<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File No. 0-26486
Auburn National Bancorporation, Inc.
(Exact name of registrant as specified 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
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value, $.01 Per Share
(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-K 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-K or any
amendment to this Form 10-K. [ x ]
The aggregate market value of the common stock held by non-affiliates of
registrant as of February 29, 2000 computed by reference to the price at which
the stock was sold as of such date, was $36,213,800.
As of February 29, 2000, there were issued and outstanding 3,924,573 shares of
the registrant's $.01 par value common stock.
Documents Incorporated by Reference
-----------------------------------
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 9, 2000 are incorporated by reference into Part
III.
<PAGE>
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made herein under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report are forward-looking statements for purposes of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21A of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and as such may involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Such forward-looking statements include statements using the words
such as "may," "will," "anticipate," "should," "would," "believe," "assessment,"
"contemplate," "expect," "estimate," "continue," "intend" or similar words and
expressions of the future. Our actual results may differ significantly from the
results we discuss in these forward-looking statements.
These forward-looking statements involve risks and uncertainties and
may not be realized due to a variety of factors, including, without limitation:
the effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and other interest-sensitive assets and
liabilities; 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, regionally,
nationally, and internationally, together with such competitors offering banking
products and services by mail, telephone, computer and Internet; and the failure
of assumptions underlying the establishment of reserves for possible loan
losses. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
ITEM 1. BUSINESS
Auburn National Bancorporation, Inc. ("the Company") is a bank holding
company registered with the Board of Governors of the Federal Reserve System
(the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). The Company was incorporated in Delaware in 1990, and in 1994
it succeeded its Alabama predecessor as the bank holding company controlling
AuburnBank, an Alabama state member bank with its principal office in Auburn,
Alabama (the "Bank"). The Company and its predecessor have controlled the Bank
since 1984. As a bank holding company, the Company facilitates the Bank's
ability to serve its customers' requirements for financial services. The holding
company structure permits diversification by the Company into a broader range of
financial services and other business activities than currently are permitted to
the Bank under applicable law. The holding company structure also provides
greater financial and operating flexibility than is presently permitted to the
Bank.
The 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.
-2-
<PAGE>
General
The Company's business is conducted primarily through the Bank. The Bank's
business consists of (i) accepting demand, savings, and time deposits; (ii)
making loans to consumers, businesses, and other institutions; (iii) investments
in 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, transaction deposit accounts 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. The Bank is one of the largest
providers of automated teller services in East Alabama with 15 locations. The
Bank's Tiger Teller ATM cards can be used internationally through the Cirrus(R)
network. In 1998, the Bank began offering VISA Checkcards, which are debit cards
with the VISA logo that work like checks but can be used anywhere VISA is
accepted, including ATMs. In 1999, the Bank launched its web page on the World
Wide Web. In conjunction with the web page, the Bank began offering on-line
banking and bill payment services.
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. Since September 29, 1995, any bank
holding company located outside Alabama may presently acquire any bank based in
Alabama or generally, any other state, subject to certain deposit-percentage,
aging requirements, and other restrictions. Alabama has also opted to the
provisions of the Interstate Banking Act which permits national and
state-chartered banks to branch interstate through acquisitions of banks in
other states. See "SUPERVISION AND REGULATION."
Selected Economic Data
The Bank's 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 100,900. The 1996 per capita
-3-
<PAGE>
income in Lee County was $17,236, which ranked it 32nd in the state.
Unemployment has been relatively low in Lee County, and during 1999, the County
had average unemployment of 2.2%, which is the 3rd lowest unemployment rate in
Alabama.
Approximately 71% of the land in Lee County is devoted to agriculture,
with 91% comprised of forests. An estimated 10% is urban or developed. Timber
and timber products, greenhouses and horticulture, beef cattle, and cotton are
the major agricultural products. Principal manufactured products in the
Company's PSA include 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 & Stratton.
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, 1999, the Company had 2 full-time equivalent employees,
both of which are officers, and the Bank had 113 full-time equivalent employees,
including 25 officers.
Statistical Information
Certain statistical information (as required by Guide 3) is included in
response to Item 7 of this Annual Report on Form 10-K. Certain statistical
information is included in response to Item 6 and Item 8 of the Annual Report on
Form 10-K.
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 status or regulations
applicable to the Company's and the Bank's business. Supervision, regulation,
and examination of the Company and the Bank and their respective subsidiaries by
the bank regulatory agencies are intended primarily for the protection of
depositors rather than holders of Company capital stock. Any change in
applicable law or regulation may have a material effect on the Company's
business.
-4-
<PAGE>
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 Company's 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 subsidiary. 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.
In November 1999, Congress enacted the German-Leach-Bliley Act ("GLB
Act"), which made substantial revisions to the statutory restrictions separating
banking activities from certain other financial activities. Under the GLB Act,
bank holding companies that are well-capitalized and well-managed and meet
certain other conditions can elect to become "financial holding companies." As
such, they and their subsidiaries are permitted to acquire or engage in
previously impermissible activities such as insurance underwriting, securities
underwriting and distribution, travel agency activities, broad insurance agency
activities, merchant banking, and other activities that the Federal Reserve
determines to be financial in nature or complementary thereto. Financial holding
companies continue to be subject to the overall oversight and supervision of the
Federal Reserve, but the GLB Act applies the concept of functional regulation to
the activities conducted by subsidiaries. For example, insurance activities
would be subject to supervision and regulation by state insurance authorities.
While the Company does not currently intend to become a financial holding
company in order to exercise the broader activity powers provided by GLB Act, it
may elect to do so in the future.
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. The Company and the Bank are subject to Section 23A of the
Federal Reserve Act. Section 23A 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 subsidiary
are prohibited from purchasing low-quality assets from the bank's affiliates.
Finally, Section 23A requires that all of a bank's extensions of credit to an
affiliate be appropriately secured by acceptable collateral, generally United
States government or agency securities. The Company and the Bank also are
subject to Section 23B of the Federal Reserve Act, which generally limits
covered and other transactions among affiliates to terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the bank or its subsidiary as prevailing at the time for
transactions with unaffiliated companies.
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
subsidiary in situations where additional investments in a troubled bank may not
otherwise be warranted. In addition, 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 ("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 subsidiary in the form of capital notes or other
-5-
<PAGE>
instruments which qualify as capital under regulatory rules. However, any loans
from the holding company to such subsidiary banks likely will be unsecured and
subordinated to such bank's depositors and perhaps to other creditors of the
bank.
Bank and Bank Subsidiary Regulation
The Bank is subject to supervision, regulation, and examination by the
Federal Reserve and the Alabama Superintendent of Banks, which monitor all areas
of the operations of the Bank, including reserves, loans, mortgages, issuances
of securities, payment of dividends, establishment of branches, capital
adequacy, and compliance with laws. The Bank is a member of the FDIC 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").
The Federal Reserve has 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
UFIRS, each financial institution is assigned a confidential composite "CAMELS"
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, Liquidity and Sensitivity to market risk.
For most institutions, the FFIEC has indicated that market risk primarily
reflects exposures to changes in interest rates. When regulators evaluate this
component, consideration is expected to be given to: management's ability to
identify, measure, monitor, and control market risk; the institution's size; the
nature and complexity of its activities and its risk profile, and the adequacy
of its capital and earnings in relation to its level of market risk exposure.
Market risk is rated based upon, but not limited to, an assessment of the
sensitivity of the financial institution's earnings or the economic value of its
capital to adverse changes in interest rates, foreign exchange rates, commodity
prices, or equity prices; management's ability to identify, measure, monitor and
control exposure to market risk; and the nature and complexity of interest rate
risk exposure arising from nontrading positions.
The GLB Act requires the Banks and their affiliated companies to adopt
and disclose policies regarding the sharing of personal information it obtains
from its customers with third parties. The GLB Act also permits the Banks to
engage in "financial activities" through subsidiaries similar to that permitted
financial holding companies.
Community Reinvestment Act
The Company and the Bank are subject to the provisions of the Community
Reinvestment Act of 1977, as amended (the "CRA"), and the federal banking
agencies' regulations thereunder. Under the CRA, all banks and thrifts have a
continuing and affirmative obligation, consistent with their safe and sound
operation to help meet the credit needs for their entire communities, including
low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires a depository institution's primary federal regulator, in
connection with its examination of the institution, to assess the institution's
record of assessing and meeting the credit needs of the community served by that
institution, including low- and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to:
(i) charter a national bank; (ii) obtain deposit insurance coverage for a
newly-chartered institution; (iii) establish a new branch office that accepts
deposits; (iv) relocate an office; or (v)
-6-
<PAGE>
merge or consolidate with, or acquire the assets or assume the liabilities of,
a federally regulated financial institution. In the case of a bank holding
company applying for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company, and such records may be the
basis for denying the application. A less than satisfactory CRA rating will
slow, if not preclude expansion of banking activities. The Bank had a CRA rating
of satisfactory as of December 31, 1999.
Current CRA regulations rate institutions based on their actual
performance in meeting community credit needs. CRA performance is evaluated by
the Federal Reserve, the Bank's primary federal regulator using a lending test,
an investment test, and a service test. The Federal Reserve also will consider:
(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 Bank is also subject to, among other things, the provisions of the
Equal Credit Opportunity Act (the "ECOA") and the Fair Housing Act (the "FHA"),
both of which prohibit discrimination based on race or color, religion, national
origin, sex, and familial status in any aspect of a consumer or commercial
credit or residential real estate transaction. In April 1994, the Department of
Housing and Urban Development, the Department of Justice (the "DJ"), and the
federal banking agencies issued an Interagency Policy Statement on
Discrimination in Lending in order to provide guidance to financial institutions
in determining whether discrimination exists, how the agencies will respond to
lending discrimination, and what steps lenders might take to prevent
discriminatory lending practices. The DJ has also increased its efforts to
prosecute what it regards as violations of the ECOA and FHA.
Payment of Dividends
The Company is a legal entity separate and distinct from the Bank. 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 1999, the Bank paid cash dividends of $855,000 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 also have indicated that financial depository institutions should
generally pay dividends only out of current operating earnings.
Capital
The Federal Reserve has risk-based capital guidelines for bank holding
companies and state member banks, respectively. These guidelines require a
minimum ratio of capital to risk-weighted assets (including certain
off-balance-sheet activities, such as standby letters of credit) of 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 and certain core
deposit intangibles ("Tier 1 capital"). The remainder may consist of
non-qualifying preferred stock, qualifying subordinated, perpetual, and/or
mandatory convertible debt, term subordinated debt and intermediate term
preferred stock, up to 45% of pretax unrealized holding gains on available for
sale equity securities with readily determinable
-7-
<PAGE>
market values that are prudently valued, and a limited amount of any loan loss
allowance ("Tier 2 capital" and, together with Tier 1 capital, "Total Capital").
In addition, the federal regulatory agencies have established minimum
leverage ratio guidelines for bank holding companies and state member banks,
which provide for a minimum leverage ratio of Tier 1 capital to adjusted average
quarterly assets ("leverage ratio") equal to 3%, plus an additional cushion of
1.0% - 2.0%, 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. Higher capital may be required in individual cases and depending upon a
bank holding company's risk profile. All bank holding companies and banks are
expected to hold capital commensurate with the level and nature of their risks
including the volume and severity of their problem loans. Lastly, 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 1991
("FDICIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" regarding 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.
All of the federal banking agencies have adopted regulations
establishing relevant capital measures and relevant capital levels. The relevant
capital measures are the Total Capital ratio, Tier 1 capital ratio, and the
leverage ratio. Under the regulations, a state member bank will be (i) well
capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 capital
ratio of 6% or greater, and is not subject to any written agreement, order,
capital directive, or prompt corrective action directive by a federal bank
regulatory agency to meet and maintain a specific capital level for any capital
measure, (ii) adequately capitalized if it has a Total Capital ratio of 8% or
greater, a Tier 1 capital ratio of 4% or greater, and a leverage ratio of 4% or
greater (3% in certain circumstances), (iii) undercapitalized if it has a Total
Capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% (3% in
certain circumstances), or (iv) critically undercapitalized if its tangible
equity is equal to or less than 2% of average quarterly tangible assets.
As of December 31, 1999, the consolidated capital ratios of the Company
and the Bank were as follows:
Regulatory
Minimum Company Bank
------- ------- ----
Tier 1 risk-based capital ratio 4.0% 11.28% 10.59%
Total risk-based capital ratio 8.0% 12.53% 11.84%
Tier 1 leverage ratio 3.0-5.0% 8.02% 7.52%
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
-8-
<PAGE>
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. 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. 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 have had any material impact on the
Company and the Bank or their respective operations.
FDICIA
FDICIA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth composition, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares, and such other standards as the federal
regulatory agencies deem appropriate.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Bank, including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, and a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not well capitalized or are adequately capitalized and have not received a
waiver from the FDIC.
Enforcement Policies and Actions
The Federal Reserve and the Superintendent monitor compliance with laws
and regulations. Violations of laws and regulations, or other unsafe and unsound
practices, may result in these agencies imposing fines or penalties, cease and
desist orders, or taking other enforcement actions. Under certain circumstances,
these agencies may enforce these remedies directly against officers, directors,
employees and others participating in the affairs of a bank or bank holding
company.
Depositor Preference
The Omnibus Budget Reconciliation Act of 1993 provides that deposits
and certain claims for administrative expenses and employee compensation against
an insured depository institution would be afforded a priority over other
general unsecured claims against such an institution in the "liquidation or
other resolution" of such an institution by any receiver.
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 and the Bank are 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
-9-
<PAGE>
reserve requirements on deposits. The nature and timing of any changes in such
policies and their effect on the Company and the Bank cannot be predicted.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments. The Bank's
deposits are insured by the FDIC's Bank Insurance Fund ("BIF"), and it has no
deposit insured by the Savings Association Insurance Fund ("SAIF"). Beginning in
1996, the FDIC has applied a new risk-based premium schedule which decreased the
assessment rates for BIF depository institutions. Under this schedule, the
annual premiums range from zero to $.27 for every $100 of deposits. 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, through the
earlier of its merger of BIF and SAIF on December 31, 1999. The FICO assessments
are set quarterly, and for BIF in 1999 ranged from 1.16 to 1.22 basis points.
The FICO assessment rates for both BIF and SAIF for the first quarter of 2000
are 2.12 basis points.
