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, 1995
Commission File No 0-17719
AUBURN BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 94-2827787
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Reorganization)
540 Wall Street, Auburn, California 95603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (916) 888-8405
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. ____
As of March 15, 1996, the aggregate market value of the voting shares held by
nonaffiliates of the Registrant was approximately $5,870,000.
1,004,955 Shares of Common Stock were outstanding at March 15, 1996.
PART I
Item 1. Business
The Bancorp was organized and incorporated under the laws of the State of
California on December 31, 1981 and obtained approval of the Board of Governors
of the Federal Reserve System to be a bank holding company. Approval was
subsequently received from the Comptroller of the Currency on August 10, 1982 to
organize Auburn Bank of Commerce, N.A.,("Bank") as a wholly owned subsidiary of
Bancorp which opened for business on February 7, 1983. The name of the Bank was
subsequently changed to The Bank of Commerce, N.A. on July 29, 1988.
The Bank currently operates out of its main office at 540 Wall Street, Auburn,
California 95603, with branch offices at 10375 Brunswick Road, Grass Valley,
California 95945 and 2893 Sunrise Blvd., Suite 106, Rancho Cordova, California
95741. In addition, a loan production office is maintained at 1601 Response
Road, Sacramento, California 95815. The Bancorp has no industry segments other
than its banking operations conducted by the Bank.
Services
The Bank offers a wide range of general commercial banking services. These
include personal and business checking accounts and savings accounts, including
money market accounts, "NOW" accounts and time certificates of deposit. The
interest paid on time and savings deposits is priced at prevailing market
conditions. The Bank also offers night depository and bank-by-mail services. The
Bank sells travelers' checks (issued by an independent entity), cashier's checks
and money orders. In addition, it provides note and collection services. The
Bank does not offer trust or international banking services, but it will arrange
for such services through a correspondent bank.
On the lending side, the Bank engages in a full complement of lending
activities, including commercial, consumer/installment and real estate loans,
with particular emphasis on short and medium-term loans. The Bank's long-term
mortgage real estate loans are generally sold without recourse to institutional
investors in the secondary market. In addition, the Bank continues to be one of
the largest generators of Small Business Administration (SBA) loans in northern
California and has been designated by SBA as a Preferred Lender.
The Bank's capital base, which includes stockholders' equity and the allowance
for loan losses less intangibles at December 31, 1995, was $7,581,000. This
capital base provides the Bank with lending limits of approximately $1,137,000
for unsecured loans. Loan limits for properly collateralized loans approximate
$1,895,000. This is based upon federal law, which restricts a national bank to
lend not more than 15 percent of its unimpaired capital and surplus, and an
additional 10 percent for loans fully secured by readily marketable collateral,
to any single customer. Management believes that this lending limit should be
sufficient to meet the needs of most of the Bank's customers. If a customer
requires, and deserves, more credit than the Bank can extend, the Bank will
attempt to arrange to sell all, or a portion, of a prospective loan to another
bank so as to accommodate the customer's credit needs while remaining within its
legal lending limits.
Source of Business
Management obtains sufficient market penetration from the services referred to
above and by the personal solicitation of the Bank's officers, directors and
shareholders. All officers are responsible for making regular calls on potential
customers to solicit business and on existing customers to obtain referrals.
Promotional efforts are directed toward residents and small to medium-sized
businesses. The Bank's customers deal with bankers who have commercial and real
estate loan experience, lending authority and the time to quickly and
competently serve customer banking needs. In order to expedite decisions on
lending transactions, the Bank's senior loan committee meets on a regular basis
and is available for committee meetings where immediate authorization is
important to the customer.
The risk of nonpayment (or deferred payment) of loans is inherent to commercial
banking. The Bank's marketing focus, directed toward residents and small to
medium-sized businesses, may, however, involve certain lending risk not inherent
in loans to larger companies. The smaller companies may have shorter operating
histories,
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less sophisticated internal record keeping and financial planning capabilities,
and greater debt-to-equity ratios.
Management of the Bank carefully evaluates all loan applicants and attempts to
minimize its credit risk exposure by use of thorough loan application and
approval procedures.
Asset Management
As of December 31, 1995, approximately 22.3 percent of the Bank's deposits are
non-interest bearing demand deposits and 77.7 percent are time and savings
demand interest-bearing deposits. Of its time and savings deposits,
approximately 71.4 percent are interest-bearing deposits without specified
maturities or contractual provisions requiring advance notice to withdraw funds.
The remaining 28.6 percent are interest-bearing with specified maturities or
such contractual provisions.
Consistent with the requirements of prudent banking necessary to maintain
liquidity, Management of the Bank invests the largest portion of the Bank's
assets in loans of the types described above, with an emphasis on short-term
real estate secured loans and longer term loans which are 75% to 80% guaranteed
by the Small Business Administration. The Bank generally sells the guaranteed
portion of these loans. As of December 31, 1995, commercial purpose loans,
consumer loans and real estate loans constitute approximately 17.2 percent, 6.7
percent and 76.1 percent, respectively, of the Bank's loan portfolio. Loans are
generally limited to less than 85 percent of the Bank's deposits. The balance of
the Bank's investable funds are invested primarily in securities of the United
States government and its agencies, obligations of states and political
subdivisions, and the sale of Federal funds to other banks. At December 31,
1995, the portfolio mix of such investments was 24.3 percent, 17.9 percent, and
57.8 percent, respectively.
Competition
The banking business in California generally, and the Bank's primary service
area in particular, is highly competitive with respect to both loans and
deposits and is dominated by a relatively small number of major banks which have
many offices operating over wide geographic areas. Moreover, the entry of other
independent commercial banks in the area surrounding Auburn, Grass Valley and
Rancho Cordova affects the Bank's competitive position.
The Bank competes for deposits and loans principally with these banks, as well
as with savings and loan associations, savings banks, thrift and loan
associations, credit unions, mortgage companies, insurance companies and other
lending institutions. Among the advantages certain of these institutions have
over the Bank are their ability to finance extensive advertising campaigns and
to allocate their investment assets to regions of highest yield and demand.
Further, the effect of recent legislation has increased competition among
different types of financial institutions for both deposits and loans.
Many of the major commercial banks operating in the Bank's primary service area
offer certain services (such as international banking services) which will not
be offered directly by the Bank and, by virtue of their greater total
capitalization, have substantially higher lending limits than the Bank. In
addition, other entities (both public and private) seeking to raise capital
through the issuance and sale of debt or equity securities will also compete
with the Bank in the acquisition of deposits. In order to compete with the other
financial institutions in its primary service area, the Bank relies principally
upon local promotional activity, personal contacts by its Officers, Directors,
employees and shareholders, and extended hours.
The Bank's promotional activities emphasize the advantages of dealing with a
locally-owned and headquartered institution attuned to the particular needs of
the community. For customers whose loan demands exceed the Bank's lending limit,
the Bank attempts to arrange for such loans on a participation or sale basis
with its correspondent banks.
In addition to competing with other financial institutions, commercial banks
compete with other financial markets for funds. For instance, yields on
corporate and government debt securities and other commercial paper affect the
ability of commercial banks to attract and hold deposits. Commercial banks also
compete for available funds with money market funds which are not generally
subject to federal deposit insurance and
3
banking laws and regulations. In periods of high interest rates, such money
market funds have provided substantial competition to banks for deposits and it
is anticipated that they may continue to do so in the future. The discussion
which follows, under the heading "Recent Legislation and Other Changes Affecting
Banking", discusses the changes which have significantly altered the competitive
banking environment.
Employees
As of December 31, 1995, the Bank had 50 full-time and 21 part-time employees.
Market Area
The Bank's primary service area consists of the cities of Auburn, Grass Valley
and Rancho Cordova, California, and adjacent areas in Placer, Nevada and
Sacramento Counties, including Newcastle, Loomis, Colfax, Meadow Vista, Bowman,
Nevada City, Folsom and portions of Lincoln and Rocklin. This area is primarily
rural; however, in recent years there has been increased commercial and light
industrial development. This trend is expected to continue in the future.
The largest employer in the primary service area is Placer County, for which
Auburn is the county seat. Major businesses and employers in the area are
Modular Homes, Inc.; American Forest Products; Auburn Container; Pacific Gas &
Electric; Pacific Telesis; the United States Government (Bureau of Reclamation);
Cable Data and Auburn Faith Hospital.
The Holding Company
The capital stock of Bancorp is subject to the registration and periodic
reporting requirements of the Securities Act of 1933. The Bank's common stock is
exempt from such requirements.
The Bancorp is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and is registered as such and is subject to the
supervision of the Federal Reserve Board. The Bancorp is required to obtain the
approval of the Federal Reserve Board before it may acquire all or substantially
all of the assets of any bank or ownership or control of the voting shares of
any bank, if, after giving effect to such acquisition of shares, the Bancorp
would own or control more than 5 percent of the voting shares of such bank. The
Bank Holding Company Act prohibits the Bancorp from acquiring any voting shares,
interest in or substantially all of the assets of a bank located outside the
State of California unless such an acquisition is specifically authorized by the
laws of the state in which such bank is located. Under the Bank Holding Company
Act, the Bancorp may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, except that it may
engage in certain activities which, in the opinion of the Federal Reserve Board,
are so closely related to banking or to managing or controlling banks as to be a
proper incident thereto. The Bancorp is also prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company unless the company is engaged in such
activities. The Federal Reserve Board's approval must be obtained before the
shares of any such company can be acquired and, in certain cases, before any
approved company can open new offices. In making such determinations the Federal
Reserve Board considers whether the performance of such activities by a bank
holding company would offer advantages to the public, such as greater
convenience, increased competition, or gains in undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. Further, the Federal Reserve Board is empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern. The Bancorp has no present
plans to directly or indirectly engage in any non-banking activity.
The Bancorp's primary source of income is the earnings of the Bank.
No national bank may, pursuant to 12 U.S.C. Section 56, pay dividends from its
capital. All dividends must be paid out of net profits then on hand, after
deducting therefrom losses and bad debts. The payment of dividends out of net
profits of a national bank is further limited by 12 U.S.C. Section 60(a), which
prohibits a bank from declaring a dividend on its shares of common stock until
the surplus fund equals the amount of capital stock or, if the surplus fund does
not equal the amount of capital stock, until one-tenth part of the
4
Bank's net profits of the preceding half year, in the case of quarterly or
semiannual dividends, or the preceding two consecutive half years in the case of
an annual dividend, are transferred to the surplus fund.
Pursuant to 12 U.S.C. Section 60(a), the approval of the Comptroller shall be
required if the total of all dividends declared by the Bank in any calendar year
shall exceed the total of its retained net profits of that year combined with
its net profits of the two preceding years, less any required transfers to
surplus or a fund for the retirement of any preferred stock. Additionally,
pursuant to 12 U.S.C. Section 1818(b), the Comptroller may prohibit the payment
of dividends which would constitute an unsafe and unsound banking practice.
As a bank holding company, the Bancorp is required to file reports with the
Federal Reserve Board and provide such additional information as the Federal
Reserve Board may require. The Federal Reserve Board will also have the
authority to examine the Bancorp and each of its subsidiaries, with the cost
thereof to be borne by the Bancorp.
The Bancorp, and any subsidiaries which it may acquire or organize, will be
deemed to be affiliates of the Bank, within the meaning set forth in the Federal
Reserve Act. This means, for example, that there will be limitations on
extensions of credit, including loans by the Bank to affiliates, on investments
by the Bank in affiliates' stock and on the Bank's taking affiliates' stock as
collateral for loans to any borrower. The Bancorp and its subsidiaries will also
be subject to certain restrictions with respect to engaging in the underwriting,
public sales and distribution of securities.
The Bancorp and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer's obtaining other
services provided by it, the Bancorp, or any other subsidiary or on a promise by
its customer not to obtain other services from a competitor.
Non-Banking Activities That May Be Engaged in by the Holding Company
Federal Reserve Regulation "Y" sets out those activities which are regarded as
closely related to banking or managing or controlling banks, and thus, are
permissible activities that may be engaged in by bank holding companies subject
to approval in individual cases by the Federal Reserve Board. There has been
litigation challenging the validity of certain activities authorized by the
Federal Reserve Board for bank holding companies, and the Federal Reserve Board
has various regulations in this regard still under consideration.
The Bank - General
The Bank, as a national banking association whose accounts are insured by the
FDIC up to the maximum legal limits of the FDIC, is subject to regulation,
supervision and regular examination by the Comptroller of the Currency. The Bank
is a member of the Federal Reserve System and, as such, is subject to certain
provisions of the Federal Reserve Act and regulations issued by the Board. The
Bank is subject to applicable provisions of California law insofar as they do
not conflict with, or are not preempted by, federal law. The regulations of
these various agencies govern most aspects of the Bank's business, including
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. California law exempts banks from usury laws.
Recent Legislation and Other Changes
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. The likelihood of any major changes and the impact such
changes might have on the Bank are impossible to predict. Certain of the
potentially significant changes which have been enacted recently by Congress or
various regulatory or professional agencies are discussed below.
5
On September 28, 1995, Governor Pete Wilson signed Assembly Bill 1482 (known as
the Caldera, Weggeland, and Killea California Interstate Banking and Branching
Act of 1995 and referred to herein as the "CIBBA") which allows for early
interstate branching in California. Under the federally enacted Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"), discussed in
more detail below, individual states could "opt-out" of the federal law that
would allow banks on an interstate basis to engage in interstate branching by
merging out-of-state banks with host state banks after June 1, 1997. In addition
under IBBEA, individual states could also "opt-in" and allow out-of-state banks
to merge with host state banks prior to June 1, 1997. The host state is allowed
under IBBEA to impose certain nondiscriminatory conditions on the resulting
depository institution until June 1, 1997. California in enacting CIBBA
authorizes out-of-state banks to enter California by the acquisition of or
merger with a California bank that has been in existence for at least five
years.
Section 3824 of the California Financial Code ("Section 3824") as added by CIBBA
provides for the election of California to "opt-in" under IBBEA allowing
interstate bank merger transactions prior to July 1, 1997 of an out-of-state
bank with a California bank that has been in existence for at least five years.
The early "opt in" has the reciprocal effect of allowing California banks to
merge with out-of-state banks where the states of such out-of-state banks have
also "opted in" under IBBEA. The five year age limitation is not required when
the California bank is in danger of failing or in certain other emergency
situations.
Under IBBEA, California may also allow interstate branching through the
acquisition of a branch in California without the acquisition of an entire
California bank. Section 3824 provides an express prohibition against interstate
branching through the acquisition of a branch in California without the
acquisition of the entire California bank. IBBEA also has a provision allowing
states to "opt-in" with respect to permitting interstate branching through the
establishment of de novo or new branches by out-of-state banks. Section 3824
provides that California expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California, or in
other words, California did not "opt-in" this aspect of IBBEA. CIBBA also amends
the California Financial Code to include agency provisions to allow California
banks to establish affiliated insured depository institution agencies out of
state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws, govern the use of
shared ATM's, allow the repurchase of stock with the prior written consent of
the Superintendent, and amend intrastate branch acquisition and bank merger
laws. Another banking bill enacted in California in 1995 was Senate Bill 855
(known as the State Bank Parity Act and is referred to herein as the "SBPA").
