "Income Tax Expense" to the Notes to the Consolidated
Financial Statements included elsewhere herein.
ITEM 7. FINANCIAL STATEMENTS
See pages 45 to 75.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-37-
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Board of Directors and Executive Officers
The following table sets forth certain information regarding the
Company's and the Bank's directors, executive officers and principal
shareholders as of December 31, 1996:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned and
Name (Age) and Year First Information About Director Percentage of
Elected as Director or Executive Officer (1) Common Stock
Outstanding (2)
<S> <C> <C>
C. Wayne Alderman (46) Director of the Bank; Dean of Auburn University 950/*/ (3)
Bank Board: 1993 College of Business since 1993; Associate
Dean of Auburn University College of
Business from 1989 to 1993; Director of
Auburn University School of Accounting
from 1988 to 1989.
Otis D. Alsobrook, III (45) City President, Opelika Office and Senior Vice 1,301/*/ (4)
President of the Bank since 1990; previously
Vice President of AmSouth Bank in
Opelika, Alabama from 1977 to 1990.
Terry W. Andrus (44) Director of the Bank; Administrator and Chief 300/*/ (5)
Bank Board: 1991 Executive Officer of the East Alabama
Medical Center since 1984.
Terrell E. Bishop (60) Senior Vice President - Mortgage Lending of the 3,706/*/ (6)
Bank since 1991; formerly Executive Vice
President, Treasurer and Director of Charter
Federal Savings and Loan Assn., West Point,
Georgia, from 1964 to 1990.
Winifred H. Boyd (74) Director of the Company and the Bank; 15,097 (7)
Bank Board: 1981 community civic leader. (1.16%)
Company Board: 1993
Curt B. Cope (43) Director of the Bank; President of Cope 6,721/*/
Bank Board: 1993 International since 1994.
Robert W. Dumas (43) Senior Vice President - Commercial Lending of 7,838/*/ (8)
the Bank since 1988; Employee of the Bank
since 1984.
J. E. Evans (55)
Bank Board: 1986 Director of the Bank; Owner of Evans Realty 6,000/*/
since 1970.
</TABLE>
-38-
<PAGE>
<TABLE>
<S> <C> <C>
Linda D. Fucci (49) Chief Financial Officer, Secretary and Treasurer 77,226 (9)
of the Company since 1984; Chief Financial (5.93%)
Officer and Senior Vice President of the
Bank since 1988; Director and Secretary of
ANB Systems since 1989; Employee of the
Bank since 1972.
Jo Ann Hall (47) Senior Vice President - Operations/ 3,894/*/ (10)
Personnel/Security of the Bank since 1994;
Employee of the Bank since 1974.
William F. Ham, Jr. (43) Director of the Bank; Owner of Varsity 352/*/ (11)
Bank Board: 1993 Enterprises, a coin-operated laundry
equipment operating company, since 1977.
Robert M. Harper (58) Director of the Company and the Bank; Alabama 8,000/*/ (12)(19)
Bank Board: 1982 Circuit Court Judge since 1986.
Company Board: 1991
Anne M. May (45) Director of the Company, the Bank, and ANB 78,142 (13)
Bank Board: 1982 Systems; Partner, Machen, McChesney & (6.00%)
Company Board: 1990 Chastain, Certified Public Accountants, since
1973.
E. L. Spencer, Jr. (66) Director of the Company, the Bank, and ANB 254,751 (14)
Bank Board: 1975 Systems; Chairman of the Board of Directors (19.55%)
Company Board: 1984 of the Bank since 1980; President and Chief
Executive Officer of the Bank and the
Company since 1990; President of Spencer
Lumber Company since 1970. (15)
Edward L. Spencer, III (41) Director of the Bank; Vice President of Spencer 1,900/*/ (16)
Bank Board: 1991 Lumber Company since 1990. (15)
Emil F. Wright, Jr. (60) Director of the Company and the Bank; Vice 142,260 (17)
Bank Board: 1973 Chairman of the Company and the Bank (10.92%)
Company Board: 1984 since 1991; Ophthalmologist practicing with
the Medical Arts Eye Clinic since 1971.
Directors and executive 459,405
officers as a group (35.26%)
(16 persons)
The Company's 401(k) Plan 69,961 (18)
(5.37%)
</TABLE>
- -------------------
* Denotes less than 1% beneficial ownership.
-39-
<PAGE>
(1) The business address of each officer and director is 100 N. Gay Street,
Auburn, Alabama 36830.
(2) Information relating to beneficial ownership of Common Stock by directors
is based upon information furnished by each person using "beneficial
ownership" concepts set forth in rules of the Commission under the Exchange
Act. Under such rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the
power to vote or direct the voting of such security, or "investment power,"
which includes the power to dispose of or to direct the disposition of such
security. The person is also deemed to be a beneficial owner of any
security of which that person has a right to acquire beneficial ownership
within 60 days. Under such rules, more than one person may be deemed to be
a beneficial owner of the same securities, and a person may be deemed to be
a beneficial owner of securities as to which he or she may disclaim any
beneficial ownership. Accordingly, directors and officers are named as
beneficial owners of shares as to which they may disclaim any beneficial
interest. Except as indicated in other notes to this table describing
special relationships with other persons and specifying shared voting or
investment power, directors and officers possess sole voting and investment
power with respect to all shares of Common Stock set forth opposite their
names.
(3) Includes 400 shares held jointly with Mr. Alderman's wife, as to which Mr.
Alderman may be deemed to have shared voting and investment power, and 550
shares held in Mr. Alderman's Simplified Employee Pension Plan.
(4) Includes 250 shares held jointly with Mr. Alsobrook's wife, as to which Mr.
Alsobrook may be deemed to have shared voting and investment power, and
1,051 shares held by the trustees for the ESOP for the benefit of Mr.
Alsobrook.
(5) Includes 100 shares held jointly with Mr. Andrus' wife, as to which Mr.
Andrus may be deemed to have shared voting and investment power.
(6) Includes 2,664 shares held jointly with Mr. Bishop's wife, as to which Mr.
Bishop may be deemed to have shared voting and investment power, and 1,042
shares held by the trustees for the ESOP for the benefit of Mr. Bishop.
(7) Includes 6,000 shares held by Ms. Boyd's husband, as to which Ms. Boyd may
be deemed to have shared voting and investment power, and as to which Ms.
Boyd disclaims beneficial ownership.
(8) Includes 2,750 shares held jointly with Mr. Dumas' wife, and 808 shares
held jointly with Mr. Dumas' parents, as to which Mr. Dumas may be deemed
to have shared voting and investment power, and 4,280 shares held by the
ESOP trustees for the benefit of Mr. Dumas.
(9) Includes 69,961 shares held by the ESOP, of which Ms. Fucci is a co-
trustee, as to which Ms. Fucci may be deemed to have shared voting and
investment power with E. L. Spencer, Jr. and Anne M. May, as co-trustees of
the ESOP, and as to which Ms. Fucci disclaims beneficial ownership of
65,792 shares. The remaining 4,169 shares are held by the ESOP trustees for
the benefit of Ms. Fucci. Also includes 7,265 shares held jointly with Ms.
Fucci's husband, as to which Ms. Fucci may be deemed to have shared voting
and investment power.
(10) Includes 2,588 shares held by the ESOP trustee for the benefit of Ms. Hall.
(11) Includes 100 shares held in Mr. Ham's self-directed Individual Retirement
Account ("IRA").
(12) Includes 2,000 shares held in Mr. Harper's self-directed Individual
Retirement Account ("IRA").
-40-
<PAGE>
(13) Includes 69,961 shares held by the ESOP, of which Ms. May is a co-trustee,
as to which Ms. May may be deemed to have shared voting and investment
power with E. L. Spencer, Jr. and Linda D. Fucci, as co-trustees of the
ESOP, and as to which Ms. May disclaims beneficial ownership. Also includes
145 shares held by Ms. May's daughter, as to which Ms. May may be deemed to
have shared voting and investment power.
(14) Includes 69,961 shares held by the ESOP, of which Mr. Spencer is a co-
trustee, as to which Mr. Spencer may be deemed to have shared voting and
investment power with Linda D. Fucci and Anne M. May, as co-trustees of the
ESOP, and as to which Mr. Spencer disclaims beneficial ownership of 66,971
shares. The remaining 2,990 shares are held by the ESOP trustees for the
benefit of Mr. Spencer. Also includes 24,900 shares held in the Trust of
E. L. Spencer, Sr., of which Mr. Spencer serves as trustee, and 5,000
shares held by Mr. Spencer's wife, as to which Mr. Spencer may be deemed to
have shared voting and investment power.
(15) E. L. Spencer, Jr. is the father of Edward L. Spencer, III.
(16) Includes 10 shares held by a minor of which Mr. Spencer serves as
custodian.
(17) Includes 9,800 shares held by DTS, a company in which Mr. Wright is a
partner, as to which Mr. Wright may be deemed to have shared voting and
investment power, and as to which Mr. Wright disclaims beneficial ownership
of 9,702 shares. Also includes 1,500 shares held for the benefit of Mr.
Wright by the Medical Arts Eye Clinic, PC Money Purchase Plan.
(18) E. L. Spencer, Jr., Linda D. Fucci, and Anne M. May are co-trustees of the
401(k) Plan. Of the 69,961 shares held by the 401(k) Plan, as to which
shares the co-trustees may be deemed to have shared voting and investment
power, Mr. Spencer disclaims beneficial ownership of 66,971 shares (with
the remaining 2,990 shares held by the 401(k) plan trustees for the benefit
of Mr. Spencer), Ms. Fucci disclaims beneficial ownership of 65,792 shares
(with the remaining 4,169 shares held by the 401(k) Plan trustees for the
benefit of Ms. Fucci), and Ms. May disclaims beneficial ownership of all
69,961 shares.
