ABBB Auburn Bancorp Inc (PK)

SECURITIES AND EXCHANGE COMMISSION

Washington, DC   20549

 

FORM 10-K

 

x           Annual Report Purs ua nt to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended June 30, 2011

 

 

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

None

 

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

 

Common Stock, par value $0.01 per share
(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section 15(d) of the Act.

o  Yes   x No

 

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 reports), and (2) has been subject to such filing requirements for the past 90 days. x    Yes  o   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o    Yes   o   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. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o                                                     Accelerated filer o

 

Non-accelerated filer o                                                       Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No x

 

Based upon the closing price of the registrant’s common stock as of December 31, 2010 the aggregate market value of the voting common equity held by non-affiliates was $1,261,991.  For purposes of the calculation, all directors and executive officers were deemed to be affiliates of the registrant.  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 503,284 outstanding as of September 27, 2011, 276,806 of which are owned by Auburn Bancorp, MHC, our federally chartered mutual holding company.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:

 

(1)      Portions of the Company’s definitive Proxy Statement for its 2011 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in Part III of this Form 10-K.

 

 

Auburn Bancorp, Inc.
Form 10-K

 

PART I
Item 1.	Business	1
Item 1A	Risk Factors	30
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	[Removed and Reserved]	31
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases	32
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	46
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	46
Item 9A.	Controls and Procedures	46
Item 9B.	Other Information	47
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	47
Item 11.	Executive Compensation	47
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence	47
Item 14.	Principal Accounting Fees and Services	47
PART IV
Item 15.	Exhibits, Financial Statement Schedules	48
Signatures		49

 

 

PART I

 

Item 1. Business

 

The terms “we,” “our,” “our company,” and “us” refer, unless the context suggests otherwise, to Auburn Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Auburn Savings Bank, FSB (the “Bank”).

 

Forward-Looking Statements.

 

Certain statements herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe”, “expect”, “anticipate”, “estimate”, and “intend” or future or conditional verbs such as “will”, “would”, “should”, “could”, or “may.” Certain factors that could have a material adverse affect on the operations of Auburn Savings Bank include, but are not limited to, increased competitive pressure among financial service companies, national and regional economic conditions, changes in interest rates, changes in consumer spending, borrowing and savings habits, legislative and regulatory changes, adverse changes in the securities markets, inability of key third-party providers to perform their obligations to Auburn Savings Bank and changes in relevant accounting principles and guidelines.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We disclaim any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise.

 

B usiness   of A uburn   B ancorp , I nc .

 

The Company was organized as a federal corporation in connection with the reorganization of the Bank from the mutual form of organization to the mutual holding company form of organization. The reorganization was completed on August 15, 2008. In the reorganization, the Company issued a total of 503,284 shares of common stock, 226,478 shares of which were sold to eligible depositors and other members of the Bank, an employee stock ownership plan and members of the general public and 276,806 shares of which were issued to Auburn Bancorp, MHC, a federally-chartered mutual holding company.

 

As a result of the reorganization, the Company owns all of the issued and outstanding common stock of the Bank.  In the future, the Company, as the holding company of the Bank, will be authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which may include the acquisition of banking and financial services companies. We have no plans for any mergers or acquisitions or other diversification of the activities of the Company at the present time.

 

Our cash flow will depend on earnings from the investment of the net proceeds we retained from the stock offering and any dividends received from the Bank. Currently, the Company neither owns nor leases any property, but will instead use the premises, equipment and furniture of the Bank. At the present time, the Company employs only persons who are officers of the Bank as officers of the Company. We will, however, use the support staff of the Bank from time to time. All of these persons are paid by the Bank under the terms of a management agreement with the Company.  The Company may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

 

B usiness   of A uburn   S avings B ank, FSB

 

The Bank is a community-oriented savings bank.  We were originally established in 1887 as a state-chartered loan and building association named “Auburn Loan and Building Association” and later converted to a state-chartered savings and loan association named “Auburn Savings and Loan Association.”  In July 2006, the Bank converted from a state-chartered savings and loan association to a federal mutual savings bank and changed its name to “Auburn Savings Bank, FSB.”  On August 15, 2008, the Bank reorganized into the mutual holding company form of organization and became a stock form federal savings institution.