SBPA went into effect on January 1, 1996, and its purpose is to allow a
California state bank to be on a level playing field with a national bank by the
elimination of certain disparities and allowing the California Superintendent of
Banks ("Superintendent") authority to implement certain changes in California
banking law which are parallel to changes in national banking law such as closer
conformance of California's version of Regulation O to the FRB's version of
Regulation O.
On September 29, 1994, IBBEA was enacted which has eliminated many of the
current restrictions to interstate banking and branching. The IBBEA permits full
nationwide interstate banking to adequately capitalized and adequately managed
bank holding companies beginning September 29, 1995 without regard to whether
such transaction is expressly prohibited under the laws of any state. The
IBBEA's branching provisions permit full nationwide interstate bank merger
transactions to adequately capitalized and adequately managed banks beginning
June 1, 1997. However, states retain the right to completely "opt out" of
interstate bank mergers and to continue to require that out-of-state banks
comply with the states' rules governing entry.
The states that opt out must enact a law after September 29, 1994 and before
June 1, 1997 that (i) applies equally to all out-of-state banks and (ii)
expressly prohibits merger transactions with out-of-state banks. States which
opt out of allowing interstate bank merger transactions will preclude the
mergers of banks in the opting out state with banks located in other states. In
addition, banks located in states that opt out are not permitted to have
interstate branches. States can also "opt in" which means states can permit
interstate branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers provide that
transactions, which result in the bank holding company or bank controlling or
holding in excess of ten percent of the total deposits nationwide or thirty
percent of the total deposits statewide, will not be permitted except under
certain
6
specified conditions. However, any state may waive the thirty percent provision
for such state. In addition, a state may impose a cap of less than thirty
percent of the total amount of deposits held by a bank holding company or bank
provided such cap is not discriminatory to out-of-state bank holding companies
or banks.
On September 23, 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "1994 Act") was enacted which covers a wide range
of topics including small business and commercial real estate loan
securitization, money laundering, flood insurance, consumer home equity loan
disclosure and protection as well as the funding of community development
projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act include an
examination schedule that has been eased for the top rated banks and will be
every 18 months for CAMEL 1 banks with less than $250 million in total assets
and CAMEL 2 banks with less than $100 million in total assets (after two years
the $100 million amount may be increased to $175 million, if the appropriate
federal banking regulatory agency so permit). The 1994 Act amends Federal
Deposit Insurance Corporation Improvement Act of 1991 with respect to the
Section 124, the mandate to the federal banking agencies to issue safety and
soundness regulations, including regulations concerning executive compensation
allowing the federal banking regulatory agencies to issue guidelines instead of
regulations.
Further regulatory relief is provided in the 1994 Act, as each of the federal
regulatory banking agencies including the National Credit Union Administration
Board is required to establish an internal regulatory appeals process for
insured depository institutions within 6 months. In addition, the Department of
Justice 30 day waiting period for mergers and acquisitions is reduced by the
1994 Act to 15 days for certain acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act requires the Secretary
of the Treasury to allow financial institutions to file such reports
electronically. The 1994 Act also requires the Secretary of the Treasury to
publish written rulings concerning the Bank Secrecy Act, and staff commentary on
Bank Secrecy Act regulations must also be published on an annual basis.
The procedures for forming a bank holding company have also been simplified. The
formal application process for many holding company formations is now a
simplified 30 day notice procedure. In addition, the Securities Act of 1933 has
been amended by the 1994 Act to further simplify the securities issuance in
connection with a bank holding company formation.
On December 17, 1993, the President signed into law legislation to provide
additional funding for failed savings associations under the jurisdiction of the
Resolution Trust Corporation. In addition to providing such funding, the
legislation, among other things, makes it more difficult for the federal banking
agencies to obtain prejudgment injunctive relief against depository institutions
and parties affiliated with such institutions, extends the moratorium on
depository institutions converting from Savings Association Insurance Fund
insurance to Bank Insurance Fund insurance or vice versa, and prohibits the FDIC
from using any deposit insurance funds to benefit the shareholders of a failed
or failing depository institution.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"), which was
signed into law on August 10, 1993, contains numerous tax and other provisions
which may affect financial institutions and their businesses. The Budget Act
contains a provision that establishes a priority for depositors, or the FDIC as
subrogee thereof, in the event of a liquidation or other resolution of an
insured depository institution for which a receiver is appointed after August
10, 1993. In addition, under the existing cross-guarantee provisions of federal
banking law, the FDIC has the power to estimate the cost of the failure of an
insured depository institution and assess a charge against any financial
institution affiliated with the failed institution.
On December 19, 1991, the FDIC Improvement Act of 1991 (the "1991 Act") was
signed into law. The 1991 Act provides for the recapitalization and funding of
the Bank Insurance Fund of the FDIC. In addition the 1991 Act includes many
changes to banking law. Supervisory reforms provided under the 1991 Act include
annual on-site full scope examinations of most insured institutions, additional
audit and audit report requirements imposed on most insured institutions and a
new annual report requirement for most insured institutions. Accounting reforms,
including the prescription of accounting principles no less stringent than
generally accepted accounting principles, and prescription of standards for the
disclosure of off-balance sheet items,
7
market value information and capital adequacy, are also provided for in the 1991
Act. In addition, the 1991 Act provides for a new rating system for insured
institutions based on capital adequacy. Institutions will be categorized as
critically undercapitalized, significantly undercapitalized, undercapitalized,
adequately capitalized and well capitalized.
The FDIC has adopted definitions of how institutions will be ranked for prompt
corrective action purposes. These definitions are as follows: (i) a well
capitalized institution is one that has a leverage ratio of 5%, a Tier 1
risk-based capital ratio of 6%, a total risk-based capital ratio of 10% and is
not subject to any written order or final directive by the FDIC to meet and
maintain a specific capital level; (ii) an adequately capitalized institution is
one that meets the minimum required capital adequacy levels but not that of a
well capitalized institution; (iii) an undercapitalized institution is one that
fails to meet any one of the minimum required capital adequacy levels but not as
undercapitalized as a significantly undercapitalized institution; (iv) a
significantly undercapitalized institution is one that has a total risk-based
capital ratio of less than 6% and/or a leverage ratio of less than 3%; and (v) a
critically undercapitalized institution is one with a leverage ratio of less
than 2%.
The banking regulators will have broad powers to regulate undercapitalized
institutions. Undercapitalized institutions must file capital restoration plans
and are automatically subject to restrictions on dividends, management fees and
asset growth. In addition, the institution is prohibited from opening new
branches, making acquisitions or engaging in new lines of business without the
approval of its appropriate banking regulator.
Holding companies with undercapitalized institutions will be prohibited from
capital distributions without the prior approval of the FRB. Definite drop dead
dates are mandated under the 1991 Act for when critically undercapitalized
insured institutions must go under receivership or conservatorship.
The 1991 Act also requires the regulators to issue regulations in many areas of
banking including prescribing safety and soundness standards as to internal
controls, asset quality, earnings, stock valuation and executive compensation.
Least cost resolution is mandated by the 1991 Act which will require the FDIC to
use the least cost method case resolution. Beginning in 1995, the FDIC generally
will not be permitted to cover uninsured depositors or creditors unless the
President, Secretary of Treasury and the FDIC jointly determine that such is
necessary to avoid systemic risk.
The 1991 Act also contains miscellaneous provisions including additional
regulation of foreign banks, notification of branch closures, reduced
assessments for lifeline account products, FDIC affordable housing program,
Truth in Savings disclosure provisions, limitations on brokered deposits,
restrictions on state bank nonbanking activities, risk-based assessments and
deposit insurance limitations for certain accounts. The FDIC also adopted a
risk-based assessment system for purposes of determining the insurance premium
to be paid by a bank for FDIC deposit insurance.
The Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of
1990 (the "Crime Bill"), signed into law on November 29, 1990, also expanded the
enforcement powers of regulatory authorities. The Crime Bill increases fines and
prison terms for various financial institution related crimes; appoints
additional prosecutors; establishes a system of rewards for people providing
information leading to the prosecution of financial institution crimes; mandates
prison terms of ten years to life for "kingpins" of financial institution
crimes; makes it a crime to obstruct the examination of a financial institution
to conceal assets from a conservator or to impede conservatorship operations;
provides for the forfeiture of assets obtained through bank crimes; prohibits
persons convicted of bank crimes from engaging in certain transactions with
financial institutions or regulatory agencies; and provides that liabilities
arising from a breach of fiduciary duty to a financial institution or the breach
of an agreement to maintain the institution's capital cannot be discharged in
bankruptcy. Further, the Crime Bill prohibits a financial institution from
prepaying the salary, liabilities or legal expenses of an affiliated party if
such prepayments are made in contemplation of an institution's insolvency or if
such prepayments will prevent normal payments from being made to the
institution's creditors. Golden parachute and indemnification payments can also
be prohibited by regulatory authorities in certain circumstances if the
institution is insolvent, is in conservatorship or receivership, is in troubled
condition, or has received a regulatory rating in one of the two lowest rating
categories (or in contemplation of such events).
8
On August 9, 1989, Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA") was signed into law. FIRREA provided funding in the range of
many billions of dollars for the so-called "bailout" of insolvent or seriously
undercapitalized savings and loans, reorganized the federal regulatory structure
of the financial institution industry, and expanded the enforcement authority of
banking supervisory agencies. Tighter regulatory standards are required under
FIRREA for the performance of real estate appraisals, and FIRREA provides for
greater examination and disclosure of an insured depository institution's
compliance with the Community Reinvestment Act which deals with the
institution's record of meeting the credit needs of its entire community
including low and moderate income neighborhoods.
It is likely that other bills affecting the business of banks may be introduced
in the future by the United States Congress or California legislature.
Impact of Monetary Policies
Banking is a business which depends on interest rate differentials. In general,
the difference between the interest paid by the Bank on its deposits and its
other borrowings, and the interest received by the Bank on loans extended to its
customers and on securities held in its portfolio, comprises the major portion
of the Bank's earnings.
The earnings and growth of the Bank are affected not only by general economic
conditions, both domestic and foreign, but also by the monetary and fiscal
policies of the United States and its agencies, particularly the FRB. The FRB
can and does implement national monetary policy, such as seeking to curb
inflation and combat recession by its open market operations in United States
Government securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements, and by varying the discount rates
applicable to borrowings by banks from the Federal Reserve System. The actions
of the FRB influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact that future changes in fiscal or monetary policies or economic controls
may have on the Bank's business and earnings cannot be predicted.
9
SELECTED STATISTICAL DATA
Distribution of Assets, Liabilities and Stockholders' Equity:
Interest Rates and Interest Differential
Set forth below are the consolidated assets, liabilities and stockholders'
equity and applicable percentages computed on a daily average basis as of the
dates indicated:
(Dollars In Thousands) Year Ended December 31,
Assets 1995 Percent 1994 Percent
- ------ ------- ------- ------- -------
Cash and Due from Banks ................ $ 5,112 6.9 $ 5,196 8.0
Federal Funds Sold ..................... 6,471 8.8 6,668 10.3
Investment Securities .................. 6,550 8.9 5,221 8.0
Loans Held for Sale .................... 4,931 6.7 5,331 8.2
Loans, Net ............................. 44,215 60.0 36,690 56.6
Bank Premises and Equipment ............ 3,572 4.9 3,407 5.3
Other Assets ........................... 2,780 3.8 2,366 3.6
------- ----- ------- -----
Total Assets .................. $73,631 100.0% $64,879 100.0%
======= ===== ======= =====
Liabilities and Stockholders'
Equity
Non-interest Bearing Deposits .......... $13,778 18.7 $12,087 18.6
Interest-bearing Deposits .............. 51,338 69.7 44,821 69.1
Long-term Debt ......................... 572 .8 602 .9
Other Liabilities ...................... 482 .7 258 .4
Stockholders' Equity ................... 7,461 10.1 7,111 11.0
------- ----- ------- -----
Total Liabilities and
Stockholders' Equity ........ $73,631 100.0% $64,879 100.0%
======= ===== ======= =====
10
Average Balances and Interest Rates
The following tables indicate the amounts and average balances, amounts of
return and average yield of interest-bearing assets and liabilities for the
period indicated:
Year Ended December 31,
------------------------------------------------------
(Dollars In Thousands) 1995 1994
------------------------ ------------------------
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- --------- -----
Earning Assets
Federal Funds Sold ............... $ 6,471 $ 364 5.6% $ 6,668 $ 278 4.2%
Loans Held for Sale .............. 4,931 527 10.7 5,331 474 8.9
Investment Securities:
Obligations of U.S. ............
Government Agencies .......... 3,500 206 5.9 1,855 111 6.0
Other Securities ............... 3,050 217 7.1 3,366 234 7.0
------- ------- ------- -------
Total Investment
Securities ............ 6,550 423 6.5 5,221 345 6.6
Loans (Net) ...................... 44,215 4,812 10.9 36,690 3,633 9.9
------- ------- ------- -------
Total Earning
Assets ................ $62,167 $ 6,126 9.9% $53,910 $ 4,730 8.8%
======= ======= ======= =======
Year Ended December 31,
------------------------------------------------------
(Dollars In Thousands) 1995 1994
------------------------ ------------------------
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- --------- -----
Interest-Bearing Liabilities
Demand Deposits - Interest
Bearing ........................ $32,910 $ 758 2.3% $33,253 $ 740 2.2%
Savings Deposits ................. 3,198 70 2.2 3,391 74 2.2
Time Deposits .................... 15,230 802 5.3 8,177 275 3.4
Long-term Debt ................... 572 49 8.6 602 51 8.5
------- ------- ------- -------
Total Interest-
Bearing Liabilities
$51,910 $ 1,679 3.2% $45,423 $ 1,140 2.5%
======= ======= ======= =======
Interest Income/Earning Assets ... 9.9% 8.8%
Interest Expense/Earning Assets .. 2.7% 2.1%
----- -----
Net Interest Income and
Net Yield on Interest-
Earning Assets $ 4,447 7.2% $ 3,590 6.7%
======= ===== ======= =====
11
Rate/Volume Analysis of Net Interest Revenue
The following table sets forth information regarding changes in interest income
and interest expense for the Bank for the periods indicated. For each category
of interest earning asset and interest bearing liability, information is
provided on changes attributable to (1) changes in volume (changes in volume
multiplied by previous rate), (2) change in rate (changes in rate multiplied by
previous volume) and (3) changes in rate/volume (change in rate multiplied by
the change in volume).