(19) Mr. Harper resigned from the Bank and Company Board effective February 11,
1997.
Committees and Meetings of the Board of Directors
All Company Directors hold office until the next annual meeting of Company
stockholders, unless they sooner resign, become disqualified, or are removed.
All executive officers of the Company are elected annually. All Company
Directors are members of the Bank's Board of Directors. Various Bank Directors
are not directors of the Company.
The Company's Board of Directors held 5 meetings during 1996 and has five
standing committees: the Executive Committee, the Proxy Committee, the Personnel
and Salary Committee, the Audit and Compliance Committee, and the Strategic
Planning Committee. The Bank's Board of Directors held 12 meetings during 1996
and has the following standing committees separate from the Company: the Audit
and Compliance Committee, the Property Committee, the Executive Committee, the
Loan Committee, the Investment Committee, the Personnel and Salary Committee,
and the Strategic Planning Committee. Such committees perform those duties
customarily performed by similar committees at other financial institutions. All
directors attended at least 75% of all meetings of the Company's and the Bank's
Board and each committee on which they served.
The Company's and the Bank's Executive Committees to act in the absence of
the respective Boards of Directors on most matters that require Board approval.
E. L. Spencer, Jr., Anne M. May and Emil F. Wright, Jr. are the members of these
committees for both the Company and the Bank, each of which held three meetings
in 1996.
-41-
<PAGE>
The Company's and the Bank's Personnel and Salary Committees make
recommendations to the respective Boards of Directors with respect to the
compensation of executive officers and employees of the Company and the Bank.
Anne M. May, Winifred H. Boyd, and Emil F. Wright, Jr. are the members of these
committees for both the Company and the Bank, each of which held two meetings in
1996.
The Company's and the Bank's Audit and Compliance Committees are composed
of at least three Directors that are not serving as officers of the Company or
the Bank. These committees are authorized to make an examination of the affairs
of the Company and Bank, respectively, and report the results of such
examinations to the respective Boards of Directors. These committees are also
responsible for reviewing the reports of any independent certified public
accountants' examinations and to report to the Boards on such examinations. Anne
M. May, Emil F. Wright, Winifred H. Boyd, Terry W. Andrus, C. Wayne Alderman and
Curt B. Cope are the members of these committees for both the Company and the
Bank, each of which held 11 meetings in 1996.
The Company's and the Bank's Strategic Planning Committees evaluate
potential acquisitions and the Company's and the Bank's long range goals and
oversee the planning process for officer and director strategic planning
sessions. E. L. Spencer, Jr., Anne M. May and Linda D. Fucci are the members of
these committees for both the Company and the Bank, each of which held one
meeting in 1996.
The Bank's Property Committee evaluates and oversees building projects and
property acquisitions. J. E. Evans, William F. Ham, Jr., Anne M. May and E. L.
Spencer, Jr. are members of this committee, which held two meetings in 1996.
The Bank's Loan Committee is comprised of three or more non-employee
Directors and the Bank's CEO. This committee has the authority to examine and
approve loans and discounts, to exercise authority regarding loans and
discounts, to ensure adherence to the Bank's loan policy. E. L. Spencer, Jr., C.
Wayne Alderman, Winifred H. Boyd, J. E. Evans, William F. Ham, Jr. and Edward
Lee Spencer, III are members of this committee, which held 12 regular and at
least seven phone meetings in 1996.
The Bank's Investment Committee has the authority to examine and approve
investment transactions, to exercise authority regarding investment
transactions, and to ensure adherence to Bank's Investment Policy. Terry Andrus,
Curt B. Cope, and Emil F. Wright are members of this committee.
Members of the Boards of Directors that are not Company or Bank executives
are paid $300 for each Board meeting attended. For his services as such, the
Chairman of the Company's and the Bank's Board of Directors is paid $600 for
each Board meeting attended. In addition to Board meeting fees, members of the
Loan and the Audit and Compliance Committees receive $900 per year for serving
on each of these committees, and members of the Personnel and Salary Committee
receive $75 per meeting held. Members of the Investment Committee receive $75
per meeting attended. The chairman of the Audit and Compliance Committee
receives $1,800 per year, and the Chairman of the Personnel and Salary Committee
received $300 during 1996. Total directors' fees and bonuses of $100,350 were
paid during 1996.
Principal Stockholders
The Auburn National Bancorporation, Inc. 401(k) and Employee Stock
Ownership Plan (the "401(k) Plan") is the only stockholder, other than E. L.
Spencer, Jr. and Emil F. Wright, Jr. (whose ownership is described above), that
is known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock. As of December 31, 1996, the 401(k) Plan
beneficially owned 69,961 shares, 5.37% of the total outstanding shares of
common stock.
Compliance with Section 16(a) of the Exchange Act
The Company's officers, directors, and 10% stockholders are required to
file reports under Section 16(a) of the Exchange Act.
-42-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation of Executive Officers
The following table sets forth certain information regarding compensation
paid or to be paid by the Company or the Bank during 1996, 1995, and 1994 to E.
L. Spencer, Jr., as the Company's Chief Executive Officer. No other executive
officers' aggregate salaries and bonuses in 1996 exceeded $100,000. The Company
has not granted any stock options or stock appreciation rights and has not made
any payouts under any long-term incentive plan.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Annual Compensation(1) Awards
-------------------------- ------------
Securities Underlying
Name and Other Annual Options/ All Other
Principal Position Year Salary Bonus Compensation SARs Compensation (2)
------------------ ---- ------ ----- ------------ --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
E. L. Spencer, Jr., 1996 $168,000 $30,000 $ -- $ -- $55,878
Chairman, CEO
and Director of the 1995 159,148 21,000 -- -- 40,630
Company and the
Bank 1994 155,148 21,000 -- -- 42,235
</TABLE>
- ------------------
(1) Excludes certain personal benefits, the total value of which did not
exceed the lesser of $50,000 or 10% of the total annual salary and bonus
for Mr. Spencer.
(2) Includes premiums paid on split-dollar whole life insurance of $20,000,
$20,000, and $20,000; Company contributions or other allocations to the
Auburn National Bancorporation, Inc. 401(k) and Employee Stock Ownership
Plan of $18,878, $9,530, and $9,335; and Board of Director and board
committee fees of $17,000, $11,100, and $12,900, respectively, for the
years 1996, 1995, and 1994. The Company purchased the split-dollar whole
life insurance policy in 1990. The premiums are $20,000 each year for 20
years, of which $120,000 has been paid and $280,000 will be paid over the
next 14 years. Upon the Chairman's death, the Company will receive a
return of all premiums paid, and the Chairman's spouse will receive the
remaining benefits in trust. If the policy is surrendered, the Company
will receive the cash surrender value up to the amount of premiums paid.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 9 "Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Various Company directors, officers, and their affiliates, including
corporations and firms of which they are officers or in which they and/or their
families have an ownership interest, are customers of, or had transactions with,
the Company and/or the Bank. All such transactions were in the ordinary course
of business with the Company
-43-
<PAGE>
and/or the Bank, including borrowings, all of which the Company believes were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unaffiliated persons and
did not involve more than the normal risk of collectibility or present other
unfavorable features. The Company and the Bank expect to continue to have such
transactions on similar terms with their directors, officers, and their
affiliates and associates. The aggregate amount of loans outstanding by the Bank
to directors, executive officers, and related parties of the Company or the Bank
as of December 31, 1996 was approximately $7,427,000, which represented
approximately 32.1% of the Company's consolidated stockholders' equity on that
date.
None of the directors of the Company serves as an executive officer of, or
owns, or during 1996 or 1995 owned, of record or beneficially, in excess of 10%
equity interest in any business or professional entity that made during 1996,
1995, or 1994, payments to the Company or the Bank for property or services in
excess of $60,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. A. Certificate of Incorporation of Auburn National Bancorporation, Inc.
(incorporated by reference from Registrant's Registration Statement on
Form SB-2 (File No. 33-86180)).
B. Bylaws of Auburn National Bancorporation, Inc. (incorporated by
reference from Registrant's Registration Statement on Form SB-2 (File
No. 33-86180)).
4. Instruments Defining the Rights of Security Holders (incorporated by
reference from Registrant's Registration Statement on Form SB-2 (File No.
33-86180)).
10. Material Contracts
A. Auburn National Bancorporation, Inc. 1994 Long-Term Incentive Plan
(incorporated by reference from Registrant's Registration Statement on
Form SB-2 (File No. 33-86180)).
B. Lease and Equipment Purchase Agreement, dated September 15, 1987
(incorporated by reference from Registrant's Registration Statement on
Form SB-2 (File No. 33-86180)).
11. Statement Regarding Computation of Per Share Earnings.
21. Subsidiaries of Registrant (incorporated by reference from Registrant's
Registration Statement on Form SB-2 (File No. 33-86180)).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1996.
