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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, 1997 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
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 $21,920,381.
The aggregate market value of the common stock held by non-affiliates of
registrant as of February 27, 1998, computed by reference to the price at which
the stock was sold as of such date, was $46,894,405.
As of February 27, 1998, there were issued and outstanding 1,308,191 shares of
the registrant's $.01 par value common stock.
Transitional Small Business Disclosure Format: Yes [_] No [ x ]
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PART I
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 purposes 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 which may cause the actual results, performance or achievements to
differ from those expressed 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; governmental monetary and fiscal
policies, as well as interest rate risks; the effects 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 competitors offering banking
products and services by mail, telephone, and computer and the Internet; and the
failure of assumptions underlying the establishment of reserves for loan losses
and estimations of values of collateral and various financial assets and
liabilities. All 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. During 1997, the Company also owned 100% of the stock of ANB Systems,
Inc., an inactive subsidiary ("ANB Systems," and collectively with the Bank, the
"Subsidiaries") which was dissolved on November 11, 1997.
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;
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(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 has 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 13 locations
and was one of the nine original founders of Alabama Network, Inc. (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(R). The Company was a one eighth owner of Alert(R). On January 1, 1997,
Alert(R), Internet, Inc., and Southeast Switch, Inc. merged to become Honor
Technologies, Inc. (Honor). At December 31, 1996, the Company was paid a one
time special dividend of $150,000 from Alert(R), in connection with the merger
of these ATM networks. Pursuant to such merger, the Company received an equity
position in Honor equal to 0.3125% of combined total equity and a 30 month
waiver of certain fees in Honor. The Bank's Tiger Teller ATM cards can be used
internationally through the Cirrus(R) network. Starting in 1998, the Bank is
offering VISA Checkcards, which are ATM cards with the VISA logo that work like
checks but can be used anywhere VISA is accepted.
Competition
The banking business in Alabama, including Lee County, is highly
competitive with respect to loans, deposits, and other services, and the area 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
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to branch interstate through acquisitions of banks in other states after May 31,
1997. See "Supervision and Regulation."
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 96,000, which ranks it 11th in
the state. The 1994 per capita income in Lee County was $15,438, which ranked it
32nd in the state. Unemployment has been relatively low in Lee County, and
during 1997, the County had average unemployment of 3.6%.
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 magnetic recording tapes, tires, textiles, small gasoline engines,
and hardware. The largest employers in the area are Auburn University, East
Alabama Medical Center, Quantegy Corporation, Uniroyal-Goodrich, West Point
Stevens, and Briggs & Straton.
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 risks 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 risks, 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, 1997, the Company had 2 full-time equivalent employees,
both of which are officers, and the Bank had 102 full-time equivalent employees,
including 13 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 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.
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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 Bank. 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.
The Company is a legal entity separate and distinct from the Bank. Various
legal limitations restrict the Bank from lending or otherwise supplying funds to
the Company or any non-bank subsidiaries. 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 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
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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.
Bank Regulation Generally
The Bank is subject to supervision, regulation, and examination by the
Federal Reserve and the Alabama Superintendent, which monitor 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 "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 generally 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
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federally regulated financial institution. An unsatisfactory CRA record may
constitute grounds for denial of such application.
Under new CRA regulations, effective January 1, 1996, the process-based CRA
assessment factors were 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 lending test - the most
important of the three tests for all institutions other than wholesale and
limited purpose (e.g. credit card) banks - evaluates 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.
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.
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.
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, an institution is 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
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discriminatory or other illegal credit practices would adversely affect an
institution's overall rating. As a result of the Bank's most recent CRA
examination in August 1996, the Bank received an "outstanding" CRA rating.
Payment of Dividends
The Company is a legal entity separate and distinct from its subsidiary.
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 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 1997, the Bank paid cash dividends of $697,000 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
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 risk-based capital"). The remainder may consist of subordinated debt,
non-qualifying preferred stock and a limited amount of any loan loss allowance
("Tier 2 risk-based capital" and, together with Tier 1 risk-based capital,
"Total risk-based 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 risk-based capital to adjusted average
quarterly assets ("Tier 1 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 risk-based capital ratio, Tier 1 risk-based capital
ratio, and the Tier 1 leverage ratio. Under the regulations, a state member bank
will be (i) well capitalized if it has a Total risk-based capital ratio of 10%
or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1
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
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of
4% or greater, and a Tier 1 leverage ratio of 4% or greater (3% in certain
circumstances), (iii) undercapitalized if it has a Total risk-based capital
ratio of less than 8%, a Tier 1 risk-based capital ratio and a Tier 1 leverage
ratio of less than 4% (3% in certain circumstances), (iv) significantly
undercapitalized if it has a Total risk-based capital ratio of less than 6%, a
Tier 1 risk-based capital ratio and a Tier 1 leverage ratio of less than 3%, or
(v) 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, 1997, the consolidated capital ratios of the Company and
the Bank were as follows:
<TABLE>
<CAPTION>
Regulatory
Minimum Company Bank
---------- ------- ------
<S> <C> <C> <C>
Tier 1 risk-based capital ratio 4.0% 14.06% 12.72%
Total risk-based capital ratio 8.0% 15.22% 13.89%
Tier 1 leverage ratio 3.0-5.0% 9.80% 8.84%
</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.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments (FICO). 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"). Prior
to January 1, 1996, the annual premiums ranged from $.04 to $.31 for every $100
of BIF deposits. 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 beginning January 1, 1996,
the annual premiums range from zero to $.27 for every $100 of deposits. In
addition, the FDIC Board eliminated
-9-
<PAGE>
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 1.296 basis points
for BIF-assessable deposits and 6.480 basis points for SAIF 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. For the years
1996 and before 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, 1997, 1996 and 1995 the Bank paid $26,000, $2,000 and
$192,000, respectively, in BIF deposit insurance premiums.
Legislative and Regulatory Changes
Various 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.
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 January 1996 to avoid a possible
stalling of a period of moderate economic growth. There have been no changes to
the discount rate since January 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Effects of Inflation and
Changing Prices" and "-Interest Rate Sensitivity Management."
-10-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Bank conducts its business from its main office and three 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, Alabama. 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's Winn Dixie branch which opened on April 3, 1997 is located in
the Winn Dixie supermarket in the Tiger Crossing Shopping Center on the south
side of Auburn, Alabama. The Bank entered into a five year lease agreement for
approximately 350 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 Bank has entered into a contract with Wal-mart to open a full service
branch subject to approval from the State Banking Department and the Federal
Reserve Bank inside the Wal-mart in Phenix City, Alabama, which is 10 miles
south of Auburn, Alabama. The branch is tentatively scheduled to open August
1998. The Bank's initial investment in fixed assets are expected to be
approximately $320,000. In the first year of operation, the Bank estimates that
income will be reduced by approximately $150,000, due to various factors such as
depreciation expense, start-up costs, and operating costs related to this
branch.
The Bank owns 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.
In addition, the Bank leases from the Company approximately 8,300 square
feet of space in the AuburnBank 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 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 outside third parties.
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.
-11-
<PAGE>
In 1994, the Bank acquired a piece of commercial real estate located in
Auburn on U.S. Highway 29. This property, which was acquired in satisfaction of
debt previously contracted, was formerly used by a floor covering business and
contained approximately 6,045 square feet of office, showroom, and warehouse
space. The Bank subsequently removed an underground storage tank ("UST")
containing petroleum products from the site. In March 1995, the Alabama
Department of Environmental Management ("ADEM") requested that the Bank submit a
Secondary Investigation Plan ("Secondary Investigation") as a result of
underground soil and water contamination of petroleum-based hydrocarbon
products. The Secondary Investigation was completed and submitted to ADEM by Roy
R. Weston, Inc. ("Weston"), an independent consultant hired by the Bank. The
Secondary Investigation indicated low concentrations of soil contamination on
site and elevated concentrations of gasoline constituents both on-site and off-
site. The Secondary Investigation indicated a low risk to human receptors, and
Weston recommended to ADEM initiation of a quarterly ground water monitoring
program for one year, at which time the program would be reassessed. In response
to ADEM's Letter of Requirement dated January 18, 1996, Weston prepared and
submitted, on behalf of the Bank, a Monitoring Only Corrective Action Plan on
February 20, 1996. Quarterly groundwater monitoring will continue in 1998 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 1998 will be approximately
$9,000 (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, 1997.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective February 7, 1995, the Company engaged in a public offering (the
"Public Offering"). The Company's Common Stock is listed on the Nasdaq SmallCap
Market, under the symbol AUBN. The following table sets forth, for the indicated
periods, the high and low closing sale prices for Company's Common Stock as
reported on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
Estimated Cash
Price Range Dividends
Per Share(1) Declared
--------------------- ----------
High Low
---- ---
<S> <C> <C> <C>
1997
First Quarter $ 27.50 $ 23.50 $ 0.12
Second Quarter 26.00 23.00 0.12
Third Quarter 29.50 23.50 0.12
Fourth Quarter 41.50 34.00 0.12
1996
First Quarter 20.25 19.00 0.10
Second Quarter 20.25 19.25 0.11
Third Quarter 20.50 19.25 0.11
Fourth Quarter 23.50 21.50 0.11
- --------------
</TABLE>
(1) The price information represents actual transactions.
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.
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, 1997, 1996 and 1995. 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.
-13-
<PAGE>
Summary
Net earnings increased $327,000 (11.9%) to $3,080,000 during 1997 from
$2,753,000 for the year ended December 31, 1996. Basic income per share was
$2.36 and $2.11 for 1997 and 1996, respectively, an increase of 11.8%.
Comparatively, net earnings during 1996 increased $662,000 (31.7%) from the 1995
total of $2,091,000, while basic income per share showed a similar increase of
$0.50 per share for 1996 from a 1995 per share total of $1.61. The increase in
net earnings for 1997 is attributable to higher net interest income for the
year. The increase in 1996 was due to higher levels of net interest income and
noninterest income and lower noninterest expense as compared to 1995. See
"FINANCIAL CONDITION -- CAPITAL RESOURCES" and the "CONSOLIDATED AVERAGE
BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES" tables.
Total assets at December 31, 1997 and 1996 were $264,734,000 and
$258,055,000, an increase of $6,679,000 (2.6%). The Company's growth during 1997
resulted primarily from the growth in loans. See "FINANCIAL CONDITION-INVESTMENT
SECURITIES AND LIQUIDITY."
Financial Condition
Investment Securities
Investment securities held to maturity were $14,364,000 and $17,903,000 at
December 31, 1997 and 1996, respectively. This decline of $3,539,000 (19.8%) in
1997 resulted entirely from scheduled paydowns, calls and maturities. The
securities available for sale portfolio was $40,446,000 and $44,027,000 at
December 31, 1997 and 1996, respectively. This decrease of $3,581,000 (8.1%)
reflects the reinvestment of investment funds to fund loan growth. 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,
--------------------------------
1997 1996 1995
------ ----- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. government agency $ 3,216 2,028 2,054
State and political subdivisions 1,479 1,470 1,790
Mortgage-backed securities 9,470 13,663 18,887
Collateralized mortgage obligations 199 535 998
Other -- 207 899
------- ------ -----
Total investment securities
held to maturity $14,364 17,903 24,628
======== ====== ======
</TABLE>
-14-
<PAGE>
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
----------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment Securities Available for Sale:
Treasury $ -- -- 1,016
U.S. Government agency 12,097 17,873 15,084
State and political subdivisions 498 490 --
Mortgage-backed securities 7,990 363 2,155
Collateralized mortgage obligations 19,861 24,854 12,062
Mutual funds -- 447 457
-------- ------ ------
Total investment securities
available for sale $ 40,446 44,027 30,774
-------- ------ ------
</TABLE>
All investment securities 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, 1997 and 1996, all 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, 1997, the Bank owned CMOs with a total amortized cost of
$19,859,000. All of the CMOs are rated AAA. The CMOs are all backed by federal
agency guaranteed mortgages except for 3 issues in the amount of $7,298,000
which are privately issued mortgage pass-through certificates. Fair values for
the private placement CMOs were estimated based on fair values for similar
instruments.