Each financial institution is assigned to one of three capital groups -
well capitalized, adequately capitalized or undercapitalized - and further
assigned to one of three subgroups within a capital group, on the basis of
supervisory evaluations by the institution's primary federal and, if applicable,
state regulators and other information relevant to the institution's financial
condition and the risk posed to the applicable insurance fund. The actual
assessment rate applicable to a particular institution will, therefore, depend
in part upon the risk assessment classification so assigned to the institution
by the FDIC. During the three years ended December 31, 1999, the Bank paid $0,
respectively, in BIF deposit insurance premiums, and paid approximately $28,000
and $27,000 in FICO assessments during 1999 and 1998, respectively.
Legislative and Regulatory Changes
Various legislative and regulatory proposals regarding changes in
banking, and the regulation of banks, thrifts 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. The
FDIC changed, effective April 1, 2000, its deposit insurance assessments to more
timely reflect changes in risk, and is engaged in a comprehensive review of its
insurance premiums and how to better measure and price deposit insurance in
light of an insured bank's size and risk. 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. Various federal oversight authorities are also reviewing the capital
adequacy and riskiness of government sponsored enterprises such as Fannie Mae
and Freddie Mac. Changes from such review could affect the cost and availability
of Fannie Mae and Freddie Mac Services.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank conducts its business from its main office and five 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.
-10-
<PAGE>
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 opened April 3, 1997, at the Winn Dixie
supermarket in the Tiger Crossing Shopping Center on the south side of Auburn,
Alabama. The Bank has 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
deposit and other services, except loans and safe deposit boxes.
The Bank's Wal-Mart branch was opened August 19, 1998 in the Wal-Mart
shopping center in Phenix City, Alabama, about 20 miles south of Auburn,
Alabama. The Bank has a five-year lease agreement for approximately 600 square
feet of space in the Wal-Mart. This branch offers the full line of the Bank's
deposit and other services, except loans and safe deposit boxes.
The Bank's Hurtsboro branch was opened June 28, 1999. This branch is
located in Hurtsboro, Alabama, about 40 miles south of Auburn, Alabama, in a
1,000 square foot building. This branch was built in 1999 and is owned by the
Bank. 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 8
vehicles, including a handicapped ramp.
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.
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.
The Bank also owns a two-story building located directly behind the main
office. The first floor of this building is leased to unaffiliated 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 63.2% of this building is available for
rent by third-party tenants. The Bank occupies approximately 5,300 square feet,
which includes a portion of the basement level used for storage and office space
used to house certain bank functions. The Bank pays rent to the Company based on
current market rates for such space.
In 1994, the Bank acquired a piece of commercial real estate located in
Auburn on U.S. Highway 29. This property, which was acquired in satisfaction of
debt previously contracted, was formerly used by a floor covering business and
contained approximately 6,045 square feet of office, showroom, and warehouse
space. The Bank subsequently removed an underground storage tank ("UST")
containing petroleum products from the site. In March 1995, the Alabama
Department of Environmental Management ("ADEM") requested that the Bank submit a
Secondary Investigation Plan ("Secondary Investigation") as a result of
underground soil and water contamination
-11-
<PAGE>
of petroleum-based hydrocarbon products. The Secondary Investigation was
completed and submitted to ADEM by Roy F. 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. In
1999, Weston installed a passive waste removal system to remove petroleum-based
hydrocarbon products from the groundwater test well. Quarterly groundwater
monitoring will continue in 2000 as required by ADEM. Samples from the eight (8)
existing monitoring wells will be collected and analyzed by Weston. 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 2000 will
be approximately $13,000 (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.
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, 1999.
-12-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq SmallCap Market,
under the symbol "AUBN". As of February 29, 2000, there were approximately
3,924,573 shares of the Company's Common Stock issued and outstanding, which
were held by approximately 450 shareholders of record. The following table sets
forth, for the indicated periods, the high and low closing sale prices for the
Company's Common Stock as reported on the Nasdaq SmallCap Market.
Closing Cash
Price Dividends
Per Share (1)(2) Declared (2)
----------------------- ---------------
High Low
---- ---
1999
First Quarter $ 18.00 $ 14.00 $ 0.06
Second Quarter 18.50 15.94 0.06
Third Quarter 17.50 12.38 0.10
Fourth Quarter 15.75 12.75 0.10
1998
First Quarter 19.67 $ 12.77 $ 0.04
Second Quarter 24.00 18.17 0.05
Third Quarter 29.25 17.94 0.05
Fourth Quarter 17.50 15.88 0.05
---------------
(1) The price information represents actual transactions.
(2) The price information for the first quarter of 1998 is restated to
reflect the Company's three for one stock split in the form of a
dividend in June 1998.
On May 12, 1998, the Company's Board of Directors approved a three for one
stock split effected in the form of a dividend payable on June 25, 1998 to
shareholders of record on June 10, 1998. All share and per share information in
the accompanying financial statements has been restated to reflect the effect of
the additional shares outstanding resulting from the stock split. Common stock
and surplus have been restated also to reflect the stock split retroactively.
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. SELECTED FINANCIAL DATA
13
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings
- --------
Net Interest Income $ 12,128 $ 10,531 $ 9,507 $ 7,937 $ 7,304
Provision for Loan Losses 2,506 891 285 80 --
Net Income 2,922 3,439 3,080 2,753 2,091
Per Share: (1)
Net Income 0.74 0.88 0.79 0.70 0.54
Cash Dividend 0.32 0.19 0.16 0.14 0.12
Book Value 7.25 7.37 6.64 5.90 5.40
Issued 3,957,135 3,957,135 3,957,135 3,957,135 3,957,135
Weighted Average Outstanding 3,924,573 3,924,573 3,916,446 3,914,226 3,914,226
<CAPTION>
(1) Restated to reflect the three for one stock split in the form of a 6/28/98 dividend.
Financial Condition
- -------------------
<S> <C> <C> <C> <C> <C>
Total Assets 377,518 307,874 264,029 258,055 222,197
Loans (Net of Unearned Income) 260,606 218,687 185,493 161,718 140,471
Investment Securities 77,867 71,680 54,810 61,930 55,401
Total Deposits 294,722 233,505 223,978 216,727 185,803
Long Term Debt 46,861 31,000 11,138 10,908 6,029
Shareholders' Equity 28,442 28,943 26,047 23,083 21,269
Selected Ratios
- ---------------
Return on Average Total Assets 0.85% 1.22% 1.20% 1.18% 0.98%
Return on Average Total Equity 9.86% 12.26% 12.61% 12.58% 10.51%
Average Stockholders' Equity to
Average Assets 8.62% 9.91% 9.48% 9.36% 9.30%
Reserve For Loans As a % Of Loans
(Net of Unearned Income) 1.45% 1.28% 1.15% 1.29% 1.43%
Loans (Net of Unearned Income)
To Total Deposits 88.42% 93.65% 82.82% 74.62% 75.60%
</TABLE>
14
<PAGE>
ITEM 7. 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, 1999, 1998 and 1997. This discussion and analysis
is intended to supplement and highlight information contained in the
accompanying consolidated financial statements and the selected financial data
presented elsewhere herein.
Summary
Net earnings decreased $517,000 (15.0%) to $2,922,000 during 1999 from
$3,439,000 for the year ended December 31, 1998. Basic income per share was
$0.74 and $0.88 for 1999 and 1998, respectively, a decrease of 15.9%.
Comparatively, net earnings during 1998 increased $359,000 (11.7%) from the 1997
total of $3,080,000, while basic income per share showed a similar increase of
$0.09 per share for 1998 from a 1997 per share total of $0.79. The decrease in
net earnings for 1999 is mainly attributable to an increase in provision for
loan losses. The increase in 1998 was due to higher levels of net interest
income, and noninterest income offset by higher noninterest expense compared to
1997. See "FINANCIAL CONDITION -- CAPITAL RESOURCES" and the "CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES" tables.
Total assets at December 31, 1999 and 1998 were $377,518,000 and
$307,874,000, reflecting growth of $69,644,000 (22.6%). The Company's growth
during 1999 resulted primarily from the growth in loans and cash and cash
equivalents. Deposits grew $61,217,000 (26.2%) from $233,505,000 at year-end
1998 to $294,722,000 at year-end 1999. See "FINANCIAL CONDITION-DEPOSITS AND
LOANS AND LIQUIDITY."
Financial Condition
Investment Securities
Investment securities held to maturity were $10,068,000 and $8,094,000
at December 31, 1999 and 1998, respectively. This increase of $1,974,000 (24.4%)
in 1999 resulted from a large increase in U.S. government agency securities that
offset decreases in state and political subdivisions and mortgage-backed
securities. The investment securities available for sale portfolio was
$67,799,000 and $63,586,000 at December 31, 1999 and 1998, respectively. This
increase of $4,213,000 (6.6%) reflects purchases of mortgage-backed securities.
In addition, proceeds from held-to-maturity securities that were called or
matured during 1999 were shifted by management to available for sale securities
to maintain flexibility in its liquidity planning. See "-- 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.
15
<PAGE>
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,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. government agency $ 4,508 -- 3,216
State and political subdivisions 731 1,585 1,479
Mortgage-backed securities 4,829 6,509 9,470
Collateralized mortgage obligations -- -- 199
----------- ---------- ----------
Total investment securities
held to maturity $ 10,068 8,094 14,364
=========== ========== ==========
The following table indicates the fair value of the portfolio of
investment securities available for sale at the end of the last three years:
<CAPTION>
Fair Value
December 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Investment Securities Available for Sale:
U.S. government agency $ 17,871 17,340 12,097
State and political subdivisions 845 883 498
Mortgage-backed securities 20,138 17,711 7,990
Collateralized mortgage obligations 25,945 27,652 19,861
Commercial paper 3,000 -- --
----------- ---------- ----------
Total investment securities
available for sale $ 67,799 63,586 40,446
=========== ========== ==========
</TABLE>
At December 31, 1999, the Bank owned CMOs with a total amortized cost
of $27,377,000. All of the CMOs are rated AAA. The CMOs are all backed by
federal agency guaranteed mortgages, except for one issue in the amount of
$26,000 which is a privately issued mortgage pass-through certificate. Fair
values for the private placement CMOs were estimated based on fair values for
similar instruments.
The MBS portfolio's total amortized cost of $25,676,000 at December 31,
1999, is a mixture of fixed rate mortgages, adjustable rate mortgages ("ARMs"),
and securities 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 tables present the maturities and weighted average yields
of investment securities at
16
<PAGE>
December 31, 1999:
<TABLE>
<CAPTION>
Maturities of Held-to-Maturity
Investment Securities
Amortized Cost
----------------------------------------------------------
After one After After
Within through five ten
one year five through years
years ten years
------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
(In thousands)
U.S. government agency $ -- -- -- 4,508
State and political subdivisions -- -- 320 411
Mortgage-backed securities 88 4,415 326 --
------------ ----------- ----------- --------
Total investment securities
held to maturity $ 88 4,415 646 4,919
============ =========== =========== ========
<CAPTION>
Weighted Average Yields of Held-to-Maturity
Investment Securities
<C> <C> <C> <C>
U.S. government agency -- % -- % -- % 7.99
State and political subdivisions (1) -- % -- % 7.83 % 6.89
Mortgage-backed securities 5.98 % 6.49 % 6.26 % --
Total weighted average yield 5.98 % 6.49 % 7.04 % 7.97
(1) Weighted average yields have not been computed on a tax-equivalent basis.
<CAPTION>
Maturities of Available for Sale
Investment Securities
Amortized Cost
-----------------------------------------------------------
After one After five After
Within through through ten years
one year five years ten years
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
(In thousands)
U.S. government agency $ -- 1,999 16,801 --
State and political subdivisions -- 594 250 --
Mortgage-backed securities -- 6,091 14,756 --
Collateralized mortgage obligations -- 6,814 19,605 958
Commercial paper 2,987 -- -- --
------------ ----------- ----------- --------
Total investment securities
available for sale $ 2,987 15,498 51,412 958
============ =========== =========== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Weighted Average Yields of Available for Sale
Investment Securities
----------------------------------------------------------
After one After five After
Within through through ten
one year five years ten years years
------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
U.S. government agency -- % 5.63 % 6.27 % --
State and political subdivisions (1) -- % 6.46 % 7.42 % --
Mortgage-backed securities -- % 6.68 % 6.43 % --
Collateralized mortgage obligations -- % 6.20 % 6.42 % 8.96
Commercial paper 5.95 % -- % -- % --
Total weighted average yield 5.95 % 6.32 % 6.38 % 8.96
</TABLE>
(1) Weighted average yields have not been computed on a tax-equivalent basis.
Loans
Total loans, net of unearned income, were $260,606,000 at December 31,
1999, an increase of $41,919,000 (19.2%), over total loans, net of unearned
income, of $218,687,000 at December 31, 1998. The primary growth during 1999
occurred in the commercial, financial and agricultural, real estate construction
and real estate mortgage loan areas. The commercial, financial and agricultural
portfolio increased $16,161,000 (26.5%) to $77,236,000 at December 31, 1999
compared to $61,075,000 at December 31, 1998. The increase was due primarily to
increased demand for commercial credits. Commercial, financial and agricultural
loans represented 29.6% and 27.9% of the total loans at December 31, 1999 and
1998, respectively.
The real estate mortgage loan component of the loan portfolio increased
$15,823,000 (12.6%) to $141,272,000 at December 31, 1999, over the 1998 balance
of $125,449,000 and represented 54.2% of the total loan portfolio at December
31, 1999, as compared to 57.4% at December 31, 1998. This growth in real estate
mortgage loans was attributable to the increase in commercial real estate
mortgages of $14,170,000 (23.2%) combined with an increase in residential real
estate mortgage loans of $1,653,000 (2.6%), reflecting lower rates to borrowers
and strong demand in the Bank's market for those products.
In addition to originating mortgage loans for its own portfolio, the
Company also 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 Bank retaining 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 1999, the Bank sold mortgage loans
totaling approximately $16,803,000, to FNMA, with the Bank retaining the
servicing, and sold mortgage loans, totaling approximately $2,486,000, to the
mortgage servicing company, with servicing released. At December 31, 1999, the
Bank was servicing loans totaling approximately $70,284,000. 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."