-44-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996, 1995, and 1994
With Independent Auditors' Report Thereon
-45-
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Auburn National Bancorporation, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Auburn National
Bancorporation, Inc. and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Auburn National
Bancorporation, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
January 17, 1997
-46-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and due from banks (note l) $ 15,427,715 8,175,545
Federal funds sold 11,745,000 10,575,000
------------- ------------
Cash and cash equivalents 27,172,715 18,750,545
Interest-earning deposits with other banks 6,354 7,110
Investment securities held to maturity (fair value
of $19,091,036 and $26,084,159 for December 31, 1996
and 1995, respectively) (notes 2 and 6) 19,051,036 25,760,581
Investment securities available for sale (note 2) 44,026,979 30,773,639
Loans:
Loans, less unearned income of $91,167 and
$156,935 at December 31, 1996 and 1995, respectively 161,718,475 140,470,965
Less allowance for loan losses (2,093,682) (2,012,133)
------------- ------------
Loans, net (notes 3 and 6) 159,624,793 138,458,832
Premises and equipment, net (note 4) 3,447,099 3,626,943
Rental property, net 1,899,354 1,978,192
Other assets (note 7) 2,827,027 2,841,630
------------- ------------
Total assets $ 258,055,357 222,197,472
============= ============
</TABLE>
(Continued)
See accompanying summary of signigicant accounting policies and notes to
consolidated financial statements.
-47-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ---- ----
Deposits:
<S> <C> <C>
Noninterest bearing $ 28,406,946 25,491,056
Interest-bearing (note 5) 188,320,228 160,311,472
------------- ------------
Total deposits 216,727,174 185,802,528
Securities sold under agreements to repurchase 4,652,834 7,010,098
Other short-term borrowings (note 6) 1,203,130 472,195
Other borrowed funds (note 6) 10,908,338 6,029,138
Accrued expenses and other liabilities 1,367,149 1,443,905
Employee Stock Ownership Plan debt (note 8) 113,940 170,946
------------- ------------
Total liabilities 234,972,565 200,928,810
Stockholders' equity (notes 11 and 12):
Preferred stock of $.01 par value; authorized
200,000 shares; issued shares - none -- --
Common stock of $.01 par value; authorized 2,500,000 shares; issued
1,319,045 shares at December 31, 1996
and 1995 13,190 13,190
Surplus 3,691,099 3,685,488
Retained earnings 19,942,980 17,749,910
Less:
Unrealized gain (loss) on mutual funds and investment
securities available for sale, net of taxes (146,528) 90,775
Treasury stock, 15,974 shares and 5,820 shares
at December 31, 1996 and 1995,
respectively, at cost (304,009) (99,755)
Employee Stock Ownership Plan debt (113,940) (170,946)
------------- ------------
Total stockholders' equity 23,082,792 21,268,662
------------- ------------
Commitments and contingencies (note 9)
Total liabilities and stockholders' equity $ 258,055,357 222,197,472
============= ============
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
-48-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $13,137,404 12,183,299 10,506,815
Interest and dividends on investment securities held to maturity:
Taxable 1,455,910 2,172,396 2,200,345
Tax-exempt 104,492 135,223 170,430
----------- ---------- -----------
Total interest and dividends on investment
securities held to maturity 1,560,402 2,307,619 2,370,775
Interest and dividends on investment securities available for sale:
Taxable 2,690,009 1,473,954 676,687
Tax-exempt 15,464 -- --
----------- ---------- -----------
Total interest and dividends on investment
securities available for sale 2,705,473 1,473,954 676,687
Interest on federal funds sold 337,452 345,069 101,822
Interest on interest-earning deposits with other banks 1,550 3,215 1,820
----------- ---------- -----------
Total interest income 17,742,281 16,313,156 13,657,919
----------- ---------- -----------
Interest expense:
Interest on deposits 8,684,432 8,058,254 5,329,749
Interest on federal funds purchased 11,040 15,635 54,441
Interest on securities sold under agreements to
repurchase 413,650 133,979 68,480
Interest on other borrowings 554,606 649,726 691,301
----------- ---------- -----------
Total interest expense 9,663,728 8,857,594 6,143,971
----------- ---------- -----------
Net interest income 8,078,553 7,455,562 7,513,948
Provision for loan losses (note 3) 80,102 -- 171,600
----------- ---------- -----------
Net interest income after provision for
loan losses 7,998,451 7,455,562 7,342,348
----------- ---------- -----------
Noninterest income:
Service charges on deposit accounts 801,124 734,522 805,327
Investment securities gains (losses), net (note 2) 26,478 37,237 (52,367)
Other (note 13) 1,439,417 1,371,380 1,099,898
----------- ---------- -----------
Total noninterest income 2,267,019 2,143,139 1,852,858
----------- ---------- -----------
Noninterest expense:
Salaries and benefits (note 8) 2,940,791 2,986,511 2,782,913
Net occupancy expense 816,653 723,916 613,003
Other (note 13) 2,249,867 2,708,243 2,582,943
----------- ---------- -----------
Total noninterest expense 6,007,311 6,418,670 5,978,859
----------- ---------- -----------
Earnings before income taxes 4,258,159 3,180,031 3,216,347
Income tax expense (note 7) 1,504,805 1,088,797 1,114,257
----------- ---------- -----------
Net earnings $ 2,753,354 2,091,234 2,102,090
=========== ========== ===========
Earnings per share $ 2.11 1.61 1.69
=========== ========== ===========
Weighted average shares outstanding 1,304,742 1,301,372 1,245,845
=========== ========== ===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
Net
unrealized gain
(loss) on mutual
funds and
investment Employee
securities Stock
Common Retained available Ownership Treasury
Shares stock Surplus earnings for sale plan debt stock Total
------ ------ ------- -------- --------------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 1,250,000 $12,500 2,452,088 14,493,771 (65,049) (284,959) (13,893) 16,594,458
Net earnings - - - 2,102,090 - - - 2,102,090
Effect of adoption of FASB Statement
No. 115, Accounting for Certain
Investments in Debt and Equity
Securities - - - - 39,000 - - 39,000
Cash dividends paid ($0.38 per share) - - - (467,516) - - - (467,516)
Change in net unrealized gain (loss)
on mutual funds and investment
securities available for sale - - - - (322,614) - - (322,614)
Payment of Employee Stock Ownership
Plan debt - - - - - 57,006 - 57,006
Purchase of treasury stock
(5,018 shares) - - - - - - (81,593) (81,593)
Sale of treasury stock (1,264 shares) - - 361 - - - 20,492 20,853
---------- ------- ---------- ---------- -------- --------- ------- ----------
Balance at December 31, 1994 1,250,000 12,500 2,452,449 16,128,345 (348,663) (227,953) (74,994) 17,941,684
Issuance of common stock (69,045 shares) 69,045 690 1,233,729 - - - - 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 _ _ _ _ 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 1,319,045 13,190 3,685,488 17,749,910 90,775 (170,946) (99,755) 21,268,662
Net earnings _ _ _ 2,753,354 _ _ _ 2,753,354
Cash dividends paid ($0.43 per share) _ _ _ (560,284) _ _ _ (560,284)
Change in net unrealized gain (loss) on
mutual funds and investment securities
available for sale _ _ _ _ (237,303) _ _ (237,303)
Payment of Employee Stock Ownership
Plan debt _ _ _ _ _ 57,006 _ 57,006
Sale of treasury stock (1,111 shares) _ _ 5,611 _ _ _ 16,887 22,498
Purchase of treasury stock (11,265 shares) _ _ _ _ _ _ (221,141) (221,141)
---------- ------- ---------- ---------- -------- --------- ------- ----------
Balance at December 31, 1996 1,319,045 $13,190 3,691,099 19,942,980 (146,528) (113,940) (304,009) 23,082,792
---------- ------- ---------- ---------- -------- --------- ------- ----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
-62-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,753,354 2,091,234 2,102,090
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 519,063 435,302 853,723
Net amortization (accretion) of investment
premiums (discounts) 46,623 104,234 (14,902)
Provision for loan losses 80,102 -- 171,600
Loans originated for resale (13,730,694) (10,391,523) (7,089,476)
Proceeds from sale of loans originated for resale 12,480,598 9,938,200 6,729,090
Gain on sale of credit card loan portfolio -- (125,269) --
Loss on sale of premises and equipment -- 178,216 12,586
Loss on disposal of rental property -- 6,045 --
Gain on sale of investment securities (26,478) (37,237) (2,633)
Other than temporary decline in market value
of investment securities available for sale -- -- 55,000
(Gain) loss on sale of other real estate -- (39,993) 25,425
Increase in interest receivable (241,612) (72,926) (119,844)
Writedown on lease with bargain purchase
option -- 10,000 100,000
(Increase) decrease in other assets 388,073 (450,498) (391,702)
Increase (decrease) in interest payable (94,652) 239,913 276,624
(Decrease) increase in accrued expenses
and other liabilities 17,896 (50,775) (36,148)
----------- ---------- -----------
Net cash provided by operating activities 2,192,273 1,834,923 2,671,433
----------- ---------- -----------
Cash flows from investing activities:
Proceeds from sales of investment securities
available for sale 3,871,059 498,750 --
Proceeds from maturities/calls/paydowns of
investment securities held to maturity 6,668,991 10,923,422 7,703,980
Purchases of investment securities held to maturity (17,800) (500,000) (12,015,698)
Proceeds from maturities/calls/paydowns of
investment securities available for sale 16,102,270 6,143,749 6,715,317
Purchases of investment securities available for sale (33,557,621) (24,848,140) (6,363,091)
Proceeds from sale of credit card loan portfolio -- 1,008,468 --
Proceeds from sale of student loan portfolio -- 6,863,214 --
Other net increase in loans (20,078,467) (7,012,292) (15,819,917)
Purchases of premises and equipment (224,636) (1,896,232) (301,558)
Proceeds from sale of other real estate 82,500 680,595 31,800
Proceeds from sales of premises and equipment -- 375 11,959
Additions to rental property (35,745) (68,388) (4,155)
Purchase of property included as other real estate -- -- 3,100
Proceeds from lease of other real estate -- 4,584 --
Net (increase) decrease in interest-bearing deposits
with other banks 756 (408) 1,649
----------- ---------- -----------
Net cash used in investing activities (27,188,693) (8,202,303) (20,036,614)
----------- ---------- -----------
</TABLE>
(Continued)
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest bearing deposits 2,915,890 (1,180,109) 3,771,377
Net increase in interest-bearing deposits 28,008,756 21,933,364 10,452,658
Net increase (decrease) in securities sold under agreements
to repurchase (2,357,264) 2,389,538 1,248,086
Borrowings from FHLB 5,000,000 -- 10,000,000
Repayments to FHLB (100,000) (11,600,000) (100,000)
Repayments of other borrowed funds (20,800) (18,493) (19,230)
Net increase (decrease) in other short-term borrowings 730,935 (261,076) (832,952)
Proceeds from issuance of common stock -- 1,233,729 --
Proceeds from sale of treasury stock 22,498 -- 20,853
Purchase of treasury stock (221,141) (24,761) (81,593)
Dividends paid (560,284) (469,669) (467,516)
----------- ----------- -----------
Net cash provided by financing activities 33,418,590 12,002,523 23,991,683
Net increase in cash and cash equivalents 8,422,170 5,635,143 6,626,502
Cash and cash equivalents at beginning of year 18,750,545 13,115,402 6,488,900
----------- ----------- -----------
Cash and cash equivalents at end of year $ 27,172,715 18,750,545 13,115,402
=========== =========== ===========
Supplemental information on cash payments:
Interest paid $ 9,758,380 8,617,681 5,867,347
=========== =========== ===========
Income taxes paid $ 1,239,739 1,147,122 996,310
=========== =========== ===========
Supplemental information on noncash transactions:
Loans transferred to other real estate $ 82,500 23,000 405,000
=========== =========== ===========
Loans to facilitate the sale of other real estate $ -- 534,186 --
=========== =========== ===========
Securities transferred from held-to-maturity to
available-for-sale $ -- -- 12,790,451
=========== =========== ===========
Change in unrealized gain (loss) on investment
securities available for sale, net of change in deferred tax $ (237,303) 439,438 (322,614)
=========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
Summary of Significant Accounting Policies
- ------------------------------------------
Business
- --------
Auburn National Bancorporation, Inc. (the Company) provides a full range of
banking services to individual and corporate customers in Lee County, Alabama
through its subsidiary, AuburnBank (the Bank). The Company is subject to
competition from other financial institutions. The Company is also subject to
the regulations of certain federal agencies and undergoes periodic examinations
by those regulatory authorities.