The MBS portfolio's total amortized cost of $17,428,000 at December 31,
1997, 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 at December 31, 1997:
Maturities of Held-to-Maturity
Investment Securities
Amortized Cost
<TABLE>
<CAPTION>
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 $ -- -- -- 3,216
State and political subdivision securities -- 796 410 273
Mortgage-backed securities 208 273 3,555 5,434
Collateralized mortgage obligations -- -- -- 199
---- ----- ----- -----
Total investment securities
held to maturity $ 208 1,069 3,965 9,122
==== ===== ===== =====
</TABLE>
-15-
<PAGE>
<TABLE>
<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 -- -- -- 8.01%
State and political subdivision securities -- 6.49% 5.30% 7.58%
Mortgage-backed securities 6.98% 6.82% 6.16% 6.93%
Collateralized mortgage obligations -- -- -- 6.09%
----- ----- ----- -----
Total weighted average yield 6.98% 6.53% 6.09% 7.30%
<CAPTION>
Maturities of Available for Sale
Investment Securities
Amortized Cost
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 $ -- 9,986 2,070 --
State and political subdivision securities -- -- 480 --
Mortgage-backed securities -- 237 7,720 --
Collateralized mortgage obligations 5,921 4,897 7,894 948
------ ----- ----- ---
Total investment securities
held to maturity $5,921 15,120 18,164 948
====== ====== ====== ===
<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 -- 6.31% 6.14% --
State and political subdivision securities -- -- 4.96% --
Mortgage-backed securities -- 6.81% 6.50% --
Collateralized mortgage obligations 5.98% 6.79% 7.06% 7.83%
----- ----- ----- -----
Total weighted average yield 5.98% 6.45% 6.73% 7.83%
</TABLE>
Loans
Total loans, net of unearned income, of $183,368,000 at December 31, 1997,
reflected an increase of $23,743,000 (14.9%), over total loans, net of unearned
income, of $159,625,000 at December 31, 1996. The primary growth during 1997
occurred in the real estate mortgage and commercial, financial and agricultural
loan
-16-
<PAGE>
area. The real estate mortgage loan component of the loan portfolio increased
$12,469,000 (12.3%) to $113,826,000 at December 31, 1997 over the 1996 balance
of $101,357,000 and represented 61.3% of the total loan portfolio at December
31, 1997, as compared to 62.7% at December 31, 1996. This growth was
attributable to the increase in commercial real estate mortgages of $8,887,000
(20.8%) combined with an increase in residential real estate mortgage loans of
$3,582,000 (6.1%).
The commercial, financial and agricultural portfolio increased $7,116,000
(18.1%) to $46,329,000 at December 31, 1997 compared to $39,213,000 at December
31, 1996. The increase was due primarily to increased demand for commercial
credits. Commercial, financial and agricultural loans represented 25.0% and
24.2% of the total loans at December 31, 1997 and 1996, 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, 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 1997, the Bank sold mortgage loans
totaling approximately $9,899,000, to FNMA, with the Bank maintaining the
servicing, and sold mortgage loans, totaling approximately $4,393,000, to
mortgage servicing companies, with servicing released. At December 31, 1997, the
Bank was servicing loans totaling approximately $54,744,000. The Bank collects
monthly servicing fees of 0.25% to 0.375% annually of the outstanding balances
of loans serviced for FNMA. See "- Effects of Inflation and Changing Prices."
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,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 46,329 39,213 35,800 32,443 27,728
Real estate - construction:
Commercial 3,172 3,572 945 1,076 1,959
Residential 3,583 3,068 2,323 1,657 2,342
Real estate - mortgage:
Commercial 51,714 42,827 33,593 33,517 30,179
Residential 62,112 58,530 54,384 50,677 42,614
Consumer installment 18,620 14,600 13,583 21,168 19,800
-------- ------- ------- ------- -------
Total loans $185,530 161,810 140,628 140,538 124,622
Less:
Unearned income (37) (91) (157) (210) (138)
Allowance for loan losses (2,125) (2,094) (2,012) (2,100) (2,264)
-------- ------- ------- ------- -------
Loans, net $183,368 159,625 138,459 138,228 122,220
======== ======= ======= ======= =======
</TABLE>
-17-
<PAGE>
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, 1997:
<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 $27,767 14,610 3,952 46,329
Real estate - construction 6,445 310 -- 6,755
Real estate - mortgage 17,752 18,729 77,345 113,826
Consumer installment 8,817 9,102 701 18,620
------- ------ ------ -------
Total loans 60,781 42,751 81,998 185,530
======= ====== ====== =======
Variable-rate loans 30,630 6,575 73,666 110,871
Fixed-rate loans 30,151 36,176 8,332 74,659
------ ------ ------ -------
Total loans $60,781 42,751 81,998 185,530
======= ====== ====== =======
</TABLE>
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
-18-
<PAGE>
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 Bank's 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 a semi-
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 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.
-19-
<PAGE>
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,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,094 2,012 2,100 2,264 1,510
Provision for loan losses 285 80 -- 172 222
Charge-offs:
Commercial, financial, and
agricultural 146 64 43 90 7
Real estate 1 1 1 164 11
Consumer 173 108 113 183 46
--- --- --- --- ---
Total charge-offs 320 173 157 437 64
Recoveries:
Commercial, financial and
agricultural 15 100 4 7 375
Real estate 3 5 28 34 180
Consumer 48 70 88 60 41
-- -- -- -- --
Total recoveries 66 175 120 101 596
-- --- --- --- ---
Net charge-offs (recoveries) 254 (2) 37 336 (532)
Other adjustments (1) -- -- (51) -- --
--- --- ---- --- -----
Balance at end of period $ 2,125 2,094 2,012 2,100 2,264
===== ===== ====== ===== =====
Ratio of allowance for loan losses to loans
outstanding, net of unearned discount 1.15% 1.29% 1.43% 1.50% 1.82%
Ratio of allowance for loan losses
to nonaccrual loans, renegotiated loans,
and other nonperforming assets -- 1,957.01% 1,468.61% 156.72% 249.61%
Ratio of net charge-offs (recoveries) to
average loans outstanding, net of
unearned income 0.15% (0.001)% 0.03% 0.26% (0.43)%
</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 1997, the Company had loan charge-offs totaling $320,000 and
recoveries of $66,000, as compared to $173,000 in charge-offs and recoveries of
$175,000 in the prior year. Management believes that the $2,125,000 in allowance
for loan losses at December 31, 1997 (1.15% of total outstanding loans, net of
unearned income) at such date is adequate to absorb known risks in the
portfolio. However, no assurance can be given that adverse economic
circumstances will not result in increased losses in the Bank's loan portfolio.
The Bank does not currently allocate its allowance 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 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
-20-
<PAGE>
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 charge-offs
for the 12-month period ending December 31, 1998 will be approximately $90,000,
$31,000 and $116,000 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, 1997, the Company had
approximately $578,000 of impaired loans, which included 1 loan, totaling
approximately $72,000 with a valuation allowance of approximately $49,000. No
valuation allowance was deemed necessary for the remaining $506,000 of impaired
loans. In comparison, 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.
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 $276,000, $219,000, and $270,000 at December 31,
1997, 1996, and 1995, respectively. These levels represent an increase of
$57,000 (26.0%) for the year ended 1997, and a decrease of $51,000 (18.9%) for
the year ended 1996. The increase is mainly due to a overdrawn checking account.
The decrease during 1996 is attributable to the disposal of other nonperforming
assets offset by a slight increase in nonaccrual loans.
-21-
<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,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ -- 107 73 27 30
Renegotiated loans -- -- -- -- --
Other nonperforming assets (primarily
other real estate) -- -- 64 1,313 877
Accruing loans 90 days or more past due 276 112 133 120 32
--- --- --- --- --
Total nonperforming assets $ 276 219 270 1,460 939
=== === === ===== ===
Nonaccrual loans and renegotiated loans
as a % of total loans -- 0.07% 0.05% 0.02% 0.02%
Nonaccrual loans, renegotiated loans and other
nonperforming assets as a percentage of total
loans, net of unearned income -- 0.07% 0.10% 0.95% 0.72%
Nonperforming assets as a percentage of
total loans, net of unearned income 0.15% 0.14% 0.19% 1.03% 0.75%
</TABLE>
If nonaccrual loans had performed in accordance with their original
contractual terms, interest income would have increased approximately $0,
$6,300, and $3,800 for the years ended December 31, 1997, 1996 and 1995
respectively. The amount of interest income earned and collected on nonaccrual
loans which is included in net income was $0 for 1997, $2,200 for 1996 and
$3,800 for 1995.
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, 1997, 73 loans totaling approximately $2,681,000 or 1.5%
of total net loans were considered potential problem loans.
Deposits
Total deposits increased $7,251,000 (3.4%) to $223,978,000 at December 31,
1997, as compared to $216,727,000 at December 31, 1996. Noninterest-bearing
deposits were $32,638,000 and $28,407,000 while total interest-bearing deposits
were $191,340,000 and $188,320,000 at December 31, 1997 and 1996, 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. At December 31, 1997, as a
percentage of total deposits, noninterest-bearing accounts comprised
approximately 14.6%, while MMDAs, NOWs and regular savings made up approximately
37.2%, certificates of deposit under $100,000 comprised approximately 31.7%, and
certificates of deposit and other time deposits of $100,000 or more comprised
16.5%. 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%.
-22-
<PAGE>
The composition of total deposits for the last three years is presented in
the following table:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
% Change % Change % Change
from prior from prior from prior
Amount year end Amount year end Amount year end
------ -------- ------- -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 32,638 14.89 % 28,407 11.44 % 25,491 (4.42)%
Interest bearing deposits:
NOWs 22,423 11.62 % 20,089 (13.48)% 23,220 (2.19)%
MMDAs 50,678 18.81 % 42,656 66.35 % 25,643 (0.84)%
Savings 10,217 (0.39)% 10,257 (0.37)% 10,295 (6.15)%
Certificates of deposit
under $100,000 71,136 (4.49)% 74,477 (3.78)% 77,402 29.87 %
Certificates of deposit and other
time deposits of $100,000
and over 36,886 (9.68)% 40,841 71.95 % 23,752 30.46 %
------ ------- ------ ------ ------ ------
Total interest bearing
deposits 191,340 16.04 % 188,320 17.47 % 160,312 15.85 %
------- ------ ------- ------ ------- ------
Total deposits $ 223,978 3.35 % 216,727 16.64 % 185,803 12.57 %
======= ====== ======= ====== ======= ======
</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:
-23-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1997 1996
------------------------------------- -----------------------------------
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) $ 172,742 15,220 8.81% 150,356 13,067 8.69%
Investment securities held to maturity:
Taxable 15,274 1,047 6.85% 20,794 1,456 7.00%
Tax-exempt (2) 1,540 152 9.87% 1,549 158 10.20%
---------------------------- -------------------------
Total investment securities held to maturity 16,814 1,199 7.13% 22,343 1,614 7.22%
Investment securities available for sale:
Taxable 44,555 2,886 6.48% 41,020 2,619 6.38%
Tax-exempt (2) 491 36 7.33% 312 23 7.28%
---------------------------- -------------------------
Total investment securities available for sale 45,046 2,922 6.49% 41,332 2,642 6.39%
Federal funds sold 6,778 388 5.72% 6,249 337 5.39%
Interest bearing deposits with other banks 1,446 81 5.60% 25 2 8.00%
---------------------------- -------------------------
Total interest earning assets 242,826 19,810 8.16% 220,305 17,661 8.02%
Allowance for loan losses (2,151) (2,055)
Cash and due from banks 7,652 7,207
Premises and equipment 3,597 3,530
Rental property, net 1,859 1,954
Other assets 3,879 2,905
--------------- ------------
Total Assets $ 257,662 233,846
=============== ============
LIABILITIES & SHAREHOLDERS' EQUITY
- ------------------------------------------------
Interest bearing liabilites:
Deposits:
Demand $ 20,143 426 2.11% 20,042 414 2.07%
Savings and Money Market 59,098 2,660 4.50% 42,219 1,680 3.98%
Certificates of deposits less than $100,000 71,933 4,495 6.25% 75,139 4,998 6.65%
Certificates of deposit and other time
deposits of $100,000 or more 37,808 1,972 5.22% 28,972 1,592 5.49%
---------------------------- -------------------------
Total interest bearing deposits 188,982 9,553 5.05% 166,372 8,684 5.22%
Federal funds purchased and securities sold under
agreements to repurchase 2,868 128 4.46% 7,784 425 5.46%
Other short term borrowings 94 9 9.57% 602 30 4.98%
Other borrowed funds 11,160 645 5.78% 9,003 513 5.70%
Employee stock ownership plan debt 113 8 7.08% 171 12 7.02%
---------------------------- -------------------------
Total interest bearing liabilities 203,217 10,343 5.09% 183,932 9,664 5.25%
Noninterest bearing demand deposits 27,941 26,131
Accrued expenses and other liabilities 2,070 1,896
Shareholders' equity 24,434 21,887
--------------- ------------
Total Liabilities and shareholders' equity $ 257,662 233,846
=============== ============
Net Interest Income $9,467 $7,997
============= =============
Net Yield on Total Interest Earning Assets 3.90% 3.63%
========== =========
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995
-----------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
- ------------------------------------------------ ------- -------- ----
<S> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned income (1) 140,829 12,118 8.60%
Investment securities held to maturity:
Taxable 31,427 2,173 6.91%
Tax-exempt (2) 1,708 205 12.00%
------------------------------
Total investment securities held to maturity 33,135 2,378 7.18%
Investment securities available for sale:
Taxable 21,678 1,388 6.40%
Tax-exempt (2) -- -- --
------------------------------
Total investment securities available for sale 21,678 1,388 6.40%
Federal funds sold 5,784 345 5.96%
Interest bearing deposits with other banks 48 3 6.25%
------------------------------
Total interest earning assets 201,474 16,232 8.06%
Allowance for loan losses (2,224)
Cash and due from banks 6,346
Premises and equipment 2,876
Rental property, net 1,943
Other assets 3,533
---------------
Total Assets 213,948
===============
LIABILITIES & SHAREHOLDERS' EQUITY
- ------------------------------------------------
Interest bearing liabilites:
Deposits:
Demand 19,435 468 2.41%
Savings and Money Market 34,555 1,317 3.81%
Certificates of deposits less than $100,000 76,489 4,757 6.22%
Certificates of deposit and other time
deposits of $100,000 or more 24,111 1,516 6.29%
------------------------------
Total interest bearing deposits 154,590 8,058 5.21%
Federal funds purchased and securities sold under
agreements to repurchase 2,599 150 5.77%
Other short term borrowings 712 38 5.34%
Other borrowed funds 9,708 595 6.13%
Employee stock ownership plan debt 227 17 7.49%
------------------------------
Total interest bearing liabilities 167,836 8,858 5.28%
Noninterest bearing demand deposits 24,350
Accrued expenses and other liabilities 1,869
Shareholders' equity 19,893
---------------
Total Liabilities and shareholders' equity 213,948
===============
Net Interest Income 7,374
===============
Net Yield on Total Interest Earning Assets 3.66%
=========
</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%.