18
<PAGE>
The following table presents the composition of the loan portfolio by
major categories at the end of the last five years:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 77,236 61,075 46,329 39,213 35,800
Real estate - construction:
Commercial 16,591 8,112 3,172 3,572 945
Residential 5,653 4,544 3,583 3,068 2,323
Real estate - mortgage:
Commercial 75,284 61,113 51,714 42,827 33,593
Residential 65,988 64,335 62,112 58,530 54,384
Consumer installment 19,862 19,523 18,620 14,600 13,583
---------- ---------- ---------- ---------- ----------
Total loans $ 260,614 218,702 185,530 161,810 140,628
Less:
Unearned income (7) (15) (37) (91) (157)
Allowance for loan losses (3,775) (2,808) (2,125) (2,094) (2,012)
---------- ---------- ---------- ---------- ----------
Loans, net $ 256,832 215,879 183,368 159,625 138,459
========== ========== ========== ========== ==========
</TABLE>
The following table presents maturities by major loan classifications
and the sensitivity of loans to changes in interest rates within each maturity
category at December 31, 1999:
<TABLE>
<CAPTION>
Maturities of Loan Portfolio
----------------------------------------------------------
After one After
Within through five
one year five years through Total
ten years
------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Commercial, financial and agricultural $ 39,678 30,970 6,588 77,236
Real estate - construction 18,016 1,134 3,094 22,244
Real estate - mortgage 10,112 20,705 110,455 141,272
Consumer installment 8,459 10,590 813 19,862
------------ ----------- ---------- ----------
Total loans 76,265 63,399 120,950 260,614
============ =========== ========== ==========
Variable-rate loans 25,738 15,358 88,814 129,910
Fixed-rate loans 50,527 48,041 32,136 130,704
------------ ----------- ---------- ----------
Total loans $ 76,265 63,399 120,950 260,614
============ =========== ========== ==========
</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
19
<PAGE>
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. Thereafter, 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 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 possibility 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 Director's 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
Director's Loan Committee as to loan charge-offs on a monthly basis.
The allowance for loan losses represents management's assessment of the
risk associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for loan losses and the appropriate provision required to
maintain a level considered adequate to absorb anticipated loan losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
the Bank's loan loss experience, the amount of past due and nonperforming loans,
specific known risk, the status and amount of nonperforming assets, underlying
collateral values securing loans, current and anticipated economic conditions
and other factors which affect the allowance for 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 Director's Loan Committee on a monthly 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 of Banks 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 loans
for 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.
20
<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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,808 2,125 2,094 2,012 2,100
Provision for loan losses 2,506 891 285 80 --
Charge-offs:
Commercial, financial, and agricultural 1,018 42 146 64 43
Real estate 277 -- 1 1 1
Consumer 336 272 173 108 113
--- --- --- --- ---
Total charge-offs 1,631 314 320 173 157
Recoveries:
Commercial, financial and agricultural 5 7 15 100 4
Real estate 1 2 3 5 28
Consumer 86 97 48 70 88
-- -- -- -- --
Total recoveries 92 106 66 175 120
-- --- -- --- ---
Net charge-offs (recoveries) 1,539 208 254 (2) 37
Other adjustments (1) -- -- -- -- (51)
-- -- -- -- ----
Balance at end of period $ 3,775 2,808 2,125 2,094 2,012
===== ===== ===== ===== =====
Ratio of allowance for loan losses to loans
outstanding, net of unearned income 1.45% 1.28% 1.15% 1.29% 1.43%
Ratio of allowance for loan losses
to nonaccrual loans, renegotiated loans,
and other nonperforming assets 57.34% 61.14% -- 1,957.01% 1,468.61%
Ratio of net charge-offs (recoveries) to
Average loans outstanding, net of
Unearned income 0.63% 0.10% 0.15% (0.001)% 0.03%
</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 the first six months of 1999, the Bank recorded $332,000 in
provision for loan losses based on internal reviews, growth in the loan
portfolio and other components of its normal allowance methodology. During
Summer 1999, the Bank was examined by the Federal Reserve, which criticized a
number of loans and credits held by the Bank. As a result of such examination
and deterioration of certain credits, the Bank increased its allowance for loan
losses by an additional $932,000. The Bank's regulators required the Bank to
review its loan portfolio and improve its loan and credit policies and credit
practices. As a result, the Bank has been engaged in vigorous review of its loan
approval and credit grading processes and had identified additional potential
problem loans that had not been previously identified; such that the potential
problem loans were approximately $10,798,000 at December 31, 1999. Since Summer
1999, the Bank has sought to better price its loan consistent with its cost of
funds and its assessment of potential credit risk, along with general increase
in interest rates which has had the effect of slowing the Bank's loan growth.
The Bank's more rigorous internal reviews and changes in its credit practices,
may result in additions to the allowance for loan losses, and the identification
of additional potential problem loans.
During 1999, the Company had loan charge-offs totaling $1,631,000 and
recoveries of $92,000, as compared to $314,000 in charge-offs and recoveries of
$106,000 in the prior year. Such deterioration primarily related to several
large commercial loans in various industries which were identified as problem
credits in the reviews and examinations as discussed above. Management believes
that the $3,775,000 in allowance for loan losses at December 31, 1999 (1.45% of
total outstanding loans, net of unearned income), is adequate to absorb known
risks in the portfolio at such date. 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. The decrease in the ratio of
the allowance for loan losses to nonperforming assets between year-end 1998 and
year-end 1999 was primarily due to an increase in nonaccrual loans offset by an
increase in provision for loan losses. The increase in charge-offs for
commercial, financial, and agricultural is primarily due to a charge-off of one
large credit of $800,000 resulting from this credit filing for bankruptcy.
Management's assessment of the credit quality of the loan portfolio during 1998
indicated deterioration of a $4.098 million commercial credit such that
management's estimate of the necessary level of the allowance increased. This
entire
21
<PAGE>
credit has been classified as impaired and included in nonaccrual loans since
July 1998. The relationship continues to be monitored as part of the Bank's
overall credit administration procedures.
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
determination of the specific and potential loss allowance for certain loans
classified as problem credits and uses a three-year historical loss factor to
determine the loss allocation for the remainder of the 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 factors, subject to certain minimums, for Level II problem loans
are applied to the total Level II loans in determining the allocation. Level III
is the 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. 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 Company's consolidated financial condition or the results of operation.
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,
1999, the Company had approximately $5,177,000 of impaired loans, which included
loans to two borrowers with a total valuation allowance of approximately
$345,000. In comparison, at December 31, 1998, the Company had approximately
$4,098,000 of impaired loans, which included three loans to the same borrower
with a total valuation allowance of approximately $564,000.
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 accruing loans that are past due 90 days or
more.
Nonperforming assets were $6,853,000, $4,897,000, and $276,000 at
December 31, 1999, 1998, and 1997, respectively. These levels represent an
increase of $1,956,000 (39.9%) for the year ended December 31, 1999, and an
increase of $4,621,000 (1674.3%) for the year ended December 31, 1998. The
increase in 1999 was due to a deterioration in certain loans determined by a
recent analysis and loan reviews performed during a normal independent loan
review and recent regulatory examination. The increase in 1998 was primarily due
to the $4.078 million commercial loan relationship that is classified as
impaired.
22
<PAGE>
An analysis of the components of nonperforming assets at the end of the
last five years is presented in the following table:
<TABLE>
<CAPTION>
Nonperforming Assets
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans $ 6,075 4,593 -- 107 73
Renegotiated loans -- -- -- -- --
Other nonperforming assets (primarily
other real estate) 509 -- -- -- 64
Accruing loans 90 days or more past due 269 304 276 112 133
--- --- --- --- ---
Total nonperforming assets $ 6,853 4,897 276 219 270
===== ===== === === ===
Nonaccrual loans and renegotiated loans
as a % of total loans, net of unearned income 2.33% 2.10% -- 0.07% 0.05%
Nonaccrual loans, renegotiated loans and
other nonperforming assets as a percentage of
total loans, net of unearned income 2.53% 2.10% -- 0.07% 0.10%
Nonperforming assets as a percentage of
total loans, net of unearned income 2.63% 2.24% 0.15% 0.14% 0.19%
</TABLE>
If nonaccrual loans had performed in accordance with their original
contractual terms, interest income would have increased approximately $428,000,
$183,000, and $0 for the years ended December 31, 1999, 1998 and 1997
respectively. The amount of interest income earned and collected on nonaccrual
loans which is included in net income was $27,000 for 1999, $33,000 for 1998 and
$0 for 1997.
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, 1999, the Company had identified 92 loans
totaling approximately $10,798,000 or 4.1% of total loans, net of unearned
income which were considered potential problem loans. At December 31, 1998, the
Company had identified 77 loans totaling approximately $2,654,000 or 1.2% of
total loans, net of unearned income which were considered potential problem
loans. Such loans have been considered in the determination of the Level II
allowance previously discussed. The increase in 1999 was due to a deterioration
in certain loans determined by a recent analysis and loan reviews performed
during a normal independent loan review and recent regulatory examination.
Deposits
Total deposits increased $61,217,000 (26.2%) to $294,722,000 at
December 31, 1999, as compared to $233,505,000 at December 31, 1998.
Noninterest-bearing deposits were $38,868,000 and $34,724,000 while total
interest-bearing deposits were $255,854,000 and $198,781,000 at December 31,
1999 and 1998, respectively. This 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 and fund its loan growth.
In addition, the increase in
23
<PAGE>
MMDAs is due to a $19 million increase in public funds. The increase in
certificates of deposit and other time deposits of $100,000 and over is due to a
$16 million increase in brokered certificates of deposit. At December 31, 1999,
as a percentage of total deposits, noninterest-bearing accounts comprised
approximately 13.2%, while MMDAs, NOWs and regular savings made up approximately
35.5%, certificates of deposit under $100,000 comprised approximately 24.6%, and
certificates of deposit and other time deposits of $100,000 or more comprised
26.7%. At December 31, 1998, as a percentage of total deposits,
noninterest-bearing accounts comprised approximately 14.9%, while MMDAs, NOWs
and regular savings made up approximately 31.9%, certificates of deposit under
$100,000 comprised approximately 31.0%, and certificates of deposit and other
time deposits of $100,000 or more comprised 22.2%.
The composition of total deposits for the last three years is presented
in the following table:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
% 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 $ 38,868 11.93% 34,724 6.39% 32,638 14.89%
Interest bearing deposits:
NOWs 33,987 57.30% 21,606 (3.64)% 22,423 11.62%
MMDAs 59,219 40.09% 42,271 (16.59)% 50,678 18.81%
Savings 11,493 9.08% 10,536 3.12% 10,217 (0.39)%
Certificates of deposit
under $100,000 72,517 0.13% 72,425 1.81% 71,136 (4.49)%
Certificates of deposit
and other time deposits of
$100,000 and over 78,638 51.39% 51,943 40.82% 36,886 (9.68)%
------ ------ ------ ------ ------- -------
Total interest bearing deposits 255,854 28.71% 198,781 3.89% 191,340 16.04%
------- ------ ------- ----- ------- ------
Total deposits $ 294,722 26.22% 233,505 4.25% 223,978 3.35%
======= ====== ======= ===== ======= =====
</TABLE>
The average balances outstanding and the average rates paid for certain
categories of deposits at the end of the last three years are disclosed in the
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" table
immediately following:
24
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC. & SUBSIDIARIES
Consolidated Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- -----------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
========== ======= ======== ==== ======= ======== ====
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (1) $ 243,938 20,393 8.36% 200,230 17,468 8.72%
Investment securities:
Taxable 70,842 4,551 6.42% 59,450 3,787 6.37%
Tax-exempt (2) 1,515 112 7.40% 1,875 164 8.75%
----------------------- ----------------------
Total investment securities 72,357 4,663 6.44% 61,325 3,951 6.44%
Federal funds sold 6,796 347 5.11% 4,200 236 5.62%
Interest-earnings deposits with other banks 1,940 113 5.82% 1,589 120 7.55%
----------------------- ----------------------
Total interest-earning assets 325,031 25,516 7.85% 267,344 21,775 8.14%
Allowance for loan losses (3,093) (2,437)
Cash and due from banks 9,833 7,997
Premises and equipment 3,482 3,481
Rental property, net 1,727 1,795
Other assets 6,729 4,863
---------- ----------
Total assets $ 343,709 283,043
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
======================================
Interest-bearing liabilities:
Deposits:
Demand $ 26,795 658 2.46% 20,646 428 2.07%
Savings and money market 69,787 2,958 4.24% 58,461 2,531 4.33%
Certificates of deposits less than $100,000 70,934 4,118 5.81% 71,616 4,411 6.16%
Certificates of deposits and other time
deposits of $100,000 or more 62,700 3,147 5.02% 42,685 2,187 5.12%
----------------------- ----------------------
Total interest-bearing deposits 230,216 10,881 4.73% 193,408 9,557 4.94%
Federal funds purchased and securities sold under
agreements to repurchase 6,832 336 4.92% 4,554 226 4.96%
Other short term borrowings 0 0 0.00% 0 0 0.00%
Other borrowed funds 39,236 2,132 5.43% 24,935 1,402 5.62%
Employee stock ownership plan debt 0 0 0.00% 57 4 6.92%
----------------------- ----------------------
Total interest-bearing liabilities 276,284 13,349 4.83% 222,954 11,189 5.02%
Noninterest-bearing deposits 35,417 30,292
Accrued expenses and other liabilities 2,371 1,737
Stockholders' equity 29,637 28,060
---------- ----------
Total liabilities and stockholders' equity $ 343,709 283,043
========== ==========
Net interest income $12,167 10,586
============= ============
Net yield on total interest-earning assets 3.74% 3.96%
========= =========
<CAPTION>
Twelve Months Ended December 31,
------------------------------------
1997
------------------------------------
Average Yield/
ASSETS Balance Interest Rate
================================= ======= ======== ====
<S> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (1) 172,742 15,323 8.87%
Investment securities:
Taxable 59,829 3,933 6.57%
Tax-exempt (2) 2,031 188 9.26%
----------------------
Total investment securities 61,860 4,121 6.66%
Federal funds sold 6,778 388 5.72%
Interest-earnings deposits with other banks 1,446 81 5.60%
----------------------
Total interest-earning assets 242,826 19,913 8.20%
Allowance for loan losses (2,151)
Cash and due from banks 7,652
Premises and equipment 3,597
Rental property, net 1,859
Other assets 3,879
----------
Total assets 257,662
==========
LIABILITIES & STOCKHOLDERS' EQUITY
======================================
Interest-bearing liabilities:
Deposits:
Demand 20,143 426 2.11%
Savings and money market 59,098 2,660 4.50%
Certificates of deposits less than $100,000 71,933 4,495 6.25%
Certificates of deposits and other time
deposits of $100,000 or more 37,808 1,952 5.16%
----------------------
Total interest-bearing deposits 188,982 9,533 5.04%
Federal funds purchased and securities sold under
agreements to repurchase 2,868 148 5.16%
Other short term borrowings 94 9 9.57%
Other borrowed funds 11,160 645 5.78%
Employee stock ownership plan debt 113 8 6.98%
----------------------
Total interest-bearing liabilities 203,217 10,343 5.09%
Noninterest-bearing deposits 27,941
Accrued expenses and other liabilities 2,070
Stockholders' equity 24,434
----------
Total liabilities and stockholders' equity 257,662
==========
Net interest income 9,570
============
Net yield on total interest-earning assets 3.94%
==========
</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, 1999
<TABLE>
<CAPTION>
Maturities of Time Deposits over $100,000
December 31, 1999
-----------------
(In thousands)
<S> <C>
Three months or less............................. $ 28,680
After three within six months.................... 25,193
After six within twelve months................... 7,163
After twelve months.............................. 17,602
------
Total........................................ $ 78,638
=========
Weighted Average rate on time deposits
of $100,000 or more at period-end............ 5.86%
</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>
1999 $13,548 $6,832 4.92% $8,866 5.30%
1998 12,944 4,554 4.96% 12,944 4.99%
1997 8,516 2,962 5.30% 1,274 5.29%
</TABLE>
(1) Consists of federal funds purchased; treasury, tax and loan deposits;
securities sold under agreements to repurchase.