The bank holding company was reincorporated in July 1994 from Alabama to
Delaware to take advantage of certain provisions of Delaware law, but made no
material change in the business, management, or financial condition of the
Company.
Basis of Financial Statement Presentation
- -----------------------------------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and foreclosed real estate owned, management obtains independent
appraisals for significant properties.
The Company's real estate loans are secured by real estate located principally
in Lee County, Alabama and surrounding areas. In addition, the foreclosed real
estate owned by the Company is located in this same area. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
and the recovery of real estate owned are susceptible to changes in market
conditions in this area.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowances may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and real estate
owned. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
The accounting policies followed by the Company and its subsidiaries and the
methods of applying these principles conform with generally accepted accounting
principles and with general practice within the banking industry. Certain
principles which significantly affect the determination of financial position,
results of operations and cash flows are summarized below.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, AuburnBank and ANB Systems, Inc. All significant intercompany
accounts and transactions have been eliminated.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
Cash Equivalents
- ----------------
Cash equivalents include amounts due from banks and federal funds sold. Federal
funds are generally sold for one-day periods.
Investment Securities
- ---------------------
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115) which requires that investment securities be held in one
of three portfolios: (i) trading account securities, (ii) held-to-maturity
securities, and (iii) securities available for sale. Trading account securities
are to be stated at market value. The Company does not have trading account
securities. Investment securities held to maturity are stated at cost adjusted
for amortization of premiums and accretion of discounts. With regard to
investment securities held to maturity, management has the intent and ability to
hold such securities until maturity. Investment securities available for sale
are stated at fair value with any unrealized gains and losses reported in a
separate component of stockholders' equity, net of tax effects, until realized.
Once realized, gains and losses on investment securities available for sale are
reflected as adjustments to current period earnings. Additionally, SFAS 115
specifies accounting principles in regard to transfers among the three
portfolios and the conditions that would permit such transfers. Investment
securities available for sale are classified as such due to the fact that
management may decide to sell certain securities prior to maturity for
liquidity, tax planning, or other valid business purposes. The adoption of SFAS
115 resulted in an addition of $39,000 to stockholders' equity at January 1,
1994, representing the tax-effected unrealized gains on the Company's investment
securities available for sale of $101,000 and a tax-effected unrealized loss of
$62,000 on mutual funds. With the adoption of SFAS 115, the Company transferred
primarily its U.S. Treasury, U.S. Agency and CMO securities, totaling
approximately $12,790,000, to the available for sale portfolio at January 1,
1994.
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Accretion of discounts and
amortization of premiums are calculated on the effective interest method over
the anticipated life of the security. Gains and losses from the sale of
investment securities are computed under the specific identification method.
The Company uses interest rate swaps, caps, and floors as part of its overall
interest rate risk management. Any gains and losses arising from the use of
interest rate contracts are deferred and amortized over the lives of the
underlying assets or liabilities as an adjustment to interest income or expense.
Interest income or expense related to interest rate swaps, caps, and floors is
recorded over the life of the agreement as an adjustment to interest income or
expense. Interest rates on variable rate derivative products held by the Bank
are derived from the Telerate USD-LIBOR rate and the USD CP-HP.15.
Loans
- -----
Loans are stated at principal amounts outstanding, net of unearned income.
Interest on fixed rate precomputed installment loans is credited to income based
on a method which approximates the level-yield method. Interest on all other
loans is credited to income on the simple interest method.
It is the general policy of the Bank to discontinue the accrual of interest when
principal or interest payments become more than ninety days delinquent. When a
loan is placed on a nonaccrual basis, any interest previously accrued but not
collected is reversed against current income unless the collateral for the loan
is sufficient to cover the accrued interest. Income on such loans is then
recognized only to the extent that cash
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
Loans, Continued
- ----------------
is received and where the future collection of principal is probable. Interest
accruals are recorded on such loans only when they are brought fully current
with respect to interest and principal and when, in the judgment of management,
the loans are estimated to be fully collectible as to both principal and
interest.
The Company adopted the provisions of SFAS 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures, on January 1, 1995.
Under the provisions of SFAS 114 and 118, management considers a loan to be
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When a
loan is considered impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the note's effective
interest rate. If the loan is collateral-dependent, the fair value of the
collateral is used to determine the amount of impairment. Impairment losses are
included in the allowance for loan losses through the provision for loan losses.
Impaired loans are charged to the allowance when such loans are deemed to be
uncollectible. Subsequent recoveries are added to the allowance.
When a loan is considered impaired, cash receipts are applied under the
contractual terms of the loan agreement, first to principal and then to interest
income. Once the recorded principal balance has been reduced to zero, future
cash receipts are applied to interest income, to the extent that any interest
has not been recognized. Any further cash receipts are recorded as recoveries of
any amount previously charged off.
A loan is also considered impaired if its terms are modified in a troubled debt
restructuring after January 1, 1995. For those accruing impaired loans, cash
receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting.
Allowance for Loan Losses
- -------------------------
The amount of provision for loan losses charged to earnings is based on actual
loss experience and management's evaluation of the loan portfolio under current
economic conditions. In addition, loans are examined for credit quality,
documentation and financial information annually by a qualified non-employee
loan review examiner. Such provisions, adjusted for loan charge-offs and
recoveries, comprise the allowance for loan losses.
Loans are charged against the allowance when management determines such loans to
be uncollectible. Subsequent recoveries are credited to the allowance.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on both the double-declining balance and straight-line
methods for buildings and principally on a straight-line method for furniture,
fixtures, and equipment over the estimated useful lives of the assets, which
range from 3 to 39 years.
Rental Property
- ---------------
Rental property consists of land, buildings, and furniture, fixtures, and
equipment which are rented to the Bank and the general public. Rental property
is stated at cost less accumulated depreciation. Depreciation is computed on
both the double-declining balance and straight-line methods for buildings and
principally on a straight-line method for furniture, fixtures, and equipment
over the estimated useful lives of the assets.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
Other Real Estate
- -----------------
Real estate acquired through foreclosure or in lieu of foreclosure is carried at
the lower of cost or fair value, adjusted for estimated selling costs. Any
write-down at the time of foreclosure is charged to the allowance for loan
losses. Subsequent declines in fair value below acquisition cost and gains or
losses on the sale of these properties are credited or charged to earnings.
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company files its federal income tax returns on a consolidated basis.
Earnings per Share
- ------------------
Earnings per share is determined by net earnings divided by the number of
weighted average shares outstanding. The Company reserved 75,000 shares of
common stock in May of 1994 for issuance under stock option plans. Since no
options have been granted as of December 31, 1996, no common stock equivalents
have been included in the computation of earnings per share.
