UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from_______ to __________.
Commission file number: 0-27036
AMBANC HOLDING CO., INC.
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(Exact name of registrant as specified in its charter)
Delaware 14-1783770
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 Division Street, Amsterdam, New York 12010-4303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518)842-7200
---------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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 reports) and (2) has been subject to such
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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the closing bid and
asked prices of such stock on the Nasdaq National Market as of March 27, 1998,
was $78,061,715. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
As of March 27, 1998, there were issued and outstanding 4,258,418 shares of
the Registrant's Common Stock.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to
Shareholders for the year ended December 31, 1997.
Part III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Shareholders for the year ended December 31, 1997.
PART I
Item 1. Description of Business
General
Ambanc Holding Co., Inc. (the "Company") was formed as a Delaware
corporation in June 1995 to act as the holding company for Amsterdam Savings
Bank, FSB (the "Bank") upon the completion of the Bank's conversion from mutual
to stock form (the "Conversion"). The Company received approval from the Office
of Thrift Supervision (the "OTS") to acquire all of the common stock of the Bank
to be outstanding upon completion of the Conversion. The Conversion was
completed on December 26, 1995. The Company's Common Stock trades on The Nasdaq
National Market under the symbol "AHCI". All references to the Company, unless
otherwise indicated, at or before December 26, 1995 refer to the Bank.
At December 31, 1997, the Company had $510.4 million of assets and
shareholders' equity of $61.2 million or 12% of total assets.
The Bank, organized in 1886, is a federally chartered savings bank
headquartered in Amsterdam, New York. The principal business of the Bank
consists of attracting retail deposits from the general public and using those
funds, together with borrowings and other funds, to originate primarily one- to
four-family residential mortgage loans, home equity loans and consumer loans,
and to a lesser extent, commercial and multi-family real estate, and commercial
business loans in the Bank's primary market area. See "Market Area." The Bank
also invests in mortgage-backed securities, U.S. Government and agency
obligations and other permissible investments. Revenues are derived primarily
from interest on loans, mortgage-backed and related securities and investments.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank is a member of the Bank Insurance Fund (the
"BIF"), which is administered by the Federal Deposit Insurance Corporation (the
"FDIC"). Its deposits are insured up to applicable limits by the FDIC, which
insurance is backed by the full faith and credit of the United States
Government. The Bank primarily solicits deposits in its primary market area and
currently does not have brokered deposits. The Bank is a member of the Federal
Home Loan Bank (the "FHLB") System.
The Company's and the Bank's executive office is located at 11 Division
Street, Amsterdam, New York, 12010-4303, and its telephone number is (518)
842-7200.
2
<PAGE>
When used in this annual Report on Form 10-K, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties - including, changes in economic conditions in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition,
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
The Company does not undertake - and specifically disclaims any obligation
- - to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Market Area
The Company's primary market area is comprised of Albany, Schenectady,
Saratoga, Montgomery, and Fulton Counties in New York, which are serviced
through the Bank's main office, eleven other banking offices and its operations
center. The Bank also operates two offsite automated teller machines.
The Company's primary market area consists principally of suburban and
rural communities but also includes the capital of New York State, Albany. The
economy of the Company's primary market area is highly dependent on
manufacturing, state government services (including the State University of New
York at Albany), and private higher education services. These three sectors
provide the basis for the region's economy and the principal support for its
remaining sectors, such as retail trade, finance, and medical services.
Significant reductions in two of the region's main sectors, manufacturing and
state government, from completed, announced, and anticipated layoffs and
relocations will continue to have a negative effect on the economy in the
Company's primary market area.
Saratoga County, where the Bank operates two (2) traditional and two (2)
supermarket branches, is the fastest growing county in the Company's market
area. From 1980 to 1990 the population in Saratoga County grew by 27,517 or
17.9% to 181,276. For the same period, the number of households increased by
14,490, or 27.9% to 66,425.