Capital Resources
The Company's consolidated stockholders' equity was $28,442,000 and
$28,943,000 at December 31, 1999 and 1998, respectively, a decrease of $501,000
(1.7%) since year-end 1998. The decrease in stockholders' equity for 1999 is due
to an increase in cash dividends paid combined with the decrease in the
accumulated other comprehensive income due to unrealized loss on mutual funds
and investment securities available for sale offset by net income for 1999. The
Company has funded its capital growth primarily through retained earnings since
its early 1995 sale of common stock that raised approximately $1,234,000 of net
proceeds to the Company.
On May 12, 1998, the Company's Board of Directors approved a
three-for-one stock split effected in the form of a dividend payable on June 25,
1998 to shareholders of record on June 10, 1998. All share and per share
information in the accompanying financial statements has been restated to
reflect the effect of the additional shares outstanding resulting from the stock
split. Common stock and surplus have been restated also to reflect the stock
split retroactively.
During 1999, cash dividends of $1,256,000 or $0.32 per share, were
declared on the Common Stock as compared to $759,000, or $0.19 per share, in
1998, representing an increase of $497,000 (65.5%). 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; however, the Company is dependent on dividends from the Bank
as discussed subsequently. 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
-26-
<PAGE>
depositor and investor confidence in the institution. See "SUPERVISION AND
Regulation."
Certain financial ratios for the Company for the last three years are
presented in the following table:
Equity and Asset Ratios
December 31,
1999 1998 1997
---- ---- ----
Return on average assets 0.85% 1.22% 1.20%
Return on average equity 9.86% 12.26% 12.61%
Common dividend payout ratio 43.24% 21.59% 20.25%
Average equity to average asset ratio 8.62% 9.91% 9.48%
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, 1999, 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, 1999:
<TABLE>
<CAPTION>
Actual Required
Capital Actual Capital Required
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 Risk-Based Capital $ 28,228 10.59% $ 10,659 greater than or equal to 4%
Leverage Capital 28,228 7.52% 15,015 greater than or equal to 4%
Total Qualifying Capital 31,564 11.84% 21,318 greater than or equal to 8%
</TABLE>
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133" (Statement 137).
Statement 133 is effective for financial statements for the first fiscal quarter
of fiscal years beginning after June 15, 2000. The Company can not predict
whether the provisions of Statement 133 as amended by Statement 137 will have a
significant impact on its financial statements upon adoption.
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,
-27-
<PAGE>
such balances may be influenced by changes in the banking industry, interest
rates available on other investments, general economic conditions, competition
and other factors. The Bank has participated in the FHLB-Atlanta's advance
program to obtain funding for its growth. Advances include both fixed and
variable terms and are taken out with varying maturities. The Bank has a current
line of credit of $50,000,000. This line is collateralized by a blanket lien
against its one to four family residential mortgage loans. At December 31, 1999,
the Bank had credit available from FHLB-Atlanta of $3,360,000, and had
$46,640,000 in advances drawn down.
Overall, net cash provided from financing activities increased
$28,444,000 (70.6%) to $68,744,000 during 1999 from the previous year's total of
$40,300,000. Net cash provided by operating activities decreased $1,782,000
(56.1%) to $1,392,000 from $3,174,000 for the year ended December 31, 1999.
$52,244,000 of cash was used in investing activities during 1999.
The Company depends mainly on dividends, management fees and lease
payments from the Bank, for its liquidity. 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, also giving consideration to regulatory
restrictions. Accordingly, the Bank paid the Company $855,000, $385,000, and
$697,000 in cash dividends for 1999, 1998, and 1997 respectively. The Company
provides services to the Bank for which it is paid a management fee comparable
to a third-party vendor. The Bank paid the Company $354,000 and $314,000 in
management fees and $188,000 and $187,000 in lease payments for the years ended
December 31, 1999 and 1998, respectively. These funds were used to pay operating
expenses and fund dividends to the Company's shareholders. 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.
The Bank's liquidity, especially its loan to deposit ratio was
criticized by the Bank's regulators in Summer 1999. The Bank has reduced its
loan to deposit ratio from 91.58% at June 30, 1999 to 88.42% at December 31,
1999. Since Summer 1999, the Bank has been more carefully monitoring its
liquidity, and has sought to better price its loans consistent with its costs of
funds and the Bank's assessment of potential credit risk. This has slowed and is
expected to continue to slow the Bank's loan growth and related loan revenues.
Year 2000
The Company has been aware of the issues associated with the
programming code in existing computer systems relative to the Year 2000 issue.
The Company conducted a comprehensive review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and developed a plan
to resolve the mission critical modifications necessary in order to be prepared
for the new millennium. The Company reviewed both information technology (IT)
systems and non-IT systems. All mission critical systems were upgraded, as
needed, and tested. The Company received certification of Year 2000 compliance
from their critical vendors used in the major operations of the Company. As of
February 29, 2000 there have not been any significant disruptions relative to
the Year 2000 issue. The Bank continues to monitor the effects on third parties,
including its borrowers.
The total cost of the Year 2000 project was $137,000, which was
expensed in 1999 and 1998. The Company currently has in place a disaster
recovery plan. A business resumption plan and a remediation plan have been
developed based upon certain circumstances. The Bank has continued to monitor
borrower status and requested copies of the status of loan customers' Year 2000
plan and examined all large loan customers for potential impacts on the
customer's creditworthiness.
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, 1999, would increase approximately 2.32% in a rising rate
environment and decrease approximately
-28-
<PAGE>
2.61% 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. Certificates of deposits are spread according to their contractual
maturity. Investment securities and loans reflect either the contractual
maturity, call date, repricing date, or in the case of mortgage related
products, a market prepayment assumption.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
Over Five
One to Four to One to Years and
Three Twelve Five Non-rate
December 31, 1999 Immediate Months Months Years Sensitive Total
--------- ------ ------ ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned $ -- 89,179 53,318 99,724 18,385 260,606
Taxable investment securities -- -- -- 1,455 8,293 9,748
Tax-exempt investment securities -- -- -- -- 320 320
Investment securities available
for sale -- 5,689 12,028 17,171 32,911 67,799
Federal funds sold and securities
purchased under agreements to
resell 15,710 -- -- -- -- 15,710
Interest earning deposits with
other banks 1,270 -- -- -- -- 1,270
------- -------- ------- ------- ------- -------
Total earning assets 16,980 94,868 65,346 118,350 59,909 355,453
------- -------- ------- ------- ------- -------
Interest bearing liabilities:
Demand deposits -- 12,989 -- -- 20,998 33,987
Savings and Money Market -- 59,218 -- -- 11,494 70,712
Certificates of deposit less than
$100,000 -- 27,383 22,814 22,319 1 72,517
Certificates of deposit and other
time deposits of $100,000 or more -- 22,558 25,852 20,228 10,000 78,638
Federal funds purchased and securities
sold under agreements to repurchase -- 5,866 -- -- -- 5,866
FHLB and other borrowings -- 3,012 36 10,223 33,590 46,861
------- -------- ------- ------- ------- -------
Total interest bearing liabilities -- 131,026 48,702 52,770 76,083 308,581
Interest sensitivity gap 16,980 (36,158) 16,644 65,580 (16,174) 46,872
------- -------- ------- ------- ------- =======
Cumulative interest sensitivity gap $ 16,980 (19,178) (2,534) 63,046 46,872
======= ========= ======== ======= =======
</TABLE>
The interest sensitive assets at December 31, 1999, that reprice or
mature within 12 months were $177,194,000 while the interest sensitive
liabilities that reprice or mature within the same time frame were $179,728,000.
At December 31, 1999, the 12 month cumulative GAP position, was a negative
$2,534, resulting in a GAP ratio of 99%. This negative GAP indicates that the
Company has more interest-bearing liabilities than interest-earning assets 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
-29-
<PAGE>
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.
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 static; 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, 1999:
<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:
Over one year through two years 10,000 -- (140) 5.44% 6.08% 1.25
Over two years through five years 5,000 -- (243) 5.68% 6.17% 3.25
Over five years through ten years 5,000 -- (150) 7.25% 6.12% 8.75
Over ten years 5,000 -- (144) 7.75% 6.13% 13.75
Floors
Purchased
One year or less 10,000 1 -- -- -- 0.25
One year or less 10,000 2 -- 6.00% -- 0.25
---------- - --
$ 45,000 $ 3 $(677)
========== ==== ======
</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 rate.
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. See "Results of
Operations - Net Interest Income."
-30-
<PAGE>
Interest rate swaps, floors 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 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.
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 effect 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 volume of such activities and the income from the sale of residential
mortgage loans in the secondary market.
Results of Operations
Net Income
Net income decreased $517,000 (15.0%) to $2,922,000 during 1999 from
$3,439,000 for the year ended December 31, 1998. Basic income per share was
$0.74 and $0.88 for 1999 and 1998, respectively, a decrease of 15.9%.
Comparatively, net income during 1998 increased $359,000 (11.7%) from the 1997
total of $3,080,000, while basic income per share showed a similar increase of
$0.09 per share for 1998 from a 1997 per share total of $0.79.
The decrease in net income for 1999 is attributable to higher provision
for loan losses and noninterest expense offset by a higher net interest income
and noninterest income. The increase in net income for 1998 was attributable to
higher net interest income and noninterest income offset by a higher noninterest
expense.
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 $12,128,000 for the
-31-
<PAGE>
year ended December 31, 1999. This increase of $1,597,000 (15.2%) over 1998 is
due to the increase in average interest earning assets during 1999 offset by a
decrease in the net yield on total interest earning assets of 22 basis points to
3.74%.
Net interest income for 1998 was $10,531,000, $1,024,000 (10.8%) higher
than 1997 net interest income of $9,507,000. This increase over 1997 was due to
the increase in average interest earning assets during 1998 and an increase in
the net yield on total interest earning assets of 2 basis points to 3.96%.
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 $131,000, $93,000 and $43,000 during 1999, 1998 and 1997,
respectively. 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/
1999 Compared to 1998 change Rate Volume Volume
------ ---- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Earning Assets:
</TABLE>
-32-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Loans, net of unearned income $ 2,925 (729) 3,813 (159)
Investment securities:
Taxable 764 32 726 6
Tax-exempt (52) (25) (32) 5
---- ---- ---- -
Total investment securities 712 7 694 11
Federal funds sold 111 (22) 146 (13)
Interest earning deposits with other banks (7) (27) 26 (6)
--- ---- -- ---
Total earning assets $ 3,741 (771) 4,679 (167)
===== ===== ===== =====
Interest bearing liabilities:
Deposits:
Demand $ 230 79 127 24
Savings and money market 427 (53) 490 (10)
Certificates of deposit less than $100,000 (293) (253) (42) 2
Certificates of deposit and other time
deposits of $100,000 or more 960 (45) 1,026 (21)
--- ---- ----- ----
Total interest bearing deposits 1,324 (272) 1,601 (5)
Federal funds purchased and securities sold
under agreements to repurchase 110 (2) 113 (1)
Other borrowed funds 726 (48) 801 (27)
--- ---- --- ----
Total interest bearing liabilities $ 2,160 (322) 2,515 (33)
===== ===== ===== ====
</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 are calculated by
multiplying the change in volume by the change in rate.
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis
Taxable-Equivalent Basis (1)(2) Change Due to
Years Ended December 31, Net Rate/
1998 Compared to 1997 Change Rate Volume volume
------ ---- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income $ 2,145 (253) 2,438 (40)
</TABLE>
-33-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Investment securities:
Taxable (146) (122) (25) 1
Tax-exempt (24) (10) (15) 1
---- ---- ---- -
Total investment securities (170) (132) (40) 2
Federal funds sold (152) (7) (148) 3
Interest earning deposits with other banks 39 28 8 3
-- -- - -
Total earning assets $ 1,862 (364) 2,258 (32)
===== ===== ===== ====
Interest bearing liabilities:
Deposits:
Demand $ 2 (8) 10 0
Savings and money market (129) (101) (29) 1
Certificates of deposit less than $100,000 (84) (64) (20) -
Certificates of deposit and other time
deposits of $100,000 or more 235 (15) 252 (2)
--- ---- --- ---
Total interest bearing deposits 24 (188) 213 (1)
Federal funds purchased and securities sold
under agreements to repurchase 78 (6) 87 (3)
Other short term borrowings (9) - - (9)
Other borrowed funds 753 (19) 795 (23)
--- ---- --- ----
Total interest bearing liabilities $ 846 (213) 1,095 (36)
=== ===== ===== ====
</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 are calculated by
multiplying the change in volume by the change in rate.
Interest Income
Interest income is a function of the volume of interest-earning
assets and their related yields. Interest income was $25,477,000,
$21,720,000, and $19,849,000 for the years ended December 31, 1999, 1998,
and 1997, respectively. Average interest-earning assets increased
$57,687,000 (21.6%) during 1999, $24,518,000 (10.0%) during 1998, and
$22,521,000 (10.2%) during 1997, while the fully taxable equivalent yields
on average earning assets decreased 29 basis points in 1999 after
decreasing 6 basis points in 1998 and increasing 18 basis points in 1997.
The combination of these factors resulted in increases in interest income
of $3,757,000 (17.3%), $1,871,000 (9.4%) and $2,248,000 (12.8%) during
1999, 1998, and 1997, respectively. See "--CONSOLIDATED AVERAGE BALANCES,
INTEREST INCOME/EXPENSE AND YIELDS/RATES" and THE "RATE/VOLUME VARIANCE
ANALYSIS" tables.
Loans are the main component of the Bank's earning assets.