 

Our principal business consists of attracting retail deposits from the general public in the areas surrounding our main office in Auburn, Maine and our branch office in Lewiston, Maine and investing those deposits, together with funds generated from operations, primarily in one- to four-family residential mortgage loans and home equity loans and lines of credit, commercial and multi-family real estate loans, and, to a lesser extent, commercial business loans, construction loans, consumer loans, and investment securities. Our revenues are derived principally from interest on loans and securities. We also generate revenues from fees and service charges and other income. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities.

 

Our website address is www.auburnsavings.com. Information on our website should not be considered a part of this Annual Report on Form 10-K.  

 

Market Area

 

We primarily serve communities located in Androscoggin County, Maine. We are headquartered in Auburn, Maine.  In addition to our main office, we operate a full-service branch office in Lewiston, Maine.  Lewiston and Auburn are in Androscoggin County, Maine, approximately 35 miles northeast of Portland, Maine. Historically, substantially all of our loans have been made to borrowers who resided within Androscoggin County.  Androscoggin County is also the same geographic area as the Lewiston-Auburn metropolitan statistical area (the “Lewiston-Auburn MSA”).

 

During the past several years, the population in the Lewiston-Auburn area as well as in Androscoggin County has increased moderately.  As of 2010, the most recent date for which data is available, Androscoggin County’s total population increased by 4.03% from the county’s population in 2000.  The total population of the city of Lewiston decreased by 0.7% from 2000 to 2010, while the total population of the city of Auburn increased by 2.4% over the same time period.

 

The largest industries in Androscoggin County are educational services, health care and social assistance.  The two largest employers in the area, Central Maine Medical Center and St. Mary’s Health Systems, are both health service providers.  The median household income in Androscoggin County in 2010 was $43,416 which is below the state and national median household incomes of $46,353 and $54,442, respectively.  As of July 2010, the unemployment rate in Androscoggin County was 8.5%, above the state unemployment rate of 7.9% and below the United States unemployment rate of 9.5%.

 

 

Competition

 

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms and insurance companies.  Federal and state credit unions accounted for approximately a quarter of the total deposits in Androscoggin County, and have the competitive advantage of not paying state and federal income tax while having a broad range of banking powers.  In addition, several large holding companies operate banks in our market area, including Toronto Dominion Bank, Bank of America and Key Bank, as well as several Maine-based banks including Androscoggin Savings Bank, Bangor Savings Bank, Mechanics Savings Bank and Northeast Bank.  Most of these institutions are significantly larger than us and, therefore, have significantly greater resources.  We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2010, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held 4.80% of the deposits in Androscoggin County.

 

Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers.  Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

 

We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

 

Lending Activities

 

We originate one- to four-family residential loans and home equity loans.  We also originate commercial and multi-family real estate loans and, to a lesser extent, commercial business loans, construction loans and consumer loans.  We believe that originating a limited amount of non-residential and multi-family loans allows us to provide more comprehensive financial services to families and businesses within our community as well as increase the yield and interest rate sensitivity of our loan portfolio.  

 

 

Loan Portfolio Composition . The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated.

		At June 30,
		2011								2010
		Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Mortgage loans:
One- to four-family residential		$	40,549				59.3	%		$	36,418				52.4	%
Commercial			11,310				16.5	%			15,136				21.8	%
Construction			156				0.2	%			410				0.6	%
Equity lines of credit and loans			11,141				16.3	%			11,436				16.4	%
Undisbursed portion of construction loan			(112	)			-0.2	%			(97	)			-0.1	%
Total mortgage loans on real estate		$	63,044				92.1	%		$	63,303				91.1	%
Other loans:
Commercial loans			4,485				6.6	%			5,267				7.5	%
Consumer loans			897				1.3	%			952				1.4	%
Total loans		$	68,426				100.0	%		$	69,522				100.0	%
Other loans:
Deferred loan origination costs		$	161							$	165
Deferred loan origination fees			(284	)							(312	)
Allowance for loan losses			(907	)							(492	)
Total loans, net		$	67,396							$	68,883