Montgomery County, where the main office of the Company is located, is the
least populated county in the Company's primary market area with a 1990
population of approximately 51,981. Albany County, where the Bank operates one
traditional branch (Guilderland) and one supermarket branch (Latham) is the most
populated county in the Company's market area with a 1990 population of
approximately 292,594.
3
<PAGE>
The Capital District Regional Planning Commission (CDRPC) in its most
recent population and household projections (1997) has projected the population
in the Capital District to increase by 97,331 persons or 12.5% between 1990 and
2030. Saratoga County is projected to experience the greatest amount and rate of
growth rising from 181,276 persons in 1990 to 234,085 persons in 2030, a 29.1%
increase.
The most significant population growth is expected to occur in suburban and
rural communities, while population in many of the cities and villages is
projected to remain the same or slightly decline. The communities expected to
experience the largest net increase in population between 1990 and 2030 include
Clifton Park (Saratoga County), up 12,862 or 42.7%; Guilderland (Albany County),
up 8,211 or 27.4%; Colonie (Albany County), up 6,805 or 24.7%; and Halfmoon
(Saratoga County), up 6,618 or 47.7%.
Lending Activities
General
The Company primarily originates fixed- and adjustable rate, one- to
four-family mortgage loans. The Company's general policy is to originate
mortgages with terms between 15 and 30 years for retention in its portfolio. The
Company also originates fixed and adjustable rate consumer loans. Adjustable
rate mortgage ("ARM"), home equity and consumer loans are originated in order to
maintain loans with more frequent terms to repricing or shorter maturities than
fixed-rate, one- to four-family mortgage loans. See "- Loan Portfolio
Composition" and "- One- to Four-Family Residential Real Estate Lending." In
addition, the Company originates commercial and multi-family real estate,
construction and commercial business loans in its primary market area; although,
the originations of these types of loans has recently been de-emphasized. In
1997 the Company initiated an FHA loan program primarily directed at
low-to-moderate income borrowers with terms up to 30 years. Loan originations
are generated by the Company's marketing efforts, which include print and radio
advertising, lobby displays and direct contact with local civic and religious
organizations, as well as by the Company's present customers, walk-in customers
and referrals from real estate agents, brokers and builders. At December 31,
1997, the Company's net loan portfolio totaled $281.1 million.
Loan applications are initially considered and approved at various levels
of authority, depending on the type, amount and loan-to-value ratio of the loan.
Bank employees with lending authority are designated, and their lending limit
authority defined, by the Board of Directors of the Bank. The approval of the
Bank's Board of Directors is required for any commercial real estate or
commercial business loan whose aggregate borrowings are in excess of $250,000,
and for all other loans in excess of $500,000. The Bank also has an
Officer/Director Loan Committee which has authority to approve loans between
$250,000 and $2,000,000 and meets as needed to approve loans between Board
meetings.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At
December 31, 1997, the maximum amount which the Bank could have loaned to any
one borrower and the borrower's related entities was approximately $7.4 million.
At such date, the Bank did not have any loans or series of loans to related
borrowers with an outstanding balance in excess of this amount.
4
<PAGE>
At December 31, 1997, the Company's largest lending relationship consisted
of a $1.4 million loan secured by a strip shopping center. The next three
largest lending relationships at December 31, 1997 consisted of a $1.2 million
loan secured by a motel, a $1.1 million loan secured by a day treatment center
for the mentally retarded and developmentally disabled individuals, and a $1.0
million lending relationship consisting of 20 loans secured by 20 one-to
four-family properties. At December 31, 1997, there were no other loans or
lending relationships equal to or in excess of $1.0 million. All of the
foregoing loans were current at December 31, 1997.
Loan Portfolio Composition.