(Dollars In Thousands) 1995 over 1994(1) 1994 over 1993(1)
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
Increase (Decrease) in:
Interest Income
Loans Held for Sale .............. (31) 83 52 437 0 437
Federal Funds Sold ............... (8) 94 86 9 86 95
Investment Securities ............ 86 (8) 78 29 (18) 11
Loans ............................ 792 383 1,175 98 78 176
------ ------ ------ ------ ------ ------
Total increase (decrease) ...... 839 552 1,391 573 146 719
------ ------ ------ ------ ------ ------
Interest Expense
Demand Deposits - Interest
Bearing ........................ (8) 26 18 122 (12) 110
Savings Deposits ................. (4) 0 (4) (1) (2) (3)
Time Deposits .................... 298 195 493 18 3 21
Long-term Debt ................... (3) 1 (2) (2) (5) (7)
------ ------ ------ ------ ------ ------
Total increase (decrease) ...... 283 222 505 137 (16) 121
------ ------ ------ ------ ------ ------
Total change in net interest
income ......................... $ 556 $ 330 $ 886 $ 436 $ 162 $ 598
====== ====== ====== ====== ====== ======
(1) The variance not solely due to rate or volume is proportionately allocated
between the rate and volume variances.
12
Investment Portfolio
The following table summarizes the investments at amortized cost by term,
distributions and yields as of December 31, 1995:
After Five
(Dollars In Thousands) One Year Years to Over Ten
or Less Ten Years Years Total
Available-for-sale Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Government
Agencies .................. $3,500 5.9% $3,500 5.9%
Obligations of States &
Political Subdivisions .... 1,000 7.5% $1,571 8.2% 2,571 7.9%
Federal Reserve Bank
Stock ..................... 141 6.0% 141 6.0%
------ --- ------ --- ------ --- ------ ---
Total .............. $4,500 6.3% $1,571 8.2% $ 141 6.0% $6,212 6.7%
====== === ====== === ====== === ====== ===
The Company had no held-to-maturity investment securities at December 31, 1995.
Year End Balances
The following table summarizes the year-end balances and distributions of the
Bank's investment securities held on the dates indicated. The Company had no
held-to-maturity investment securities at December 31, 1995. Available-for- sale
investment securities are shown at estimated market value:
(Dollars In Thousands)
Available-for-sale
1995 1994
------- -------
U.S. Government Agencies .................... $ 3,510 $ 3,410
State and Political Subdivisions ............ 2,666 2,979
Federal Reserve Bank Stock .................. 141 141
------- -------
$ 6,317 $ 6,530
======= =======
Loan Portfolio
The following table sets forth the amounts of gross loans outstanding at the end
of the period indicated, according to the type of loan:
(Dollars In Thousands) December 31,
1995 1994
------- -------
Commercial, Financial, and Agricultural ..... $ 7,901 $ 6,858
Real estate - Construction .................. 2,791 2,871
Real estate - Mortgage ...................... 32,283 31,796
Installment Loans to Individuals ............ 3,093 2,192
------- -------
Total Loans ........................ $46,068 $43,717
======= =======
13
Maturity of Loans and Sensitivity of Loans to Changes in Interest
Rates
Fixed Variable
One Rate Rate
Less Year More Due Due
than to than After After
One Five Five One One
(Dollars In Thousands) Year Years Years Year Year
------ ------ ------ ------ ------
December 31, 1995
Commercial, Financial
Agricultural ................... $6,039 $1,395 $ 467 $1,862 $3,843
Real Estate Construction ......... 2,791
Impaired, Nonaccrual, Past Due and Restructured Loans
(Dollars In Thousands) Year Ended Year Ended
December 31, 1995 December 31, 1994
Loan Amount Loan Amount
Loans meeting the definition of
impairment under SFAS 114 ................. $604,717 $ 0
Loans accounted for on a non-
accrual basis ............................. $604,717 $451,908
Accruing loans which are 90
days or more past due as to
interest or principal ..................... $ 62,801 $ 89,300
Troubled debt restructuring ................. $ 0 $ 0
Interest income on these loans included in net income for the year ended
December 31, 1995 and 1994 totaled $54,949 and $28,384, respectively. Interest
foregone on nonaccrual loans totaled $12,526 for the year ended December 31,
1995.
Impaired loans are defined as loans for which it is probable that all amounts
due (including both principal and interest) will not be collected in accordance
with the contractual term of the loan agreement. An impaired loan is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical matter, at the loan's
observable market price or the fair value of collateral if the loan is
collateral dependent. Loans are generally placed on non-accrual status when
principal or interest payments are past due 90 days or more. Certain loans are
placed on non-accrual earlier if there is a reasonable doubt as to the
collectibility of interest. Loans which are in the process of renewal in the
normal course of business or are well secured and in the process of collection
continue to accrue interest if Management considers the risk of loss to be
minimal. Troubled debt restructurings are those loans for which the terms have
been renegotiated to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower or which
would be classified as a restructured debt in a troubled loan situation.
Potential Problem Loans
Management knows of no potential problem loans that have not been reported
above.
14
Foreign Loans
There are no foreign loans.
Loan Concentrations and Other Interest-Bearing Assets
As of December 31, 1995, there were no concentrations of loans exceeding 10
percent of total loans which were not otherwise disclosed as a category in the
loan portfolio table. As of December 31, 1995, there were no other
interest-bearing assets that would be required to be in the Impaired, Nonaccrual
and Potential Problem Loans sections above if such assets were classified as
loans, except as noted above.
Analysis of the Allowance for Loan Losses
Year Ended December 31,
(Dollars In Thousands) 1995 1994
------- -------
Balance at beginning of period .............. $ 741 $ 793
Charge-offs:
Commercial, financial and agricultural .... (59)
Real estate-mortgage ...................... (64) (72)
Installment loans to individuals .......... (7) (7)
Recoveries:
Commercial, financial and agricultural .... 49 3
Real estate-mortgage ...................... 2 24
------- -------
Net charge-offs ............................. (79) (52)
Additions charged to operations ............. 70
------- -------
Balance at end of period .................... $ 732 $ 741
======= =======
Ratio of net charge-offs during the
period to average loans outstanding
during period ............................. .18% .14%
======= =======
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Loan losses are charged and recoveries are
credited to the allowance for loan losses. The provision for loan losses is
determined after considering various factors such as impaired loans, loan loss
experience, the existing allowance for loan losses, current charges-offs and
recoveries to the allowance for loan losses, and the overall quality of the
portfolio, as determined by management, regulatory agencies and current economic
conditions. The adequacy of the allowance for loan losses is determined after
considering the results of the Bank's ongoing internal review of the portfolio
which is undertaken to ascertain whether there are probable losses that must be
charged off and to assess the risk characteristics of the portfolio in
aggregate. In addition, consideration is given to the results of examinations
and third-party loan file reviews performed annually. The Bank's loan loss
experience, current charge-offs and recoveries, delinquency trends and current
national and local economic conditions are also evaluated by management. 1996
losses for all loan categories as a percentage of average loans are expected to
approximate the average for the previous three years. As over 95% of the loan
portfolio is made up of commercial and real estate loans, the Bank does not
specifically allocate the allowance for loan losses to particular categories of
loans.
15
Deposit Structure
The following is a distribution of average daily deposits for the years ended
December 31, 1995 and 1994.
Years Ended December 31,
(Dollars In Thousands) 1995 1994
---- ----
Amount Rate Amount Rate
Demand deposits
Non-interest bearing ................. $13,778 $12,087
Demand deposits
Interest bearing ..................... 32,910 2.3% 33,253 2.2%
Saving deposits ........................ 3,198 2.2 3,391 2.2
Time deposits .......................... 15,230 5.3 8,177 3.4
------- -------
Total ......................... $65,116 3.2% $56,908 2.4%
======= =======
Time deposits of $100,000 or more at December 31, 1995 had the following
schedule of maturities:
(Dollars In Thousands) December 31,
1995
Three months or less ............................. $ 875
Over three months to six months .................. 1,514
Over six months to twelve months ................. 1,173
-------
Total ................................... $ 3,562
=======
Financial Ratios
The following table indicates the key financial ratios of Bancorp for the
periods indicated:
Years Ended December 31,
1995 1994 1993
------ ------ ------
Profitability ratios:
Rate of return on average total assets ...... 1.20% 1.26% 1.30%
Rate of return on average stockholders'
equity .................................... 11.79% 11.52% 9.96%
Liquidity and capital ratios:
Dividend payout ratio ....................... 35.50% 35.61% 30.86%
Average stockholders' equity to average
total assets .............................. 10.13% 10.96% 13.06%
16
Item 2. Properties
Bancorp and Bank conduct operations at their main office at 540 Wall Street,
Auburn, California, with branch banking offices at 10375 Brunswick Road, Grass
Valley, California, and 2893 Sunrise Blvd, Suite 106, Rancho Cordova,
California. The Bank also maintains a loan production office at 1601 Response
Road, Suite 150, Sacramento, California.
The Auburn main office consists of a one-story building of approximately 4,000
square feet of office space with parking facilities on the property, which is
owned by Bancorp in fee. The property is subject to a first trust deed securing
a note with an original amount of $308,000.
The Bancorp also owns property in fee at 500 Wall Street, Auburn, California.
The property includes a one-story building with approximately 5,200 square feet
of office space. This space is used by the Bank and Bancorp for administrative
offices. The property is also subject to a first trust deed securing a note in
the original amount of $390,000.
The branch office located at 10375 Brunswick Road, Grass Valley, California, is
a two-story building owned by the Bank with approximately 12,990 square feet of
office space. The Bank occupies the lower floor of approximately 6,890 square
feet. The upper floor is being leased to third parties.
The Bank leases its Rancho Cordova facility under a noncancellable operating
lease which expires November 1999. The monthly rental is $5,133.90 and the
office consists of approximately 3,843 square feet. The loan production office
in Sacramento is approximately 2,085 square feet and is leased for $3,736.28 per
month.
The Bank acquired property at the corner of Bell Road and Professional Drive in
Auburn, California during December 1989. It was determined not to use this site
for future Bank offices and the property is currently for sale.
Management of Bancorp and Bank believe that the facilities are appropriate and
adequate for the operation of the business of Bancorp and Bank.
Item 3. Legal Proceedings
There are no legal proceedings other than ordinary routine litigation incidental
to the business pending against Bancorp or Bank to which the Bancorp or the Bank
is a party or of which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
a. Market Information
There is no established public trading market for Auburn Bancorp
common stock. The Bancorp's common stock is traded
over-the-counter, is not listed on any exchange and is not quoted
on NASDAQ. The following table summarizes the trades about which
management of Bancorp has information:
Quarter Ended High(Ask) Low(Bid)
-------------- -------- --------
December 31, 1995 ...................... $ 7.63 $ 7.63
September 30, 1995 ..................... 7.63 7.50
June 30, 1995 .......................... 7.75 7.50
March 31, 1995 ......................... 7.50 7.50
December 31, 1994 ...................... 7.50 7.00
September 30, 1994 ..................... 8.00 7.00
June 30, 1994 .......................... 8.13 7.50
March 31, 1994 ......................... 7.50 7.50
b. Holders
In addition, there were approximately 460 shareholders of Bancorp
stock as of March 1, 1996.
c. Dividends
On February 14, 1996, the Board of Directors of the Bancorp
declared a $.32 per share cash dividend distributed March 29,
1996 to shareholders of record on March 15, 1996.
On January 18, 1995, the Board of Directors of the Bancorp
declared a $.30 per share cash dividend distributed February 28,
1995 to shareholders of record on February 10, 1995.
On January 19, 1994, the Board of Directors of the Bancorp
declared a $.28 per share cash dividend distributed February 28,
1994 to shareholders of record on February 11, 1994.
Under California law, the Bancorp is prohibited from paying
dividends unless: (1) its retained earnings immediately prior to
dividend payment equals or exceeds the amount of the dividend; or
(2) immediately after giving effect to the dividend (i) the sum
of the Bancorp's assets would be at least 125% of its liabilities
and (ii) the current assets of the Bancorp would be at least
equal to its current liabilities or, if the average of its
earnings before taxes on income and before interest expense for
the two preceding fiscal years was less than the average of its
interest expense for the two preceding fiscal years, at least
125% of its current liabilities.
The Bancorp's principal source of funds, including funds
available for payment of cash dividends to shareholders, consists
of dividends paid and other funds advanced to the Bancorp by the
subsidiary Bank. Statutory and regulatory requirements impose
limitations on the amount of dividends payable by the Bank to the
Bancorp and on extensions of credit by the Bank to the Bancorp.
Extensions of credit by the Bank to the Bancorp are limited by 12
U.S.C. 371c to an amount not to exceed 10 percent of the capital
stock and surplus of the Bank and must be on terms and conditions
that are consistent with safe and sound banking practices. In
addition, any such extension of credit must be secured by
collateral having market values equal to specified percentages of
the loan. Although there were no extensions of credit to the
Bancorp by the Bank at December 31, 1995, the Bank was limited in
the amount it could lend to the Bancorp to $730,000.
18
Pursuant to 12 U.S.C. Sections 56 and 60, the Bank's shareholders
are entitled to cash dividends when, as and if declared by the
Board of Directors of the Bank out of funds properly available
therefore. A dividend cannot be declared if it would exceed the
Bank's net profits or if it would impair the Bank's capital.
Furthermore, unless the Bank's surplus fund is equal to its
common stock, no dividends can be paid until a required amount of
the Bank's undivided profits has been transferred to its surplus
fund. The approval of the Comptroller of the Currency is required
if the total of all cash dividends declared by the Bank in a
calendar year exceeds the total of the Bank's net profit for that
year combined with its retained profits for the preceding two
years. At December 31, 1995, $708,270 in retained earnings of the
Bank were available for dividend payments.