Accounting Pronouncements
- -------------------------
Effective January 1, 1996, the Company adpoted Statement of Financial Accounting
Standards No. 122, Accounting for Mortgage Servicing Rights an amendment of FASB
Statement No. 65 (SFAS 122). SFAS 122 requires that a mortgage banking
enterprise recognize as separate assets, rights to service mortgage loans for
others, however those servicing rights are acquired. SFAS 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 recognition criteria
under SFAS 122 has not had a material impact on the consolidated financial
statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans. A company can elect to use the new
fair-value-based method of accounting for employee stock compensation plans of
SFAS 123 or continue to account for such plans under the current accounting
standards of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Entities electing to
remain with the present accounting standards must make pro-forma disclosures of
net income and earnings per share as if the fair-value-based method of
accounting had been applied. Upon the granting of any stock options, the Company
plans to account for employee stock options using the accounting standards of
APB Opinion No. 25 and include the required disclosures in the financial
statements.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(1) Cash and Due from Banks
-----------------------
The Bank is required to maintain certain daily cash reserve balances in
accordance with Federal Reserve Board requirements. The amounts of those
required balances as of December 31, 1996 and 1995 were approximately
$1,117,000 and $1,149,000, respectively.
(2) Investment Securities
---------------------
The amortized cost and approximate fair value of investment securities at
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. government agencies
excluding mortgage-
backed securities $ 2,027,883 16,177 -- 2,044,060
State and political
subdivisions 1,469,847 50,776 -- 1,520,623
Mortgage-backed securities 13,662,962 86,246 141,014 13,608,194
Collateralized mortgage
obligations 535,093 219 -- 535,312
Corporate bonds 207,294 985 -- 208,279
Other securities 1,147,957 26,635 24 1,174,568
------------ --------- ---------- ------------
$ 19,051,036 181,038 141,038 19,091,036
============ ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government agencies
excluding mortgage-
backed securities $ 18,013,005 20,805 160,980 17,872,830
Mortgage-backed securities 364,647 -- 1,556 363,091
Collateralized mortgage
obligations 24,906,147 104,037 155,224 24,854,960
Mutual funds 478,211 -- 31,708 446,503
State and political subdivisions 480,000 9,595 -- 489,595
------------ --------- ---------- ------------
$ 44,242,010 134,437 349,468 44,026,979
============ ========= ========== ============
</TABLE>
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(2) Investment Securities, Continued
--------------------------------
The amortized cost and approximate fair value of investment securities
other than stock in the Federal Home Loan Bank of Atlanta (FHLB) and
other equity securities at December 31, 1996, by contractual maturity are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without prepayment penalties.
<TABLE>
<CAPTION>
Approximate
Amortized fair
cost value
---- -----
<S> <C> <C>
Investment securities held to maturity:
Due in one year or less $ 2,072,883 2,089,770
Due after one year through five years 547,294 564,143
Due after five years through ten years 455,000 450,488
Due after ten years 629,847 668,561
------------ ------------
Subtotal 3,705,024 3,772,962
Mortgage-backed securities 13,662,962 13,608,194
Collateralized mortgage obligations 535,093 535,312
------------ ------------
Total $ 17,903,079 17,916,468
============ ============
</TABLE>
<TABLE>
<CAPTION>
Approximate
Amortized fair
cost value
---- -----
<S> <C> <C>
Investment securities available for sale:
Due in one year or less $ -- --
Due after one year through five years 9,011,366 8,932,200
Due after five years through ten years 4,231,639 4,227,566
Due after ten years 5,250,000 5,202,659
------------ ------------
Subtotal 18,493,005 18,362,425
Mortgage-backed securities 364,647 363,091
Collateralized mortgage obligations 24,906,147 24,854,960
Mutual funds 478,211 446,503
------------ ------------
Total $ 44,242,010 44,026,979
============ ============
</TABLE>
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(2) Investment Securities, Continued
--------------------------------
The amortized cost and approximate fair value of investment securities at
December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. government agencies
excluding mortgage-
backed securities $ 2,053,708 15,412 -- 2,069,120
State and political
subdivisions 1,789,781 74,668 -- 1,864,449
Mortgage-backed securities 18,887,364 267,270 49,403 19,105,231
Collateralized mortgage
obligations 998,141 506 -- 998,647
Corporate bonds 899,030 9,477 -- 908,507
Other securities 1,132,557 5,648 -- 1,138,205
------------ --------- -------- ------------
$ 25,760,581 372,981 49,403 26,084,159
============ ========= ======== ============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. treasury $ 1,001,496 14,754 -- 1,016,250
U.S. government agencies
excluding mortgage-
backed securities 14,962,778 119,832 -- 15,082,610
Mortgage-backed securities 2,140,899 14,465 -- 2,155,364
Collateralized mortgage
obligations 12,036,124 136,114 110,074 12,062,164
Mutual funds 478,212 -- 20,961 457,251
------------ --------- --------- ------------
$30,619,509 285,165 131,035 30,773,639
============ ========= ========= ============
</TABLE>
Included in other securities held to maturity is stock in the Federal
Home Loan Bank (FHLB) of Atlanta. FHLB stock is carried at cost, has no
contractual maturity, has no quoted fair value, and no ready market
exists; therefore, the fair value of such stock is assumed to approximate
cost in the above summaries. The investment in the stock is required of
every member of the FHLB system and is included in investment securities
held to maturity due to this requirement and the lack of a ready market.
The investment in the stock was $859,200 and $843,900 at December 31,
1996 and 1995, respectively.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(2) Investment Securities, Continued
--------------------------------
There were no sales of investment securities held to maturity during any
of the years in the three-year period ended December 31, 1996. Proceeds
from sales of investment securities available for sale were $3,871,059
and $498,750 for the years ended December 31, 1996 and 1995,
respectively. There were no sales of investment securities available for
sale during the year ended December 31, 1994. Gross gains of $19,083 and
$22,989 were realized on those sales for the years ended December 31,
1996 and 1995, respectively. Gross gains of $14,248 and $2,633 were
realized on calls of investment securities during the years ended
December 31, 1995 and 1994, respectively.
Investment securities with carrying value of $52,721,095 and $31,009,884
at December 31, 1996 and 1995, respectively, were pledged to secure
public and trust deposits as required by law and for other purposes.
The Company maintains a diversified investment portfolio, including
held-to-maturity and available-for-sale securities, with limited
concentration in any given region, industry, or economic characteristic.
Investments in municipal governments are made throughout the U.S. with no
concentration in any given state.
(3) Loans
-----
At December 31, 1996 and 1995, the composition of the loan portfolio was
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 39,212,438 35,799,798
Real estate - construction:
Commercial 3,572,030 945,284
Residential 3,068,125 2,323,196
Real estate - mortgage:
Commercial 42,827,126 33,592,453
Residential 58,529,443 54,384,370
Consumer installment 14,600,480 13,582,799
------------- -------------
Total loans 161,809,642 140,627,900
Less:
Unearned income (91,167) (156,935)
Allowance for loan losses (2,093,682) (2,012,133)
------------- -------------
Loans, net $ 159,624,793 138,458,832
============= =============
</TABLE>
During 1995, the Company sold its credit card loan and student loan
portfolios totaling $933,767 and $6,863,214, respectively. The portfolios
were sold on a whole-loan basis for total proceeds of $1,008,468 and
$6,863,214, respectively. In conjunction with the sale of its credit card
portfolio in 1995, the Bank reversed the portion, totaling $50,568, of
the allowance for loan losses that had been maintained to absorb losses
on credit card lines. A total of $125,269 was realized on the sale of the
credit card loan portfolio while the student loan portfolio was sold for
its book value.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(3) Loans, Continued
----------------
During 1996 and 1995, certain executive officers and directors of the
Company and the Bank, including companies with which they are associated,
were loan customers of the Bank. Total loans outstanding to these persons
at December_31, 1996 and 1995 amounted to $7,426,728 and $5,404,101,
respectively. The change from 1995 to 1996 reflects payments of
$2,365,656 and advances of $4,388,283. In management's opinion, these
loans were made in the ordinary course of business at normal credit
terms, including interest rate and collateral requirements, and do not
represent more than normal credit risk.
A summary of the transactions in the allowance for loan losses for the
years ended December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 2,012,133 2,099,599 2,263,886
Provision charged to earnings 80,102 -- 171,600
Loan recoveries 174,050 119,521 101,239
Loans charged off (172,603) (156,419) (437,126)
Reversal of credit card allowance -- (50,568) --
----------- ----------- -----------
Balance at end of year $ 2,093,682 2,012,133 2,099,599
=========== =========== ===========
</TABLE>
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS
114, Accounting by Creditors for Impairment of a Loan. SFAS 114 requires
impaired loans to be measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate, or
at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent, beginning in 1995. In
October 1994, the FASB issued SFAS 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures, which amends the
requirements of SFAS 114 regarding interest income recognition and
related disclosure requirements. Initial adoption of SFAS 114 and SFAS
118 must be reflected prospectively. The Company adopted SFAS 114 and
SFAS 118 on January 1, 1995 and the impact to the consolidated financial
statements was not material. At December 31, 1996 and 1995, pursuant to
the definition within SFAS 114, the Company had $620,438 and $855,503,
respectively, of impaired loans. Impaired loans at December 31, 1996
include loans of $84,248 that had a related valuation allowance of
$64,205. Impaired loans at December 31, 1995 included loans of $91,381
with a valuation allowance of $74,103.
For the years ended December 31, 1996 and 1995, the average recorded
investment in the impaired loans was $655,907 and $1,521,355,
respectively. The related amount of interest income recognized during
1996 and 1995 amounted to $54,258 and $87,525 respectively.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(3) Loans, Continued
----------------
Nonperforming loans, consisting of loans on nonaccrual status and
accruing loans past due greater than 90 days, amounted to $219,000 and
$206,000 at December 31, 1996 and 1995, respectively. Nonaccrual loans
were $107,033 and $73,000 at December 31, 1996 and 1995, respectively. If
these loans had been current throughout their terms, interest income
would have increased by $6,343, $3,760, and $2,100 for the years ended
December 31, 1996, 1995, and 1994, respectively.