Interest and fees on loans were $20,392,000, $17,468,000, and $15,323,000
for the years ended December 31, 1999, 1998, and 1997, respectively. These
levels reflected increases of $2,924,000 (16.7%) during 1999, $2,145,000
(14.0%) during 1998, and $2,256,000 (17.3%) during 1997 due to increases in
the average volume outstanding on loans over the past three years. While
the level of average balances has grown to $243,938,000 in 1999 from
$200,230,000 and $172,742,000 for 1998 and 1997, respectively, the fully
taxable equivalent yield on loans decreased 36 basis points to 8.36% in
1999, and decreased 15 basis points to 8.72% in 1998 from the 1997 average
yield of 8.87%.
Interest income on investment securities increased $729,000
(18.7%) to $4,625,000 in 1999, following
-34-
<PAGE>
a decrease of $161,000 (4.0%) to $3,896,000 in 1998 and a decrease of
$138,000 (3.3%) to $4,057,000 in 1997. The 1999 increase was due to a
$11,032,000 increase in average volume outstanding and a comparable fully
taxable equivalent yield compared to 1998 levels. The 1998 decrease was due
to the combination of a $535,000 decrease in average volume outstanding and
a 22 basis point decrease in the fully taxable equivalent yield over 1997
levels. The fully taxable equivalent yields on investment securities were
6.44% in 1999, 6.44% in 1998, and 6.66% in 1997. See "FINANCIAL
CONDITION--INVESTMENT SECURITIES."
Interest Expense
Total interest expense was $13,349,000, $11,189,000 and
$10,343,000 for the years ended December 31, 1999, 1998, and 1997
respectively, representing increases of $2,160,000 (19.3%), $846,000 (8.2%)
and $679,000 (7.0%) during 1999, 1998, and 1997, respectively. Total
average balances outstanding of interest-bearing liabilities have continued
an upward trend over the last three years to $276,284,000 in 1999 from
$222,954,000 in 1998 and $203,217,000 in 1997. The rates paid on these
liabilities decreased 19 basis points in 1999 to 4.83% after decreasing 7
basis points to 5.02% during 1998, and decreasing 16 basis points to 5.09%
during 1997.
Interest on deposits, the primary component of total interest
expense, increased $1,324,000 to $10,881,000 (13.9%) during 1999 from
$9,557,000 in 1998, which in turn represents a $24,000 (0.3%) increase from
the 1997 level of $9,533,000. The average balance outstanding of
interest-bearing deposits has increased steadily to the 1999 level of
$230,216,000 as compared to $193,408,000 in 1998 and $188,982,000 in 1997.
The 1998 increase is mainly attributable to growth in certificates of
deposit over $100,000 accounts in the normal course of business. The
average rates paid on interest-bearing deposits were 4.73%, 4.94%, and
5.04% for 1999, 1998, and 1997, respectively.
Interest expense on borrowed funds was $2,132,000 in 1999,
$1,406,000 in 1998, and $662,000 in 1997. These levels represent an
increase of $726,000 (51.6%) during 1999, an increase of $744,000 (112.4%)
during 1998, and an increase of $107,000 (19.3%) during 1997. The increase
in 1999 is primarily due to increases in FHLB advances of $15,882,000
compared to 1998.
Provision for Loan Losses
During 1999, the Company made a total provision for loan losses of
$2,506,000 based on management's assessment of the risk in the loan
portfolio, the growth of the loan portfolio and historical loan loss
trends, and an evaluation of certain significant problem loans. This
provision was taken primarily as a result of a deterioration in certain
loans determined by recent analyses and loan reviews performed during a
normal independent loan review and a recent regulatory examination. In
addition, the level of monthly provision has increased during 1999 due to
loan growth. During 1998 and 1997, the Company made total provisions for
loan losses of $891,000 and $285,000, respectively. See "FINANCIAL
CONDITION -- ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS."
Noninterest Income
Noninterest income increased $519,000 (20.9%) to $2,998,000 for
the year ended December 31, 1999, from the 1998 total of $2,479,000, which
in turn represented an increase of $408,000 (19.7%) from the total of
$2,071,000 for 1997.
Service charges on deposit accounts increased $186,000 (19.0%)
during 1999 and $113,000 (13.1%) in 1998 both primarily due to increases in
nonsufficient funds and overdraft charges mainly due to an increase in the
number of items.
Other noninterest income increased $346,000 (23.3%) to $1,833,000 in 1999
from $1,487,000 in 1998. Comparatively, the 1998 total represented an
increase of $222,000 (17.5%) from $1,265,000 in 1997. The increase in 1999
was primarily due to an increase in Mastercard/VISA discounts and fees due
to the Auburn University's acceptance of Mastercard/VISA for tuition, an
increase in ATM service charges, an increase in
-35-
<PAGE>
checkcard income and an increase in stock dividends from stock owned in
other companies. This increase was offset by a loss on premises and
equipment primarily for computer equipment that was not Year 2000
compliant. The increase in 1998 was due to an increase in Mastercard/VISA
income mainly due to one merchant, an increase in stock dividends resulting
from additional shares purchased in Southeastern Bankcard Association, Inc.
and FHLB Atlanta stock, offset by a decrease in lease income due to lease
expirations. See "ITEM 1 - BUSINESS - SERVICES."
Noninterest Expense
Total noninterest expense was $8,138,000 for 1999, $6,838,000 for
1998, and $6,385,000 for 1997 reflecting an increase of $1,300,000 (19.0%)
for 1999, an increase of $453,000 (7.1%) for 1998 and an increase of
$378,000 (6.3%) for 1997.
Salaries and benefits increased $615,000 (19.0%) to $3,852,000 for
the year ended December 31, 1999, and increased $94,000 (3.0%) to
$3,237,000 for the year ended December 31, 1998, from the 1997 total of
$3,143,000. At December 31, 1999, the Company had 115 full-time equivalent
employees, an increase of 7 over the level at December 31, 1998. At
December 31, 1998, the Company had 108 full-time equivalent employees, an
increase of 4 over the level at December 31, 1997. The salary and benefit
increases for 1999 and 1998 were primarily due to new hires and merit
raises and the cost of benefits associated with such increases.
Net occupancy expense was $1,116,000, $1,022,000, and $972,000 for
1999, 1998 and 1997, respectively, representing increases of $94,000 (9.2%)
in 1999 and $50,000 (5.1%) in 1998 over the previous year's levels. The
1999 increase is primarily due to increases in lease payments for computer
equipment, lease payments on building due to the addition of the Wal-Mart
branch and depreciation on furniture and equipment.
The 1998 increase resulted primarily from an increase in furniture
and equipment depreciation due to the opening of the Wal-Mart branch, an
increase in real estate rentals of the Wal-Mart branch, and an increase in
lease payments for furniture and equipment due to new leases of computers.
Other noninterest expense was $3,169,000 for 1999, $2,578,000 for
1998, and $2,270,000 for 1997. These levels represent an increase of
$591,000 (22.9%) in 1999 and an increase of $308,000 (13.6%) in 1998 over
the respective previous years. The 1999 increase resulted from expenses
associated with Auburn University's acceptance of Mastercard/VISA for
tuition mentioned above, professional fees for strategic tax services and
legal fees related to certain nonaccrual loans.
The 1998 increase resulted from an increase in loan expenses,
including legal, loan review and administration, primarily related to the
$4.078 million commercial loan classified as impaired, an increase in
Mastercard/VISA expense due to the merchant mentioned above, an increase in
ATM expense due to increases in ATM rent and courier expenses, an increase
in network expenses due to the Visa Checkcard that was launched in 1998, an
increase in professional fees due to management's development of a
strategic plan, an increase in director's fees due to an increase in board
meeting fees, offset by a decrease in computer software expense due to
fully amortized software, a decrease in personnel, education and training
and a decrease in marketing expense due to 1997 expenses for the Winn Dixie
branch opening and promotion for the Visa Checkcard. See "SUPERVISION AND
REGULATION-FDIC INSURANCE ASSESSMENTS."
Income Taxes
The Company's income tax expense was $1,559,000, $1,842,000, and
$1,828,000 in 1999, 1998, and 1997, respectively. These levels represent an
effective tax rate on pre-tax earnings of 34.8% for 1999, 34.8% for 1998,
and 37.2% for 1997. Details of the tax provision for income taxes are
included in Note 10, "Income Tax Expense" in the Notes to the Consolidated
Financial Statements included elsewhere herein.
-36-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk, with respect to the company, is the risk of loss arising
from adverse changes in interest rates and prices. The risk of loss can result
in either lower fair market values or reduced net interest income. Although the
Company manages other risk, such as credit and liquidity, management considers
interest rate risk to be the more significant market risk and could potentially
have the largest material effect on the Company's financial condition. Further,
the Company believes the potential reduction of net interest income may to be
more significant than the effect of reduced fair market values. The Company does
not maintain a trading portfolio, therefore is not exposed to risk from trading
activities. Nor does it deal in international instruments, therefore the Company
is not exposed to foreign currency risk.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO). ALCO has established policies and
limits to monitor, measure and coordinate the Company's sources, uses and
pricing of funds.
The Company manages the relationship of interest sensitive assets to
interest sensitive liabilities and the resulting effect on net interest income.
The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both a rise and fall in interest rates of 200 basis
points over a twelve and twenty-four month period. The model is based on actual
repricing dates of interest sensitive assets and interest sensitive liabilities.
The model incorporates assumptions regarding the impact of changing interest
rates on the prepayment rates of certain assets. The assumptions are based on
nationally published prepayment speeds on given assets when interest rates rise
or decrease by 200 basis points or more.
Interest rate risk represents the sensitivity of earnings to changes in
interest rates. As interest rates change the interest income and expense
associated with the Company's interest sensitive assets and liabilities also
change, thereby impacting net interest income, the primary component of the
Company's earnings. ALCO utilizes the results of the simulation model and the
static GAP report to quantify the estimated exposure of net interest income to a
sustained change in interest rates.
The Company makes use of off-balance sheet interest rate contracts to
protect its net interest income against changes in interest rates. At year-end,
the Company had off-balance sheet interest rate floor agreements with a notional
value of $20 million and off-balance sheet interest rate swap agreements with a
notional value of $25 million. All of these contracts were negotiated to protect
the Company's balance sheet against a fall in interest rates. All are matched to
specific assets and liabilities and none were booked for the purpose of trading.
The effect of these instruments is considered in the simulation models.
Currently the Company's income exposure to changes in market rates is
relatively low. The Company measures this exposure based on an immediate change
in interest rates of up or down 200 basis points. Given this scenario, the
Company had, at year-end, a very slight exposure to rising rates and a benefit
from falling rates. In performing these shock tests, the Company also runs a
scenario based on a steeping of the current yield curve. In a steeping yield
curve environment, the Company again experienced a very slight exposure to
rising rates and a benefit from falling rates.
The following chart reflects the Company's sensitivity to changes in
interest rates as of December 31, 1999. Numbers are based on a flat balance
sheet and assumes paydowns and maturities of both assets and liabilities are
reinvested in like instruments at either current interest rates, rates up 100
basis points, up 200 basis points, down 100 basis points and down 200 basis
points. In the first table, net interest income at the Base model is a
projection for the coming year, given a flat balance sheet and no change in
interest rates. The dollar change and percentage change of the up and down 200
basis points and up and down 100 basis points is measured against the Base
model. In the second chart, the dollar change and percentage change is measured
against the first year's base model. Table three is a summary of the two years.
INTEREST RATE RISK
Income Sensitivity Summary
Interest Rate Scenario (000)
- --------------------------------------------------------------------------------
-200 BP -100 BP Base +100 BP +200BP
- --------------------------------------------------------------------------------
Year 1 Net Interest Income $13,266 $13,112 $12,965 $12,863 $12,627
- --------------------------------------------------------------------------------
$ Change Net Interest Income $ 301 $ 147 - $ (102) $ (338)
- --------------------------------------------------------------------------------
% Change Net Interest Income 2.32% 1.13% - -.79% -2.61%
- --------------------------------------------------------------------------------
Policy Limit 5% for +/-200 Basis Points (BP) over 12 months.
- --------------------------------------------------------------------------------
-200 BP -100 BP Base +100 BP +200 BP
- --------------------------------------------------------------------------------
Year 2 Net Interest Income $14,052 $13,827 $13,619 $13,509 $13,025
- --------------------------------------------------------------------------------
$ Change vs Year 1 Base- $ 1,087 $ 862 $ 654 $ 544 $ 60
Net Interest Income
- --------------------------------------------------------------------------------
% Change vs Year 1 Base- 8.32% 6.55% 5.04% 4.20% 0.46%
Net Interest Income
- --------------------------------------------------------------------------------
24 Month Summary
- --------------------------------------------------------------------------------
-200 BP -100 BP Base +100 BP +200 BP
- --------------------------------------------------------------------------------
Net Interest Income $27,318 $26,939 $26,584 $26,372 $25,652
- --------------------------------------------------------------------------------
$ Change Net Interest Income $ 734 $ 355 - $ (212) $ (932)
- --------------------------------------------------------------------------------
% Change Net Interest Income 2.76% 1.34% - -.80% -3.51%
- --------------------------------------------------------------------------------
The preceding sensitivity analysis is a modeling analysis, which changes
quarterly and consist of hypothetical estimates based upon numerous assumptions
including the interest rate levels, shape of the yield curve, prepayments on
loans and securities, rates on loans and deposits, reinvestments of paydowns and
maturities of loans, investments and deposits, and others. In addition, there is
no input for growth or a change in asset mix. While assumptions are developed
based on the current economic and market conditions, management cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity
analysis, actual results will differ. Also, the sensitivity analysis does not
reflect actions that ALCO might take in responding to or anticipating changes in
interest rates. SEE "INTEREST SENSITIVITY ANALYSIS" table.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTRY DATA
See Financial Statements and Supplementary Data contained within this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required by this item is set forth under the heading
"Information about Nominees for Directors" on Pages 2 through 3 and under the
heading "Executive Officers" on Pages 5 and 6 of the definitive proxy statement
for the Company's Annual Meeting to be held on May 9, 2000, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth under the heading "Meetings
and Committees of the Board of Directors" on Page 4 and under the heading
"Summary Compensation of Executive Officers" on Pages 5 and 6 of the definitive
proxy statement for the Company's Annual Meeting to be held on May 9, 2000, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the heading
"Information about Nominees for Directors" on Pages 2 through 3 of the
definitive proxy statement for the Company's Annual Meeting to be held on May 9,
2000, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the heading "Certain
Transactions and Business Relationships on Page 7 of the definitive proxy
statement for the Company's Annual Meeting to be held on May 9, 2000, and is
incorporated herein by reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) List of all Financial Statements
--------------------------------
The following consolidated financial statements and report of
independent certified public accountants of the Company are included
in this Annual Report on Form 10-K:
Independent Auditor's Report
-37-
<PAGE>
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statement of Earnings for the years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997
Notes to the Consolidated Financial Statements
(b) Exhibits
--------
3.1. Certificate of Incorporation of Auburn National Bancorporation,
Inc. (incorporated by reference from Registrant's Registration
Statement on Form SB-2 (File No. 33-86180)).