19
Item 6. Selected Financial Information
The following table summarizes certain consolidated financial information
relating to Bancorp and Bank:
(Dollars in thousands except Years Ended December 31,
per share data) 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
CONSOLIDATED STATEMENTS
OF OPERATIONS
Total interest income .......... $ 6,126 $ 4,731 $ 4,011 $ 4,112 $ 4,944
Net interest income ............ 4,447 3,590 2,992 2,822 2,950
Provision for loan losses ...... 70 0 90 50 82
Net income ..................... 880 819 738 572 469
Per common share(1) ............ $ .85 $ .79 $ .65 $ .49 $ .40
CONSOLIDATED BALANCE SHEETS
Total assets ................... $76,128 $69,428 $57,119 $56,635 $54,134
Net loans ...................... 45,237 42,847 34,167 35,310 31,823
Total deposits ................. 67,246 61,070 49,242 48,503 46,287
Allowance for loan losses ...... 732 741 793 772 736
Total stockholders'
equity ....................... $ 7,800 $ 7,475 $ 7,063 $ 7,270 $ 6,925
STOCK DATA
Cash dividends paid ............ $ .30 $ .28 $ .20 $ .20 $ --
Book value per share(2) ........ $ 7.91 $ 7.18 $ 6.78 $ 6.39 $ 6.08
SELECTED RATIOS (3)
Return on average assets
(net income divided
by average total assets) ... 1.20% 1.26% 1.30% 1.05% .87%
Return on average equity
(net income divided
by average equity) ......... 11.79% 11.52% 9.96% 8.03% 6.97%
Equity to assets
(average equity divided
by average total assets) ... 10.13% 10.96% 13.06% 13.11% 12.54%
Net yield on average
interest-earning assets .... 9.85% 8.77% 8.52% 9.12% 10.80%
Average net loans
to average deposits ........ 67.90% 64.47% 73.77% 72.86% 79.20%
(1) Per share net income is based on weighted-average number of shares of
common stock and common stock equivalents outstanding during each period.
(2) The book value per share is based on total stockholders' equity divided by
the number of shares outstanding as of the date indicated. Total
stockholders' equity includes the unrealized loss on available-for-sale
investment securities, net of taxes, at December 31, 1995 and 1994.
(3) Average balances are based on daily average balances for each month.
20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Management's discussion and analysis is intended to provide a better
understanding of the financial condition and results of operations of Auburn
Bancorp (the "Company") and its wholly-owned subsidiary, The Bank of Commerce,
N.A. (the "Bank"). This discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto, along with other
financial information included in this report.
Financial Overview
Auburn Bancorp and subsidiary produced earnings of $880,000 for 1995,
representing earnings per share of $.85. This represents a 7.4% increase over
1994 earnings of $819,000 and a 19.2% increase from 1993 earnings of $738,000.
Total assets increased to $76,128,000, as compared to 1994 assets of
$69,428,000. The improved earnings for 1995 were primarily the result of a 24%
increase in net interest income and only a marginal increase in operating
expenses. Interest on loans held for sale increased to $527,000 for 1995 from
$474,000 for 1994 and $37,000 for 1993 and was the result of retaining Small
Business Administration loans held for sale for longer periods before being
sold.
Net Interest Income
The primary source of earnings for the Bank is its net interest income, the
amount by which interest and fees on loans and investments exceed interest paid
on deposits and long-term debt. Net interest income for 1995 was $4,447,000,
which represents a 23.9% increase from 1994, and a 48.6% increase from 1993.
Average loans outstanding increased 20.5% to $44,215,000 in 1995 from
$36,690,000 in 1994. The increase in average loans outstanding was the primary
reason for the increase in net interest income. However, average yields on loans
also increased to 10.9% in 1995, from 9.9% in 1994 and 9.7% in 1993. In
addition, average yields on investments decreased to 6.5% from 6.6% in 1994, and
7.2% in 1993.
Although average yields on interest-bearing deposits increased in 1995 to 3.2%,
from 2.4% in 1994 and 2.5% in 1993, the Bank's earning assets, such as loans,
reflect changes in interest rates more readily than do its interest-bearing
liabilities, such as certificates of deposit. Non-interest bearing deposits
increased 8.8%, to $15,025,000 in 1995 from $13,816,000 in 1994. Interest
bearing deposits increased 10.5% to $52,221,000 in 1995 from $47,253,000 in
1994. Total interest income increased $1,395,000 for 1995 and total interest
expense increased $538,000 for 1995, leaving an increase in net interest income
of approximately $857,000.
Management believes net interest margins will decrease slightly under current
economic conditions. The Bank's net interest margin averaged 7.2% in 1995 as
compared to 6.7% in 1994 and 6.3% in 1993.
21
Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses in the loan
portfolio which can be expected to occur in the normal course of operations. The
level of the allowance for loan losses is based on management's evaluation of
potential losses in the loan portfolio, as well as prevailing and anticipated
economic conditions. At December 31, 1995, the allowance for loan losses totaled
$732,000, or 1.6% of gross loans. This compares to $741,000 or 1.7% of total
gross loans at December 31, 1994. Impaired loan totaled $605,000 at December 31,
1995. The allowance for loan losses included an allocation for these loans
totaling $76,000. Nonaccrual loans totaled $605,000 and $452,000 at December 31,
1995 and 1994, respectively. Nonperforming loans (loans greater than 90 days
past due and still accruing interest) totaled $62,800 and $481,900 at December
31, 1995 and 1994, respectively. The Bank's net charge-offs remain minimal at
$79,000, $51,000 and $69,000 for the years ended December 31, 1995, 1994 and
1993, respectively. The provision for loan losses was $70,000 in 1995, as
compared to no provision in 1994 and $90,000 in 1993. The provision to the
allowance for loan losses in 1995 reflects the continued high level of asset
quality as evidenced by the minimal charge-offs and delinquencies experienced
during the year. In addition, management does not believe that any loans
classified for regulatory purposes represent a significant risk of loss to the
Bank or that there are any negative trends or uncertainties reflected in their
quarterly analysis of the adequacy of the allowance for loan losses which would
materially impact future operating results.
Other Real Estate
Other real estate acquired through foreclosure during 1995 was $599,000 as
compared to none in 1994. Other real estate sold during 1995 resulted in a net
loss of $7,000.
Non-interest Income
Non-interest income is comprised primarily of service charges on deposit
accounts and gains on sales of investments and loans. Service charges on deposit
accounts were $367,600 in 1995 as compared to $252,700 in 1994 and $232,400 in
1993.
There were no sales of investments in 1995. A gain of $173,000 was recognized on
the sale of investments in 1994 and there were no sales of investments in 1993.
At December 31, 1995, an unrealized gain on available- for-sale investment
securities totaling $104,355 existed in the portfolio. At December 31, 1994 and
1993, an unrealized loss of $195,365 and a gain of $406,000, respectively,
existed in the investment portfolio .
In addition, the Bank's mortgage and Small Business Administration (SBA) lending
departments generated gains from the sale of loans totaling $535,000 in 1995,
$1,101,000 in 1994 and $1,234,000 in 1993. The decrease in income from the sale
of loans during 1995 occurred as a result of a decrease in the SBA loans
originated and sold. Sales of the guaranteed portion of SBA loans totaled
$7,952,000 in 1995, $18,419,000 in 1994 and $12,275,000 in 1993. The decrease in
SBA activity was the result of a funding shortfall in the SBA program during
1995, which restricted SBA lending activity for several months. The Bank
continues to focus significant attention toward increasing SBA loan volumes.
However, the present yield curve and risk based pricing are presently making
alternative financing more attractive than the SBA 7a program. As a result, SBA
lending for real estate purposes has been impacted and 1996 volumes should be
approximately at the 1995 level. Our marketing program has been expanded in an
effort to increase volumes to offset these effects. After the sale of the
quaranteed portion, the Bank continues to service these loans, resulting in
servicing income of $335,000 in 1995, $288,000 in 1994 and $197,000 in 1993. The
volume of servicing income will continue to grow with the continued sales of SBA
loans.
22
Loans Held for Sale
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
Accounting for Mortgage Servicing Rights. This Statement requires that the
rights to service mortgage loans for others, whether those servicing rights are
acquired through the purchase or origination of the related loans, be recognized
as separate assets. In addition, capitalized mortgage servicing rights must be
evaluated for impairment based on the fair value of the rights. This Statement
is effective for fiscal years beginning after December 15, 1995. Earlier
application is encouraged, but was determined by the Company to be
impracticable. The Company does not believe that the adoption of SFAS 122 will
have a significant impact on its financial position and results of operations
when implemented.
Non-interest Expense
Non-interest expense increased 3.7% to $4,250,000 in 1995, from $4,097,000 in
1994 and 26.7% from $3,355,000 in 1993 primarily due to an increase in salary
and employee benefit expense.
Salary and employee benefit expense, before deferred loan origination costs,
increased 3.8%, to $2,554,000 in 1995 from $2,461,000 in 1994 and 32.2% from
$1,932,000 in 1993. Other expenses decreased 4.3% to $1,216,000 in 1995 from
$1,271,000 in 1994 and increased 15.3% from $1,055,000 in 1993.
Cumulative Effect of Change in Accounting Principle
On January 1, 1993, the Company changed its method of accounting for income
taxes from the deferred method to an asset and liability approach. Under this
approach, deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement and tax
basis of existing assets and liabilities. The cumulative effect on prior years
of this change in accounting principle increased 1993 net income by $19,000, or
$.02 per share.
Liquidity Management
Both the Company and the Bank must maintain adequate liquidity to service
long-term debt, accommodate customer withdrawals of deposits and fund new loans.
The main sources of liquidity are cash and due from banks, Federal funds sold,
marketable investment securities, loan repayments and the sale of SBA and
mortgage loans. Investment securities are a secondary source of liquidity and
are categorized as available-for-sale. The ratio of cash, Federal funds sold,
marketable investment available-for-sale securities and loans held for sale to
total liabilities was 35.6% at December, 31, 1995, as compared to 32.8% at
December 31, 1994.
The Bank's liquidity is also enhanced by its strong core deposit base. At
December 31, 1995, demand deposits and interest-bearing savings deposits (e.g.,
savings, money market accounts and CODs) of the Bank increased from the previous
year's ending balances by $1,209,000 and $1,677,000, respectively. In addition,
the Bank has a $2,000,000 unsecured Federal funds purchase agreement with one of
its correspondent banks. Although management believes current liquidity levels
are adequate, cash flow requirements of the Company and the Bank are continually
monitored.
23
Interest Rate Sensitivity
Because the majority of the Company's assets and liabilities are interest rate
sensitive, fluctuations in interest rates expose the Company to potential
increases and decreases in its net interest income. The following table reflects
repricing options that are included in the December 31, 1995 balance sheet that
are sensitive to changes in interest rates.
(Dollars In Thousands)
1-90 days 91-365 days 1-5 years 5-10 years 10+ years
Earning assets ................... $44,394 $ 5,206 $10,656 $ 3,870 $ 1,033
Net sources ...................... 58,014 8,782 450 0 557
Incremental gap .................. (13,620) (3,576) 10,206 3,870 476
Cumulative gap ................... (13,620) (17,196) (6,990) (3,120) (2,644)
% of earning assets .............. (20.9) (26.4) (10.7) (4.8) (4.1)
At December 31, 1995, the cumulative one-year gap was a negative $17.2 million,
representing 26.4% of earning assets. As a result, $17.2 million of earning
assets will reprice after the sources of funds are eligible to be repriced.
Interest rates increased during the first half of 1995, but began to decrease in
the latter part of the year. During a period of rising interest rates the Bank's
negative gap position should result in a decrease in its net interest margin.
However, because the Bank's deposits do not respond to interest rate changes as
readily as its loans, the Bank's net interest margin increased in 1995.
Capital Acquisitions
Additions to premises and equipment during 1995 totaled $53,000.
24
Regulatory Capital
The Office of the Comptroller of the Currency specifies minimum capital ratios
for national banks using both risk-weighted assets (risk-based capital ratio)
and average assets (leverage ratio). Regulatory accounting principles, which
differ from generally accepted accounting principles, are applied in the
calculation of these ratios.
Total risk-based capital consists of the following two elements:
Tier I - Common stock, additional paid-in capital, retained earnings,
less certain intangible assets such as goodwill and core deposit
premiums.
Tier II - Allowance for loan losses, limited to 1.25% of risk-weighted
assets.
In addition, certain additional capital guidelines were defined under the
Federal Deposit Insurance Corporation Improvement Act. These guidelines include
minimum capital ratios for banks considered to be well capitalized.
The Bank's capital ratios and the respective minimum regulatory requirements at
December 31, 1995, 1994 and 1993 were as follows:
1995 1994 1993
------ ------ ------
Leverage Ratio
The Bank of Commerce, N.A ..................... 9.1% 9.0% 9.5%
Minimum requirement for "Well-
Capitalized" institution .................... 5.0% 5.0% 5.0%
Minimum regulatory requirement ................ 4.0% 4.0% 4.0%
Tier I Risk-Based Capital Ratio
The Bank of Commerce, N.A ..................... 11.8% 12.2% 12.7%
Minimum requirement for "Well-
Capitalized" institution .................... 6.0% 6.0% 6.0%
Minimum regulatory requirement ................ 4.0% 4.0% 4.0%
Total Risk-Based Capital Ratio
The Bank of Commerce, N.A ..................... 13.1% 13.4% 13.9%
Minimum requirement for "Well-
Capitalized" institution .................... 10.0% 10.0% 10.0%
Minimum regulatory requirement ................ 8.0% 8.0% 8.0%
25
Dividends
The following dividends were declared by the Board of Directors of the Company
during 1996 and the four years ended December 31, 1995:
Amount Per Share Distribution Date
$.32 March 29, 1996
.30 February 28, 1995
.28 February 28, 1994
.20 February 26, 1993
.20 February 14, 1992
Stock Redemption
During 1993, the Company offered to purchase up to 140,000 shares, 12% of its
common stock outstanding as of October 31, 1993, at a price of $7.00 per share.
Upon expiration of the tender offer on December 17, 1993, the Company had
redeemed 97,402 shares at a total cost of $716,782, which included stock
redemption expense of $34,968. Of the total shares redeemed, 30,982 were
tendered by members of the Company's Board of Directors.
During 1995, the Company repurchased, at market price, 6,028 shares of its
outstanding common stock from a retiring director and 50,000 shares from other
stockholders. In addition, the Company repurchased, at market price, 250 shares
of outstanding common stock from the Company's 401(k) Profit Sharing Stock
Ownership Plan. The cost of the redemptions totaled $422,147.
The Future
Management believes 1996 will be a year of continued growth. Although interest
rates are expected to decline and the competition for deposits among financial
institutions, non-financial institutions and non-regulated industries remains
challenging, the directors, officers and employees are committed to meeting
these challenges.
The business plan for 1996 calls for developing the Bank's current existing
markets in Auburn, Grass Valley and Rancho Cordova. In addition, our loan
production office in Sacramento should continue to provide a broader marketing
area for SBA loans.
Although its business plan is more aggressive in 1996, the Bank is committed to
remaining focused on the business and professional sectors of the community and
continuing the conservative loan underwriting practices that have served the
Bank well in the past.
26
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page(s)
Independent Auditor's Report ..................... F-1
Consolidated Balance Sheet ....................... F-2
Consolidated Statement of Income ................. F-3 and F-4
Consolidated Statement of Stockholders'
Equity ......................................... F-5
Consolidated Statement of Cash Flows ............. F-6 and F-8
Notes to Consolidated Financial Statements ....... F-9 to F-35
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
27
PART III
Item 10. Directors and Executive Officers of the Registrant
Year First Principal
Name and Title Appointed Occupation During the
Other Than Director Age Director Past Five Years
- ------------------------------ --- -------------- --------------------------------------
John G. Briner 56 1981 President and Chief Executive Officer
Director, President and of the Company and the Bank.