The following table presents information concerning the composition of the
Company's loan portfolio in dollar amounts and in percentages (before deferred
costs net of deferred fees and discounts and allowances for losses) as of the
dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family $189,666 66.88% 158,182 63.15% $133,468 53.20% $140,418 53.63% $116,441 52.18%
Home Equity 30,246 10.67 22,817 9.11 17,519 6.98 16,715 6.39 16,135 7.23
Multi-family 4,152 1.46 4,724 1.88 8,176 3.26 8,718 3.33 10,978 4.92
Commercial 26,585 9.38 29,947 11.96 41,929 16.71 46,736 17.85 51,528 23.09
Construction 2,081 0.73 2,234 0.89 1,073 0.43 4,809 1.84 812 0.36
-------- ------ -------- ------ -------- ------ -------- ------- ------- ------
Total Real Estate 252,730 89.12 217,904 86.99 202,165 80.58 217,396 83.04 195,894 87.78
-------- ------ -------- ------ -------- ------ -------- ------- ------- ------
Other Loans:
Consumer Loans
Auto Loans 16,237 5.73 12,417 4.96 9,337 3.72 4,765 1.82 1,147 0.52
Recreational Vehicles 6,775 2.39 9,416 3.76 12,881 5.13 12,352 4.72 7,908 3.54
Manufactured Homes 494 0.17 620 0.25 13,484 5.37 15,161 5.79 5,751 2.58
Other Secured 1,781 0.63 1,866 0.74 2,020 0.81 2,065 0.79 3,867 1.73
Unsecured 1,847 0.65 1,445 0.58 1,299 0.52 1,398 0.53 1,499 0.67
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Consumer Loans 27,134 9.57 25,764 10.29 39,021 15.55 35,741 13.65 20,172 9.04
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Commercial Business Loans:
Secured 3,233 1.14 6,199 2.47 9,346 3.73 8,332 3.18 6,810 3.05
Unsecured 471 0.17 620 0.25 350 0.14 339 0.13 279 0.13
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Commercial
Business Loans 3,704 1.31 6,819 2.72 9,696 3.87 8,671 3.31 7,089 3.18
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Loan Portfolio, Gross 283,568 100.00% 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00%
====== ====== ====== ====== ======
Deferred costs, net of deferred
fees and discounts 1,362 1,045 1,756 2,008 741
Allowance for Loan Losses (3,807) (3,438) (2,647) (2,235) (3,249)
-------- -------- -------- -------- --------
Total Loans Receivable, Net $281,123 $248,094 $249,991 $261,581 $220,647
======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
The following table shows the composition of the Company's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real Estate:
One- to four-family $124,457 43.89% $111,841 44.65% $ 91,528 36.48% $ 91,299 34.87% $ 68,377 30.64%
Home Equity 23,099 8.14% 15,234 6.08% 8,405 3.35% 6,689 2.56% 5,586 2.50%
Commercial and Multi-family 2,723 0.96% 2,590 1.03% 2,633 1.05% 13,144 5.02% 17,918 8.03%
Construction 2,081 0.73% 1,840 0.73% 633 0.25% 4,809 1.84% 812 0.36%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Real Estate 152,360 53.72% 131,505 52.49% 103,199 41.13% 115,941 44.29% 92,693 41.53%
Consumer 26,260 9.26% 25,110 10.03% 33,343 13.29% 28,027 10.70% 15,644 7.01%
Commercial Business 1,415 0.50% 3,124 1.24% 4,476 1.79% 3,480 1.33% 2,387 1.07%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total fixed-rate loans 180,035 63.48% 159,739 63.76% 141,018 56.21% 147,448 56.32% 110,724 49.61%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Adjustable Rate Loans:
Real Estate:
One- to four-family 65,209 23.00% 46,341 18.50% 41,940 16.72% 49,119 18.76% 48,064 21.54%
Home Equity 7,147 2.52% 7,583 3.03% 9,114 3.63% 10,026 3.83% 10,549 4.73%
Commercial and Multi-family 28,014 9.88% 32,081 12.81% 47,472 18.92% 42,310 16.16% 44,588 19.98%
Construction --- ----% 394 0.16% 440 0.18% --- ----% --- ----%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Real Estate 100,370 35.40% 86,399 34.50% 98,966 39.45% 101,455 38.75% 103,201 46.25%
Consumer 874 0.31% 654 0.26% 5,678 2.26% 7,714 2.95% 4,528 2.03%
Commercial Business 2,289 0.81% 3,695 1.48% 5,220 2.08% 5,191 1.98% 4,702 2.11%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total adjustable-rate loans 103,533 36.52% 90,748 36.24% 109,864 43.79% 114,360 43.68% 112,431 50.39%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Loan Portfolio, Gross 283,568 100.00% 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00%
====== ====== ====== ====== ======
Deferred costs, net of deferred
fees and discounts 1,362 1,045 1,756 2,008 741
Allowance for Loan Losses (3,807) (3,438) (2,647) (2,235) (3,249)