<PAGE>
The following table presents the maturities of certificates of deposit and
other time deposits of $100,000 or more at December 31, 1997:
Maturities of Time Deposits over $100,000
December 31, 1997
-----------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Three months or less.......................... $15,202
After three within six months................. 5,398
After six within twelve months................ 3,646
After twelve months........................... 12,640
-------
Total..................................... $36,886
=======
Weighted Average rate on time deposits
of $100,000 or more at period-end......... 6.10%
</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>
Maximum Weighted
Year ended Outstanding at Average Interest Rate Ending Average Interest
December 31 any Month-end Balance During Year Balance Rate at Year-end
- ----------- ------------- ------- ------------- ------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1997 $8,516 $2,963 5.30% $1,274 5.29%
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.
Capital Resources
The Company's consolidated stockholders' equity was $26,047,000 and
$23,083,000 at December 31, 1997 and 1996, respectively, an increase of
$2,964,000 (12.8%) since year end 1996. 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 1997, cash dividends of $627,000 or $0.48 per share, were declared
on the Common Stock as compared to $560,000, or $0.43 per share, in 1996,
representing an increase of $67,000 (12.0%). 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.
25
<PAGE>
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,
-----------------------------------------------
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
Return on average assets 1.20% 1.18% 0.98%
Return on average equity 12.61% 12.58% 10.51%
Common dividend payout ratio 20.34% 20.38% 22.36%
Average equity to average asset ratio 9.48% 9.36% 9.30%
</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, 1997, that the Bank meets all capital adequacy requirements to
which it is subject. See "Supervision and Regulation."
The following table sets forth the Bank's actual capital levels and the
related required capital levels at December 31, 1997:
<TABLE>
<CAPTION>
Actual Required
Capital Actual Capital
Amount Ratio Amount Required Ratio
------- ------ -------- --------------------------
<S> <C> <C> <C> <C>
Tier 1 Risk-Based Capital $23,104 12.72% $ 7,264 greater than or equal to 4%
Leverage Capital 23,104 8.84% 10,453 greater than or equal to 4%
Total Qualifying Capital 25,229 13.89% 14,529 greater than or equal to 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
-26-
<PAGE>
would have been if the fair-value-based method of accounting had been applied.
No options were granted in 1997, 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.
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 establishes
standards for computing and presenting earnings per share. Under SFAS No. 128
entities with complex capital structures are required to present basic and
diluted earnings per share. Diluted earnings per share reflects the effect of
dilutive potential outstanding shares. The Company has no potential outstanding
shares that would result in diluted earnings per share, thus only basic earnings
per share are presented.
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 has
a current line of credit of $25,000,000. This line is collateralized by a
blanket lien against its one to four family residential properties. At December
31, 1997, the Bank had credit available from FHLB-Atlanta of $14,124,000, and
had $10,876,000 in advances drawn down.
Overall, net cash provided from financing activities decreased
$31,015,000 (92.8%) to $2,404,000 during 1997 from the previous year's total of
$33,419,000. Net cash provided by operating activities increased $1,704,000
(77.7%) to $3,896,000 from $2,192,000 for the year ended December 31, 1997.
$18,590,000 of the cash was used in investing activities during 1997.
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 third party vendor. The Bank paid the Company $295,000 and
$277,000 in management fees and $187,000 and $180,000 in lease payments for the
years ended December 31, 1997 and 1996, 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,
the Company only receives cash dividends from the Bank if the cash flow from
other sources is not sufficient to maintain a positive cash flow. Accordingly,
the Bank paid the Company $697,000, $265,000, and $0 in cash dividends for 1997,
1996, and 1995 respectively.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium ("Year 2000") approaches. The
Company has conducted a comprehensive review of its computer
-27-
<PAGE>
systems to identify the systems that could be affected by the Year 2000 issue
and has developed a plan to resolve any modifications necessary in order be
prepared for the new millennium. Any modifications are expected to be completed
by December 31, 1998. The Company has received certification of Year 2000
compliance from their critical vendors used in the major operations of the
Company. The Company has followed the Federal Reserve guidelines for preparing
for Year 2000. The Company also reports quarterly to the Board the progress of
the Year 2000 project. Accordingly, the Company does not expect the Year 2000
issue to pose any significant operational problems and has not discovered any
Year 2000 problems with significant counter-parties that it believes will have
material effect on the financial position or results of operations of the
Company. However, the Company has not fully evaluated the effect of any Year
2000 problems on its loan and deposit customers, and no assurance can be given
that potential Year 2000 problems of those with whom the Company does business
will not occur, and if they occur, that the consequences to the Company will not
be material. The total cost of the project is estimated not to exceed $20,000
and is estimated to be funded through operating cash flows.
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, 1997, would increase approximately 0.83% in a rising rate
environment and decrease approximately 0.75% 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. Assets and liabilities that are subject to interest rate changes are
shown as repricing immediately.
-28-
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
Over Five
One to Four to One to Years and
Three Twelve Five Non-rate
December 31, 1997 Immediate Months Months Years Sensitive Total
--------- ------ ------ ----- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned $ 31,094 24,168 38,237 84,380 7,614 185,493
Taxable investment securities -- 2,494 5,955 4,436 -- 12,885
Tax-exempt investment securities -- 273 201 1,005 -- 1,479
Investment securities available for sale -- 14,728 5,852 19,616 250 40,446
Federal funds sold and securities
purchased under agreements to resell 2,615 -- -- -- -- 2,615
Interest bearing deposits with other banks 1,723 -- -- -- -- 1,723
--------- ------- ------- ------- ------- -------
Total earning assets 35,432 41,663 50,245 109,437 7,864 244,641
--------- ------- ------- ------- ------- -------
Interest bearing liabilities:
Demand deposits -- 3,207 -- -- 19,216 22,423
Savings and Money Market 50,678 -- -- -- 10,217 60,895
Certificates of deposit less than $100,000 -- 12,470 25,972 32,694 -- 71,136
Certificates of deposit and other
time deposits of $100,000 or more -- 15,202 9,044 12,640 -- 36,886
Federal funds purchased and securities
sold under agreements to repurchase 1,274 -- -- -- -- 1,274
Other short-term borrowings -- -- -- -- -- --
FHLB and other borrowings -- 5,030 90 5,665 410 11,195
--------- ------- ------- ------- ------- -------
Total interest bearing liabilities 51,952 35,909 35,106 50,999 29,843 203,809
Noninterest bearing sources of funds, net -- -- -- -- 32,639 32,639
Off-balance sheet items-asset/(liability) -- (5,000) 5,000 10,000 -- 10,000
--------- ------- ------- ------- ------- -------
Interest sensitivity gap (16,520) 754 20,139 68,438 (54,618) 18,193
--------- ------- ------- ------- ------- -------
Cumulative interest sensitivity gap $ (16,520) (15,766) 4,373 72,811 18,193
========= ======= ======= ======= =======
</TABLE>
The interest sensitive assets at December 31, 1997, that reprice or mature
within 12 months were $127,340,000 while the interest sensitive liabilities that
reprice or mature within the same time frame were $122,967,000. At December 31,
1997, the 12 month cumulative GAP position, including the effect of off-balance
sheet items, was a positive $4,373, resulting in a GAP ratio of 104.0%. A
positive GAP indicates that the Company has more interest-bearing assets than
interest-earning liabilities that reprice within the GAP period.
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 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 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.
-29-
<PAGE>
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 and floors
position as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Remaining
Notional Carrying Estimated Average Rate(1) Life
Amount Value Fair Value Received Paid (Years)
------ ----- ---------- -------- ----- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Receive fixed:
One year or less $ 5,000 -- 8 6.37% 5.91% 0.50
Over one year through two years 10,000 -- 68 6.42% 5.88% 1.25
Floors
Purchased
Over two years through five years 10,000 11 11 2.25
Over two years through five years 10,000 32 73 6.00% 5.81% 2.25
------
$35,000
=======
</TABLE>
________________
(1) The weighted average rates received/paid are shown only for swaps and
floors for which net interest amounts were receivable or payable at the end
of each period. For 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-LIBOR-BBA ("British Bankers
Association") rate.
In January 1997, the Securities and Exchange Commission approved rule
amendments (the Release) regarding disclosures about derivative financial
instruments, other financial instruments and derivative commodity instruments.
The release requires inclusion in the footnotes to the financial statements of
extensive detail about the accounting policies followed by a registrant in
connection with its accounting for derivative financial instruments and
derivative commodity instruments. The accounting policy requirements become
effective for all registrants for filings that include financial statements for
periods ending after June 15, 1997.
As part of its overall interest rate risk management activities, the
Company utilizes off-balance sheet derivatives to modify the repricing
characteristics of on-balance sheet assets and liabilities. The primary
instruments utilized by the Company are interest rate swaps and interest rate
floor and cap agreements. The fair values of these off-balance sheet derivative
financial instruments are based on dealer quotes and third party financial
models.
Interest rate swaps, floor and caps are accounted for on an accrual basis,
and the net interest differential, including premiums paid, if any, is
recognized as an adjustment to interest income or expense of the related
designated asset or liability. Changes in the fair values of the swaps, floors
and caps are not recorded in the consolidated statements of income because these
agreements are being treated as a synthetic alteration of the designated assets
or liabilities. The Company considers its interest rate swaps to be a synthetic
alteration of an asset or liability as long as (i) the swap is designated with a
specific asset or liability or finite pool of assets or liabilities; (ii) there
is a high correlation, at inception and throughout the period of the synthetic
alteration, between changes in the interest income or expense generated by the
swap and changes in the interest income or expense generated by
-30-
<PAGE>
the designated asset or liability; (iii) the notional amount of the swap is less
than or equal to the principal amount of the designated asset or liability; and
(iv) the swap term is less than or equal to the remaining term of the designated
asset or liability. The criteria for consideration for a floor or cap as a
synthetic alteration of an asset or liability are generally the same as those
for a swap arrangement.