Chief Executive Officer
Paul Brocker 71 1986 General Contractor and Owner of Paul
Brocker Construction and Brocker,
Brocker & Brocker, Auburn.
Pamela J. Briner 45 ___ Executive Officer and Cashier of the
Executive Officer Company and Bank since March 1996.
and Casher Executive Officer of the Company and
Bank since 1988.
Mark Lund 46 ___ Executive Vice President and Chief
Executive Vice President Credit Officer of the Company since
and Chief Credit Officer September, 1994 and of the Bank since
January, 1992. Mr. Lund was previously
the Bank's Credit Administrator from
1988 to 1992.
D. Dwight Odom, M.D. 58 1981 Former Gynecologist and President of
Chairman of the Board D. Dwight Odom, M.D., Inc., Auburn.
Dr. Odom retired from practice as of
December 31, 1993.
Thomas E. Propp 47 1995 Managing Partner. CFO & CPA of Tate,
Director Propp, Beggs & Sugimoto,an accountancy
corporation.
Donald L. Robinson 65 1981 Owner and President of Don Robinson
Director Sand & Gravel, Inc., Auburn, and Don
Robinson Construction Inc., Auburn.
Harry E. Sands 69 1981 Retired. Former business executive.
Secretary
Virgil R. Traynor, D.V.M. 58 1981 Veterinarian and Owner of Edgewood
Director Veterinary Clinic, Auburn.
Gary N. Weeks 54 1988 Owner and President of Marina Imports,
Director Grass Valley.
H. Ray Yamasaki 63 1981 Landscape Architect, Owner and Presi-
Vice Chairman dent of YamasakiNursery, Inc., Auburn.
28
All directors have been elected to serve for a one year term until the 1996
Annual Meeting of Shareholders and until their successors are elected and have
qualified. The executive officers are appointed for a one year term until the
1996 Annual Meeting of Shareholders and are subject to at-will termination by
the Company, except as may be provided by employment agreements. None of the
directors or executive officers wereselected pursuant to any arrangement or
understanding other than with the directors and executive officers of the
Company acting within their capacities as such. There are no family
relationships among any of the directors and executive officers of the Company,
except Ms. Pamela J. Briner is the spouse of John G. Briner. No director or
executive officer of the Company serves as a director of any company which has a
class of securities registered under, or which is subject to the periodic
reporting requirements of, the Securities Exchange Act of 1934, or of any
company registered as an investment company under the Investment Company Act of
1940.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and more than ten-percent shareholders are required by
Securities Exchange Commission regulation to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during 1995 its officers,
directors and more than ten-percent shareholders complied with all filing
requirements applicable to them.
29
Item 11. Executive Compensation
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award(s) Options/ Payouts sation(1)
Position Year ($) ($) ($) ($) SARs ($) ($)
John G. Briner 1995 $128,400 $18,000 10,000 $8,657
President and
Chief Executive Officer
of the Company
and the Bank
1994 $124,163 $30,947 3,000 $11,483
1993 $118,400 $7,500 0 $7,266
Mark A. Lund 1995 $84,625 $10,388 6,500 $6,735
Executive Vice President
of the Company and
the Bank
1994 $81,626 $14,244 2,000 $7,384
1993 $77,739 $10,325 0 $5,597
(1) These amounts represent the Bank's contribution under the Bank's Profit
Sharing/401(k) Plan and the cost of premiums for excess group insurance.
30
Option/SAR Grants Table
Option/SAR Grants in Last Fiscal Year
Individual Grants
(a) (b) (c) (d) (e)
% of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date
Jack G. Briner 10,000 21.7% $7.75 7/2005
Mark A. Lund 6,500 14.1% $7.75 7/2005
Option/SAR Exercises and Year-End Value Table
Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Value
(a) (b) (c) (d) (e)
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-End (#) Year-End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
John G. Briner 0 N/A 33,388/12,400(1) $79,318/$300(1)
Mark L. Lund 0 N/A 22,785/6,900(1) $53,329/$200(1)
N/A - means not applicable.
(1) Options only.
31
Employment Agreements
The Company and Bank have employment agreements with Messrs. Briner and Lund.
Both agreements provide for four weeks vacation, health, disability and life
insurance benefits, use of an appropriate company car for business use, stock
options in amounts to be determined by the board of directors, and
indemnification for matters incurred in connection with any action against the
executive which arose out of and was within the scope of his employment,
provided that the executive acted in good faith and in a manner the executive
reasonably believed to be in the best interests of the Company and the Bank and
with respect to a criminal matter if the executive also had no reasonable cause
to believe his conduct was unlawful.
Pursuant to Mr. Briner's agreement, Mr. Briner is to serve for a term of five
years commencing January 1, 1995 as the President and Chief Executive Officer of
the Company and the Bank. The base annual salary for Mr. Briner is $120,000 per
year, with increases to be determined at the discretion of the Boards of
Directors of the Bank and the Company. If the Company and the Bank terminate Mr.
Briner without cause, Mr. Briner shall be entitled to (i) two years base salary,
and (ii) continuation of insurance benefits for six months. Upon any merger or
consolidation where the Company and the Bank are not the surviving or resulting
corporations, or upon any transfer of all or substantially all of the assets of
the Company and the Bank, and Mr. Briner not be retained for the remaining term
of the agreement in a position comparable to that of the highest level vice
president of the resulting corporation or another position acceptable to Mr.
Briner, the resulting corporation shall pay to Mr. Briner three years of his
base salary plus such amount to cover the federal and state income taxes on the
three years of base salary and the "golden parachute" taxes required by Section
280G of the Internal Revenue Code in a lump sum within ten days of such
termination.
Pursuant to Mr. Lund's agreement, Mr. Lund is to serve for a term of three years
commencing January 1, 1995 as the Executive Vice President and Chief Credit
Officer of the Company and the Bank. The base annual salary for Mr. Lund is
$84,625 per year, with increases to be determined at the discretion of the
Boards of Directors of the Bank and the Company. If the Company and the Bank
terminate Mr. Lund without cause, Mr. Lund shall be entitled to (i) six months
base salary or the remaining compensation to be paid to him under his agreement,
whichever is less, and (ii) continuation of insurance benefits for three months.
Upon any merger or consolidation where the Company and the Bank are not the
surviving or resulting corporations, or upon any transfer of all or
substantially all of the assets of the Company and the Bank, and Mr. Lund not be
retained in a position satisfactory to Mr. Lund with the resulting corporation,
the resulting corporation shall pay to Mr. Lund a maximum of nine months of his
then base pay.
In addition Mr. Briner has a salary continuation agreement with the Bank which
provides that the Bank will pay him $75,000 per year for 15 years following his
retirement from the Bank at age 65 ("Retirement Age"). In the event of
disability while Mr. Briner is actively employed prior to Retirement Age, he
will have the option to take a benefit amount based on the vesting schedule
below for 15 years beginning at the earlier of the time when he reaches age 65
or the date on which he is no longer entitled to disability benefits provided by
the Bank. In the event Mr. Briner dies while actively employed by the Bank prior
to Retirement Age, his beneficiary will receive from the Bank a benefit amount
based on the vesting schedule below for 15 years beginning one month after his
death. In the event of termination without cause, early retirement, or voluntary
termination, Mr. Briner shall receive a benefit amount based on the vesting
schedule below for 15 years beginning with the month following the month in
which Executive terminates employment and attains age 65. The vesting schedule
is 12% per year of service for the first five years beginning May 18, 1994, and
decreases to 8% additional per year of service for the last five years. In the
event Mr. Briner is terminated for cause he will forfeit any benefits from the
salary continuation agreement.
32
Compensation of Directors
The directors of the Company do not receive compensation from the Company,
however, the directors do receive a fee of $500 for attendance at the Bank's
board of directors meetings and $200 for each of the Bank's committee meetings
attended, up to a maximum of $700 per month per director for all meetings
attended.
Item 12. Shareholdings of Certain Beneficial Owners and Management
Management of the Company knows of no person who owns, beneficially or of record
either individually or together with associates, 5 percent or more of the
outstanding shares of the Company's common stock except as set forth herein. The
following table sets forth, as of March 15, 1996, the number and percentage of
shares of the Company's outstanding common stock beneficially owned, directly or
indirectly, by each of the Company's directors named executive officers and
principal shareholders and by the directors and executive officers of the
Company as a group. The shares "beneficially owned" are determined under
Securities and Exchange Commission rules, and do not necessarily indicate
ownership for any other purpose. In general, beneficial ownership includes
shares over which a director, principal shareholder or officer has sole or
shared voting or investment power and shares which such person has the right to
acquire within 60 days of March 15, 1996. Unless otherwise indicated, the
persons listed below have sole voting and investment powers. Management is not
aware of any arrangements which may, at a subsequent date, result in a change of
control of the Company.
Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class(1)
Directors and Named Executive Officers:
John G. Briner 67,287(2) 5.8%
Pamela J. Briner 27,864(2) 2.6%
Paul Brocker 6,046(3) *
Mark A. Lund 23,765(4) 2.2%
D. Dwight Odom, M.D. 46,927(5) 4.2%
Thomas E. Propp 6,933(6) *
Donald L. Robinson 14,033(7) 1.3%
Harry E. Sands 37,192(8) 3.5%
Virgil R. Traynor, D.V.M. 15,009(9) 1.4%
Gary N. Weeks 30,405(10) 2.8%
H. Ray Yamasaki 27,343(11) 2.6%
All Directors and Executive Officers
as a Group (numbering 11) 235,178(1) 27.9%
Principal Shareholders:
Cede & Co. 104,347(12) 9.8%
* Less than 1%.
(Footnotes on the following page.)
33
(1) In calculating the percentage ownership of each director and executive
officer and the directors and executive officers as a group, the total
number of shares outstanding includes 64,711 shares subject to options held
by directors and executive officers that were exercisable within 60 days of
March 15, 1996.
(2) Mr. Briner has shared voting and investment powers as to 22,352 shares and
has 33,338 shares acquirable by exercise of stock options. Mr. Briner's
address is c/o Auburn Bancorp, 540 Wall Street, Auburn, California 95604.
Ms. Briner spouse of Mr. Briner has shared voting and investment powers
over the same 22,352 shares that Mr. Briner has shared voting and
investment powers. Ms. Briner has 746 shares acquirable by exercise of
stock options.
(3) Mr. Brocker has shared voting and investment powers as to all of these
shares. Mr. Brocker has 723 shares acquirable by exercise of stock options.
(4) Mr. Lund has shared voting and investment powers as to 399 shares. Mr. Lund
has 22,785 shares acquirable by exercise of stock options.
(5) Dr. Odom has shared voting and investment powers as to 6,957 shares, and
has 723 shares acquirable by exercise of stock options.
(6) Mr. Propp has shared voting and investment powers as to 266 shares.
(7) Mr. Robinson has 723 shares acquirable by exercise of stock options.
(8) Mr. Sands has shared voting and investment powers as to 29,814 shares, and
has 723 shares acquirable by exercise of stock options.
(9) Dr. Traynor has shared voting and investment powers as to 14,286 shares,
and has 723 shares acquirable by exercise of stock options.
(10) Mr. Weeks has shared voting and investment powers as to 28,682 shares.
(11) Mr. Yamasaki has shared voting and investment powers as to 23,958 shares,
and has 723 shares acquirable by exercise of stock options.
(12) The address of Cede & Co. is P.O. Box 20, Bowling Green Station, New York,
New York, 10004.
Item 13. Certain Relationships and Related Transactions
Some of the Company's directors and executive officers and their immediate
families as well as the companies with which they are associated are customers
of, or have had banking transactions with, the Bank in the ordinary course of
the Bank's business, and the Bank expects to have banking transactions with such
persons in the future. In management's opinion, all loans and commitments to
lend included in such transactions were made in compliance with applicable laws
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
creditworthiness and, in the opinion of management, did not involve more than a
normal risk of collectibility or present other unfavorable features.
34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. Financial Statements Page
See Part II, Item 8 27
2. Financial Statement Schedules
All schedules are omitted either because
they are not required, are not applicable,
or the information is otherwise shown in
Items 7 or 8.
3. Exhibits Filed
(i) Articles of Incorporation AI-1 to AI-3
(ii) Bylaws B-1 to B-13
Articles of Incorporation and Bylaws were
filed with Securities and Exchange Commis-
sion in connection with the 1988 S-4, reg-
istration No.33-20889 in favor of Auburn
Bancorp. Exhibits filed in connection with
this filing reflect all subsequent amend-
ments.
(10) Employment Agreement of John G. Briner E-1
(10a) Employment Agreement of Mark A. Lund E-10
(10b) Employment Agreement of Thomas L. Walker E-19
(12) The computation of earnings per share is
discussed in Footnote 1 to the Financial
Statements included in Part II, Item 8.
(22) Subsidiaries of Bancorp
The Bank of Commerce, N.A. is the
sole wholly-owned subsidiary of Auburn
Bancorp.
(23) Consent of Accountants C-1
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
last quarter of 1995.
(c) Exhibits
35
POWER OF ATTORNEY
Auburn Bancorp, and each of the undersigned, do hereby constitute and appoint
John G. Briner and Thomas L. Walker and each of them individually, as
attorney-in-fact, to act as its or their true and lawful attorneys to execute on
behalf of Auburn Bancorp and the undersigned any and all amendments to this
Annual Report on Form 10-K and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this form to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date March 1, 1996
AUBURN BANCORP (Registrant)
By /s/ JOHN G. BRINER
------------------------------
John G. Briner
President and
Chief Executive Officer
By /s/ THOMAS L. WALKER
------------------------------
Thomas L. Walker
Executive Vice President and
Controller and
Chief Financial Officer
36
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons and in the capacities and on the
dates indicated:
Signature and Title Date
/s/ JOHN G. BRINER 8 MAR 96
- ----------------------------- --------
John G. Briner
Director/President and
Chief Executive Officer
/s/ PAUL BROCKER 8 MAR 96
- ----------------------------- --------
Paul Brocker, Director
/s/ D. DWIGHT ODOM, M.D. 8 MAR 96
- ----------------------------- --------
D. Dwight Odom, M.D., Chairman
/s/ DONALD L. ROBINSON 3/8/96
- ----------------------------- --------
Donald L. Robinson, Director
/s/ THOMAS E. PROPP 3/8/96
- ----------------------------- --------
Thomas E. H. Propp, Director
/s/ HARRY E. SANDS 3/8/96
- ----------------------------- --------
Harry E. Sands, Director
/s/ VIRGIL R. TRAYNOR, D.V.M. 3/8/96
- ----------------------------- --------
Virgil R. Traynor, D.V.M.