The Company's loan servicing portfolio consisted of 730 loans with an
outstanding balance of $53,774,538, 691 loans with an outstanding balance
of $50,630,296, and 740 loans with an outstanding balance of $55,515,426,
as of December 31, 1996, 1995, and 1994, respectively.
(4) Premises and Equipment
----------------------
Premises and equipment at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 407,747 407,747
Building 2,714,002 2,691,680
Furniture, fixtures and equipment 3,549,204 3,362,253
---------- -----------
Total premises and equipment 6,670,953 6,461,680
Less accumulated depreciation (3,223,854) (2,834,737)
---------- ----------
$ 3,447,099 3,626,943
========== ===========
</TABLE>
(5) Interest-Bearing Deposits
-------------------------
At December 31, 1996 and 1995, the composition of interest-bearing
deposits was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NOW, Super NOW and Automatic Transfer Service $ 20,089,382 23,219,950
Money market 42,656,180 25,642,964
Savings 10,257,485 10,295,349
Certificates of deposit under $100,000 74,476,181 77,401,422
Certificates of deposit and other time deposits
of $100,000 and over 40,841,000 23,751,787
------------ --------------
$188,320,228 160,311,472
============ ==============
</TABLE>
Interest expense on certificates of deposit and other time deposits of
$100,000 and over amounted to approximately $1,592,000, $1,516,000, and
$922,000 in 1996, 1995, and 1994, respectively.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(6) Other Short-term Borrowings and Other Borrowed Funds
----------------------------------------------------
Other short-term borrowings and other borrowed funds at December 31, 1996
and 1995 consisted of the following:
<TABLE>
<CAPTION>
Maturity date Interest rate 1996 1995
------------- ------------- ---- ----
<S> <C> <C> <C> <C>
Short-term borrowings:
Treasury tax and
loan (note option) Demand 5.20% $ 1,203,130 472,195
------------ -----------
$ 1,203,130 472,195
============ ===========
Other borrowed funds:
Federal Home Loan
Bank borrowings March 2003 5.79% $ 625,000 725,000
January 2001 5.87% 5,000,000 5,000,000
May 1998 5.63% 5,000,000
Small business
administration debt June 2004 3.00% 32,180 36,857
June 2004 5.08% 251,158 267,281
------------ -----------
$ 10,908,338 6,029,138
============ ===========
</TABLE>
The Bank has a $25,000,000 available line of credit from the FHLB which
is reviewed annually by the FHLB. The above advances are against this
line of credit. Interest expense on FHLB advances was $498,705, $577,847,
and $637,390 in 1996, 1995, and 1994, respectively. The interest rate on
the Federal Home Loan Bank borrowing that matures in May 1998 is a
variable rate. Other borrowings have fixed interest rates. The advances
and line of credit are collateralized by the Bank's investment in the
stock of the FHLB and all first-mortgage residential loans, which are
sufficient to draw the full line of credit.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(7) Income Tax Expense
------------------
Total income tax expense (benefit) for the years ended December 31, 1996,
1995, and 1994 was allocated as follows:
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations $ 1,504,805 1,088,797 1,114,257
=========== =========== ===========
Stockholders' equity, for unrealized gains (losses)
on investment securities available-for-sale $ (131,858) 235,421 (172,066)
=========== =========== ===========
<CAPTION>
For the years ended December 31, 1996, 1995, and 1994 the components of income tax expense were as follows:
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal $ 1,314,952 1,045,510 1,023,540
State 134,622 71,000 100,239
----------- ----------- -----------
Total 1,449,574 1,116,510 1,123,779
----------- ----------- -----------
Deferred income tax expense (benefit):
Federal 45,912 (19,004) (5,522)
State 9,319 (8,709) (4,000)
----------- ----------- -----------
Total 55,231 (27,713) (9,522)
----------- ----------- -----------
$ 1,504,805 1,088,797 1,114,257
=========== =========== ===========
</TABLE>
Total income tax expense differed from the amount computed by applying
the statutory federal income tax rate of 34 percent to pretax earnings
for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax expense at statutory rate $ 1,447,774 1,081,211 1,093,558
Increase (decrease) resulting from:
Tax-exempt interest (59,513) (69,680) (90,698)
State income tax expense net
of federal income tax benefit 98,339 56,507 63,550
Decrease in valuation allowance
for deferred tax assets -- (12,640) --
Other 18,205 33,399 47,847
-------- --------- ----------
$ 1,504,805 1,088,797 1,114,257
========= ========= =========
</TABLE>
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(7) Income Tax Expense, Continued
-----------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loans losses $619,899 584,515
Principal amortization for leases being depreciated for tax 67,236 62,020
Capital loss carryforward -- 30,006
Unrealized loss on investment securities available for sale 68,503 --
Other 17,840 20,810
-------- ----------
Total gross deferred tax assets before valuation allowance 773,478 697,351
Less valuation allowance -- (30,006)
-------- ----------
Total deferred tax assets 773,478 667,345
Deferred tax liabilities:
Accrued dividend income 27,500 --
Investment securities held to maturity and available
for sale, principally due to differences in carrying
at market value 24,646 --
Premises and equipment, principally due
to differences in depreciation 294,085 285,705
Investments, principally due to discount accretion 96,403 61,307
FHLB stock dividend 21,068 21,206
Prepaid expenses 61,112 67,441
Loans, principally due to differences in deferred loan fees 30,257 25,918
Unrealized gain on investment securities available for sale -- 63,355
Other 275 908
-------- ---------
Total deferred tax liabilities 555,346 525,840
-------- ---------
Net deferred tax asset $218,132 141,505
======== =========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projection for future taxable income over the periods which the
temporary differences resulting in the deferred tax assets are deductible,
management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, giving consideration
to the valuation allowance recorded.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(8) Retirement Plans
----------------
The Bank sponsored two retirement plans, the Auburn National
Bancorporation, Inc. Employee Incentive Plan and the Auburn National
Bancorporation, Inc. Employee Stock Ownership Plan (ESOP). In January
1994, the two plans were merged into one plan, Auburn National
Bancorporation, Inc. 401(k) and Employee Stock Ownership Plan. The plan
covers substantially all employees. Participants become 20 percent vested
in their accounts after two years of service and 100 percent vested after
six years of service. Contributions to the plan are determined by the
board of directors. Company contributions to the plans amounted to
$121,076, $122,862, and $98,177 in 1996, 1995, and 1994, respectively.
During 1989, the ESOP borrowed $570,062 from an unrelated financial
institution to purchase 6,306 shares of common stock of the Company. The
remaining unallocated common stock acquired by the ESOP collateralizes
the loan. The note is payable in annual principal installments of $57,006
and quarterly interest payments until December 31, 1998. The note bears
interest at 82 percent of the lender's prime rate and is guaranteed by
the Company.
(9) Off-Balance-Sheet Risk and Contingent Liabilities
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, and standby letters of credit and financial guarantees. Such
instruments involve elements of credit risk in excess of the amounts
recognized in the consolidated financial statements.
The Company's exposure to credit loss in the event of nonperformance by
the other party to these financial instruments is represented by the
contractual amount of these instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The financial instruments whose contract amounts represent credit risk as
of December_31, 1996 are as follows:
Commitments to extend credit $ 6,862,000
Standby letters of credit $ 936,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. All guarantees expire within one year. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds
various assets as collateral supporting those commitments for which
collateral is deemed necessary.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(9) Off-Balance-Sheet Risk and Contingent Liabilities, Continued
------------------------------------------------------------
The Bank enters into interest rate protection contracts to help manage
the Bank's interest rate exposure. These contracts include interest rate
swaps, caps, and floors. Interest rate swap transactions generally involve
the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying principal amounts. Entering into
interest rate swap agreements involves not only the risk of dealing with
counterparties and their ability to meet the terms of the contracts but
also the risk associated with the movements in interest rates. Notional
principal amounts often are used to express the volume of these
transactions, however, the amounts potentially subject to credit risk are
much smaller. The notional principal amount related to these contracts was
$27,000,000 at December 31, 1996. The Company estimates its credit
exposure on the purchased swaps, caps, and floors to be approximately
$138,000 at December 31, 1996. The current credit exposure of derivatives
is represented by the fair value of contracts with a positive fair value
at the reporting date. Risks associated with interest rate contracts
include interest rate risk and creditworthiness of the counterparty. These
risks are considered in the Bank's overall asset liability management
program. The Bank utilizes periodic financial statements issued by the
counterparty to analyze the creditworthiness of the counterparty prior to
entering into a contract and to monitor changes in the financial condition
of the counterparty throughout the term of the contract. Although none of
the interest rate protection agreements are traded on any organized
exchange, the Company believes that an active secondary market exists for
such contracts.
In February 1995, the Bank entered into two interest rate floors with
respect to $20,000,000 in variable rate loans. These agreements allow the
Bank to receive interest payments based on three month LIBOR should the
floor rate fall below 5.00 percent and 6.00 percent, respectively. The
agreements required the Bank to pay a fixed amount of $26,000 and $76,500,
respectively, upon consummation of the agreements. The purpose of these
contracts was to reduce interest rate exposure to variable assets in a low
interest rate environment. In 1992, the Bank purchased an interest rate
cap with a strike price of 6.00 percent to sustain the yield of a U.S.
government agency inverse floater security held as an investment that
matures in 1997. This nonamortizing inverse floater is not considered high
risk, and the downside yield exposure is limited by the purchase of the
cap.