3.2. 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
10.1. 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)).
10.2. 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)).
21.1 Subsidiaries of Registrant
23.1 Consent of Accountants
27.1 Financial Data Schedule
(c) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1999.
-38-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
With Independent Auditors' Report Thereon
<PAGE>
Independent Auditors' Report
The Board of Directors
Auburn National Bancorporation, Inc.:
We have audited the accompanying consolidated balance sheets of Auburn National
Bancorporation, Inc. and subsidiary (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of earnings, stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Atlanta, Georgia
February 11, 2000
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks (note 2) $ 11,662,397 9,220,225
Federal funds sold 15,710,000 260,000
------------- -------------
Cash and cash equivalents 27,372,397 9,480,225
------------- -------------
Interest-earning deposits with other banks 1,269,771 133,600
Investment securities held to maturity (fair value
of $9,689,067 and $8,227,385 for December 31, 1999
and 1998, respectively) (note 3) 10,068,454 8,094,283
Investment securities available for sale (note 3) 67,799,218 63,585,573
Loans:
Loans, less unearned income of $7,105 and $15,494
at December 31, 1999 and 1998, respectively 260,606,260 218,686,991
Less allowance for loan losses (3,774,523) (2,808,307)
------------- -------------
Loans, net (notes 4 and 8) 256,831,737 215,878,684
------------- -------------
Premises and equipment, net (note 5) 3,348,217 3,434,964
Rental property, net 1,667,604 1,760,294
Other assets (note 10) 9,160,924 5,506,649
------------- -------------
Total assets $ 377,518,322 307,874,272
============= =============
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 38,867,703 34,724,182
Interest-bearing (note 6) 255,854,051 198,780,568
------------- -------------
Total deposits 294,721,754 233,504,750
Securities sold under agreements to repurchase (note 7) 5,866,385 12,944,004
Other borrowed funds (note 8) 46,861,045 31,000,458
Accrued expenses and other liabilities 1,627,541 1,481,564
------------- -------------
Total liabilities 349,076,725 278,930,776
------------- -------------
Stockholders' equity (notes 14 and 15):
Preferred stock of $.01 par value; authorized
200,000 shares; issued shares - none -- --
Common stock of $.01 par value; authorized 8,500,000 shares;
issued 3,957,135 shares at December 31, 1999 and 1998 39,571 39,571
Additional paid-in capital 3,707,472 3,707,472
Retained earnings 26,743,281 25,077,126
Accumulated other comprehensive income (loss) (1,834,128) 333,926
Less treasury stock, 32,562 shares at December 31,
1999 and 1998, at cost (214,599) (214,599)
------------- -------------
Total stockholders' equity 28,441,597 28,943,496
Commitments and contingencies (note 12)
------------- -------------
Total liabilities and stockholders' equity $ 377,518,322 307,874,272
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Earnings
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 20,392,265 17,467,725 15,323,433
------------- -------------- -------------
Interest and dividends on investment securities:
Taxable 4,550,273 3,787,501 3,933,478
Tax-exempt 74,836 108,308 123,290
------------- -------------- -------------
Total interest and dividends on
investment securities 4,625,109 3,895,809 4,056,768
Interest on federal funds sold 346,988 236,494 387,773
Interest on interest-earning deposits with other banks 112,664 120,268 81,421
------------- -------------- -------------
Total interest income 25,477,026 21,720,296 19,849,395
------------- -------------- -------------
Interest expense:
Interest on deposits (note 6) 10,881,181 9,557,171 9,532,606
Interest on federal funds purchased -- -- 86
Interest on securities sold under agreements
to repurchase (note 7) 336,226 225,524 148,216
Interest on other borrowings (note 8) 2,131,758 1,406,271 661,592
------------- -------------- -------------
Total interest expense 13,349,165 11,188,966 10,342,500
------------- -------------- -------------
Net interest income 12,127,861 10,531,330 9,506,895
Provision for loan losses (note 4) 2,506,090 891,030 285,245
------------- -------------- -------------
Net interest income after provision
for loan losses 9,621,771 9,640,300 9,221,650
------------- -------------- -------------
Noninterest income:
Service charges on deposit accounts 1,164,141 978,303 865,473
Investment securities gains (losses), net (note 3) -- 14,277 (59,876)
Other (note 16) 1,833,566 1,486,796 1,265,389
------------- -------------- -------------
Total noninterest income 2,997,707 2,479,376 2,070,986
------------- -------------- -------------
Noninterest expense:
Salaries and benefits (note 11) 3,852,344 3,237,336 3,142,740
Net occupancy expense 1,116,279 1,022,405 972,108
Other (note 16) 3,169,367 2,578,477 2,269,782
------------- -------------- -------------
Total noninterest expense 8,137,990 6,838,218 6,384,630
------------- -------------- -------------
Earnings before income taxes 4,481,488 5,281,458 4,908,006
Income tax expense (note 10) 1,559,470 1,842,041 1,827,963
------------- -------------- -------------
Net earnings $ 2,922,018 3,439,417 3,080,043
============= ============== =============
Basic income per share $ .74 .88 .79
============= ============== =============
Weighted-average shares outstanding 3,924,573 3,924,573 3,916,446
============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Common stock Additional
Comprehensive ------------------- paid-in Retained
income Shares Amount capital earnings
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,957,135 $ 39,571 3,664,718 19,942,980
Comprehensive
income:
Net earnings $ 3,080,043 -- -- -- 3,080,043
Other comprehensive income due to unrealized
gain on mutual funds and investment
securities available for sale, net (note 9) 321,964 -- -- -- --
----------------
Total comprehensive income $ 3,402,007
================
Cash dividends paid ($0.16 per share) -- -- -- (626,562)
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 3,957,135 39,571 3,707,472 22,396,461
Comprehensive income:
Net earnings $ 3,439,417 -- -- -- 3,439,417
Other comprehensive income due to unrealized
gain on mutual funds and investment
securities available for sale, net (note 9) 158,490 -- -- -- --
----------------
Total comprehensive income $ 3,597,907
================
Cash dividends paid ($0.19 per share) -- -- -- (758,752)
Payment of Employee Stock Ownership Plan debt -- -- -- --
--------- -------- --------- ----------
Balance at December 31, 1998 3,957,135 39,571 3,707,472 25,077,126
Comprehensive income:
Net earnings $ 2,922,018 -- -- -- 2,922,018
Other comprehensive income (loss) due to
unrealized loss on mutual funds and
investment securities available for sale,
net (note 9) (2,168,054) -- -- -- --
----------------
Total comprehensive income $ 753,964
================
Cash dividends paid ($0.32 per share) -- -- -- (1,255,863)
--------- -------- --------- ----------
Balance at December 31, 1999 3,957,135 $ 39,571 3,707,472 26,743,281
========= ======== ========= ==========
<CAPTION>
Accumulated Employee
other stock
comprehensive ownership Treasury
income (loss) plan debt stock Total
------------- --------- ----- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (146,528) (113,940) (304,009) 23,082,792
Comprehensive income:
Net earnings -- -- -- 3,080,043
Other comprehensive income due to unrealized
gain on mutual funds and investment
securities available for sale, net (note 9) 321,964 -- -- 321,964
Total comprehensive income
Cash dividends paid ($0.16 per share) -- -- -- (626,562)
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
Comprehensive income:
Net earnings -- -- -- 3,439,417
Other comprehensive income due to unrealized
gain on mutual funds and investment
securities available for sale, net (note 9) 158,490 -- -- 158,490
Total comprehensive income --
Cash dividends paid ($0.19 per share) -- -- -- (758,752)
Payment of Employee Stock Ownership Plan debt -- 56,934 -- 56,934
---------- -------- -------- ----------
Balance at December 31, 1998 333,926 -- (214,599) 28,943,496
Comprehensive income:
Net earnings -- -- -- 2,922,018
Other comprehensive income (loss) due to --
unrealized loss on mutual funds and
investment securities available for sale, --
net (note 9) (2,168,054) -- -- (2,168,054)
Total comprehensive income --
Cash dividends paid ($0.32 per share) -- -- -- (1,255,863)
---------- -------- -------- ----------
Balance at December 31, 1999 (1,834,128) -- (214,599) 28,441,597
========== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,922,018 3,439,417 3,080,043
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 552,602 606,127 524,338
Net (accretion) amortization of investment
discounts/premiums (131,783) (89,505) (95,906)
Provision for loan losses 2,506,090 891,030 285,245
Deferred tax benefit (124,482) (84,982) (76,861)
Loans originated for resale (22,725,579) (31,294,332) (14,185,691)
Proceeds from sale of loans originated for resale 19,289,304 30,561,484 14,184,327
(Gain) loss on sale of investment securities -- (14,277) 59,876
Gain on sale of other real estate (11,921) -- --
Increase in interest receivable (583,664) (346,662) (261,171)
Increase in other assets (446,867) (441,377) (493,632)
Increase (decrease) in interest payable 472,057 (151,352) 129,857
(Decrease) increase in accrued expenses and other liabilities (326,080) 98,924 741,983
------------ ---------- ----------
Net cash provided by operating activities 1,391,695 3,174,495 3,892,408
------------ ---------- ----------
Cash flows from investing activities:
Proceeds from sales of investment securities available
for sale -- 4,970,085 11,288,950
Proceeds from maturities/calls/paydowns of investment
securities held to maturity 2,522,426 6,844,848 6,908,351
Purchases of investment securities held to maturity (4,363,679) (425,000) (3,325,876)
Proceeds from maturities/calls/paydowns of
investment securities available for sale 17,494,430 17,689,859 14,699,633
Purchases of investment securities available for sale (25,322,726) (45,581,599) (21,907,663)
Other net increase in loans (40,789,869) (32,668,792) (24,092,861)
Purchases of premises and equipment (368,095) (359,187) (504,116)
Proceeds from sale of premises and equipment and other
real estate 269,222 -- 65,699
Additions to rental property (5,070) (48,094) (1,670)
Net (increase) decrease in interest-earning deposits
with other banks (1,136,171) 1,589,382 (1,716,628)
Increase in investment in FHLB stock (544,100) (889,300) --
------------ ---------- ----------
Net cash used in investing activities (52,243,632) (48,877,798) (18,586,181)
------------ ---------- ----------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 4,143,521 2,085,830 4,231,406
Net increase in interest-bearing deposits 57,073,483 7,440,933 3,019,407
Net (decrease) increase in securities sold under
agreements to repurchase (7,077,619) 11,670,497 (3,379,327)
Borrowings from FHLB 21,000,000 25,000,000 251,261
Repayments to FHLB (5,118,250) (5,118,256) --
Repayments of other borrowed funds (21,163) (20,136) (20,749)
Net decrease in other short-term borrowings -- -- (1,203,130)
Proceeds from sale of treasury stock -- -- 140,812
Purchase of treasury stock -- -- (8,648)
Dividends paid (1,255,863) (758,752) (626,562)
------------ ---------- ----------
Net cash provided by financing activities 68,744,109 40,300,116 2,404,470
------------ ---------- ----------
Net increase (decrease) in cash and
cash equivalents, carried forward 17,892,172 (441,377) (352,820)
</TABLE>
5
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net increase (decrease) in cash and
cash equivalents, brought forward $ 17,892,172 (5,403,187) (12,289,303)
Cash and cash equivalents at beginning of year 9,480,225 14,883,412 27,172,715
------------ ---------- ----------
Cash and cash equivalents at end of year $ 27,372,397 9,480,225 14,883,412
============ ========== ==========
Supplemental information on cash payments:
Interest paid $ 12,877,108 11,340,318 10,212,643
============ ========== ==========
Income taxes paid $ 2,163,538 2,161,351 1,596,005
============ ========== ==========
Supplemental information on noncash transactions:
Loans transferred to other real estate $ 767,001 -- 129,699
============ ========== ==========
Loans to facilitate the sale of other real estate $ -- -- 64,000
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(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 and Bank are subject to competition from other
financial institutions. The Company and Bank are also subject to the
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities.
The accounting policies followed by the Company and its subsidiary 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.
(a) 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 Bank'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 Bank is located
in this same area. Accordingly, the ultimate collectibility of a
substantial portion of the Bank'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 Bank's allowances for losses on loans and
real estate owned. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about
information available to them at the time of their examination.
(Continued)
7
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary, AuburnBank. During the year ended
December 31, 1998, the Company merged its existing subsidiary, ANB
Systems, Inc. into the Company. All significant intercompany
accounts and transactions have been eliminated.
(c) Cash Equivalents
Cash equivalents include amounts due from banks and federal funds
sold. Federal funds are generally sold for one-day periods.
(d) Investment Securities
The Company and Bank account 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 and Bank do not have trading account securities.
Investment securities held to maturity are those for which the
Company and Bank have 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 below cost of any available for sale
or held to maturity security that is deemed other than temporary
results in a charge to earnings and the establishment of a new
cost basis for the security.
The Bank uses interest rate swaps, caps, and floors as part of its
overall interest rate risk management. Any premiums or discounts
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 three-
month LIBOR rate.
(Continued)
8
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(e) Loans
Loans are stated at principal amounts outstanding, net of unearned
income. Interest on fixed rate precomputed installment loans is
credited to income based on a method which approximates the
level-yield method. Interest on all other loans is credited to
income on the simple interest method.
It is the general policy of the Bank to discontinue the accrual of
interest when principal or interest payments become more than
ninety days delinquent. When a loan is placed on a nonaccrual
basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan
is sufficient to cover the accrued interest. Income on such loans
is then recognized only to the extent that cash 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 accounts for impaired loans in accordance with 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. 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. 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.
(Continued)
9
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The Bank originates mortgage loans to be held for sale only for
loans that have been pre-approved by the investor. The Bank bears
minimal interest rate risk on these loans. Such loans are stated
at the lower of cost or aggregate market.
(f) 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. Provision
amounts are largely determined based on loan classifications
determined through credit quality review using estimated loss
factors based on historical loss experience. Such loss factors are
adjusted periodically based on changes in loss experience.
Loans are charged against the allowance when management determines
such loans to be uncollectible. Subsequent recoveries are credited
to the allowance.
(g) 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.