Director
/s/ GARY N. WEEKS 3/8/96
- ----------------------------- --------
Gary N. Weeks, Director
/s/ HIDEO RAY YAMASAKI 8 MAR 96
- ----------------------------- --------
H. Ray Yamasaki, Director
37
AUBURN BANCORP AND SUBSIDIARY
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
and
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Stockholders
Auburn Bancorp
We have audited the accompanying consolidated balance sheet of Auburn
Bancorp and subsidiary as of December 31, 1995 and 1994 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of Auburn Bancorp and
subsidiary as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the financial statements, the Company
changed its methods of accounting for certain investments in debt and equity
securities in 1994.
Certified Public Accountants
Sacramento, California
January 19, 1996
F-1
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
1995 1994
------------ ------------
ASSETS
Cash and due from banks ............................... $ 5,263,475 $ 5,404,454
Federal funds sold .................................... 8,300,000 6,200,000
Loans held for sale ................................... 4,473,733 2,173,423
Investment securities (market value of $6,316,500
in 1995 and $6,529,500 in 1994) (Note 2) ........... 6,316,500 6,529,500
Loans, less allowance for loan losses of $732,483
in 1995 and $741,323 in 1994 (Note 3) .............. 45,237,229 42,846,549
Bank premises and equipment, net (Note 4) ............. 3,092,082 3,409,874
Goodwill and other intangibles (Note 5) ............... 454,477 524,479
Accrued interest receivable and other assets (Note 9) . 2,990,713 2,339,272
------------ ------------
$ 76,128,209 $ 69,427,551
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing ............................... $ 15,025,492 $ 13,816,423
Interest bearing (Note 6) .......................... 52,221,000 47,253,089
------------ ------------
Total deposits ............................... 67,246,492 61,069,512
Long-term debt (Note 8) ............................... 556,529 586,893
Accrued interest payable and other liabilities ........ 525,512 296,000
------------ ------------
Total liabilities ............................ 68,328,533 61,952,405
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 11):
Preferred stock - no par value; 10,000,000 shares
authorized; none issued ......................... -- --
Common stock - no par value; 10,000,000 shares
authorized; issued and outstanding - 985,498
shares in 1995 and 1,041,053 shares in 1994 ..... 5,107,501 5,525,420
Retained earnings .................................. 2,631,879 2,064,511
Unrealized gain (loss) on available-for-sale
investment securities, net of taxes (Note 2) .... 60,296 (114,785)
------------ ------------
Total stockholders' equity ................... 7,799,676 7,475,146
------------ ------------
$ 76,128,209 $ 69,427,551
============ ============
The accompanying notes are an integral part of these
financial statements.
F-2
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Interest income:
Interest and fees on loans ................ $ 4,812,185 $ 3,633,191 $ 3,457,365
Interest on taxable investment
securities ............................. 422,568 347,840 334,057
Interest on Federal funds sold ............ 363,689 275,490 182,445
Interest on loans held for sale ........... 527,143 474,062 36,934
------------ ------------ ------------
Total interest income ............... 6,125,585 4,730,583 4,010,801
------------ ------------ ------------
Interest expense:
Interest on deposits ...................... 1,629,994 1,089,056 960,648
Interest on long-term debt (Note 8) ....... 48,721 51,187 58,498
------------ ------------ ------------
Total interest expense .............. 1,678,715 1,140,243 1,019,146
------------ ------------ ------------
Net interest income ................. 4,446,870 3,590,340 2,991,655
Provision for loan losses (Note 3) ........... 70,000 90,000
------------ ------------ ------------
Net interest income after
provision for loan losses ......... 4,376,870 3,590,340 2,901,655
------------ ------------ ------------
Non-interest income:
Service charges ........................... 367,550 252,734 232,360
Loan servicing income ..................... 334,580 288,204 196,873
Gain on sale of loans ..................... 535,085 1,100,891 1,233,581
Gain on sale of investment
securities ............................. 173,444
Other ..................................... 192,873 128,880 60,504
------------ ------------ ------------
Total non-interest income ........... 1,430,088 1,944,153 1,723,318
------------ ------------ ------------
(Continued)
F-3
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Continued)
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Other expenses:
Salaries and employee benefits
(Notes 3 and 13) ................... $ 2,293,813 $ 2,114,245 $ 1,701,573
Occupancy ............................. 335,541 349,830 287,925
Equipment ............................. 404,480 362,083 310,047
Other (Note 12) ....................... 1,216,439 1,271,074 1,055,260
------------ ------------ ------------
Total other expenses ............ 4,250,273 4,097,232 3,354,805
------------ ------------ ------------
Income before income taxes
and cumulative effect of
change in accounting
principle ..................... 1,556,685 1,437,261 1,270,168
Income taxes (Note 9) .................... 677,000 618,600 551,500
------------ ------------ ------------
Income before cumulative
effect of change in
accounting principle .......... 879,685 818,661 718,668
Cumulative effect on prior years of
change in accounting principle
(Note 9) .............................. 19,000
------------ ------------ ------------
Net income ...................... $ 879,685 $ 818,661 $ 737,668
============ ============ ============
Earnings per share:
Income before cumulative effect
of change in accounting principle .. $ .85 $ .79 $ .63
Cumulative effect of change in
accounting principle ............... .02
------------ ------------ ------------
Net earnings per share .......... $ .85 $ .79 $ .65
============ ============ ============
Weighted average number of
shares outstanding .................... 1,029,033 1,041,053 1,134,396
============ ============ ============
The accompanying notes are an integral part of these
financial statements.
F-4
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
Unrealized
Gain (Loss)
on Available-
Common Stock For-Sale
Retained Investment
Shares Amount Earnings Securities Total
Balance,
January 1, 1993 ........... 1,138,45 $ 6,242,20 $ 1,027,368 $ 7,269,570
Cash dividend $.20
per share ................. (227,691) (227,691)
Redemption of
common stock
(Note 11) ................. (97,402) (716,782) (716,782)
Net income ................... 737,668 737,668
------------ ------------ ------------ ------------ ------------
Balance,
December 31, 1993 ......... 1,041,053 5,525,420 1,537,345 7,062,765
Cash dividend $.28
per share ................. (291,495) (291,495)
Net income ................... 818,661 818,661
Unrealized loss on avail-
able-for-sale invest-
ment securities, net
of taxes (Note 2) ......... (114,785) (114,785)
------------ ------------ ------------ ------------ ------------
Balance,
December 31, 1994 ......... 1,041,053 5,525,420 2,064,511 (114,785) 7,475,146
Cash dividend $.30 per
share ..................... (312,317) (312,317)
Stock options exercised
and related tax bene-
fits (Note 11) ............ 723 4,228 4,228
Redemption of common
stock (Note 11) ........... (56,278) (422,147) (422,147)
Net income ................... 879,685 879,685
Net change in unrealized
(loss) gain on avail-
able-for-sale invest-
ment securities, net
of taxes (Note 2) ......... 175,081 175,081
------------ ------------ ------------ ------------ ------------
Balance,
December 31, 1995 ......... 985,498 $ 5,107,50 $ 2,631,87 $ 60,296 $ 7,799,676
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
financial statements.
F-5
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net income .................................... $ 879,685 $ 818,661 $ 737,668
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization .............. 449,381 410,876 358,733
Cumulative effect of change in
accounting principle .................... (19,000)
Provision for loan losses .................. 70,000 90,000
Decrease in deferred loan origin-
ation fees and costs, net ............... (30,375) (9,869) (55,393)
Gain on sale of available-for-sale
investment securities ................... (173,444)
Gain on sale of assets, net ................ (12,331) (1,977)
Net increase in unamortized
discount on retained portion
of sold loans ........................... 18,908 220,121 388,904
Net decrease (increase) in the present
value of future servicing income ........ 2,132 (238,507) (250,381)
Net (increase) decrease in loans
held for sale ........................... (2,300,310) 137,637 (2,158,347)
Increase in accrued interest
receivable and other assets ............. (151,064) (203,666) (89,736)
Increase (decrease) in accrued
interest payable and other
liabilities ............................. 229,512 96,275 (30,174)
Deferred tax benefits ...................... (58,000) (10,700) (28,700)
------------ ------------ ------------
Net cash (used in) provided by
operating activities .................. (890,131) 1,035,053 (1,058,403)
------------ ------------ ------------
(Continued)
F-6
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from matured investment
securities ................................. $ 300,000
Proceeds from matured available-
for-sale investment securities ............. $ 500,000 $ 500,000
Proceeds from sale of available-
for-sale investment securities ............. 2,204,400
Purchases of investment securities ............ (501,563)
Purchases of available-for-sale
investment securities ...................... (4,591,942)
Net (increase) decrease in loans .............. (2,992,286) (8,890,056) 767,049
Purchase of life insurance policies ........... (700,000)
Proceeds from sale of assets .................. 3,794 18,516 115,834
Additions to bank premises and
equipment .................................. (52,660) (368,338) (234,780)
Acquisition of other real estate .............. (26,076)
------------ ------------ ------------
Net cash (used in) provided
by investing activities ............... (2,567,228) (11,827,420) 446,540
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand, interest
bearing and savings deposits ............... 2,886,197 7,647,925 2,050,348
Net increase (decrease) in time
deposits ................................... 3,290,783 4,179,692 (1,311,591)
Principal payments on long-term
debt ....................................... (30,364) (27,898) (17,512)
Payments to redeem common stock ............... (422,147) (716,782)
Cash dividends paid ........................... (312,317) (291,495) (227,691)
Proceeds from exercised options ............... 4,228
------------ ------------ ------------
Net cash provided by (used
in) financing activities .............. 5,416,380 11,508,224 (223,228)
------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents .................. 1,959,021 715,857 (835,091)
Cash and cash equivalents at
beginning of year ............................. 11,604,454 10,888,597 11,723,688
------------ ------------ ------------
Cash and cash equivalents at
end of year ................................... $ 13,563,475 $ 11,604,454 $ 10,888,597
============ ============ ============
(Continued)
F-7
AUBURN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest expense ........................... $ 1,446,859 $ 1,103,192 $ 989,829
Income taxes ............................... $ 719,045 $ 527,500 $ 602,500
Non-cash investing activities:
Real estate acquired through
foreclosure ................................ $ 598,841 $ 51,532
Net change in unrealized gain (loss)
on available-for-sale investment
securities ................................. $ 299,720 $ (195,365)
The accompanying notes are an integral
part of these financial statements.
F-8
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Auburn Bancorp (the Company) was incorporated on December 31, 1981 and
obtained approval of the Board of Governors of the Federal Reserve System
to be a bank holding company. The Company received approval from the
Comptroller of the Currency on August 10, 1982 to organize Auburn Bank of
Commerce, N.A., which opened for business on February 7, 1983. The name of
the subsidiary was changed to The Bank of Commerce, N.A. (the Bank) during
1988.
The accounting and reporting policies of the Company and its subsidiary
conform with generally accepted accounting principles and prevailing
practices within the banking industry.
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1995.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and subsidiary, which is wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation.
Loans Held for Sale
Loans held for sale consist of Small Business Administration (SBA)
guaranteed loans and are carried at the lower of cost or market value.
Loans held for sale subsequently transferred to the loan portfolio are
transferred at the lower of cost or market value at the date of transfer.
Any difference between the carrying amount of the loan and its outstanding
principal balance is recognized as an adjustment to yield by the interest
method. Unrealized losses on loans held for sale are included in other
expenses. Realized gains or losses are determined on the specific
identification method and are reflected in non-interest income or expense.
F-9
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale(Continued)
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
Accounting for Mortgage Servicing Rights. This Statement requires that the
rights to service mortgage loans for others, whether those servicing rights
are acquired through the purchase or origination of the related loans, be
recognized as separate assets. In addition, capitalized mortgage servicing
rights must be evaluated for impairment based on the fair value of the
rights. This Statement is effective for fiscal years beginning after
December 15, 1995. Earlier application is encouraged, but was determined by
the Company to be impracticable. The Company does not believe that the
adoption of SFAS 122 will have a significant impact on its financial
position and results of operations when implemented.
Investment Securities
The Company adopted Statement of Financial Accounting Standards (SFAS) 115
Accounting for Certain Investments in Debt and Equity Securities on January
1, 1994. SFAS 115 requires that investments be classified into one of the
three following categories:
o Trading securities which are reported at fair value, with
unrealized gains and losses included in earnings. Trading
securities are bought and held principally for the purpose of
selling within a short period of time.
o Available-for-sale securities which are reported at fair value,
with unrealized gains and losses excluded from earnings and
reported, net of taxes, as a separate component of stockholders'
equity.
o Held-to-maturity securities which are reported at amortized cost,
adjusted for the accretion of discounts and amortization of
premiums.
Management determines the appropriate classification of its investments at
the time of purchase and may only change the classification in certain
limited circum-stances.
Gains or losses on the sale of securities are computed on the specific
identification method. Interest earned on investment securities is reported
in interest income, net of applicable adjustments for accretion of
discounts and amortization of premiums. In addition, unrealized losses that
are other than temporary are recognized in earnings for all investments.
F-10
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
On January 1, 1995, the Company adopted SFAS 114, Accounting by Creditors
for Impairment of a Loan and SFAS 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. As a result of
these statements, impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as a practical matter, at the loan's observable market price or the
fair value of collateral if the loan is collateral dependent.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts
due (including both principal and interest) in accordance with the
contractual terms of the loan agreement. The amount of initial impairment
and any subsequent change in expected cash flows is recognized in the
allowance for loan losses through a charge to the provision for loan
losses. The adoption of SFAS 114 and 118 did not have a material impact on
the Bank as losses in the allowance for loan losses had been previously
provided for using methods which approximated the requirements of SFAS 114.
Loans are stated at principal balances outstanding, except for loans
transferred from the loans held for sale account which are carried at the
lower of principal balance or market value at the date of transfer,
adjusted for accretion of discounts. Interest is accrued daily based upon
outstanding loan balances. However, when, in the opinion of management,
loans are considered to be impaired and the future collectibility of
interest and principal is in serious doubt, loans are placed on nonaccrual
status and the accrual of interest income is suspended. Any interest
accrued but unpaid is charged against income. Payments received are applied
to reduce principal to the extent necessary to ensure collection.
Subsequent payments on these loans, or payments received on nonaccrual
loans for which the ultimate collectibility of principal is not in doubt,
are applied first to earned but unpaid interest and then to principal.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and purchase premiums and discounts on loans are deferred
and recognized as an adjustment of yield, to be amortized to interest
income over the contractual term of the loan. The unamortized balance of
deferred fees and costs is reported as a component of net loans.