 

One- to Four-Family Residential Loans . Our primary lending activity consists of the origination of one- to four-family residential mortgage loans, substantially all of which are secured by properties located in our primary market area.  We offer fixed-rate mortgage loans, which generally have terms of 15, 20 or 30 years.   We no longer offer adjustable-rate mortgage loans (“ARMs”), however, interest rates and payments on our existing portfolio of adjustable-rate loans generally are adjusted to a rate equal to a percentage above the one-year U.S. Treasury index, in the case of one-year ARMs, and the three-year U.S. Treasury index, in the case of three-year ARMs. The maximum amount by which the interest rate may be increased or decreased is generally 1% per adjustment period with a lifetime interest rate cap of 5% over the initial interest rate of the loan on one-year ARM loans and 2% per adjustment period with a lifetime rate cap of 6% over the initial interest rate of the loan on three-year ARM loans.

 

At June 30, 2011, $40.5 million, or 59.3% of our loan portfolio, consisted of one- to four-family residential mortgage loans.  Of the one- to four-family residential mortgage loans outstanding on June 30, 2011, $31.2 million were fixed-rate mortgage loans with an average yield of 6.06%, and $9.3 million were adjustable-rate loans with an average yield of 4.17%.

 

We generally underwrite all residential real estate loans to secondary market credit standards.  While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

 

 

We do not offer loans with negative amortization and generally do not offer interest only loans.  We generally do not make loans known as subprime or Alt-A loans.

 

We generally do not make loans with a loan-to-value ratio of more than 80% without private mortgage insurance. We make first mortgage loans on owner-occupied one-to-four family dwellings up to 85% of value and loans on condominium units up to 80% of value.  We generally require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.  

 

Our residential mortgage loans customarily include due-on-sale clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage and the loan is not repaid.

 

At June 30, 2011, our largest one-to four-family residential real estate loan had a principal balance of $320,980, was secured by a residence located in Scarborough, Maine, and was performing in accordance with its original terms.

 

Home Equity Loans.   We offer home equity lines of credit and home equity loans.  At June 30, 2011, we had $11.1 million of home equity lines-of-credit and loans outstanding, representing 16.3% of our loan portfolio.  At June 30, 2011, the unadvanced amounts of home equity lines of credit totaled $3.5 million.

 

Home equity lines of credit and loans are secured by a mixture of first and second mortgages on one- to four-family owner occupied properties.  The procedures for underwriting home equity lines of credit and loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan.  We generally require all properties securing second mortgage loans to be appraised by a board-approved independent appraiser unless the first mortgage is also held by Auburn Savings Bank.  Home equity lines of credit and loans are made in amounts such that the combined first and second mortgage balances do not exceed 90% of value.

 

Home equity loans are offered with fixed interest rates and generally have terms of 5, 10 or 15 years.  Our home equity lines of credit have adjustable rates of interest, which are adjusted monthly to a rate equal to a half of a percentage above the Prime Rate as published by The Wall Street Journal on the last business day of the month.  Home equity lines of credit have a maturity of 40 years with a five-year draw period.

 

Commercial and Multi-Family Real Estate Loans . We offer commercial real estate loans, including commercial business, and multi-family real estate loans that are generally secured by five or more unit apartment buildings and properties used for business purposes such as small office buildings or retail facilities substantially all of which are located in our primary market area.  We have placed increasing emphasis on commercial real estate loans over the past several years.  As a result, these loans have grown from $5.0 million at December 31, 2005 to $11.3 million at June 30, 2011.  At June 30, 2011, commercial and multi-family real estate loans represented 16.5% of our loan portfolio.  We intend to further grow these segments of our loan portfolio, both in absolute terms and as a percentage of our loan portfolio .   

 

 

We typically offer adjustable rate commercial and multi-family real estate loans with terms of up to 20 years. Interest rates on our commercial and multi-family real estate loans adjust annually from the outset of the loan or after a five-year initial fixed rate period.  In general, rates on commercial and multi-family real estate loans are initially priced at a percentage above the corresponding Federal Home Loan Bank borrowing rate and, thereafter, interest rate adjustments are based upon a percentage above either the Prime Rate published by The Wall Street Journal on the last business day of the month or the corresponding Federal Home Loan Bank borrowing rate. Commercial and multi-family real estate loan amounts generally do not exceed 80% of the lesser of the property’s appraised value or sales price.