If the swap, floor or cap arrangements are terminated before their
maturity, the net proceeds received or paid are deferred and amortized over the
shorter of the remaining contract life or the maturity of the designated asset
or liability as an adjustment to interest income or expense. If the designated
asset or liability is sold or matures, the swap agreement is marked to market
and the gain or loss is included with the gain or loss on the sale/maturity of
the designated asset or liability. Changes in the fair value of any undesignated
swaps, floors and caps are included in other income in the consolidated
statement of income. The impact of such derivatives has been determined by
Management to be immaterial to its financial statements.
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
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 $327,000 (11.9%) to $3,080,000 during 1997 from
$2,753,000 for the year ended December 31, 1996. Basic income per share was
$2.36 and $2.11 for 1997 and 1996, respectively, an increase of 11.8%.
Comparatively, net income during 1996 increased $662,000 (31.7%) from the 1995
year end total of $2,091,000, while basic income per share showed a similar
increase of $0.50 per share for 1996 from a 1995 per share total of $1.61.
The increase in net income for 1997 is attributable to higher net
interest income offset by a decrease in noninterest income. The increase in 1996
compared to 1995 was due to higher net interest income and noninterest income
and lower noninterest expense for the year.
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 $9,403,000 for the year ended December 31, 1997. This
increase of $1,466,000 (18.5%) over 1996 is due to the increase in average
interest earning assets during 1997 and an increase in the net yield on earning
assets of 27 basis points.
Net interest income for 1996 was $7,937,000, $633,000 (8.7%) higher
than 1995 net interest income of $7,304,000. This increase over 1995 is due to
the increase in average interest earning assets during 1997 which offset a
decrease in the net yield on earning assets of 3 basis points.
-31-
<PAGE>
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 hedges against
unfavorable rate changes. The income and expense associated with interest rate
swaps, caps and floors are ultimately reflected as adjustments to the net
interest income or expense of the underlying assets or liabilities. The effect
of such interest rate protection contracts resulted in a net increase in net
interest income of $43,525 during 1997 compared to a net increase in 1996 of
$6,000 and a decrease in net interest income of $56,000 during 1995. 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.
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis
Taxable-Equivalent Basis (1)(2) Change Due to
Years Ended December 31, Net Rate/
1997 Compared to 1996 change Rate Volume volume
------ ---- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans, net of unearned income $2,153 207 1,973 (27)
Investment securities held to maturity:
Taxable (409) (22) (379) (8)
Tax-exempt (6) (5) (1) --
Total investment securities-HTM (415) (27) (380) (8)
Investment securities available for sale:
Taxable 267 41 229 (3)
Tax-exempt 13 -- 13 --
-- -- -- --
Total investment securities-AFS 280 41 242 (3)
Federal funds sold 51 22 31 (2)
Interest bearing deposits with other banks 79 (35) 80 34
------ ----- ----- -----
Total earning assets $2,148 208 1,946 (6)
====== ===== ===== =====
Interest expense:
Deposits:
Demand $ 12 10 2 --
Savings 980 308 760 (88)
Certificates of deposit less than $100,000 (503) (290) (200) (13)
Certificates of deposit and other time
deposits of $100,000 or more 380 (106) 461 25
------ ----- ----- -----
Total interest bearing deposits 869 (78) 1,023 (76)
Federal funds purchased and securities sold
under agreements to repurchase (297) (29) (219) (49)
Other short term borrowings (21) 4 (48) 23
Other borrowed funds 128 8 121 (1)
------ - ----- -----
Total interest bearing liabilities $ 679 (95) 877 (103)
====== ===== ===== =====
- -------------
</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).
(2) The change in interest due to rate is calculated by multiplying the
previous volume by the rate change and the change in interest due to volume
is calculated by multiplying the change in volume by the previous rate.
Changes attributable to both changes in rate and volume have been allocated
to the rate and volume components in proportion to the relationship of the
dollar amounts of the change in each.
-32-
<PAGE>
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis
Taxable-Equivalent Basis (1)(2) Change Due to
Years Ended December 31, Net Rate/
1996 Compared to 1995 change Rate Volume volume
------ ---- ------ -------
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans, net of unearned income $ 949 129 827 (7)
Investment securities held to maturity:
Taxable (717) 18 (743) 8
Tax-exempt (47) (28) (16) (3)
-- -- -- -
Total investment securities-HTM (764) (10) (759) 5
Investment securities available for sale:
Taxable 1,231 (7) 1,232 6
Tax-exempt 23 -- -- 23
-- -- -- --
Total investment securities-AFS 1,254 (7) 1,232 29
Federal funds sold (8) (35) 25 2
Interest bearing deposits with other banks (1) -- (1) --
------ ---- ----- ----
Total earning assets $1,430 77 1,324 29
====== ==== ===== ====
Interest expense:
Deposits:
Demand $ (54) (70) 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 or more 76 (230) 267 39
------ ---- ---- ----
Total interest bearing deposits 626 96 495 35
Federal funds purchased and securities sold
under agreements to repurchase 346 88 325 (67)
Other short term borrowings (130) (4) (109) (17)
Other borrowed funds 135 134 3 (2)
------ ---- - ----
Total interest bearing liabilities $ 977 314 714 (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).
(2) The change in interest due to rate is calculated by multiplying the
previous volume by the rate change and the change in interest due to volume
is calculated by multiplying the change in volume by the previous rate.
Changes attributable to both changes in rate and volume have been allocated
to the rate and volume components in proportion to the relationship of the
dollar amounts of the change in each.
Interest Income
Interest income is a function of the volume of interest earning
assets and their related yields. Interest income was $19,746,000, $17,601,000,
and $16,162,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. Average interest earning assets increased $22,521,000 (10.2%)
during 1997, $18,831,000 (9.4%) during 1996, and $21,979,000 (12.2%) during
1995, while the fully taxable equivalent yields on average earning assets
increased 14 basis points in 1997 after decreasing 4 basis points in 1996 and
increasing 34 basis points in 1995. The combination of these factors resulted in
increases in interest income of $2,145,000 (12.1%), $1,439,000 (8.9%) and
$2,504,000 (18.3%) during 1997, 1996 and 1995, respectively. See "--Consolidated
Average Balances, Interest Income/Expense and Yields/Rates" and the "Rate/Volume
Variance Analysis" tables.
-33-
<PAGE>
Loans are the main component of the Bank's earning assets. Interest and fees on
loans were $15,220,000, $13,067,000, and $12,118,000 for the years ended
December 31, 1997, 1996, and 1995, respectively. These levels reflected
increases of $2,153,000 (16.5%) during 1997, $949,000 (7.8%) during 1996, and
$1,611,000 (15.3%) during 1995 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 $172,742,000
in 1997 from $150,356,000 and $140,829,000 for 1996 and 1995, respectively, the
fully taxable equivalent yield on loans has also shown increases of 12 basis
points to 8.81% in 1997, and 9 basis points to 8.69% in 1996 from the 1995
average yield of 8.60%.
Interest income on investment securities held to maturity decreased
$413,000 (26.4%) to $1,147,000 in 1997, following decreases of $748,000 (32.4%)
to $1,560,000 in 1996 and $63,000 (2.7%) to $2,308,000 in 1995. The 1997
decrease was due to the combination of a $5,529,000 decrease in average volume
outstanding and a 9 basis point decrease in the fully taxable equivalent yield
over 1996 levels. The 1996 decrease was due to a 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. The decrease in average
outstandings for 1997 and 1996 was due to scheduled paydowns and calls of
principal. The fully taxable equivalent yields on investment securities held to
maturity were 7.13% in 1997, 7.22% in 1996, and 7.18% in 1995.
The Company established an available for sale portfolio in 1994 with the
adoption of SFAS No. 115. Interest income on such investments was $2,910,000,
$2,634,000 and $1,388,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. These increases in income from such portfolio of $276,000 (10.5%)
and $1,246,000 (89.8%) for 1997 and 1996, respectively were due almost entirely
to increases in the average volume outstanding. The average balance outstanding
of investment securities available for sale increased $3,714,000 (9.0%) to
$45,046,000 in 1997 over the 1996 average balance of $41,332,000, which in turn
represented an increase of $19,654,000 (90.7%) over the 1995 balance of
$21,678,000. 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 6.49% in 1997, 6.39% in 1996 and 6.40% in
1995. See "Financial Condition--Investment Securities."
Interest Expense
Total interest expense was $10,343,000, $9,664,000 and $8,858,000 for the
years ended December 31, 1997, 1996 and 1995 respectively, representing
increases of $679,000 (7.0%), of $806,000 (9.1%) and $2,714,000 (44.2%) during
1997, 1996, and 1995, respectively. Total average balances outstanding of
interest-bearing liabilities have continued an upward trend over the last three
years to $203,217,000 in 1997 from $183,932,000 in 1996 and $167,836,000 in
1995. The rates paid on these liabilities decreased 16 basis points in 1997 to
5.09% after decreasing 3 basis points to 5.25% during 1996, and decreasing 116
basis points to 5.28% during 1995.
Interest on deposits, the primary component of total interest expense,
increased $869,000 to $9,553,000 (10.0%) during 1997 from $8,684,000 in 1996,
which in turn represented a $626,000 (7.8%) increase from the 1995 level of
$8,058,000. The average balance outstanding of interest-bearing deposits has
increased steadily to the 1997 level of $188,982,000 as compared to $166,372,000
in 1996 and $154,590,000 in 1995. The 1997 increase is attributable to growth in
money market deposit accounts in the normal course of business, while the 1996
increase was due to new deposit growth in money market deposit account and
growth in certificate of deposit balances also in the normal course of business.
The average rates paid on interest-bearing deposits were 5.05%, 5.22%, and 5.21%
for 1997, 1996, and 1995, respectively.
Interest expense on borrowed funds, including both short term borrowings
and other borrowed funds, was $662,000 in 1997, $555,000 in 1996, and $650,000
in 1995. These levels represent an increase of $107,000 (19.3%) during 1997, a
decrease of $95,000 (14.6%) during 1996, and a decrease of $41,000 (5.9%) during
1995. The increase in 1997 is due to a full year of interest expense relating to
a $5,000,000 FHLB advance drawn in May 1996 compared to 7 months of interest
expense in 1996.
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<PAGE>
Provision for Loan Losses
During 1997, the Company made a total provision for loan losses of
$285,000 based on management's assessment of the risk in the loan portfolio, the
growth of the loan portfolio and historical loan loss trends. During 1996, the
Company made a total provision for loan losses of $80,000. For 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
charge-offs during the year. See "Financial Condition -- Allowance for Loan
Losses and Risk Elements."
Noninterest Income
Noninterest income decreased $233,000 (9.7%) to $2,175,000 for the year
ended December 31, 1997 from the 1996 total of $2,408,000, which in turn
represented an increase of $114,000 (5.0%) over the total of $2,294,000 for
1995.
Service charges on deposit accounts increased $64,000 (8.0%) during 1997
and $66,000 (9.0%) in 1996 both primarily due to increases in nonsufficient
funds and overdraft charges.
During 1997, the Company experienced net losses of $60,000 on the sale,
in the ordinary course of business, of investment securities available for sale,
as compared to net gains of $26,000 in 1996 and $37,000 in 1995. See "FINANCIAL
CONDITION - INVESTMENT SECURITIES."
Other noninterest income decreased $212,000 (13.4%) to $1,369,000 in
1997 from $1,581,000 in 1996. Comparatively, the 1996 total represents an
increase of $58,000 (3.8%) from $1,523,000 in 1995. The decrease in 1997 was due
to a $30,000 decrease in rental income, a $18,000 increase in ATM transaction
fees and a $151,000 decrease in stock dividends from other companies primarily
due to the one time dividend paid in 1996 in connection with the sale of Alert.
The increase in 1996 was due to a $99,000 increase in other fee income,
especially ATM transaction fees, a $162,000 increase in dividends received from
stock held in other companies primarily 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.
Noninterest Expense
Total noninterest expense was $6,385,000 for 1997, $6,007,000 for 1996,
and $6,419,000 for 1995 reflecting an increase of $378,000 (6.3%) for 1997, a
decrease of $412,000 (6.4%) for 1996 and an increase of $440,000 (7.4%) for
1995.
Salaries and benefits increased $202,000 (6.9%) to $3,143,000 for the
year ended December 31, 1997 and decreased $46,000 (1.5%) to $2,941,000 for the
year ended December 31, 1996 from the 1995 total of $2,987,000. At December 31,
1997, the Company had 104 full-time equivalent employees, an increase of 2 over
the level at December 31, 1996. The salary and benefit increase over 1996 was
primarily due to merit and cost-of-living raises and the cost of benefits
associated with such increases.