F-11
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales and Servicing of SBA Loans
Included in loans held for sale are loans which are 70% to 90% guaranteed
by the Small Business Administration (SBA). The guaranteed portion of these
loans are sold to a third party, with the Bank retaining the unguaranteed
portion. The Bank generally receives a premium in excess of the adjusted
carrying value of the loan at the time of sale. The Bank may be required to
refund a portion of the sales premium if the borrower defaults or the loan
prepays within ninety days of the settlement date. At December 31, 1995,
the Bank had received premiums of $208,634 which were subject to these
recourse provisions. In addition, the Bank receives a fee to service the
loan represented by the difference between the rate paid by the borrower to
the Bank and the rate paid by the Bank to the purchaser. Any excess of this
fee over the normal cost of servicing the loan is recorded as additional
gain (excess servicing fees).
The Bank's investment in an SBA loan is allocated between the retained
portion of the loan, the excess servicing fee, and the sold portion of the
loan based on their relative fair values on the date the loan is sold. The
gain on the sold portion of the loan is recognized as income at the time of
the sale. The carrying value of the retained portion of the loan is
discounted based on the estimated value of a comparable non-guaranteed
loan. The excess servicing fee is included in accrued interest receivable
and other assets in the financial statements and is amortized over the
estimated life of the related loan. Significant future prepayments of these
loans will result in the recognition of additional amortization of related
excess servicing fees.
Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses related
to impaired loans and other losses that can be expected to occur in the
normal course of business. The allowance is based on the character of the
loan portfolio, management's analysis of the portfolio, and business and
economic conditions in the Bank's service area. The allowance is
established through a provision for loan losses which is charged to
expense.
F-12
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of
the Bank's recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property is charged
against the allowance for loan losses. Subsequent gains or losses on sales
or writedowns are recorded in other income or expenses as incurred. In the
financial statements, other real estate is included in accrued interest
receivable and other assets.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, including interest costs
for the construction of Bank premises. Depreciation is determined using the
straight-line method over the useful lives of the related assets. The
useful lives of Bank premises are estimated to be twenty to forty years.
The useful lives of the improvements to Bank premises, furniture and
equipment are estimated to be two to ten years. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged to
expense as incurred.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS 109, Accounting for
Income Taxes. The adoption of SFAS 109 changed the Company's method of
accounting for income taxes from the deferred method to an assets and
liability approach. Under this approach, deferred tax assets and
liabilities are recognized for the tax consequences of temporary
differences between the financial statement and tax basis of existing
assets and liabilities. On the balance sheet, net deferred tax assets are
included in accrued interest receivable and other assets.
The adjustments to the January 1, 1993 balance sheet to adopt SFAS 109 are
reflected in 1993 net income as the cumulative effect of a change in
accounting principle.
Cash Equivalents
For the purpose of the statement of cash flows, the Company considers cash
and due from banks and Federal funds sold to be cash equivalents.
Generally, Federal funds are sold for one day periods.
F-13
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Earnings per share are calculated using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
year. The dilutive effect of stock options outstanding from the application
of the treasury stock method has been considered in the computation of
common stock equivalents.
Loans Serviced for Others
Loans with unpaid balances of $50,329,000 and $47,644,000 were being
serviced for others at December 31, 1995 and 1994, respectively.
2. INVESTMENT SECURITIES
As discussed in Note 1, the Bank adopted SFAS 115 as of January 1, 1994.
There was no cumulative effect on prior years of this change in accounting
principle. However, adoption resulted in an increase in stockholders'
equity of $238,000.
The amortized cost and estimated market value of investment securities at
December 31, 1995 and 1994 consisted of the following:
Available-for-Sale:
1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government
agencies ............. $ 3,499,856 $ 10,546 $ (402) $ 3,510,000
Obligations of states
and political sub-
divisions ............ 2,571,789 94,211 2,666,000
Federal Reserve
Bank stock ........... 140,500 140,500
------------ ------------ ------------ ------------
$ 6,212,145 $ 104,757 $ (402) $ 6,316,500
============ ============ ============ ============
Net unrealized gains on available-for-sale investment securities totaling
$104,355 were recorded net of $44,059 in tax liabilities as a separate
component of stockholders' equity. There were no sales or transfers of
investment securities during 1995.
F-14
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
1994
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government
agencies ............. $ 3,499,922 $ (89,922) $ 3,410,000
Obligations of states
and political sub-
divisions ............ 3,084,443 $ 460 (105,903) 2,979,000
Federal Reserve
Bank stock ........... 140,500 140,500
------------ ------------ ------------ ------------
$ 6,724,865 $ 460 $ (195,825) $ 6,529,500
============ ============ ============ ============
Net unrealized losses on available-for-sale investment securities totaling
$195,365 were recorded net of $80,580 in tax benefits as a separate
component of stockholders' equity. Proceeds and gross realized gains from
the sale of available- for-sale investment securities for the year ended
December 31, 1994 totaled $2,204,400 and $173,444, respectively. There were
no sales of investment securities during 1993.
The amortized cost and estimated market value of debt securities at
December 31, 1995 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers of
the securities may have the right to call or prepay obligations with or
without call or prepayment penalties.
Available-for-Sale
Estimated
Amortized Market
Cost Value
Within one year ........................... $ 4,499,856 $ 4,521,000
After five years through ten years ........ 1,571,789 1,654,000
Federal Reserve Bank stock ................ 140,500 140,500
------------ ------------
$ 6,212,145 $ 6,315,500
============ ============
Investment securities with amortized costs totaling $3,071,878 and
$3,585,068 and market values totaling $3,165,000 and $3,460,000 were
pledged to secure deposits at December 31, 1995 and 1994, respectively.
F-15
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS
Outstanding loans are summarized below:
December 31,
1995 1994
------------ ------------
Commercial ................................ $ 7,901,397 $ 6,857,703
Real estate-mortgage ...................... 32,282,575 31,795,561
Real estate-construction .................. 2,791,456 2,871,406
Installment ............................... 3,092,672 2,191,965
------------ ------------
46,068,100 43,716,635
Deferred loan fees ........................ (98,388) (128,763)
Allowance for loan losses ................. (732,483) (741,323)
------------ ------------
$ 45,237,229 $ 42,846,549
============ ============
Changes in the allowance for loan losses were as follows:
1995 1994 1993
------------ ------------ ------------
Balance, beginning of year ................. $ 741,323 $ 792,514 $ 771,512
Provision charged to operations ............ 70,000 90,000
Losses charged to allowance ................ (130,465) (79,143) (73,051)
Recoveries ................................. 51,625 27,952 4,053
------------ ------------ ------------
Balance, end of year ................ $ 732,483 $ 741,323 $ 792,514
============ ============ ============
The recorded investment in loans that were considered to be impaired
under SFAS 114, as discussed in Note 1, totaled $604,717 at December 31,
1995. The related allowance for loan losses on these loans at December
31, 1995 was $75,590. The average recorded investment in impaired loans
for the year ended December 31, 1995 was $424,000, and the Bank
recognized no interest income on these loans during that same period.
At December 31, 1995 and 1994, nonaccrual loans totaled $604,717 and
$451,908, respectively. Interest foregone on these loans totaled $12,526
and $47,120 for the years ended December 31, 1995 and 1994,
respectively. There was no interest foregone for the year ended December
31, 1993.
Salaries and employee benefits totaling $260,305, $346,571 and $230,508
have been deferred as loan origination costs for the years ended
December 31, 1995, 1994 and 1993, respectively.
F-16
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS (Continued)
Sales and Servicing of SBA Loans
A summary of the activity in SBA loans for the years ended December 31,
1995, 1994 and 1993 is as follows:
December 31,
1995 1994 1993
------------ ------------ ------------
SBA loans originated ....................... $ 14,854,365 $ 23,918,021 $ 20,694,127
SBA loans sold ............................. 7,951,725 18,419,284 12,275,161
Premium received at sale ................... 696,430 1,447,586 1,453,823
Excess servicing retained .................. 133,782 309,207 282,443
Amortization charged against
earnings ................................ 135,914 70,700 32,060
Balance of excess servicing retain-
ed at period end ........................ 669,538 671,670 433,163
Excess servicing was calculated based on an allocation of the investment in
the loan between the sold portion of the loan, the retained portion of the
loan and the excess servicing retained based on the relative fair value of
each component.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
1995 1994
------------ ------------
Land ...................................... $ 1,024,480 $ 1,024,480
Bank premises ............................. 1,889,710 1,889,710
Furniture, fixtures and equipment ......... 2,001,596 1,995,005
------------
4,915,786 4,909,195
Less accumulated depreciation ...... (1,823,704) (1,499,321)
------------ ------------
$ 3,092,082 $ 3,409,874
============ ============
Depreciation included in occupancy and equipment expense totaled $366,658,
$331,793 and $288,647 for the years ended December 31, 1995, 1994 and 1993,
respectively.
F-17
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. GOODWILL AND OTHER INTANGIBLES
Goodwill, recognized in business combinations accounted for as purchases,
represents the excess of cost over the fair value of the acquired assets
and is being amortized using the straight-line method over fifteen years.
Other intangibles include premiums paid for acquired deposits and are being
amortized using the straight-line method over ten years. Amortization
expense totaled $70,004 for each of the three years ended December 31,
1995, 1994 and 1993.
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
1995 1994
------------ ------------
Savings ................................... $ 3,204,097 $ 3,241,026
Money market .............................. 16,020,870 16,582,965
NOW accounts .............................. 18,086,693 15,810,541
Time, $100,000 or more .................... 3,824,778 3,665,948
Other time ................................ 11,084,562 7,952,609
------------
$ 52,221,000 $ 47,253,089
============ ============
Interest expense recognized on time deposits of $100,000 or more totaled
$156,675, $99,487 and $90,779 for the years ended December 31, 1995, 1994
and 1993, respectively.
7. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a $2,000,000 unsecured Federal funds purchase agreement with
one of its correspondent banks. There were no borrowings outstanding under
this agreement at December 31, 1995 or 1994.
F-18
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. LONG-TERM DEBT
Long-term debt consists of mortgage notes bearing fixed interest rates of
8.5% due June 28, 2010. Both notes are secured by land and buildings which
have a carrying value of approximately $399,000. Both notes contain
acceleration clauses and provide for adjustments to interest rates. Future
principal payments are as follows:
1996 $ 33,048
1997 35,969
1998 39,149
1999 42,608
2000 46,375
Thereafter 359,380
------------
$ 556,529
============
The Company paid $48,721, $51,187 and $58,498 in interest on long-term debt
during the years ended December 31, 1995, 1994 and 1993, respectively.
9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1994
and 1993 consisted of the following:
Federal State Total
1995
Current $ 526,000 $ 209,000 $ 735,000
Deferred (37,000) (21,000) (58,000)
------------ ------------ ------------
Income tax expense $ 489,000 $ 188,000 $ 677,000
============ ============ ============
1994
Current $ 458,100 $ 171,200 $ 629,300
Deferred (5,700) (5,000) (10,700)
------------ ------------ ------------
Income tax expense $ 452,400 $ 166,200 $ 618,600
============ ============ ============
1993
Current $ 423,900 $ 156,300 $ 580,200
Deferred (19,400) (9,300) (28,700)
------------ ------------ ------------
Income tax expense $ 404,500 $ 147,000 $ 551,500
============ ============ ============
F-19
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES (Continued)
As discussed in Note 1, the Company adopted SFAS 109 as of January 1, 1993.
The cumulative effect on prior years of this change in accounting principle
increased 1993 net income by $19,000 or $.02 per share, and is reported
separately in the Consolidated Statement of Income for the year ended
December 31, 1993.
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1995 and 1994:
1995 1994
------------ ------------
Deferred tax assets:
Allowance for loan losses .............. $ 295,000 $ 296,000
Future benefit of state tax deduction .. 67,000 60,000
Excess servicing fees .................. 14,000 17,000
Deferred compensation .................. 31,000 19,000
Unrealized loss on available-for-sale
investment securities .............. 81,000
Other .................................. 2,000
Total deferred tax assets .......... 407,000 475,000
------------ ------------
Deferred tax liabilities:
Bank premises and equipment ............ (173,000) (207,000)
Deposit premiums ....................... (25,000) (33,000)
Unrealized gain on available-for-sale
investment securities .............. (44,000)
Other .................................. (19,000) (11,000)
------------ ------------
Total deferred tax liabilities ..... (261,000) (251,000)
------------ ------------
Net deferred tax assets ......... $ 146,000 $ 224,000
============ ============
F-20
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES (Continued)
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rates to operating income before income
taxes. The significant items comprising these differences for the years
ended December 31, 1995, 1994 and 1993 consisted of the following:
1995 1994 1993
---------------- ---------------- ----------------
Amount Rate % Amount Rate % Amount Rate %
Federal income tax
expense, at
statutory rate ........ $ 529,273 34.0 $ 488,669 34.0 $ 431,857 34.0
State franchise tax,
net of Federal tax
effect ................ 119,871 7.7 109,232 7.6 97,020 7.6
Amortization of good-
will .................. 17,851 1.1 17,851 1.2 17,851 1.4
Increase in cash sur-
render value of life
insurance policies .... (12,607) (.8)
Other ................... 22,612 1.4 2,848 0.2 4,772 .4
--------- ---- --------- ---- --------- ----
Total income
tax expense ..... $ 677,000 43.4 $ 618,600 43.0 $ 551,500 43.4
========= ==== ========= ==== ========= ====
10. COMMITMENTS AND CONTINGENCIES
Leases
The Bank leases certain of its branch offices under noncancelable operating
leases. Future minimum lease payments are as follows:
Year Ending
December 31,
1996 $ 103,979
1997 106,279
1998 108,580
1999 66,539
-------------
$ 385,377
============
Rental expense included in occupancy expense totaled $109,649, $110,901 and
$51,110 for the years ended December 31, 1995, 1994 and 1993, respectively.
F-21
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business in order to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and
letters of credit. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and letters of credit as it
does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
December 31,
1995 1994
------------ ------------
Commitments to extend credit $ 11,166,866 $ 5,766,180
Letters of credit $ 311,498 $ 126,104
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 some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's credit-worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the borrower.
Collateral held varies, but may include accounts receivable, inventory and
equipment and deeds of trust on residential real estate and
income-producing commercial properties.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
F-22
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
At December 31, 1995, commercial loan commitments represent approximately
36% of total commitments and are generally unsecured. Real estate loan
commitments represent 51% of total commitments and are generally secured by
property with a loan-to-value ratio not to exceed 80%. Consumer loan
commitments represent the remaining 13% of total commitments and are
generally secured by automobiles and real estate.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction, commercial
and consumer loans to customers throughout Placer, Nevada and Sacramento
Counties.
Although the Bank has a diversified loan portfolio, a substantial portion
of its portfolio is secured by commercial and residential real estate.
However, personal and business income represent the primary source of
repayment for a majority of these loans.