In June 1996, the Bank entered into an interest rate swap with respect to
$5,000,000 in two-year 6 percent certificates of deposit. This agreement
allows the Bank to receive fixed interest payments at 6.37 percent per
annum and to pay a variable rate equal to three months LIBOR. The purpose
of this contract was to reduce the Bank's effective cost of funds to
better match the costs of funding variable rate loans. The Bank has
secured this interest rate swap with approximately $500,000 in principal
amount of mortgage-backed securities.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(9) Off-Balance-Sheet Risk and Contingent Liabilities, Continued
------------------------------------------------------------
The following table summarizes information on interest rate swaps, caps,
and floors at December 31, 1996:
<TABLE>
<CAPTION>
INTEREST RATE PROTECTION CONTRACTS
Weighted
Thousands Weighted average
--------------------------------------------- average rate repricing
Notional Carrying Estimated ----------------- frequency
amount value fair value received paid (years)
--------- --------- ------------- -------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
-----------------
Swaps:
Receive fixed:
Over one year through
two years $ 5,000 -- 27 6.37% 5.61% 0.25
Caps and floors:
Purchased:
One year or less 2,000 28 3 0.00
Over two years through
five years 10,000 16 40 0.25
Over two years through
five years 10,000 48 135 6.00% 5.87% 0.25
--------- ---- ----
$ 27,000 92 205
========= ==== ====
</TABLE>
The weighted average rates received/paid are shown only for swaps,
caps, and floors for which net interest amounts were receivable or payable at
the end of each period. For caps and floors when the index rate has not been
reached, no rate is shown. Interest rates on variable rate derivative products
held by the Bank are derived from the 3-months USD-LIBOR-BBA ("British Bankers
Association") rate and the USD CP-HP.15.
The Company and the Bank are involved in various legal proceedings, arising in
connection with their business. In the opinion of management, based upon
consultation with legal counsel, the ultimate resolution of these
proceedings will not have a material adverse effect upon the financial
position or results of operations of the Company.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(10) Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107 (SFAS 107), Disclosures
about Fair Value of Financial Instruments, requires disclosure of fair
value information about financial instruments, whether or not recognized
on the face of the balance sheet, for which it is practicable to estimate
that value. The assumptions used in the estimation of the fair value of
the Company's financial instruments are explained below. Where quoted
market prices are not available, fair values are based on estimates using
discounted cash flow and other valuation techniques. Discounted cash
flows can be significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. The following fair
value estimates cannot be substantiated by comparison to independent
markets and should not be considered representative of the liquidation
value of the Company's financial instruments, but rather a good-faith
estimate of the fair value of financial instruments held by the Company.
SFAS 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
(a) Cash, Cash Equivalents, and Interest Bearing Deposits with Other
_______ ----------------------------------------------------------------
Banks
-----
Fair value equals the carrying value of such assets.
(b) Investment Securities
_______ ---------------------
The fair value of investment securities is based on quoted market
prices.
(c) Loans
_______ -----
The fair value of loans is calculated using discounted cash flows
and excludes lease financing arrangements. The discount rates
used to determine the present value of the loan portfolio are
estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan portfolio. The estimated
maturities are based on the Company's historical experience with
repayments adjusted to estimate the effect of current market
conditions. The carrying amount of accrued interest approximates
its fair value.
(d) Off-Balance-Sheet Instruments
_______ -----------------------------
Fair value of interest rate swaps, financial futures, and
interest rate caps and floors is based on quoted market prices.
These values represent the estimated amount the Company would
receive or pay to terminate the contracts or agreements, taking
into account current interest rates and, when appropriate, the
creditworthiness of the counterparties.
(e) Deposits
_______ --------
As required by SFAS 107, the fair value of deposits with no
stated maturity, such as non-interest bearing demand deposits,
NOW accounts, savings and money market deposit accounts, is equal
to the carrying value. Certificates of deposit have been valued
using discounted cash flows. The discount rates used are based on
estimated market rates for deposits of similar remaining
maturities.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(10) Fair Value of Financial Instruments, Continued
----------------------------------------------
(f) Short-term Borrowings
_______ ---------------------
The fair value of federal funds purchased, securities sold under
agreements to repurchase, and other short-term borrowings
approximates their carrying value.
(g) Long-term Borrowings
--------------------
The fair value of the Company's fixed rate long-term debt is
estimated using discounted cash flows based on estimated current
market rates for similar types of borrowing arrangements. The
carrying amount of the Company's variable rate long-term debt
approximates its fair value.
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------- ---------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 27,179 27,179 18,758 18,758
========= ======= ======== ========
Investment securities $ 63,078 63,118 56,534 56,858
========= ======= ======== ========
Loans, net of allowance
for loan losses $ 159,625 163,560 138,459 140,411
========= ======= ======== ========
Financial liabilities:
Deposits $ 216,727 217,673 185,803 186,175
========= ======= ======== ========
Short-term borrowings $ 5,856 5,856 7,482 7,482
========= ======= ======== ========
Long-term borrowings $ 11,022 11,964 6,200 5,748
========= ====== ======== ========
Unrecognized financial instruments:
Interest rate contracts:
Swaps $ -- 27 -- 8
Caps and floors 92 178 140 522
--------- ------- -------- --------
$ 92 205 140 530
========= ======= ======== ========
</TABLE>
(11) Common Stock and Capital Requirements
-------------------------------------
The Company registered 172,500 shares as of February 7, 1995 at which
time the Registration Statement filed on Form SB-2 became effective. The shares
were offered on a best efforts method by the Company. As of May 31, 1995, the
closing date of the offering, 69,045 shares had been sold at $20 each.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(11) Common Stock and Capital Requirements, Continued
------------------------------------------------
The Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities, and certain off- balance sheet items as calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk- weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Company and Bank meet all capital adequacy requirements to which
they are subject.
The Bank believes it meets the requirements to be catagorized as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table.
The Company's actual capital amounts and ratios and the aforementioned
minimums for the Company and the Bank as of December 31, 1996 and 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum
Minimum to be well
for capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
----------------- --------------- -----------------
Auburn National Bancorporation, Inc. Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital (to risk-weighted assets) $ 25,248 15.39% $ 13,124 8% $ N/A N/A
Tier I risk-based capital (to risk-weighted assets) 23,198 14.14% 6,562 4% N/A N/A
Tier I leverage capital (to average assets) 23,198 8.99% 10,322 4% N/A N/A
As of December 31, 1995
Total capital (to risk-weighted assets) 22,932 16.16% 11,356 8% N/A N/A
Tier I risk-based capital (to risk-weighted assets) 21,158 14.91% 5,678 4% N/A N/A
Tier I leverage capital (to average assets) 21,158 9.52% 8,890 4% N/A N/A
AuburnBank
As of December 31, 1996
Total capital (to risk-weighted assets) 22,662 14.03S% 12,921 8% 16,151 10%
Tier I risk-based capital (to risk-weighted assets) 20,643 12.78% 6,460 4% 9,691 6%
Tier I leverage capital (to average assets) 20,643 8.09% 10,203 4% 12,753 5%
As of December 31, 1995
Total capital (to risk-weighted assets) 19,917 14.34% 11,109 8% 13,889 10%
Tier I risk-based capital (to risk-weighted assets) 18,181 13.09% 5,554 4% 8,334 6%
Tier I leverage capital (to average assets) 18,181 8.30% 8,765 4% 10,952 5%
</TABLE>
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(12) Dividends from Subsidiary
-------------------------
Dividends paid by the Bank are a source of funds available to the
Company for payment of dividends to its stockholders and for other needs.
Applicable federal and state statutes and regulations impose restrictions on the
amounts of dividends that may be declared by the subsidiary bank. In addition to
the formal statutes and regulations, regulatory authorities also consider the
adequacy of the Bank's total capital in relation to its assets, deposits and
other such items. Capital adequacy considerations could further limit the
availability of dividends from the Bank. At December 31, 1996, the Bank could
have declared dividends of approximately $4,226,000 without prior approval of
regulatory authorities. As a result of this limitation, approximately
$16,302,000 of the Company's investment in the Bank was restricted from transfer
in the form of dividends.
(13) Supplemental Information
------------------------
Components of other noninterest income exceeding one percent of
revenues for any of the years in the three-year period ended December 31, 1996,
included merchant discounts and fees on MasterCard and Visa sales of $293,004,
$241,254, and $194,632 in 1996, 1995, and 1994, respectively; and, gain on sale
of mortgage loans of $68,433, $76,559, and $52,932 in 1996, 1995, and 1994,
respectively. Also included were servicing fees of $163,820, $169,376 and
$173,803 in 1996, 1995, and 1994, respectively; and, rental income of $161,510,
$175,056 and $159,258 in 1996, 1995, and 1994, respectively.
Components of other noninterest expense exceeding 1 percent of revenues
for any of the years in the three-year period ended December 31, 1996, included
FDIC insurance expense of $2,000, $191,942 and $346,617 in 1996, 1995, and 1994,
respectively; and, professional fees of $225,036, $214,248, and $224,749 in
1996, 1995, and 1994, respectively. Also included were marketing expenses of
$191,553, $188,040 and $133,857 in 1996, 1995, and 1994, respectively; rental
property expenses of $236,206, $211,123, and $153,920 in 1996, 1995, and 1994,
respectively; and, MasterCard and Visa processing fees of $231,432, $216,891,
and $134,572 in 1996, 1995, and 1994, respectively.