Net occupancy expense was $972,000, $817,000, and $724,000 for 1997,
1996 and 1995, respectively, representing increases of $155,000 (19.0%) in 1997
and $93,000 (12.8%) in 1996 over the previous year's levels. The 1997 increase
resulted primarily from a $30,000 increase in property taxes, a $24,000 increase
in furniture and equipment depreciation, a $18,000 increase in service contract
expense, a $43,000 increase in leases payments due to the new Winn Dixie branch
and a $40,000 increase in equipment lease payments. The 1996 increase is
attributable to increases in furniture and equipment depreciation and lease
payments on equipment.
Other noninterest expense was $2,270,000 for 1997, $2,250,000 for 1996,
and $2,708,000 for 1995. These levels represent an increase of $20,000 (0.9%) in
1997 and a decrease of $458,000 (16.9%) in 1996 over the respective previous
years. The 1997 increase resulted from a $40,000 increase in electronic services
due to
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<PAGE>
Mastercard/Visa processing expenses and ATM expenses, $25,000 increase in FDIC
assessment due to an increase in premiums, $70,000 decrease in professional fees
mainly due to expenses in 1996 to set up the Dividend reinvestment plan, and a
$28,000 increase in marketing expenses due to the Winn Dixie branch opening and
the promotion of the Checkcard. The 1996 decrease resulted from a $189,000
decrease in FDIC insurance from the reassessment of insurance rates 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. See "Supervision and Regulation-FDIC
Insurance Assessments."
Income Taxes
The Company's income tax expense was $1,828,000, $1,505,000, and
$1,089,000 in 1997, 1996 and 1995, respectively. These levels represent an
effective tax rate on pre-tax earnings of 37.2% for 1997, 35.3% for 1996, and
34.2% for 1995. Details of the tax provision for income taxes are included in
Note 8, "Income Tax Expense" to the Notes to the Consolidated Financial
Statements included elsewhere herein.
ITEM 7. FINANCIAL STATEMENTS
See pages 44 to 74.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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, 1997:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned and
Name (Age) and Year First Percentage of Common
Elected as Director Information About Director or Executive Officer(1) Stock Outstanding (2)
<C> <S> <C>
C. Wayne Alderman (47) Director of the Bank; Dean of Auburn University 1,113* (3)
Bank Board: 1993 College of Business since 1993; member of
Auburn University staff since 1988.
Otis D. Alsobrook, III (46) City President, Opelika Office and Senior Vice 1,586* (4)
President of the Bank since 1990; previously Vice
President of AmSouth Bank in Opelika, Alabama
from 1977 to 1990.
</TABLE>
-36-
<PAGE>
<TABLE>
<C> <S> <C>
Terry W. Andrus (45) Director of the Bank; President and Chief Executive 300* (5)
Bank Board: 1991 Officer of the East Alabama Medical Center since
1984.
Terrell E. Bishop (61) Senior Vice President - Mortgage Lending of the 4,993* (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 (75) Director of the Company and the Bank; community 15,294 (7)
Bank Board: 1981 civic leader. 1.16%
Company Board: 1993
Curt B. Cope (44) Director of the Bank; President of Cope International 7,138*
Bank Board: 1993 since 1994; Previous owner and President of
PowerGuard, Inc.
Robert W. Dumas (44) Senior Vice President - Commercial & Consumer 8,215* (8)
Lending of the Bank since 1988; Employee of the
Bank since 1984.
J. E. Evans (56) Director of the Bank; Owner of Evans Realty since 6,000*
Bank Board: 1986 1970.
Linda D. Fucci (50) Chief Financial Officer, Secretary and Treasurer of 72,174 (9)
the Company since 1984; Chief Financial Office 5.52%
and Senior Vice President of the Bank since 1988;
Employee of the Bank since 1972
Jo Ann Hall (48) Senior Vice President - Operations of the Bank since 4,219* (10)
1994; Employee of the Bank since 1974.
William F. Ham, Jr. (44) Director of the Bank; Owner of Varsity Enterprises, a 352* (11)
Bank Board: 1993 coin-operated laundry equipment operating
company, since 1977.
David E. Housel (51) Director of the Bank; Director of Auburn University 60*
Bank Board: 1997 Athletics since 1994; Member of the Auburn
University staff since 1970.
Anne M. May (46) Director of the Company and the Bank; Partner, 73,084 (12)
Bank Board: 1982 Machen, McChesney & Chastain, Certified Public 5.59%
Company Board: 1990 Accountants, since 1973.
E. L. Spencer, Jr. (67) Director of the Company and the Bank; Chairman of 252,370 (13)(14)
Bank Board: 1975 the Board of Directors of the Bank since 1980; 19.29%
Company Board: 1984 President and Chief Executive Officer of the Bank
and the Company since 1990; President of Spencer
Lumber Company since 1970. (14)
</TABLE>
-37-
<PAGE>
<TABLE>
<C> <S> <C>
Edward L. Spencer, III (42) Director of the Bank; Vice President of Spencer 1,900* (15)
Bank Board: 1991 Lumber Company since 1990. (14)
Emil F. Wright, Jr. (61) Director of the Company and the Bank; Vice 142,260 (16)
Bank Board: 1973 Chairman of the Company and the Bank since 10.87%
Company Board: 1984 1991; practicing law clerk 1998; former
Ophthalmologist practicing with the Medical Arts
Eye Clinic 1971 - 1997.
Directors and executive 451,430
officers as a group 34.51%
(16 persons)
</TABLE>
__________________
* Denotes less than 1% beneficial ownership.
(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 413 shares held jointly with Mr. Alderman's wife, as to which Mr.
Alderman may be deemed to have shared voting and investment power, and 700
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
1,336 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 3,664 shares held jointly with Mr. Bishop's wife, as to which Mr.
Bishop may be deemed to have shared voting and investment power, and 1,329
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 828 shares
held jointly with Mr. Dumas' parents, as to which Mr. Dumas may be deemed
to have shared voting and investment power, and 4,639 shares held by the
ESOP trustees for the benefit of Mr. Dumas.
-38-
<PAGE>
(9) Includes 64,726 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
60,213 shares. The remaining 4,513 shares are held by the ESOP trustees
for the benefit of Ms. Fucci. Also includes 7,448 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 2,884 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 64,726 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 149 shares held by Ms. May's daughter, as to which Ms. May may be
deemed to have shared voting and investment power.
(13) Includes 64,726 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
61,254 shares. The remaining 3,472 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.
(14) E. L. Spencer, Jr. is the father of Edward L. Spencer, III.
(15) Includes 10 shares held by a minor of which Mr. Spencer serves as
custodian.
(16) 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.
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 6 meetings during 1997 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 1997
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 Asset Liability 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 are authorized to act in
the absence of the respective Boards of Directors on most matters that require
Board approval. The members of this committee for the Company are E. L. Spencer,
Jr., Anne M. May, and Emil F. Wright, Jr. The members of this committee for the
Bank are E. L. Spencer, Jr., Anne M. May, Emil F. Wright, Jr., and Winifred H.
Boyd. Both the Company's and the Bank's committees held 4 meetings in 1997.
-39-
<PAGE>
The Company's Proxy Committee is authorized to act on behalf of Company
stockholders when authorized by Proxy. E. L. Spencer,Jr., Winifred H. Boyd and
Emil F. Wright, Jr. are the members of this committee, which held 1 meeting in
1997.
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. Emil F. Wright, Jr. and Terry Andrus are the
members of these committees for both the Company and the Bank, each of which
held 3 meetings in 1997.
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
Edward L. Spencer, III are the members of these committees for both the Company
and the Bank, each of which held 12 meetings in 1997.
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
oversees the planning process for officer and director strategic planning
sessions. The members of this committee for the Company are E. L. Spencer, Jr.,
Anne M. May, and Linda D. Fucci. The members of this committee for the Bank are
E. L. Spencer, Jr., Anne M. May, Linda D. Fucci and Terry Andrus. Both the
Company's and Bank's committees held 1 meeting in 1997.
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 2 meetings in 1997.
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 7 phone meetings in 1997.
The Bank's Asset Liability Committee is responsible for managing the
Bank's exposure to interest rate risk and its liquidity position and for
developing and monitoring strategies to protect performance and safety. Terry
Andrus, Curt B. Cope, David E. Housel 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 Asset Liability 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 $450 during 1997. Total directors' fees and bonuses of $103,875 were
paid during 1997.
Principal Stockholders
EL. Spencer, Jr. and Emil F. Wright, Jr. (whose ownership is described
above) are the only stockholders that are known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock.
-40-
<PAGE>
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 and no such persons
failed to file any such reports, on a timely basis, as disclosed to the
Company by such persons.
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 1997, 1996 and 1995
to E. L. Spencer, Jr., as the Company's Chief Executive Officer and during
1997 to Robert W. Dumas, a Bank Senior Vice President. No other executive
officers' aggregate salaries and bonuses in 1997 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.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation (1) Awards
----------------------- ------------
Securities Underlying
Name and Other Annual Options/ All Other
Principal Position Year Salary Bonus Compensation SARs Compensation
------------------ ---- ------ ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
E. L. Spencer, Jr., 1997 $176,000 $35,000 $ - $ - $26,389 (2)
Chairman, CEO 1996 168,000 30,000 - - 44,319 (2)
and Director of the 1995 159,148 21,000 - - 40,630 (2)
Company and the Bank
Robert W. Dumas 1997 $ 83,738 $18,500 - - 5,319 (4)
Senior Vice 1996 (3)
President of the Bank 1995 (3)
</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 and Mr. Dumas.
(2) Includes Company contributions or other allocations to the 401(k) Plan of
$8,289, 7,319, and $9,530; and Board of Directors and Board committee fees
of $18,100, $17,000, and $11,100, respectively, for the years 1997, 1996,
and 1995. Includes premiums paid on split-dollar whole life insurance policy
of $20,000 for the years 1996 and 1995. The Company purchased the
split-dollar whole life policy in 1990. Through 1996, premiums paid totaled
$120,000. In 1997, the Company elected to reduce the base face amount to
$208,530 and to use a portion of the cash value to purchase the paid up
value of $42,357. Beginning in 1997, dividends earned by the policy will be
used to pay annual premiums of $8,777 or to purchase additional insurance.
Should the dividends be insufficient to pay the annual premium, the Company
will either make a payment of the difference or reduce the face amount of
insurance accordingly. 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 surrendered, the Company will
receive the cash surrender value. The policy is reevaluated on an annual
basis by the Personnel and Salary Committee.
(3) Reporting not required for 1996 and 1995 since the aggregate salary and
bonuses did not exceed $100,000.
-41-
<PAGE>
(4) Includes Company contributions or other allocations to the 401(k) Plan of
$5,319.
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 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, 1997 was
approximately $7,073,000, which represented approximately 27.1% 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 1997 or 1996 owned, of record or beneficially, in excess of 10%
equity interest in any business or professional entity that made during 1997,
1995, or 1995, payments to the Company or the Bank for property or services in
excess of $60,000.
-42-
<PAGE>
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)).
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)).