-------- -------- -------- -------- --------
Total Loans Receivable, Net $281,123 $248,094 $249,991 $261,581 $220,647
======== ======== ======== ======== ========
</TABLE>
6
<PAGE>
The following table illustrates the contractual maturity of the Company's
loan portfolio at December 31, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------
One- to Multi-
Four-Family Family and Commercial
and Home Equity Commercial Construction(2) Consumer Business Total
-------------- -------------- -------------- -------------- -------------- --------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
Due During ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Periods Ending
December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 (1) $ 985 8.92% $2,149 8.76% $----- -----% $1,637 10.06% $2,018 9.13% $6,789 8.49%
1999 to 2002 11,345 8.44 14,840 9.33 ----- ----- 19,026 8.14 1,382 7.16 46,593 8.56
2003 and beyond 207,582 7.66 13,748 9.03 2,081 7.04 6,471 10.84 304 10.71 230,186 7.77
<FN>
- ---------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Construction loan terms are generally less than one year, however, upon
completion of the construction phase, the loans are generally converted to a
permanent mortgage with a term not to exceed thirty years, thereby extending the
contractual maturity. Accordingly, the maturity on these loans are shown at the
final expected maturity of the permanent financing.
</FN>
</TABLE>
As of December 31, 1997, the total amount of loans due after December 31,
1998 which have fixed interest rates was $179.1 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
was $97.7 million.
7
<PAGE>
One- to Four-Family Residential Real Estate Lending
The Company's residential first mortgage loans consist primarily of one- to
four-family, owner-occupied mortgage loans. At December 31, 1997, $189.7
million, or 66.9%,of the Company's gross loans consisted of one- to four-family
residential first mortgage loans. Approximately 65.6% of the Company's one- to
four-family residential first mortgage loans provide for fixed rates of interest
and for repayment of principal over a fixed period not to exceed 30 years. The
Company's fixed-rate one- to four-family residential mortgage loans are priced
competitively with the market. Accordingly, the Company attempts to distinguish
itself from its competitors based on quality of service.
The Company generally underwrites its fixed-rate, one- to four-family,
residential, first mortgage loans using Federal National Mortgage Association
("FNMA") secondary market standards. The Company generally holds for investment
all one- to four-family residential first mortgage loans it originates. In
underwriting one- to four-family residential first mortgage loans, the Company
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Properties securing real estate loans made by
the Company are appraised by independent fee appraisers approved by the Board of
Directors. The Company requires borrowers to obtain title insurance, and fire
and property insurance (including flood insurance, if necessary) in an amount
not less than the amount of the loan.
The Company currently offers one, three, five and seven year residential
ARM loans with an interest rate that adjusts annually in the case of a one-year
ARM loan, and every three, five or seven years in the case of a three, five or
seven year ARM loan, respectively, based on the change in the relevant Treasury
constant maturity index. These loans provide for up to a 2.0% periodic cap and a
lifetime cap of 6.0% over the initial rate. As a consequence of using caps, the
interest rates on these loans may not be as rate sensitive as is the Company's
cost of funds. Borrowers of one-year residential ARM loans are generally
qualified at a rate 2.0% above the initial interest rate. The Company's
residential ARM loans may be modified into fixed-rate loans. ARM loans generally
pose greater credit risks than fixed-rate loans, primarily because as interest
rates rise, the required periodic payment by the borrower rises, increasing the
potential for default.
At December 31, 1997, the largest one- to four-family aggregate lending
relationship consisted of 20 loans totaling $1.0 million secured by 20
townhouses located in Webster, New York. All of these loans were current as of
December 31, 1997.