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(14) Parent Company Financial Information
------------------------------------
The condensed financial information for Auburn National Bancorporation,
Inc. (Parent Company Only) is presented as follows:
Parent Company Only
Condensed Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 43,300 405,627
Investment securities 747,775 854,321
Investment in subsidiaries:
Bank 20,528,398 18,395,015
Nonbank 1,423 1,896
------------ ------------
Total investment in subsidiaries 20,529,821 18,396,911
Premises and equipment, net 55,096 77,046
Rental property 1,899,354 1,978,192
Other assets 296,675 105,671
------------ ------------
Total assets $ 23,572,021 21,817,768
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Other borrowed funds $ 283,338 304,138
Accrued expenses and other liabilities 91,951 74,022
Employee Stock Ownership Plan debt 113,940 170,946
------------ ------------
Total liabilities 489,229 549,106
Stockholders' equity:
Preferred stock of $.01 par value; authorized
200,000 shares; issued shares-none -- --
Common stock of $.01 par value; authorized
2,500,000 shares; issued 1,319,045
shares at December 31, 1996 and 1995 13,190 13,190
Surplus 3,691,099 3,685,488
Retained earnings 19,942,980 17,749,910
Less:
Employee Stock Ownership Plan debt (113,940) (170,946)
Treasury stock, 15,974 shares and 5,820 shares in
1996 and 1995, respectively, at cost (304,009) (99,755)
Unrealized gain (loss) on mutual funds and investment
securities available for sale, net of taxes (146,528) 90,775
------------ ------------
Total stockholders' equity 23,082,792 21,268,662
------------ ------------
Total liabilities and stockholders' equity $ 23,572,021 21,817,768
============ ============
</TABLE>
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(14) Parent Company Financial Information, Continued
-----------------------------------------------
Parent Company Only
Condensed Statements of Earnings
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Cash dividends from bank subsidiary $ 265,000 -- --
Property dividend from bank subsidiary -- 234,692 --
Interest on interest-earning deposits 7,306 26,854 7,864
Interest on investment securities held to maturity:
Taxable 3,453 4,442 13,395
Tax-exempt 43,258 22,021 23,754
----------- ----------- ----------
Total interest on investment securities
held to maturity 46,711 26,463 37,149
----------- ----------- ----------
Other income 819,286 685,429 685,531
----------- ----------- ----------
Total income 1,138,303 973,438 730,544
Expense:
Interest on borrowed funds 26,197 28,863 16,913
Net occupancy expense 25,368 49,814 73,764
Salaries and benefits 322,750 321,051 282,203
Other 369,930 367,015 249,016
----------- ----------- ----------
Total expense 744,245 766,743 621,896
----------- ----------- ----------
Earnings before income tax expense (benefit) and
equity in undistributed earnings (loss) of subsidiaries 394,058 206,695 108,648
Applicable income tax expense (benefit) 10,917 (30,344) 16,451
----------- ----------- ----------
Earnings before equity in undistributed
earnings (loss) of subsidiaries 383,141 237,039 92,197
Equity in undistributed earnings (loss) of subsidiaries:
Bank 2,370,686 1,854,789 2,010,317
Other (473) (594) (424)
----------- ----------- ----------
Net earnings $ 2,753,354 2,091,234 2,102,090
=========== =========== ==========
</TABLE>
(Continued)
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
Summary of Significant Accounting Policies and
Notes to Consolidated Financial Statements
(14) Parent Company Financial Information, Continued
-----------------------------------------------
Parent Company Only
Condensed Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,753,354 2,091,234 2,102,090
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 124,980 136,977 137,379
Amortization of premium on investment
securities held to maturity 391 1,287 --
Gain on sale of premises and equipment -- -- (11,026)
Loss on sale of computer software -- -- 138
Property dividend from bank subsidiary -- (234,692) --
Net undistributed earnings of subsidiaries (2,370,213) (1,854,195) (2,009,893)
(Increase) decrease in other assets (191,004) 101,323 (70,560)
Increase (decrease) in other liabilities 17,929 (58,651) 61,995
----------- ------------ ------------
Net cash provided by operating activities 335,437 183,283 210,123
Cash flows from investing activities:
Proceeds from paydowns of investment
securities held to maturity 11,155 13,245 32,966
Proceeds from calls of investment securities
held to maturity 95,000 50,000 300,000
Purchase of investment securities held to maturity -- (500,000) --
Purchase of premises and equipment -- (13,133) (77,338)
Proceeds from sale of premises and equipment 11,554 -- 14,550
Purchase of rental property (35,746) (68,388) (4,155)
----------- ------------ ------------
Net cash provided by (used in)
investing activities 81,963 (518,276) 266,023
Cash flows from financing activities:
Decrease in other borrowed funds (20,800) (14,270) --
Proceeds from issuance of common stock -- 1,233,729 --
Purchase of Class B common stock of bank subsidiary -- (2,400) --
Proceeds from sale of treasury stock 22,498 -- 20,854
Purchase of treasury stock (221,141) (24,761) (81,593)
Dividends paid (560,284) (469,669) (467,516)
----------- ------------ ------------
Net cash provided by (used in)
financing activities (779,727) 722,629 (528,255)
----------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents (362,327) 387,636 (52,109)
Cash and cash equivalents at beginning of year 405,627 17,991 70,100
----------- ------------ ------------
Cash and cash equivalents at end of year $ 43,300 405,627 17,991
=========== ============ ============
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Auburn, State of Alabama, on the 28th day of March,
1997.
AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
By: /S/ E. L. SPENCER, JR.
------------------------
E. L. Spencer, Jr.
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/S/ E. L. SPENCER, JR. President, CEO and March 28, 1997
- ---------------------------
E. L. Spencer, Jr. Director
/S/ LINDA D. FUCCI Chief Financial Officer March 28, 1997
- ---------------------------
Linda D. Fucci and Chief Accounting
Officer
/S/ WINIFRED H. BOYD Director March 28, 1997
- ---------------------------
Winifred H. Boyd
/S/ ANNE M. MAY Director March 28, 1997
- ---------------------------
Anne M. May
/S/ EMIL F. WRIGHT, JR. Director March 28, 1997
- ---------------------------
Emil F. Wright, Jr.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
<C> <S> <C>
3.A. Certificate of Incorporation of Auburn National Bancorporation, Inc. * -
3.B. Bylaws of Auburn National Bancorporation, Inc. * -
4. Instruments Defining the Rights of Security Holders (See Certificate of -
Incorporation and Bylaws). *
10.A. Auburn National Bancorporation, Inc. 1994 Long-Term Incentive Plan. * -
10.B. Lease and Equipment Purchase Agreement, dated September 15, 1987. * -
11. Statement Regarding Computation of Per Share Earnings 80
21. Subsidiaries of Registrant. * -
27. Financial Data Schedule 81
</TABLE>
- ----------------------
* Incorporated by reference from Registrant's Registration Statement on Form
SB-2 (File No. 33-86180).
<PAGE>
------------------------------------------------
EXHIBIT 11.
STATEMENT REGARDING COMPUTATION
OF
PER SHARE EARNINGS
------------------------------------------------
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
Primary: 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Average shares outstanding $1,304,742 1,301,372 1,245,845
Dilutive Stock Options -
based on the treasury stock method
using the average market price for
the period -- -- --
---------- ---------- ----------
Total 1,304,742 1,301,372 1,245,845
========== ========== ==========
Net Income $2,753,354 $2,091,234 $2,102,090
========== ========== ==========
Earnings per share amounts:
Disclosed (1) $2.11 $1.61 $1.69
Computed $2.11 $1.61 $1.69
Fully-Diluted:
Average shares outstanding 1,304,742 1,301,372 1,245,845
Dilutive Stock Options -
based on the treasury stock method
using the period-end market price
for the period -- -- --
---------- ---------- ----------
Total 1,304,742 1,301,372 1,245,845
========== ========== ==========
Net Income $2,753,354 $2,091,234 $2,102,090
========== ========== ==========
Earnings per share amounts:
Disclosed (1) $2.11 $1.61 $1.69
Computed $2.11 $1.61 $1.69
</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 Report and, therefore,
no exercise price has been 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, which 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-KSB
for December 31, 1996 and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,428
<INT-BEARING-DEPOSITS> 6
<FED-FUNDS-SOLD> 11,745
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,026
<INVESTMENTS-CARRYING> 19,051
<INVESTMENTS-MARKET> 19,091
<LOANS> 161,718
<ALLOWANCE> 2,094
<TOTAL-ASSETS> 258,055
<DEPOSITS> 216,727
<SHORT-TERM> 5,856
<LIABILITIES-OTHER> 1,481
<LONG-TERM> 10,908
0
0
<COMMON> 13
<OTHER-SE> 23,070
<TOTAL-LIABILITIES-AND-EQUITY> 258,055
<INTEREST-LOAN> 13,137
<INTEREST-INVEST> 4,266
<INTEREST-OTHER> 339
<INTEREST-TOTAL> 17,742
<INTEREST-DEPOSIT> 8,684
<INTEREST-EXPENSE> 9,664
<INTEREST-INCOME-NET> 8,079
<LOAN-LOSSES> 80
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 6,007
<INCOME-PRETAX> 4,258
<INCOME-PRE-EXTRAORDINARY> 4,258
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,753
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
<YIELD-ACTUAL> 3.69
<LOANS-NON> 107
<LOANS-PAST> 112
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,269
<ALLOWANCE-OPEN> 2,012
<CHARGE-OFFS> 173
<RECOVERIES> 175
<ALLOWANCE-CLOSE> 2,094
<ALLOWANCE-DOMESTIC> 2,094
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