21. Subsidiaries of Registrant
23. Consent of Accountants
27. Financial Data Schedule
(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, 1997
-43-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1997, 1996, and 1995
With Independent Auditors' Report Thereon
-44-
<PAGE>
Independent Auditors' Report
The Board of Directors
Auburn National Bancorporation, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Auburn
National Bancorporation, Inc. and subsidiary (the Company) as of December 31,
1997 and 1996, 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, 1997. 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 subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
February 17, 1998
-45-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks (note 2) $ 12,268,412 15,427,715
Federal funds sold 2,615,000 11,745,000
------------ -----------
Cash and cash equivalents 14,883,412 27,172,715
Interest-earning deposits with other banks 1,722,982 6,354
Investment securities held to maturity (fair value
of $14,401,723 and $17,916,468 for December 31, 1997
and 1996, respectively) (note 3) 14,364,262 17,903,079
Investment securities available for sale (note 3) 40,445,856 44,026,979
Loans:
Loans, less unearned income of $36,706 and $91,167
at December 31, 1997 and 1996, respectively 185,493,178 161,718,475
Less allowance for loan losses (2,125,104) (2,093,682)
------------ -----------
Loans, net (notes 4 and 7) 183,368,074 159,624,793
Premises and equipment, net (note 5) 3,520,542 3,447,099
Rental property, net 1,807,359 1,899,354
Other assets (note 8) 4,621,187 3,974,984
------------ -----------
Total assets $264,733,674 258,055,357
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-46-
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
Deposits:
Noninterest-bearing $ 32,638,352 28,406,946
Interest-bearing (note 6) 191,339,635 188,320,228
------------ -----------
Total deposits 223,977,987 216,727,174
Securities sold under agreements to repurchase 1,273,507 4,652,834
Other short-term borrowings (note 7) - 1,203,130
Other borrowed funds (note 7) 11,138,850 10,908,338
Accrued expenses and other liabilities 2,238,989 1,367,149
Employee Stock Ownership Plan debt (note 9) 56,934 113,940
------------ -----------
Total liabilities 238,686,267 234,972,565
------------ -----------
Stockholders' equity (notes 12 and 13):
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, 1997
and 1996 13,190 13,190
Surplus 3,733,853 3,691,099
Retained earnings 22,396,461 19,942,980
Unrealized gain (loss) on mutual funds and investment
securities available for sale, net of taxes 175,436 (146,528)
Less:
Treasury stock, 10,854 shares and 15,974 shares
at December 31, 1997 and 1996,
respectively, at cost (214,599) (304,009)
Employee Stock Ownership Plan debt (56,934) (113,940)
------------ -----------
Total stockholders' equity 26,047,407 23,082,792
Commitments and contingencies (note 10)
------------ -----------
Total liabilities and stockholders' equity $264,733,674 258,055,357
============ ===========
</TABLE>
-47-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Earnings
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $15,219,545 13,067,275 12,118,238
----------- ---------- ----------
Interest and dividends on investment securities
held to maturity:
Taxable 1,047,042 1,455,910 2,172,396
Tax-exempt 99,505 104,492 135,223
----------- ---------- ----------
Total interest and dividends on investment
securities held to maturity 1,146,547 1,560,402 2,307,619
----------- ---------- ----------
Interest and dividends on investment securities
available for sale:
Taxable 2,886,436 2,618,820 1,387,669
Tax-exempt 23,785 15,464 -
----------- ---------- ----------
Total interest and dividends on investment
securities available for sale 2,910,221 2,634,284 1,387,669
----------- ---------- ----------
Interest on federal funds sold 387,773 337,452 345,069
Interest on interest-earning deposits with other banks 81,421 1,550 3,215
----------- ---------- ----------
Total interest income 19,745,507 17,600,963 16,161,810
----------- ---------- ----------
Interest expense:
Interest on deposits 9,553,095 8,684,432 8,058,254
Interest on federal funds purchased 86 11,040 15,635
Interest on securities sold under agreements
to repurchase 127,727 413,650 133,979
Interest on other borrowings 661,592 554,606 649,726
----------- ----------- -----------
Total interest expense 10,342,500 9,663,728 8,857,594
----------- ----------- -----------
Net interest income 9,403,007 7,937,235 7,304,216
Provision for loan losses (note 4) 285,245 80,102 -
----------- ----------- ----------
Net interest income after provision
for loan losses 9,117,762 7,857,133 7,304,216
----------- ----------- ----------
Noninterest income:
Service charges on deposit accounts 865,473 801,124 734,522
Investment securities gains (losses), net (note 3) (59,876) 26,478 37,237
Other (note 14) 1,369,277 1,580,735 1,522,726
----------- ----------- ----------
Total noninterest income 2,174,874 2,408,337 2,294,485
----------- ----------- ----------
Noninterest expense:
Salaries and benefits (note 9) 3,142,740 2,940,791 2,986,511
Net occupancy expense 972,108 816,653 723,916
Other (note 14) 2,269,782 2,249,867 2,708,243
----------- ----------- -----------
Total noninterest expense 6,384,630 6,007,311 6,418,670
----------- ----------- -----------
Earnings before income taxes 4,908,006 4,258,159 3,180,031
Income tax expense (note 8) 1,827,963 1,504,805 1,088,797
----------- ----------- -----------
Net earnings $ 3,080,043 2,753,354 2,091,234
=========== =========== ===========
Basic income per share $ 2.36 2.11 1.61
=========== =========== ===========
Weighted-average shares outstanding 1,305,482 1,304,742 1,301,372
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-48-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common Retrained
Shares stock Surplus earnings
------ ------ ------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 1,250,000 $12,500 2,452,449 16,128,345
Issuance of common stock (69,045 shares) 69,045 690 1,233,039 -
Net earnings - - - 2,091,234
Cash dividends paid ($0.36 per share) - - - (469,669)
Change in net unrealized gain (loss) on mutual funds
and investment securities available for sale - - - -
Payment of Employee Stock Ownership Plan debt - - - -
Purchase of Treasury stock (1,202 shares) - - - -
--------- ------- --------- ----------
Balance at December 31, 1995 1,319,045 13,190 3,685,488 17,749,910
Net earnings - - - 2,753,354
Cash dividends paid ($0.43 per share) - - - (560,284)
Change in net unrealized gain (loss) on mutual funds
and investment securities available for sale - - - -
Payment of Employee Stock Ownership Plan debt - - - -
Sale of Treasury stock (1,111 shares) - - 5,611 -
Purchase of Treasury stock (11,265 shares) - - - -
--------- ------- --------- ----------
Balance at December 31, 1996 1,319,045 13,190 3,691,099 19,942,980
Net earnings - - - 3,080,043
Cash dividends paid ($0.48 per share) - - - (626,562)
Change in net unrealized gain (loss) on mutual funds
and investment securities available for sale - - - -
Payment of Employee Stock Ownership Plan debt - - - -
Sale of Treasury stock (5,488 shares) - - 42,754 -
Purchase of Treasury stock (368 shares) - - - -
--------- ------- --------- ----------
Balance at December 31, 1997 1,319,045 $13,190 3,733,853 22,396,461
========= ======= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
mutual funds Employee
and investment stock
securities ownership Treasury
available for sale plan debt stock Total
------------------ ---------- -------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (348,663) (227,953) (74,994) 17,941,684
Issuance of common stock (69,045 shares) - - - 1,233,729
Net earnings - - - 2,091,234
Cash dividends paid ($0.36 per share) - - - (469,669)
Change in net unrealized gain (loss) on mutual funds
and investment securities available for sale 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 90,775 (170,946) (99,755) 21,268,662
Net earnings - - - 2,753,354
Cash dividends paid ($0.43 per share) - - - (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) - - 16,887 22,498
Purchase of Treasury stock (11,265 shares) - - (221,141) (221,141)
-------- -------- -------- ----------
Balance at December 31, 1996 (146,528) (113,940) (304,009) 23,082,792
Net earnings - - - 3,080,043
Cash dividends paid ($0.48 per share) - - - (626,562)
Change in net unrealized gain (loss) on mutual funds
and investment securities available for sale 321,964 - - 321,964
Payment of Employee Stock Ownership Plan debt - 57,006 - 57,006
Sale of Treasury stock (5,488 shares) - - 98,058 140,812
Purchase of Treasury stock (368 shares) - - (8,648) (8,648)
-------- -------- -------- ----------
Balance at December 31, 1997 175,436 (56,934) (214,599) 26,047,407
======== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-49-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,080,043 2,753,354 2,091,234
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 524,338 519,063 435,302
Net amortization (accretion) of investment
premiums (discounts) (95,906) 46,623 104,234
Provision for loan losses 285,245 80,102 -
Deferred tax (benefit) expense (76,861) 55,231 (27,713)
Loans originated for resale (14,185,691) (13,730,694) (10,391,523)
Proceeds from sale of loans originated for resale 14,184,327 12,480,598 9,938,200
Gain on sale of credit card loan portfolio - - (125,269)
Loss on sale of premises and equipment - - 178,216
Loss on disposal of rental property - - 6,045
Loss (gain) on sale of investment securities 59,876 (26,478) (37,237)
Loss (gain) on sale of other real estate 3,687 - (39,993)
Increase in interest receivable (261,171) (241,612) (72,926)
Writedown on lease with bargain purchase option - - 10,000
(Increase) decrease in other assets (493,632) 332,842 (422,785)
Increase (decrease) in interest payable 129,857 (94,652) 239,913
Increase (decrease) in accrued expenses and
other liabilities 741,983 17,896 (50,775)
------------ ----------- -----------
Net cash provided by operating activities 3,896,095 2,192,273 1,834,923
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 11,288,950 3,871,059 498,750
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 6,908,351 6,668,991 10,923,422
Purchases of investment securities held to maturity (3,325,876) (17,800) (500,000)
Proceeds from maturities/calls/paydowns of
investment securities available for sale 14,699,633 16,102,270 6,143,749
Purchases of investment securities available for sale (21,907,663) (33,557,621) (24,848,140)
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 (24,092,861) (20,078,467) (7,012,292)
Purchases of premises and equipment (504,116) (224,636) (1,896,232)
Proceeds from sale of other real estate 62,012 82,500 680,595
Proceeds from sales of premises and equipment - - 375
Additions to rental property (1,670) (35,745) (68,388)
Proceeds from lease of other real estate - - 4,584
Net (increase) decrease in interest-bearing deposits
with other banks (1,716,628) 756 (408)
------------ ----------- -----------
Net cash used in investing activities $(18,589,868) (27,188,693) (8,202,303)
------------ ----------- -----------
</TABLE>
(Continued)
-50-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits $ 4,231,406 2,915,890 (1,180,109)
Net increase in interest-bearing deposits 3,019,407 28,008,756 21,933,364
Net (decrease) increase in securities sold under
agreements to repurchase (3,379,327) (2,357,264) 2,389,538
Borrowings from FHLB 251,261 5,000,000 -
Repayments to FHLB - (100,000) (11,600,000)
Repayments of other borrowed funds (20,749) (20,800) (18,493)
Net (decrease) increase in other short-term borrowings (1,203,130) 730,935 (261,076)
Proceeds from issuance of common stock - - 1,233,729
Proceeds from sale of treasury stock 140,812 22,498 -
Purchase of treasury stock (8,648) (221,141) (24,761)
Dividends paid (626,562) (560,284) (469,669)
------------ ---------- -----------
Net cash provided by financing activities 2,404,470 33,418,590 12,002,523
------------ ---------- -----------
Net (decrease) increase in cash and
cash equivalents (12,289,303) 8,422,170 5,635,143
Cash and cash equivalents at beginning of year 27,172,715 18,750,545 13,115,402
------------ ---------- -----------
Cash and cash equivalents at end of year $ 14,883,412 27,172,715 18,750,545
============ ========== ===========
Supplemental information on cash payments:
Interest paid $ 10,212,643 9,758,380 8,617,681
============ ========== ===========
Income taxes paid $ 1,596,005 1,239,739 1,147,122
============ ========== ===========
Supplemental information on noncash transactions:
Loans transferred to other real estate $ 129,699 82,500 23,000
============ ========== ===========
Loans to facilitate the sale of other real estate $ 64,000 - 534,186
============ ========== ===========
Change in unrealized gain (loss) on investment securities
available for sale, net of change in deferred tax $ 321,964 (237,303) 439,438
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-51-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
Auburn National Bancorporation, Inc. (the Company) provides a full range
of banking services to individual and corporate customers in Lee County,
Alabama and surrounding counties 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 and state 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.
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.
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.
(Continued)
-52-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its subsidiary, AuburnBank. During the year ended December 31, 1997,
the Company merged its existing subsidiary, ANB Systems, Inc. into the
Company. All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents
----------------
Cash equivalents include amounts due from banks and federal funds sold.
Federal funds are generally sold for one-day periods.
Investment Securities
---------------------
The Company accounts for investment securities under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities whereby investment
securities are classified 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 fair
value. The Company does not have trading account securities. Investment
securities held to maturity are those for which the Company has both the
intent and ability to hold until maturity and are stated at cost adjusted
for amortization of premiums and accretion of discounts. 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.
Accretion of discounts and amortization of premiums are calculated on the
effective interest method over the anticipated life of the security,
taking into consideration prepayment assumptions. Gains and losses from
the sale of investment securities are computed under the specific
identification method.
A decline in the market value of any available for sale or held to
maturity security below cost that is deemed other than temporary results
in a charge to earnings and the establishment of a new cost basis for the
security.
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.
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.
(Continued)
-53-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 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.