(h) 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.
(i) Other Real Estate
Real estate acquired through foreclosure or in lieu of foreclosure
is carried at the lower of cost or fair value, as determined by
independent appraisals, 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.
(Continued)
10
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(j) Derivative Financial Instruments
The Bank uses derivative financial instruments to swap floating
rate assets or liabilities to fixed rate and to hedge the interest
rate spread between assets and liabilities. These transactions
serve to better match the repricing characteristics of various
assets and liabilities, reduce spread risk, adjust overall rate
sensitivity and enhance net interest income.
Interest rate swaps, purchased floors, and purchased 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 fair values of the swaps, purchased
floors, or purchased 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 Bank 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
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 of 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 in the gain or loss on the
sale/maturity of the designated asset or liability.
(k) 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 carry forwards. 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.
(Continued)
11
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(l) 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, 1999; thus, there are
no potential common shares that would result in diluted earnings
per share.
On May 14, 1998, the Company's Board of Directors approved a
three-for-one stock split effected in the form of a dividend
payable on June 25, 1998 to shareholders of record on June 10,
1998. All share and per share information in the accompanying
financial statements has been restated to reflect the effect of
the additional shares outstanding resulting from the stock split.
(m) Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of
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" for the
Company consists of items recorded directly in stockholders'
equity under SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
(n) Segment Disclosures
Effective January 1, 1998, the Company also adopted the provisions
of 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. The Company does not have any segments other than
banking that are considered material.
(Continued)
12
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(o) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 as amended by SFAS No. 137
establishes accounting and reporting standards for derivative
instruments and for hedging activities. This statement is
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company has not yet determined the impact of
SFAS No. 133 on the Company's financial statements upon adoption.
(p) Reclassifications
Certain of the 1998 and 1997 amounts have been reclassified to
conform to the 1999 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, 1999 and 1998 were approximately
$3,573,000 and $1,397,000, respectively.
(3) Investment Securities
The amortized cost and approximate fair value of investment securities at
December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. government agencies excluding
mortgage-backed securities $ 4,508,340 -- 273,663 4,234,677
State and political subdivisions 731,000 -- 2,788 728,212
Mortgage-backed securities 4,829,114 344 103,280 4,726,178
------------ ------------ ------------ ---------------
$ 10,068,454 344 379,731 9,689,067
============ ============ ============ ===============
Investment securities available for sale:
U.S. government agencies excluding
mortgage-backed securities $ 18,799,688 -- 928,205 17,871,483
Mortgage-backed securities 20,846,931 -- 709,000 20,137,931
Collateralized mortgage obligations 27,377,487 54,375 1,486,747 25,945,115
State and political subdivisions 844,838 -- 149 844,689
Commercial paper 2,987,154 12,846 -- 3,000,000
------------ ------------ ------------ ---------------
$ 70,856,098 67,221 3,124,101 67,799,218
============ ============ ============ ===============
</TABLE>
(Continued)
13
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The amortized cost and approximate fair value of investment securities at
December 31, 1999, 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>
Amortized Approximate
cost fair value
--------------- ------------------
<S> <C> <C>
Investment securities held to maturity:
Due after five years through ten years $ 320,000 317,213
Due after ten years 4,919,340 4,645,676
Mortgage-backed securities 4,829,114 4,726,178
--------------- ------------------
Total $ 10,068,454 9,689,067
=============== ==================
Investment securities available for sale:
Due in one year or less $ 2,987,154 3,000,000
Due after one year through five years 2,594,117 2,571,872
Due after five years through ten years 17,050,409 16,144,300
--------------- ------------------
Subtotal 22,631,680 21,716,172
Mortgage-backed securities 20,846,931 20,137,931
Collateralized mortgage obligations 27,377,487 25,945,115
--------------- ------------------
$ 70,856,098 67,799,218
=============== ==================
</TABLE>
The amortized cost and approximate fair value of investment securities at
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Investment securities held to maturity:
State and political subdivisions $ 1,585,000 29,911 -- 1,614,911
Mortgage-backed securities 6,509,283 103,418 227 6,612,474
------------- ------------ ------------ ---------------
$ 8,094,283 133,329 227 8,227,385
============= ============ ============ ===============
Investment securities available for sale:
U.S. government agencies excluding
mortgage-backed securities $ 17,025,648 313,834 -- 17,339,482
Mortgage-backed securities 17,630,259 91,407 10,619 17,711,047
Collateralized mortgage obligations 27,524,735 229,643 102,818 27,651,560
State and political subdivisions 848,388 35,096 -- 883,484
------------- ------------ ------------ ---------------
$ 63,029,030 669,980 113,437 63,585,573
============= ============ ============ ===============
</TABLE>
(Continued)
14
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
There were no sales of investment securities held to maturity during any
of the years in the three-year period ended December 31, 1999. There were
no sales of investment securities available for sale during the year
ended December 31, 1999. Proceeds from sales of investment securities
available for sale were $4,970,085 and $11,288,950, for the years ended
December 31, 1998 and 1997, respectively. Gross gains of $14,277 were
realized on sales for the year ended December 31, 1998. Gross losses of
$59,876 were realized on sales of investment securities for the year
ended December 31, 1997.
Investment securities with an aggregate carrying value of $72,483,891 and
$65,826,237 at December 31, 1999 and 1998, 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 $2,333,000 and $1,788,900 at December 31, 1999 and 1998,
respectively.
(4) Loans
At December 31, 1999 and 1998, the composition of the loan portfolio was
as follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Commercial, financial, and agricultural $ 77,235,951 61,074,779
Real estate - construction:
Commercial 16,590,881 8,112,199
Residential 5,653,018 4,543,748
Real estate - mortgage:
Commercial 75,284,566 61,113,412
Residential 58,350,503 60,135,660
Real estate - held for sale 7,636,093 4,199,818
Consumer installment 19,862,353 19,522,869
-------------- --------------
Total loans 260,613,365 218,702,485
Less:
Unearned income (7,105) (15,494)
Allowance for loan losses (3,774,523) (2,808,307)
-------------- --------------
Loans, net $ 256,831,737 215,878,684
============== ==============
</TABLE>
(Continued)
15
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
During 1999 and 1998, 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, 1999 and 1998 amounted to $10,305,953 and $7,404,807,
respectively. The change from 1998 to 1999 reflects payments of
$4,677,283 and advances of $7,578,429. 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, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,808,307 2,125,104 2,093,682
Provision charged to earnings 2,506,090 891,030 285,245
Loan recoveries 91,046 105,901 66,224
Loans charged off (1,630,920) (313,728) (320,047)
------------- -------------- -------------
Balance at end of year $ 3,774,523 2,808,307 2,125,104
============= ============== =============
</TABLE>
At December 31, 1999 and 1998, the Company had $5,177,329 and $4,098,533,
respectively, of impaired loans. Impaired loans at December 31, 1999 and
1998, include loans with a related valuation allowance of $345,496 and
$564,313, at December 31, 1999 and 1998, respectively.
For the years ended December 31, 1999, 1998, and 1997, the average
recorded investment in the impaired loans was $4,368,233, $2,370,393, and
$593,750, respectively. The related amount of interest income recognized
during 1999, 1998, and 1997 amounted to $73,863, $110,367, and $54,459,
respectively.
Nonperforming loans, consisting of loans on nonaccrual status and
accruing loans past due greater than 90 days, amounted to $6,343,282 and
$4,896,756 at December 31, 1999 and 1998, respectively. Nonaccrual loans
were $6,074,985 and $4,593,108 at December 31, 1999 and 1998,
respectively. There were no nonaccrual loans at December 31, 1997.
Interest that would have been recorded on nonaccrual loans had they been
in accruing status was approximately $428,000 in 1999 and $183,000 in
1998. The amount of interest collected and recorded on nonaccrual loans
was approximately $27,000 in 1999 and $33,000 in 1998.
The Company's loan servicing portfolio consisted of 908 loans with an
outstanding balance of $70,284,016, 869 loans with an outstanding balance
of $65,661,064; and 832 loans with an outstanding balance of $63,565,693,
as of December 31, 1999, 1998, and 1997, respectively.
16
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(5) Premises and Equipment
Premises and equipment at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Land $ 407,747 407,747
Buildings 2,827,055 2,730,244
Furniture, fixtures, and equipment 3,577,102 3,824,649
------------- -------------
Total premises and equipment 6,811,904 6,962,640
Less accumulated depreciation (3,463,687) (3,527,676)
------------- -------------
$ 3,348,217 3,434,964
============= =============
</TABLE>
(6) Interest-Bearing Deposits
At December 31, 1999 and 1998, the composition of interest-bearing
deposits was as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
NOW, Super NOW, and Automatic Transfer Service $ 33,987,050 21,606,033
Money market 59,218,864 42,270,612
Savings 11,493,379 10,535,711
Certificates of deposit under $100,000 72,516,621 72,424,754
Certificates of deposit and other time
deposits of $100,000 and over 78,638,137 51,943,458
--------------- ---------------
$ 255,854,051 198,780,568
=============== ===============
</TABLE>
Interest expense on certificates of deposit and other time deposits of
$100,000 and over amounted to approximately $3,147,000, $2,187,000, and
$1,972,000, in 1999, 1998, and 1997, respectively.
17
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The following table presents the maturities of certificates of deposit
and other time deposits of $100,000 or more at December 31, 1999.
Years ending December 31,
-----------------------------
2000 $ 44,921,532
2001 7,300,248
2002 2,146,143
2003 3,110,032
2004 11,160,182
Thereafter 10,000,000
---------------
$ 78,638,137
===============
(7) Securities Sold Under Agreements to Repurchase
The securities sold under agreements to repurchase at December 31, 1999
and 1998 are collateralized by obligations of the U.S. Government or its
corporations and agencies, state and municipal securities, or
mortgage-backed securities, which are held by independent trustees. The
following summarizes pertinent data related to the securities sold under
agreements to repurchase as of and for the years ended December 31, 1999,
1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Weighted-average borrowing rate at year-end 5.30% 4.99% 5.29%
============== ============== ==============
Weighted-average borrowing rate during
the year 4.92% 4.96% 5.16
============== ============== ==============
Average daily balance during the year $ 6,832,000 4,554,000 2,868,000
============== ============== ==============
Maximum month-end balance during the year $ 13,548,000 12,944,000 8,516,000
============== ============== ==============
</TABLE>
18
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(8) Other Borrowed Funds
Other borrowed funds at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
Maturity Interest
date rate 1999 1998
------------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank borrowings February 2017 6.64 $ 314,755 333,005
March 2003 5.79 325,000 425,000
January 2001 5.87 5,000,000 5,000,000
January 2008 5.46 5,000,000 5,000,000
March 2008 5.51 5,000,000 5,000,000
June 2008 5.51 10,000,000 10,000,000
October 2003 3.90 -- 5,000,000
February 2004 4.88 5,000,000 --
April 2009 5.26 5,000,000 --
August 2009 4.95 8,000,000 --
January 2000 5.98 3,000,000 --
Small Business Administration debt June 2004 3.00 17,240 21,842
June 2004 5.08 204,050 220,611
------------ -------------
$ 46,861,045 31,000,458
============ =============
</TABLE>
The Bank has a $50,000,000 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 $2,118,189,
$1,386,924, and $630,494 in 1999, 1998, and 1997, respectively. All
interest rates on outstanding advances are 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.
19
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(9) Comprehensive Income
The following table sets forth the amounts of other comprehensive income
included in stockholders' equity along with the related tax effect for
the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Tax Net of
Pretax (expense) tax
amount benefit amount
-------------- -------------- --------------
<S> <C> <C> <C>
1999
Net unrealized holding losses on
investment securities available
for sale arising during the year $ (3,613,423) 1,445,369 (2,168,054)
Reclassification adjustment
for net gains realized in net
income -- -- --
-------------- -------------- --------------
Other comprehensive loss $ (3,613,423) 1,445,369 (2,168,054)
============== ============== ==============
1998
Net unrealized holding gains on
investment securities available
for sale arising during the year $ 278,426 (111,370) 167,056
Reclassification adjustment for
net gains realized in net income 14,277 (5,711) 8,566
-------------- -------------- --------------
Other comprehensive income $ 264,149 (105,659) 158,490
============== ============== ==============
1997
Net unrealized holding gains on
investment securities available
for sale arising during the year $ 447,549 (163,577) 283,972
Reclassification adjustment
for net losses realized in net
income (59,876) 21,884 (37,992)
-------------- -------------- --------------
Other comprehensive income $ 507,425 (185,461) 321,964
============== ============== ==============
</TABLE>
20
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(10) Income Tax Expense
Total income tax expense (benefit) for the years ended December 31, 1999,
1998, and 1997 was allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Income from continuing operations $ 1,559,470 1,842,041 1,827,963
============ =========== ===========
Stockholders' equity, for accumulated other
comprehensive income $ (1,445,369) 105,659 185,461
============ =========== ===========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997 the components of
income tax expense were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Current income tax expense:
Federal $ 1,682,584 1,760,302 1,733,135
State 1,368 166,721 171,689
------------ ----------- ------------
Total 1,683,952 1,927,023 1,904,824
------------ ----------- ------------
Deferred income tax expense (benefit):
Federal (110,786) (75,526) (68,833)
State (13,375) (9,456) (8,028)
------------ ----------- ------------
Total (124,482) (84,982) (76,861)
------------ ----------- ------------
$ 1,559,470 1,842,041 1,827,963
============ =========== ============
</TABLE>
21
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense at statutory rate $ 1,523,706 1,795,696 1,668,722
Increase (decrease) resulting from:
Tax-exempt interest (26,895) (36,625) (49,177)
State income tax expense net of Federal
income tax benefit (7,925) 103,795 108,016
Increase (decrease) in valuation allowance
for deferred tax assets (6,423) (1,533) 7,956
Other 77,007 (19,292) 92,446
----------- ----------- -----------
$ 1,559,470 1,842,041 1,827,963
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 918,679 700,465
Principal amortization for leases being
depreciated for tax 92,677 92,677
Unrealized loss on investment securities
available for sale 1,222,752 --
Capital loss carry forward -- 6,423
Other 18,733 17,630
----------- ---------
Total gross deferred tax assets before
valuation allowance 2,252,841 817,195
Valuation allowance -- (6,423)
----------- ---------
Total deferred tax assets 2,252,841 810,772
----------- ---------
Deferred tax liabilities:
Premises and equipment, principally due
to differences in depreciation 227,168 263,927
Investments, principally due to discount accretion 90,674 87,864
FHLB stock dividend 18,118 21,068
Prepaid expenses 64,827 64,800
Loans, principally due to differences in
deferred loan fees 58,492 57,151
Unrealized gain on investment securities
available for sale -- 222,617
Other 134,857 4,490
----------- ---------
Total deferred tax liabilities 594,136 721,917
----------- ---------
Net deferred tax asset $ 1,658,706 88,855
=========== =========
</TABLE>
(Continued)
22
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
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.