 

We generally require title insurance for commercial and multi-family real estate loans, an appraisal on all such loans if the total amount of loans with that borrower is in excess of $250,000, and an evaluation of the property by an approved appraiser for loans between $100,000 and $250,000.  We may require a full appraisal on property securing any loan less than $250,000.

 

In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise and credit history, and the profitability of the underlying business and the value of the underlying property. In addition, with respect to real estate rental properties, we will also consider the term of the lease and the quality of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.2 times. Generally, multi-family and commercial real estate loans made to corporations, partnerships and other business entities require the principals to execute the loan agreements in their individual capacity as well as signing on behalf of such business entity.

 

A commercial borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower. We generally require commercial borrowers to provide federal tax returns and financial statements annually. These requirements also apply to the individual principals of our commercial borrowers. We may require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable.

 

Loans secured by commercial real estate, including multi-family properties, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

 

At June 30, 2011, our largest commercial real estate loan was for $544,000 and was secured by real estate in Lisbon, Maine and 80% is guaranteed by the Finance Authority of Maine (FAME). This loan was performing according to its original repayment terms at June 30, 2011.  Our largest multi-family real estate loan was for $295,000, was secured by real estate in Auburn, Maine and was performing according to its original repayment terms at June 30, 2011.

 

Construction Loans.   We also offer construction loans for the development of one- to four-family residential properties located in our primary market area.  Residential construction loans are generally offered to individuals for construction of their personal residences.  Our construction loans were $2.6 million at December 31, 2005 as compared to $156,000 at June 30, 2011.  At June 30, 2011, residential and commercial construction loans represented 0.2% of our loan portfolio.  At June 30, 2011, the unadvanced portion of these construction loans totaled $112,000.

 

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is usually six months. In the case of construction loans to individuals for the construction of their primary residences, our policies require that the loan convert to a permanent mortgage loan at the end of the construction phase. Residential construction loans can be made with a maximum loan-to-value ratio of 95%, provided that the borrower obtains private mortgage insurance on the loan if the loan balance exceeds 80% of the appraised value of the secured property.

 

 

At June 30, 2011, there was only one residential construction loan commitment for $156,000 of which $44,000 was outstanding. This loan was performing according to its terms at June 30, 2011. Residential construction loans are generally made on the same terms as our one- to four-family mortgage loans.

 

Before making a commitment to fund a residential construction loan, we require an appraisal on the property by an independent licensed appraiser. We also review and inspect each property before disbursement of funds during the terms of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method.

 

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value which is insufficient to assure full repayment.

 

Commercial Loans.   We make commercial business loans primarily in our market area to a variety of small businesses, professionals and sole proprietorships.  Our commercial business loan portfolio has grown from $1.3 million at December 31, 2005 to $4.5 million at June 30, 2011.  At June 30, 2011, commercial business loans represented 6.6% of our loan portfolio.

 

Commercial lending products include term loans and revolving lines of credit. The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit of 15% of unimpaired capital, which at June 30, 2011 was $1 million.  Commercial loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial loans are made with either adjustable or fixed rates of interest. Adjustable rate loans are based on the Prime Rate, as published in The Wall Street Journal, plus a margin.  The rate adjusts monthly from the outset of the loan.  Our adjustable rate commercial business loans amortize over terms up to 15 years and may carry prepayment penalties. Fixed rate commercial loans are set at percentage above either the corresponding Federal Home Loan Bank borrowing rate or the Prime Rate.

 

When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and we also require the business principals to execute such loans in their individual capacities. Depending on the amount of the loan and the collateral used to secure the loan, commercial loans are made in amounts of up to 50-80% of the value of the collateral securing the loan, or up to 100% of the value of the collateral securing the loan if the collateral consists of cash or cash equivalents. We generally do not make unsecured commercial loans.  We require adequate insurance coverage including, where applicable, title insurance, flood insurance, builder’s risk insurance and environmental insurance.