(Continued)
-54-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 three 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.
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
------------------
Basic income per share is computed on the weighted-average number of
shares outstanding in accordance with SFAS No. 128, Earnings Per Share.
The Company reserved 75,000 shares of common stock in May 1994 for
issuance under stock option plans; however, no options have been granted
as of December 31, 1997, thus there are no potential common shares that
would result in diluted earnings per share.
(Continued)
-55-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Accounting Pronouncements
-------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. This statement establishes
standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. SFAS
No. 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed in equal prominence with the
other financial statements. The term "comprehensive income" is used in
the statement to describe the total of all components of comprehensive
income including net income. "Other comprehensive income" refers to
revenues, expenses, gains, and losses that are included in comprehensive
income but excluded from earnings under current accounting standards.
Currently, "other comprehensive income" for the Company consists of items
recorded directly in equity under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 130 is effective for
financial statements for both interim and annual periods beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes new
standards for the disclosures made by public business enterprises to
report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No.
131 is effective for financial statements for years beginning after
December 15, 1997. The Company does not have any segments other than
banking that are considered material.
Reclassifications
-----------------
Certain of the 1996 and 1995 amounts have been reclassified to conform to
the 1997 presentation.
(2) Cash and Due from Banks
-----------------------
The Bank is required to maintain certain average cash reserve balances in
accordance with Federal Reserve Board requirements. The amounts of those
required balances as of December 31, 1997 and 1996 were approximately
$1,243,000 and $1,117,000, respectively.
(Continued)
-56-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment Securities
---------------------
The amortized cost and approximate fair value of investment securities at
December 31, 1997, 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 $ 3,216,614 - 71,264 3,145,350
State and political subdivisions 1,478,866 41,216 1,520,082
Mortgage-backed securities 9,469,748 67,907 - 9,537,655
Collateralized mortgage obligations 199,034 - 398 198,636
----------- ------- ------ ----------
$14,364,262 109,123 71,662 14,401,723
=========== ======= ====== ==========
</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 $12,056,107 41,107 - 12,097,214
Mortgage-backed securities 7,957,596 32,576 - 7,990,172
Collateralized mortgage obligations 19,659,759 234,443 33,519 19,860,683
State and political subdivisions 480,000 17,787 - 497,787
----------- ------- ------ ----------
$40,153,462 325,913 33,519 40,445,856
=========== ======= ====== ==========
</TABLE>
(Continued)
-57-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and approximate fair value of investment securities at
December 31, 1997, 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 $ - -
Due after one year through five years 795,578 552,925
Due after five years through ten years 410,000 684,940
Due after ten years 3,489,902 3,427,567
----------- ----------
Subtotal 4,695,480 4,665,432
Mortgage-backed securities 9,469,748 9,537,655
Collateralized mortgage obligations 199,034 198,636
----------- ----------
Total $14,364,262 14,401,723
=========== ==========
</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 9,986,600 10,033,814
Due after five years through ten years 2,549,507 2,561,187
Due after ten years - -
----------- ----------
Subtotal 12,536,107 12,595,001
Mortgage-backed securities 7,957,596 7,990,172
Collateralized mortgage obligations 19,659,759 19,860,683
----------- ----------
Total $40,153,462 40,445,856
=========== ==========
</TABLE>
(Continued)
-58-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
----------- ------- ------- ----------
$17,903,079 154,403 141,014 17,916,468
=========== ======= ======= ==========
</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>
There were no sales of investment securities held to maturity during any
of the years in the three-year period ended December 31, 1997. Proceeds
from sales of investment securities available for sale were $11,288,950,
$3,871,059, and $498,750 for the years ended December 31, 1997, 1996, and
1995, respectively. Gross losses of $59,876 were realized on sales of
investment securities for the year ended December 31, 1997. Gross gains
of $26,478 and $37,237 were realized on sales for the years ended
December 31, 1996 and 1995, respectively.
Investment securities with an aggregate carrying value of $50,086,378 and
$52,721,095 at December 31, 1997 and 1996, 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.
Included in other assets 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. The investment in the
stock is required of every member of the FHLB system. The investment in
the stock was $899,600 and $859,200 at December 31, 1997 and 1996,
respectively.
(Continued)
-59-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Loans
-----
At December 31, 1997 and 1996, the composition of the loan portfolio was
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial, financial, and agricultural $ 46,328,523 39,212,438
Real estate - construction:
Commercial 3,172,382 3,572,030
Residential 3,582,534 3,068,125
Real estate - mortgage:
Commercial 51,713,918 42,827,126
Residential 62,112,576 58,529,443
Consumer installment 18,619,951 14,600,480
------------ -----------
Total loans 185,529,884 161,809,642
Less:
Unearned income (36,706) (91,167)
Allowance for loan losses (2,125,104) (2,093,682)
------------ -----------
Loans, net $183,368,074 159,624,793
============ ===========
</TABLE>
During 1997 and 1996, 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, 1997 and 1996 amounted to $7,072,874 and $8,260,845,
respectively. The change from 1996 to 1997 reflects payments of
$7,613,296 and advances of $6,425,325. 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, 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,093,682 2,012,133 2,099,599
Provision charged to earnings 285,245 80,102 -
Loan recoveries 66,224 174,050 119,521
Loans charged off (320,047) (172,603) (156,419)
Reversal of credit card allowance - - (50,568)
---------- --------- ---------
Balance at end of year $2,125,104 2,093,682 2,012,133
========== ========= =========
</TABLE>
At December 31, 1997 and 1996, the Company had $578,130 and $620,438,
respectively, of impaired loans. Impaired loans at December 31, 1997
include loans of $71,983 that had a related valuation allowance of
$49,450. Impaired loans at December 31, 1996 include loans of $84,248
that had a related valuation allowance of $64,205.
(Continued)
-60-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1996, and 1995, the average
recorded investment in the impaired loans was $593,750, $655,907, and
$1,521,355, respectively. The related amount of interest income
recognized during 1997, 1996, and 1995 amounted to $54,459, $54,258, and
$87,525, respectively.
Nonperforming loans, consisting of loans on nonaccrual status and
accruing loans past due greater than 90 days, amounted to $276,000 and
$219,000 at December 31, 1997 and 1996, respectively. There were no
nonaccrual loans at December 31, 1997. Nonaccrual loans were $73,000 at
December 31, 1996. The impact of nonaccrual loans on interest income for
the years ended December 31, 1997, 1996, and 1995 was not significant.
The Company's loan servicing portfolio consisted of 832 loans with an
outstanding balance of $63,565,693, 730 loans with an outstanding balance
of $53,774,538, and 691 loans with an outstanding balance of $50,630,296,
as of December 31, 1997, 1996, and 1995, respectively.
(5) Premises and Equipment
----------------------
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 407,747 407,747
Buildings 2,713,251 2,713,251
Furniture, fixtures, and equipment 3,961,765 3,549,955
----------- ----------
Total premises and equipment 7,082,763 6,670,953
Less accumulated depreciation (3,562,221) (3,223,854)
----------- ----------
$ 3,520,542 3,447,099
=========== ==========
</TABLE>
(6) Interest-Bearing Deposits
-------------------------
At December 31, 1997 and 1996, the composition of interest-bearing
deposits was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NOW, Super NOW, and Automatic
Transfer Service $ 22,422,519 20,089,382
Money market 50,677,710 42,656,180
Savings 10,217,311 10,257,485
Certificates of deposit under $100,000 71,136,109 74,476,181
Certificates of deposit and other time
deposits of $100,000 and over 36,885,986 40,841,000
------------ -----------
$191,339,635 188,320,228
============ ===========
</TABLE>
(Continued)
-61-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Interest expense on certificates of deposit and other time deposits of
$100,000 and over amounted to approximately $1,972,000, $1,592,000, and
$1,516,000 in 1997, 1996, and 1995, respectively.
(7) Other Short-term Borrowings and Other Borrowed Funds
----------------------------------------------------
Other short-term borrowings and other borrowed funds at December 31, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
Maturity date Interest rate 1997 1996
------------- ------------- ---- ----
<S> <C> <C> <C> <C>
Short-term borrowings:
Treasury tax and
loan (note option) Demand 5.20% $ - 1,203,130
=========== ==========
Other borrowed funds:
Federal Home Loan
Bank borrowings February 2017 6.64 351,261 -
March 2003 5.79 525,000 625,000
January 2001 5.87 5,000,000 5,000,000
May 1998 5.63 5,000,000 5,000,000
Small business
administration debt June 2004 3.00 27,355 32,180
June 2004 5.08 235,234 251,158
----------- ----------
$11,138,850 10,908,338
=========== ==========
</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 $630,494, $498,705,
and $577,847 in 1997, 1996, and 1995, 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.
(8) Income Tax Expense
------------------
Total income tax expense (benefit) for the years ended December 31, 1997,
1996, and 1995 was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations $1,827,963 1,504,805 1,088,797
========== ========= =========
Stockholders' equity, for unrealized
gains (losses) on investment securities
available-for-sale $ 185,461 (131,858) 235,421
========== ========= =========
</TABLE>
(Continued)
-62-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1996, and 1995 the components of
income tax expense were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal $1,733,135 1,314,952 1,045,510
State 171,689 134,622 71,000
---------- --------- ---------
Total 1,904,824 1,449,574 1,116,510
---------- --------- ---------
Deferred income tax expense (benefit):
Federal (68,833) 45,912 (19,004)
State (8,028) 9,319 (8,709)
---------- --------- ---------
Total (76,861) 55,231 (27,713)
---------- --------- ---------
$1,827,963 1,504,805 1,088,797
========== ========= =========
</TABLE>
Total income tax expense differed from the amount computed by applying
the statutory federal income tax rate of 34 percent to pretax earnings as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax expense at statutory rate $1,668,722 1,447,774 1,081,211
Increase (decrease) resulting from:
Tax-exempt interest (49,177) (59,513) (69,680)
State income tax expense net
of federal income tax benefit 108,016 95,001 41,112
Increase (decrease) in valuation allowance
for deferred tax assets 7,956 - (12,640)
Other 92,446 21,543 48,794
---------- --------- ---------
$1,827,963 1,504,805 1,088,797
========== ========= =========
</TABLE>
(Continued)
-63-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for
loan losses $658,913 619,899
Principal amortization for leases being
depreciated for tax 77,487 67,236
Capital loss carryforward 7,956 -
Unrealized loss on investment securities
available for sale - 68,503
Other 17,313 17,840
-------- -------
Total gross deferred tax assets before
valuation allowance 761,669 773,478
Valuation allowance (7,956) -
-------- -------
Total deferred tax assets 753,713 773,478
-------- -------
Deferred tax liabilities:
Accrued dividend income - 27,500
Premises and equipment, principally due
to differences in depreciation 280,058 294,085
Investments, principally due to discount
accretion 109,337 96,403
FHLB stock dividend 21,068 21,068
Prepaid expenses 69,952 61,112
Loans, principally due to differences in
deferred loan fees 42,681 30,257
Unrealized gain on investment securities
available for sale 116,958 -
Other 4,127 24,921
-------- -------
Total deferred tax liabilities 644,181 555,346
-------- -------
Net deferred tax asset $109,532 218,132
======== =======
</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)
-64-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) 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 plan amounted to
$125,870, $121,076, and $122,862 in 1997, 1996, and 1995, 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.
(10) 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, 1997 are as follows:
<TABLE>
<S> <C>
Commitments to extend credit $3,750,000
Standby letters of credit 2,205,000
</TABLE>
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)
-65-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 $35,000,000 at December 31, 1997. The Company estimates its
current credit exposure on the purchased swaps, caps, and floors to be
approximately $117,000 at December 31, 1997. The current credit exposure
of derivatives is represented by the excess of the fair value of
contracts over the respective carrying value for those contracts with a
net 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% and 6.00%, 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 June 1996, the Bank entered into an interest rate swap with respect to
$5,000,000 in two-year six percent certificates of deposit. This
agreement allows the Bank to receive fixed interest payments at 6.37% 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.
In May 1997, the Bank entered into an interest rate swap with respect to
$10,000,000 in two-year 6.25% certificates of deposit. This agreement
allows the Bank to receive fixed interest payments at 6.42% per annum and
to pay a variable rate equal to three-month 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.