Federal Reserve Requirements
Banks are required to maintain reserves with the Federal Reserve Bank equal
to a percentage of their reservable deposits. The reserve balances held on
behalf of the Federal Reserve Bank totaled $1,217,000 and $1,124,000 as of
December 31, 1995 and 1994, respectively.
Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect
the financial position or results of operations of the Company.
F-23
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. STOCKHOLDERS' EQUITY
Dividends
Upon declaration by the Board of Directors of the Company, all stockholders
of record will be entitled to receive dividends. The Company's primary
source of funds for payment for such dividends is the net income of its
subsidiary bank. Under applicable Federal laws, the Comptroller of the
Currency restricts the total dividend payment of any national banking
association in any calendar year to the net income of the year, as defined,
combined with the net income for the two preceding years, less
distributions made to stockholders during the same three-year period. At
December 31, 1995, the Bank had $708,270 in retained earnings available for
dividend payments to the Company.
Regulatory Capital
The Office of the Comptroller of Currency specifies minimum capital ratios
for national banks using both risk-weighted assets (risk-based capital
ratio) and average assets (leverage ratio). Regulatory accounting
principles, which differ from generally accepted accounting principles, are
applied in the calculation of these ratios. Regulatory capital is defined
as follows:
Tier I - Common stock, additional paid-in capital, retained
earnings, less certain intangible assets such as
goodwill and core deposit premiums.
Tier II - Allowance for loan losses, limited to 1.25% of risk-
weighted assets.
In addition, certain additional capital guidelines were defined under the
Federal Deposit Insurance Corporation Improvement Act. These guidelines
include minimum capital ratios for banks considered to be well capitalized.
F-24
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. STOCKHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
The Bank's capital ratios and the respective minimum regulatory
requirements at December 31, 1995, 1994 and 1993, are as follows:
1995 1994 1993
-------- -------- --------
Leverage Ratio
The Bank of Commerce, N.A ........................ 9.1% 9.0% 9.5%
Minimum requirement for "Well-
Capitalized" institution ...................... 5.0% 5.0% 5.0%
Minimum regulatory requirement ................... 4.0% 4.0% 4.0%
Tier I Risk-Based Capital Ratio
The Bank of Commerce, N.A ........................ 11.8% 12.2% 12.7%
Minimum requirement for "Well-
Capitalized" institution ...................... 6.0% 6.0% 6.0%
Minimum regulatory requirement ................... 4.0% 4.0% 4.0%
Total Risk-Based Capital Ratio
The Bank of Commerce, N.A ........................ 13.1% 13.4% 13.9%
Minimum requirement for "Well-
Capitalized" institution ...................... 10.0% 10.0% 10.0%
Minimum regulatory requirement ................... 8.0% 8.0% 8.0%
Stock Options
In 1994 and 1982, the Board of Directors adopted Stock Option Plans
pursuant to which 389,497 shares of common stock have been reserved for
issuance to employees and directors.
The Plans require that the price of all options may not be less than the
fair market value of the stock at the date the option is granted, and that
the stock must be paid for in full at the time the option is exercised. All
options expire on a date determined by the Board of Directors, but not
later than ten years from the date of grant. Shares granted under both
plans are considered to be common stock equivalents for purposes of
calculating earnings per share.
F-25
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. STOCKHOLDERS' EQUITY (Continued)
Stock Options (Continued)
A summary of the activity within each plan follows:
Stock Option Plans
1982
1982 Non- 1994
Incentive Qualified Plan
Common stock reserved ........ 79,860 79,137 230,500
============ ============ ============
Balance, January 1, and
December 31, 1993 .......... 76,007 5,784
Options granted
($7.50 per share) ..... 22,500
------------ ------------ ------------
Balance, December 31, 1994 ... 76,007 5,784 22,500
Options canceled ........ (4,500)
Options granted
($7.75 per share) .... 52,500
Options exercised
($4.70 per share) .... (723)
------------ ------------ ------------
Balance, December 31, 1995 ... 76,007 5,061 70,500
============ ============ ============
At December 31, 1995, stock options for 75,507 shares in the 1982 Incentive
Plan were exercisable at prices ranging from $4.88 to $5.78 per share. In
the 1982 Non- Qualified Plan, options for 5,061 shares were exercisable at
$4.70 per share. In the 1994 plan, options for 3,600 shares were
exercisable at $7.50 per share.
Stock Redemption
During 1993, the Company offered to purchase up to 140,000 shares, 12% of
its common stock outstanding as of October 31, 1993, at a price of $7.00
per share. Upon expiration of the tender offer on December 17, 1993, the
Company had redeemed 97,402 shares at a total cost of $716,782, which
included stock redemption expenses of $34,968. Of the total shares
redeemed, 30,982 were tendered by members of the Company's Board of
Directors.
F-26
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. STOCKHOLDERS' EQUITY (Continued)
Stock Redemption (Continued)
During 1995, the Company repurchased, at market price, 6,028 shares of its
outstanding common stock from a retiring director and 50,000 shares from
other stockholders. In addition, the Company repurchased, at market price,
250 shares of outstanding common stock from the Company's 401(k) Profit
Sharing Stock Ownership Plan. The cost of the redemptions totaled $422,147.
12. OTHER EXPENSES
Other expenses consisted of the following:
1995 1994 1993
------------ ------------ ------------
Professional services ........ $ 136,194 $ 176,100 $ 152,837
Regulatory assessments ....... 101,565 146,369 133,718
Stationery and supplies ...... 96,535 122,745 118,818
Telephone .................... 73,846 103,656 64,720
Postage ...................... 78,015 84,094 63,532
Directors fees ............... 75,700 73,900 80,900
Amortization of goodwill and
deposit premium ............ 70,004 70,004 70,004
Data processing .............. 57,585 69,666 77,247
Advertising .................. 82,619 62,732 51,706
Other ........................ 444,376 361,808 241,778
------------ ------------ ------------
$ 1,216,439 $ 1,271,074 $ 1,055,260
============ ============ ============
13. EMPLOYEE BENEFIT PLANS
The Bank maintains a profit sharing plan and a salary continuation plan for
certain officers and employees. Contributions under these plans are
determined by the Board of Directors.
F-27
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. EMPLOYEE BENEFIT PLANS (Continued)
Profit Sharing Plan
The Bank adopted The Bank of Commerce, N.A. 401(k) Profit Sharing Plan and
Trust effective January 1, 1987. The Plan was revised to a 401(k) Profit
Sharing Stock Ownership Plan on January 1, 1995. The Plan is available to
employees meeting certain service requirements. The Bank's contribution to
the Plan is discretionary and is allocated in the same ratio as each
participant's compensation bears to total compensation of all participants.
Such contributions may be made in cash or invested in shares of the
Company's common stock and vest over a six-year period. Aggregate
contributions to the profit sharing plan totaled $80,000, $73,000 and
$78,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Salary Continuation Plan
The Bank also provides a salary continuation plan for a key executive which
was restructured during 1994. Under this plan, the Bank is obligated to
provide the executive, or designated beneficiary, with annual benefits for
fifteen years after retirement or death. These benefits are substantially
equivalent to those available under insurance policies purchased by the
Bank on the life of the executive. In addition, the estimated present value
of these future benefits is being accrued over the period from the
effective date of the plan until the executive's expected retirement date.
As a result of the restructuring, no additional expense was accrued for the
year ended December 31, 1994. The expense accrued for the years ended
December 31, 1995 and 1993 totaled $27,818 and $15,144, respectively.
In connection with the Plan, the Bank purchased two single premium life
insurance policies with cash surrender values totaling $732,207 and
$707,630 at December 31, 1995 and 1994, respectively.
F-28
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including directors and affiliates. These
transactions include borrowings from the Bank with substantially the same
terms, including rates and collateral, as loans to unrelated parties. The
following is a summary of the aggregate activity involving related party
borrowers during 1995:
Balance, January 1, 1995 $ 1,218,857
Disbursements 324,550
Amounts repaid (243,330)
Balance, December 31, 1995 $ 1,300,077
============
Undisbursed commitments to related
parties, December 31, 1995 $ 66,323
============
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's adopted SFAS 107, Disclosures About Fair Value of Financial
Instruments, on January 1, 1995. SFAS 107 requires that the Company
disclose estimated fair values for financial instruments for which it is
practicable to estimate fair value. These estimates are made at a specific
point in time based on relevant market data and information about the
financial instruments. These estimates do not reflect any premium or
discount that could result from offering the Company's entire holdings of a
particular financial instrument for sale at one time, nor do they attempt
to estimate the value of anticipated future business related to the
instruments. In addition, the tax ramifications related to the realization
of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the fair values presented.
The following methods and assumptions were used by the Company to estimate
the fair value of its financial instruments at December 31, 1995:
F-29
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Cash and cash equivalents: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Investment securities: For investment securities, fair values are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for similar
securities and indications of value provided by brokers.
Loans receivable: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. Fair values of loans held for sale are estimated using quoted
market prices for similar loans. SBA loans held for sale, which are
scheduled for sale after final disbursements are made, are valued at their
cost plus estimated gain on only the funded portion of the loan. The fair
values for other loans (e.g., real estate mortgage, commercial and
installment loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of comparable creditworthiness. The carrying amount of accrued
interest receivable approximates its fair value.
Excess servicing: The unsold interest revenue related to sold SBA loans
which represents the excess of servicing fees over servicing costs is
valued at the current market rate for SBA interest strips.
Life insurance policies: The fair values of life insurance policies are
based on current cash surrender values provided by the insurers.
Deposits: The fair values for demand deposits (e.g., interest and
non-interest checking, savings, NOW and money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date
represented by their carrying amount. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow analyses
using interest rates currently being offered by the Bank for certificates
with similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
Long-term debt: Fair value is estimated utilizing a discounted cash flow
analysis using market interest rates currently being offered for debt with
similar remaining maturities and collateralized by similar property.
F-30
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Commitments to extend credit: The fair values of commitments to extend
credit are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the borrowers. For adjustable rate loan
commitments, the carrying amount is considered to be fair value. For fixed
rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates.
The estimated fair values of the Bank's financial instruments are as
follows:
December 31, 1995
Carrying Fair
Amount Value
------------ ------------
Financial assets:
Cash and due from banks ................ $ 5,263,475 $ 5,263,475
Federal funds sold ..................... 8,300,000 8,300,000
Investment securities .................. 6,316,500 6,316,500
Loans held for sale .................... 4,473,733 4,631,000
Loans .................................. 45,237,229 45,061,000
Excess servicing ....................... 669,538 837,000
Accrued interest receivable ............ 515,083 515,083
Cash surrender value of life
insurance policies ................. 732,207 732,207
------------ ------------
$ 71,507,765 $ 71,656,265
============ ============
Financial liabilities:
Deposits ............................... $ 67,246,492 $ 67,290,000
Long-term debt ......................... 556,529 482,000
Accrued interest payable ............... 333,315 333,315
------------ ------------
$ 68,136,336 $ 68,105,315
============ ============
Off-balance-sheet financial instruments:
Commitments to extend credit ........... $ 11,166,866 $ 11,166,866
Standby letters of credit .............. 311,498 311,498
------------ ------------
$ 11,478,364 $ 11,478,364
============ ============
F-31
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 1995 and 1994
1995 1994
------------ ------------
ASSETS
Cash and due from banks ................... $ 85,229 $ 185,287
Premises and equipment, net ............... 900,305 943,222
Investment in wholly-owned subsidiary ..... 7,363,471 6,919,468
Other assets .............................. 11,945 16,062
------------ ------------
$ 8,360,950 $ 8,064,039
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Long-term debt ............................ $ 556,529 $ 586,893
Other liabilities ......................... 4,745 2,000
------------ ------------
Total liabilities .................. 561,247 588,893
------------ ------------
Common stock .............................. 5,107,501 5,525,420
Retained earnings ......................... 2,631,879 2,064,511
Unrealized loss on available-for-sale
investment securities, net of taxes ... 60,296 (114,785)
------------ ------------
Total stockholders' equity ......... 7,799,676 7,475,146
------------ ------------
$ 8,360,950 $ 8,064,039
============ ============
F-32
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Income paid by subsidiary
eliminated in consolidation:
Rent .......................................... $ 138,840 $ 138,840 $ 138,840
Interest ...................................... 3,075
Dividends ..................................... 600,000 1,100,000
------------ ------------ ------------
Total income ........................... 738,840 138,840 1,241,915
------------ ------------ ------------
Expenses:
Interest ...................................... 48,721 51,187 61,573
Depreciation .................................. 42,917 47,219 46,760
Professional fees ............................. 10,909 11,357 10,066
Other ......................................... 22,030 21,106 17,207
------------ ------------ ------------
Total expenses ......................... 124,577 130,869 135,606
------------ ------------ ------------
Income before income
taxes and equity in
undistributed income
(loss) of subsidiary ............... 614,263 7,971 1,106,309
Income taxes ..................................... 3,500 2,000 800
------------ ------------ ------------
Income before equity
in undistributed
income (loss) of
subsidiary ......................... 610,763 5,971 1,105,509
Equity in undistributed income
(loss) of subsidiary .......................... 268,922 812,690 (367,841)
------------ ------------ ------------
Net income ............................. $ 879,685 $ 818,661 $ 737,668
============ ============ ============
F-33
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net income .................................... $ 879,685 $ 818,661 $ 737,668
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation .............................. 42,917 47,219 46,760
(Increase) decrease in
undistributed earnings
of subsidiary .......................... (268,922) (812,690) 367,841
Decrease (increase) in other
assets ................................. 4,117 (2,941) (5,218)
Increase (decrease) in
other liabilities ...................... 2,745 1,200 (10)
------------ ------------ ------------
Net cash provided by
operating activities ............... 660,542 51,449 1,147,042
------------ ------------ ------------
Cash flows from investing
activities:
Additions to premises and
equipment ................................. (35,368)
------------ ------------ ------------
Net cash used in
investing activities ............... (35,368)
------------ ------------ ------------
F-34
AUBURN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Cash flows from financing
activities:
Principal payments on long-
term debt ................................. $ (30,364) $ (27,898) $ (17,512)
Payments to redeem common
stock ..................................... (422,147) (716,782)
Cash dividends paid ........................... (312,317) (291,495) (227,691)
Proceeds from exercised stock
options ................................... 4,228
------------ ------------ ------------
Net cash used in
financing activities ............... (760,600) (319,393) (961,985)
------------ ------------ ------------
(Decrease) increase
in cash ............................ (100,058) (267,944) 149,689
Cash balance at beginning
of year ....................................... 185,287 453,231 303,542
------------ ------------ ------------
Cash balance at end of year ...................... $ 85,229 $ 185,287 $ 453,231
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense .......................... $ 48,721 $ 51,187 $ 61,573
Income taxes .............................. $ 800
Non-cash investing activities:
Unrealized gain (loss) on
available-for-sale
investment securities ..................... $ 299,720 $ (195,365)
F-35