 

Commercial loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards.

 

 

At June 30, 2011, our largest commercial loan was a $752,000 loan to a public accounting firm located in Scarborough, Maine.  This loan is secured by business assets and 90% is guaranteed by the Small Business Association (SBA).  This loan was performing according to its terms at June 30, 2011.

 

Consumer Loans . We offer a limited range of consumer loans, primarily to our customers residing in our primary market area.  Our consumer loans generally consist of loans on new and used automobiles, loans secured by deposit accounts and unsecured personal loans.  As of June 30, 2011, these loans totaled $897,000, or 1.3% of our loan portfolio.

 

Our automobile loans have fixed interest rates and generally have terms up to five years for new automobiles and four years for used automobiles. We will generally offer automobile loans with a maximum loan-to-value ratio of 80% of the base vehicle price plus accessories or, if less for used cars, the average retail value taken from a current month’s issue of the “NADA Used Car Guide.”

 

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

 

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Origination, Sale and Servicing of Loans. We originate real estate and other loans through marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.  We generally do not purchase loans or participation interests in loans.

 

Generally, we sell a portion of the fixed-rate one- to four-family mortgages that we originate to the Federal Home Loan Bank of Boston.  We generally make decisions regarding the amount of loans that we wish to sell based on an evaluation of asset/liability position and similar factors.  See “ Management’s Discussion and Analysis of Financial Condition and Operating Results – Management of Market Risk .”  During the fiscal years 2011 and 2010, we sold $2.2 million and $2.6 million, respectively, of fixed-rate one-to-four family mortgage loans to the Federal Home Loan Bank of Boston.  We retained servicing on all of those loans. At June 30, 2011, we serviced $9.8 million of mortgage loans that were sold by us to the Federal Home Loan Bank of Boston.

 

We account for a transfer of financial assets, or a portion of a financial asset, as a sale when we surrender control of the transferred assets. Servicing rights and other retained interests in the sold assets are recorded by allocating the previously recorded investment between the assets sold and interest retained based on their relative fair values at the date of transfer. We determine the fair values of servicing rights and other retained interests at the date of transfer using a method that approximates the present value of estimated future cash flows, using assumptions that market participants would use in their estimates of values.

 

 

Loan Approval Procedures and Authority . Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by the board of directors of Auburn Savings Bank. The board of directors has granted loan approval authority to certain officers up to prescribed individual limits based on the type and amount of the loan request, whether the loan is secured or unsecured, and the officer’s position at Auburn Savings Bank. Residential mortgage loans over $225,000, home equity loans over $125,000, commercial mortgage loans over $300,000, secured commercial business loans over $125,000 and unsecured commercial business loans over $15,000 must be approved by the management loan committee of Auburn Savings Bank, which consists of the President, Senior Loan Officer and Commercial Loan Officer.  Residential mortgage loans over $300,000, home equity loans over $150,000, commercial mortgage loans over $400,000, secured commercial business loans over $150,000 and unsecured commercial business loans over $20,000 must be approved by either the loan committee of the board of directors or the full board of directors of Auburn Savings Bank based upon the type and amount of the loan request.  

 

Loans to One Borrower .   The maximum amount that we may lend to one borrower and the borrower’s related entities is limited by regulation generally, with certain exceptions, to 15% of our unimpaired capital and reserves. At June 30, 2011, our largest relationship exposure was $802,000 with a public accounting firm, secured by business assets and personal real estate. This relationship includes an individual loan balance of $752,000 of which 90% ($677,000) is guaranteed by the Small Business Association (SBA).  This loan was performing according to its terms at June 30, 2011.

 

Loan Commitments . We issue commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 45 days.

 

Loan Maturity.   The following table sets forth certain information at June 30, 2011 regarding the dollar amount of loan principal repayments becoming due during the periods indicated.  The table does not reflect scheduled principal payments, unscheduled prepayments, or the ability of certain loans to reprice prior to maturity dates. Demand loans, loans having no stated repayment schedule, and overdraft loans are reported as being due in one year or less.