(Continued)
-66-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table summarizes information on interest rate swaps and
floors at December 31, 1997:
INTEREST RATE PROTECTION CONTRACTS
<TABLE>
<CAPTION>
Weighted-
Thousands Weighted- average
----------------------------------- average rate remaining
Notional Carrying Estimated ----------------- life
amount value fair value Received Paid (years)
-------- -------- ---------- -------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Swaps:
Receive fixed:
One year or less $ 5,000 - 8 6.37% 5.91 0.50
Over one year through
two years 10,000 - 68 6.42% 5.88 1.25
Floors:
Purchased:
Over two years through
five years 10,000 11 11 - - 2.25
Over two years through
five years 10,000 32 73 6.00% 5.81 2.25
------- -- ---
$35,000 43 160
======= == ===
</TABLE>
All interest rate protection contracts reprice quarterly. The
weighted-average rates received/paid are shown only for swaps and floors
for which net interest amounts were receivable or payable at the end of
each period. For 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 USD-LIBOR rate.
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)
-67-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) 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 nonfinancial 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 quote
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.
(Continued)
-68-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(e) Deposits
--------
As required by SFAS 107, the fair value of deposits with no
stated maturity, such as noninterest-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.
(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, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 16,606 16,606 27,179 27,179
======== ======= ======= =======
Investment securities $ 54,810 54,848 61,930 61,970
======== ======= ======= =======
Loans, net of allowance
for loan losses $183,368 186,582 159,625 163,560
======== ======= ======= =======
Financial liabilities:
Deposits $223,978 223,387 216,727 217,673
======== ======= ======= =======
Short-term borrowings $ 1,274 1,274 5,856 5,856
======== ======= ======= =======
Long-term borrowings $ 11,196 10,999 11,022 11,964
======== ======= ======= =======
Off-balance sheet financial instruments:
Interest rate contracts:
Swaps $ - 76 - 27
Caps and floors 43 84 92 178
-------- ------- ------- ------
$ 43 160 92 205
-------- ------- ------- ------
</TABLE>
(Continued)
-69-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) Common Stock and Capital Requirements
-------------------------------------
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, 1997, that the Company and Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, based on its most recent notification the Bank
is categorized 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. There are no conditions or
events since that notification that management believes have changed the
Bank's capital category.
(Continued)
-70-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The actual capital amounts and ratios and the aforementioned minimums as
of December 31, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum
Minimum to be well
for capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
---------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Auburn National Bancorporation, Inc.
As of December 31, 1997
Total capital (to risk-weighted assets) $27,997 15.22% $14,717 8% N/A N/A
Tier I risk-based capital (to risk-weighted assets) 25,872 14.06 7,359 4 N/A N/A
Tier I leverage capital (to average assets) 25,872 9.80 10,561 4 N/A N/A
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
AuburnBank
As of December 31, 1997
Total capital (to risk-weighted assets) $25,229 13.89% $14,529 8% $ 18,161 10%
Tier I risk-based capital (to risk-weighted assets) 23,104 12.72 7,264 4 10,897 6
Tier I leverage capital (to average assets) 23,104 8.84 10,453 4 13,066 5
As of December 31, 1996
Total capital (to risk-weighted assets) $22,662 14.03% $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
</TABLE>
(13) Dividends from Subsidiary
-------------------------
Dividends paid by the Bank are a principal 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, 1997, the Bank could have
declared dividends of approximately $1,214,394 without prior approval of
regulatory authorities. As a result of this limitation, approximately
$22,065,755 of the Company's investment in the Bank was restricted from
transfer in the form of dividends.
(14) 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, 1997,
included merchant discounts and fees on MasterCard and Visa sales of
$310,416, $293,004, and $241,254 in 1997, 1996, and 1995, respectively;
and, gain on sale of mortgage loans of $76,747, $68,433, and $76,559 in
1997, 1996, and 1995, respectively. Also included were servicing fees of
$166,538, $163,820, and $169,376 in 1997, 1996, and 1995, respectively;
and, rental income of $138,618, $161,510, and $175,056 in 1997, 1996, and
1995, respectively.
(Continued)
-71-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Components of other noninterest expense exceeding one percent of revenues
for any of the years in the three-year period ended December 31, 1997,
included FDIC insurance expense of $26,315, $2,000, and $191,942 in 1997,
1996, and 1995, respectively; and, professional fees of $155,635,
$225,036, and $214,248 in 1997, 1996, and 1995, respectively. Also
included were marketing expenses of $221,504, $191,553, and $188,040 in
1997, 1996, and 1995, respectively; rental property expenses of $239,192,
$236,206, and $211,123 in 1997, 1996, and 1995, respectively; and,
MasterCard and Visa processing fees of $254,863, $231,432, and $216,891
in 1997, 1996, and 1995, respectively.
(15) 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, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 474,460 43,300
Investment securities 693,221 747,775
Investment in subsidiaries:
Bank 23,280,149 20,528,398
Nonbank - 1,423
----------- ----------
Total investment in subsidiaries 23,280,149 20,529,821
Premises and equipment, net 68,194 55,096
Rental property 1,807,359 1,899,354
Other assets 154,238 296,675
----------- ----------
Total assets $26,477,621 23,572,021
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Other borrowed funds $ 262,589 283,338
Accrued expenses and other liabilities 110,691 91,951
Employee Stock Ownership Plan debt 56,934 113,940
----------- ----------
Total liabilities 430,214 489,229
----------- ----------
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, 1997 and 1996 13,190 13,190
Surplus 3,733,853 3,691,099
Retained earnings 22,396,461 19,942,980
Unrealized gain (loss) on mutual funds and investment
securities available for sale, net of taxes 175,436 (146,528)
Less:
Employee Stock Ownership Plan debt (56,934) (113,940)
Treasury stock, 10,854 shares and 15,974 shares in
1997 and 1996, respectively, at cost (214,599) (304,009)
----------- ----------
Total stockholders' equity 26,047,407 23,082,792
----------- ----------
Total liabilities and stockholders' equity $26,477,621 23,572,021
=========== ----------
</TABLE>
(Continued)
-72-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Parent Company Only
Condensed Statements of Earnings
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income:
Cash dividends from bank subsidiary $ 697,000 265,000 -
Property dividend from bank subsidiary - - 234,692
Interest on interest-earning deposits - 7,306 26,854
Interest on investment securities held to maturity:
Taxable 3,822 3,453 4,442
Tax-exempt 37,765 43,258 22,021
---------- --------- ---------
Total interest on investment securities
held to maturity 41,587 46,711 26,463
---------- --------- ---------
Other income 612,970 819,286 685,429
---------- --------- ---------
Total income 1,351,557 1,138,303 973,438
---------- --------- ---------
Expense:
Interest on borrowed funds 22,450 26,197 28,863
Net occupancy expense 24,218 25,368 49,814
Salaries and benefits 357,186 322,750 321,051
Other 331,948 369,930 367,015
---------- --------- ---------
Total expense 735,802 744,245 766,743
---------- --------- ---------
Earnings before income tax expense
(benefit) and equity in undistributed
earnings (loss) of subsidiaries 615,755 394,058 206,695
Applicable income tax expense (benefit) (35,924) 10,917 (30,344)
---------- --------- ---------
Earnings before equity in undistributed
earnings (loss) of subsidiaries 651,679 383,141 237,039
Equity in undistributed earnings (loss) of subsidiaries:
Bank 2,429,787 2,370,686 1,854,789
Other (1,423) (473) (594)
---------- --------- ---------
Net earnings $3,080,043 2,753,354 2,091,234
========== ========= =========
</TABLE>
(Continued)
-73-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Parent Company Only
Condensed Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,080,043 2,753,354 2,091,234
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 116,919 124,980 136,977
Amortization of premium on investment
securities held to maturity - 391 1,287
Property dividend from bank subsidiary - - (234,692)
Net undistributed earnings of subsidiaries (2,428,364) (2,370,213) (1,854,195)
Decrease (increase) in other assets 142,437 (191,004) 101,323
Increase (decrease) in other liabilities 18,740 17,929 (58,651)
----------- --------- ---------
Net cash provided by operating
activities 929,775 335,437 183,283
----------- --------- ---------
Cash flows from investing activities:
Proceeds from paydowns of investment
securities held to maturity 9,554 11,155 13,245
Proceeds from calls of investment securities
held to maturity 45,000 95,000 50,000
Purchase of investment securities held to maturity - - (500,000)
Purchase of premises and equipment (83,488) - (13,133)
Proceeds from sale of premises and equipment 47,444 11,554 -
Purchase of rental property (1,978) (35,746) (68,388)
----------- --------- ---------
Net cash provided by (used in)
investing activities 16,532 81,963 (518,276)
----------- --------- ---------
Cash flows from financing activities:
Decrease in other borrowed funds (20,749) (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 140,812 22,498 -
Purchase of treasury stock (8,648) (221,141) (24,761)
Dividends paid (626,562) (560,284) (469,669)
----------- --------- ---------
Net cash (used in) provided by
financing activities (515,147) (779,727) 722,629
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 431,160 (362,327) 387,636
Cash and cash equivalents at beginning of year 43,300 405,627 17,991
----------- --------- ---------
Cash and cash equivalents at end of year $ 474,460 43,300 405,627
=========== ========= =========
</TABLE>
(Continued)
-74-
<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 26th day of March,
1998.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ E.L. SPENCER, JR. President, CEO and March 26, 1998
---------------------------------- Director
E.L. Spencer, Jr.
/s/ LINDA D. FUCCI Chief Financial Officer March 26, 1998
---------------------------------- and Chief Accounting
Linda D. Fucci Officer
/s/ WINIFRED H. BOYD Director March 26, 1998
----------------------------------
Winifred H. Boyd
/s/ ANNE M. MAY Director March 26, 1998
----------------------------------
Anne M. May
/s/ EMIL F. WRIGHT, JR. Director March 26, 1998
----------------------------------
Emil F. Wright, Jr.
</TABLE>
-75-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- -------- ----------- -------------
<S> <C> <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. * -
21. Subsidiaries of Registrant 77
23. Consent of Accountants 78
27. Financial Data Schedule 79
</TABLE>
- ----------------------
* Incorporated by reference from Registrant's Registration Statement on
Form SB-2 (File No. 33-86180).
-76-
<PAGE>
AUBURN NATIONAL BANCORPORATION INC. AND SUBSIDIARIES
EXHIBIT 21 - SUBSIDIARIES
AuburnBank
-77-
<PAGE>
AUBURN NATIONAL BANCORPORATION INC AND SUBSIDIARIES
EXHIBIT 23 - CONSENT OF ACCOUNTANTS
The Board of Directors
Auburn National Bancorporation, Inc.
We consent to the incorporation by reference in the registration statement (No.
333-03516) on Form S-3 of Auburn National Bancorporation, Inc. of our report
dated February 17, 1998, relating to the consolidated balance sheets of Auburn
National Bancorporation, Inc. and subsidiary as of December 31, 1997 and 1996,
and the related statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-KSB of the Auburn
National Bancorporation, Inc.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 30, 1998
-78-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-KSB
FOR DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,268
<INT-BEARING-DEPOSITS> 1,723
<FED-FUNDS-SOLD> 2,615
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,446
<INVESTMENTS-CARRYING> 14,364
<INVESTMENTS-MARKET> 14,402
<LOANS> 185,493
<ALLOWANCE> 2,125
<TOTAL-ASSETS> 264,734
<DEPOSITS> 223,978
<SHORT-TERM> 1,274
<LIABILITIES-OTHER> 2,239
<LONG-TERM> 11,196
0
0
<COMMON> 13
<OTHER-SE> 26,034
<TOTAL-LIABILITIES-AND-EQUITY> 264,734
<INTEREST-LOAN> 15,220
<INTEREST-INVEST> 4,057
<INTEREST-OTHER> 469
<INTEREST-TOTAL> 19,746
<INTEREST-DEPOSIT> 9,553
<INTEREST-EXPENSE> 10,343
<INTEREST-INCOME-NET> 9,403
<LOAN-LOSSES> 285
<SECURITIES-GAINS> (60)
<EXPENSE-OTHER> 6,385
<INCOME-PRETAX> 4,908
<INCOME-PRE-EXTRAORDINARY> 4,908
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,080
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.36
<YIELD-ACTUAL> 3.90
<LOANS-NON> 0
<LOANS-PAST> 276
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,681
<ALLOWANCE-OPEN> 2,094
<CHARGE-OFFS> 320
<RECOVERIES> 66
<ALLOWANCE-CLOSE> 2,125
<ALLOWANCE-DOMESTIC> 2,125
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