(11) 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
$271,946, $130,123, and $125,870 in 1999, 1998, and 1997, respectively.
(12) 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.
(Continued)
23
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The financial instruments whose contract amounts represent credit risk as
of December 31, 1999 are as follows:
Commitments to extend credit $ 35,622,000
Standby letters of credit 4,978,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. All guarantees expire within one year. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds
various assets as collateral supporting those commitments for which
collateral is deemed necessary.
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 $45,000,000 at December 31, 1999. 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.
(Continued)
24
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
In 1999, the Bank entered into four interest rate swaps with respect to
various fixed rate certificates of deposit. These agreements allow the
Bank to receive fixed interest payments at rates ranging from 5.44% to
7.75% per annum and to pay a variable rate equal to three-month LIBOR in
the case of two swaps, and three-month LIBOR plus three basis points in
the case of two swaps. The purpose of these contracts is to reduce the
Bank's effective cost of funds to better match the costs of funding
variable rate loans.
The following table summarizes information on interest rate swaps and
floors at December 31, 1999:
INTEREST RATE PROTECTION CONTRACTS
<TABLE>
<CAPTION>
(In Thousands) Weighted-average rate
----------------------------------- -----------------------
Weighted-
average
remaining
Notional Carrying Estimated life
amount value fair value Received Paid (years)
--------- --------- ----------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Over one year through
five years $ 10,000 -- (139) 5.44% 6.08% 1.25
Over one year through
five years 5,000 -- (243) 5.68% 6.17% 3.25
Over five years through
ten years 5,000 -- (150) 7.25% 6.12% 8.75
Over ten years 5,000 -- (144) 7.75% 6.13% 13.75
Floors:
Purchased:
One year or less 10,000 1 -- N/A N/A 0.25
One year or less 10,000 2 -- 6.00% N/A 0.25
--------- --------- -----------
$ 45,000 3 (676)
========= ========= ===========
</TABLE>
All interest rate protection contracts above 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 three-month 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 and Bank.
(Continued)
25
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(13) 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-Earning Deposits with Other
Banks
Fair value equals the carrying value of such assets.
(b) Investment Securities
The fair value of investment securities is based on quoted market
prices.
(c) Loans
The fair value of loans is calculated using discounted cash flows
and excludes lease financing arrangements. The discount rates used
to determine the present value of the loan portfolio are estimated
market discount rates that reflect the credit and interest rate
risk inherent in the loan portfolio. The estimated maturities are
based on the Company's historical experience with repayments
adjusted to estimate the effect of current market conditions. The
carrying amount of accrued interest approximates its fair value.
(d) Off-Balance-Sheet Instruments
Fair value of interest rate swaps 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)
26
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(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, 1999 and 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 28,642 28,642 9,614 9,614
============ ============ =========== ==============
Investment securities $ 77,868 77,488 71,680 71,813
============ ============ =========== ==============
Loans, net of allowance
for loan losses $ 256,832 255,268 215,879 221,028
============ ============ =========== ==============
Financial liabilities:
Deposits $ 294,722 293,840 233,505 234,146
============ ============ =========== ==============
Short-term borrowings $ 5,866 5,866 12,944 12,944
============ ============ =========== ==============
Long-term borrowings $ 46,861 42,116 31,000 31,423
============ ============ =========== ==============
Off-balance sheet financial
instruments:
Interest rate contracts:
Swaps $ -- (676) -- 41
Caps and floors 3 -- 23 126
------------ ------------ ----------- --------------
$ 3 (676) 23 167
============ ============ =========== ==============
</TABLE>
(Continued)
27
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(14) 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 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, 1999, that the Company and Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, 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)
28
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The actual capital amounts and ratios and the aforementioned minimums as
of December 31, 1999 and 1998 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, 1999
Total capital (to risk-
weighted assets) $ 33,637 12.53% $ 21,477 8% $ N/A N/A
Tier I risk-based capital
(to risk-weighted assets) 30,276 11.28 10,739 4 N/A N/A
Tier I leverage capital (to
average assets) 30,276 8.02 13,101 4 N/A N/A
As of December 31, 1998
Total capital (to risk-
weighted assets) $ 31,294 14.58% $ 17,169 8% N/A N/A
Tier I risk-based capital
(to risk-weighted assets) 28,610 13.33 8,584 4 N/A N/A
Tier I leverage capital (to
average assets) 28,610 9.29 12,315 4 N/A N/A
AuburnBank
As of December 31, 1999
Total capital (to risk-
weighted assets) $ 31,564 11.84% $ 21,318 8% $ 26,648 10%
Tier I risk-based capital
(to risk-weighted assets) 28,228 10.59 10,659 4 15,989 6
Tier I leverage capital (to
average assets) 28,228 7.52 15,015 4 18,769 5
As of December 31, 1998
Total capital (to risk-
weighted assets) $ 28,829 13.58% $ 16,988 8% $ 21,235 10%
Tier I risk-based capital
(to risk-weighted assets) 26,173 12.33 8,495 4 12,741 6
Tier I leverage capital (to
average assets) 26,173 8.57 12,213 4 15,266 5
</TABLE>
(Continued)
29
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(15) 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. State statutes restrict the Bank from declaring
dividends in excess of the sum of the current year's earnings plus the
retained net earnings from the preceding two years without prior
approval. 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, 1999, the Bank could have declared dividends of
approximately $8,408,000 without prior approval of regulatory
authorities. As a result of this limitation, approximately $17,986,000 of
the Company's investment in the Bank was restricted from transfer in the
form of dividends.
(16) 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, 1999,
included merchant discounts and fees on MasterCard and Visa sales of
$656,187, $391,315, and $310,416 in 1999, 1998, and 1997, respectively;
and, NSF and overdraft charges of $854,578, $717,052, and $592,745 in
1999, 1998 and 1997, respectively. Also included were servicing fees of
$191,310, $176,522, and $166,538 in 1999, 1998, and 1997, respectively;
and, rental income of $145,232, $150,623, and $138,618 in 1999, 1998, and
1997, respectively.
Components of other noninterest expense exceeding one percent of revenues
for any of the years in the three-year period ended December 31, 1999,
included professional fees of $405,197, $254,981, and $155,635 in 1999,
1998, and 1997, respectively. Also included were marketing expenses of
$165,565, $184,512, and $221,504 in 1999, 1998, and 1997, respectively;
rental property expenses of $246,273, $238,570, and $239,192 in 1999,
1998, and 1997, respectively; and, MasterCard and Visa processing fees of
$650,061, $371,361, and $254,863 in 1999, 1998, and 1997, respectively.
(Continued)
30
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(17) 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, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 217,142 170,713
Investment securities held to maturity 330,686 642,228
Investment in bank subsidiary 26,393,501 26,506,602
Premises and equipment, net 23,976 44,346
Rental property 1,667,604 1,760,294
Other assets 149,985 152,346
------------ ------------
Total assets $ 28,782,894 29,276,529
============ ============
Liabilities and Stockholders' Equity
Other borrowed funds $ 221,290 242,453
Accrued expenses and other liabilities 120,007 90,580
------------ ------------
Total liabilities 341,297 333,033
------------ ------------
Stockholders' equity:
Preferred stock of $.01 par value; authorized
200,000 shares; issued shares - none -- --
Common stock of $.01 par value; authorized
8,500,000 shares; issued 3,957,135
shares at December 31, 1999 and 1998 39,571 39,571
Additional paid-in capital 3,707,472 3,707,472
Retained earnings 26,743,281 25,077,126
Accumulated other comprehensive income (loss) (1,834,128) 333,926
Less:
Treasury stock, 32,562 shares in 1999 and 1998,
at cost (214,599) (214,599)
------------ ------------
Total stockholders' equity 28,441,597 28,943,496
------------ ------------
Total liabilities and stockholders' equity $ 28,782,894 29,276,529
============ ============
</TABLE>
(Continued)
31
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Parent Company Only
Condensed Statements of Earnings
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Cash dividends from bank subsidiary $ 855,000 385,000 697,000
Interest on investment securities:
Taxable 1,250 1,764 3,822
Tax-exempt 28,246 34,982 37,765
----------- ----------- -----------
Total interest on investment
securities 29,496 36,746 41,587
----------- ----------- -----------
Other income 688,799 640,358 612,970
----------- ----------- -----------
Total income 1,573,295 1,062,104 1,351,557
----------- ----------- -----------
Expense:
Interest on borrowed funds 13,568 19,347 22,450
Net occupancy expense 21,134 24,819 24,218
Salaries and benefits 317,082 332,685 357,186
Other 362,411 341,021 331,948
----------- ----------- -----------
Total expense 714,195 717,872 735,802
----------- ----------- -----------
Earnings before income tax
benefit and equity in
undistributed earnings (loss) of
subsidiaries 859,100 344,232 615,755
Applicable income tax benefit (7,965) (27,222) (35,924)
----------- ----------- -----------
Earnings before equity in
undistributed earnings (loss) of
subsidiaries 867,065 371,454 651,679
Equity in undistributed earnings (loss) of
subsidiaries:
Bank 2,054,953 3,067,963 2,429,787
Other -- -- (1,423)
----------- ----------- -----------
Net earnings $ 2,922,018 3,439,417 3,080,043
=========== =========== ===========
</TABLE>
(Continued)
32
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Parent Company Only
Condensed Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,922,018 3,439,417 3,080,043
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 118,130 119,007 116,919
Net undistributed earnings of subsidiaries (2,054,953) (3,067,963) (2,428,364)
Decrease in other assets 2,361 1,892 142,437
Increase (decrease) in other liabilities 29,427 (20,111) 18,740
------------ ------------ ------------
Net cash provided by operating activities 1,016,983 472,242 929,775
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from paydowns of investment
securities held to maturity 6,542 5,993 9,554
Proceeds from calls of investment securities
held to maturity 305,000 45,000 45,000
Purchase of premises and equipment -- -- (83,488)
Proceeds from sale of premises and equipment -- -- 47,444
Purchase of rental property (5,070) (48,094) (1,978)
------------ ------------ ------------
Net cash provided by investing activities 306,472 2,899 16,532
------------ ------------ ------------
Cash flows from financing activities:
Decrease in other borrowed funds (21,163) (20,136) (20,749)
Proceeds from sale of treasury stock -- -- 140,812
Purchase of treasury stock -- -- (8,648)
Dividends paid (1,255,863) (758,752) (626,562)
------------ ------------ ------------
Net cash used in financing activities (1,277,026) (778,888) (515,147)
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents 46,429 (303,747) 431,160
Cash and cash equivalents at beginning of year 170,713 474,460 43,300
------------ ------------ ------------
Cash and cash equivalents at end of year $ 217,142 170,713 474,460
============ ============ ============
</TABLE>
33
<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 30th day of March,
2000.
AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
By: /s/ E. L. SPENCER, JR.
-------------------------
E. L. Spencer, Jr.
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/S/ E. L. SPENCER, JR. President, CEO and March 30, 2000
- ----------------------------- Director
E. L. Spencer, Jr.
/S/ LINDA D. FUCCI Chief Financial Officer March 30, 2000
- ----------------------------- and Chief Accounting
Linda D. Fucci Officer
/S/ TERRY W. ANDRUS Director March 30, 2000
- -----------------------------
Terry W. Andrus
/S/ ANNE M. MAY Director March 30, 2000
- -----------------------------
Anne M. May
/S/ EMIL F. WRIGHT, JR. Director March 30, 2000
- -----------------------------
Emil F. Wright, Jr.
-39-
<PAGE>
AUBURN NATIONAL BANCORPORATION, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
<C> <S> <C>
3.1. Certificate of Incorporation of Auburn National Bancorporation, Inc. * -
3.2. Bylaws of Auburn National Bancorporation, Inc. * -
4.1. Instruments Defining the Rights of Security Holders (See Certificate of -
Incorporation and Bylaws). *
10.1. Auburn National Bancorporation, Inc. 1994 Long-Term Incentive Plan. * -
10.2. Lease and Equipment Purchase Agreement, dated September 15, 1987. * -
21.1. Subsidiaries of Registrant 75
23.1. Consent of Accountants 76
27.1. Financial Data Schedule 77
</TABLE>
- ----------------------
* Incorporated by reference from Registrant's Registration Statement on Form
SB-2 (File No. 33-86180).
-40-
<PAGE>
AUBURN NATIONAL BANCORPORATION INC AND SUBSIDIARY
EXHIBIT 21.1 - SUBSIDIARIES
AuburnBank
<PAGE>
AUBURN NATIONAL BANCORPORATION INC AND SUBSIDIARY
EXHIBIT 23.1 - 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 11, 2000, relating to the consolidated balance sheets of Auburn
National Bancorporation, Inc. and subsidiary as of December 31, 1999 and 1998,
and the consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999
annual report on Form 10-K of Auburn National Bancorporation, Inc.
KPMG LLP
Atlanta, Georgia
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K FOR
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,662
<INT-BEARING-DEPOSITS> 1,270
<FED-FUNDS-SOLD> 15,710
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,799
<INVESTMENTS-CARRYING> 10,068
<INVESTMENTS-MARKET> 9,689
<LOANS> 260,606
<ALLOWANCE> 3,775
<TOTAL-ASSETS> 377,518
<DEPOSITS> 294,722
<SHORT-TERM> 5,866
<LIABILITIES-OTHER> 1,628
<LONG-TERM> 46,861
0
0
<COMMON> 40
<OTHER-SE> 28,401
<TOTAL-LIABILITIES-AND-EQUITY> 377,518
<INTEREST-LOAN> 20,392
<INTEREST-INVEST> 4,625
<INTEREST-OTHER> 460
<INTEREST-TOTAL> 25,477
<INTEREST-DEPOSIT> 10,881
<INTEREST-EXPENSE> 13,349
<INTEREST-INCOME-NET> 12,128
<LOAN-LOSSES> 2,506
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,138
<INCOME-PRETAX> 4,481
<INCOME-PRE-EXTRAORDINARY> 4,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,922
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 3.74
<LOANS-NON> 6,075
<LOANS-PAST> 269
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,798
<ALLOWANCE-OPEN> 2,808
<CHARGE-OFFS> 1,631
<RECOVERIES> 92
<ALLOWANCE-CLOSE> 3,775
<ALLOWANCE-DOMESTIC> 3,775
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