The Company's one- to four-family mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property. The Company has waived the due on sale
clause on loans held in its portfolio from time to time to permit assumptions of
the loans by qualified borrowers.
The Company does not currently originate residential mortgage loans if the
ratio of the loan amount to the value of the property securing the loan (i.e.,
the "loan-to-value" ratio) exceeds 95%, with the exception of FHA loans, which
are fully insured by the Federal Government. If the loan-to-value ratio exceeds
80%, the Company requires that borrowers obtain private mortgage insurance in
amounts intended to reduce the Company's exposure to 80% or less of the lower of
the appraised value or the purchase price of the real estate security. See "Loan
Originations and Sales."
8
<PAGE>
The Company makes construction loans to individuals for the construction of
their residences. The Company has occasionally made loans to builders for the
construction of residential homes, provided the builder has a sales contract to
sell the home upon completion. No construction loan is approved unless there is
evidence of a commitment for permanent financing upon completion of the
residence, whether through the Company or another financial institution.
Construction loans generally will require construction stage inspections before
funds may be released to the borrower. Such inspections are generally performed
by outside fee appraisers.
At December 31, 1997, the Company's construction loan portfolio totaled
$2.1 million, or 0.7% of its gross loan portfolio. Substantially all of these
construction loans were to individuals intending to occupy such residences and
were secured by property located within the Company's primary market area.
Although no construction loans were classified as non-performing as of December
31, 1997, these loans do involve a higher level of risk than conventional one-
to four-family residential mortgage loans. For example, if a project is not
completed and the borrower defaults, the Company may have to hire another
contractor to complete the project at a higher cost.
Home Equity Lending
The Company's home equity loans and lines of credit are secured by a lien
on the borrower's residence and generally do not exceed $300,000. The Company
uses the same underwriting standards for home equity loans as it uses for one-
to four-family residential mortgage loans. Home equity loans are generally
originated in amounts which, together with all prior liens on such residence, do
not exceed 90% of the appraised value of the property securing the loan. The
interest rates for home equity loans and lines of credit adjust at a stated
margin over the prime rate or, in the case of loans (but not lines of credit),
have fixed interest rates. Home equity lines of credit generally require
interest only payments on the outstanding balance for the first five years of
the loan, after which the outstanding balance is converted into a fully
amortizing, adjustable-rate loan with a term not in excess of 15 years. As of
December 31, 1997, the Company had $30.2 million in home equity loans and lines
of credit outstanding, with an additional $4.3 million of unused home equity
lines of credit.
Commercial and Multi-Family Real Estate Lending
The Company has engaged in commercial and multi-family real estate lending
secured primarily by apartment buildings, small office buildings, motels,
warehouses, nursing homes, strip shopping centers and churches located in the
Company's primary market area, although the origination of these types of loans
has recently been de-emphasized by the Bank. At December 31, 1997, the Company
had $26.6 million and $4.2 million of commercial real estate and multi-family
real estate loans, respectively, which represented 9.4% and 1.5%, respectively,
of the Company's gross loan portfolio at that date. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management
Strategy - Asset Quality" and "Provision for Loan Losses" in the Annual Report
for a discussion of the Bank's 1996 bulk sale of certain multi-family and
commercial real estate loans.
9
<PAGE>
The Bank's commercial and multi-family real estate loans generally have
adjustable rates and terms to maturity that do not exceed 20 years. The
Company's current lending guidelines generally require that the multi-family or
commercial income-producing property securing a loan generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and a loan-to-value ratio not exceeding 65%. Prior to
September 1990, the Company originated commercial and multi-family loans with
loan-to-value ratios of up to 75%. Due to declines in the value of some
properties as a result of the economic conditions in the Company's primary
market area, however, the current loan-to-value ratio of some commercial and
multi-family real estate loans in the Company's portfolio may exceed the initial
loan-to-value ratio. Adjustable rate commercial and multi-family real estate
loans provide for interest at a margin over a designated index, with periodic
adjustments at frequencies of up to five-years. The Company generally analyzes
the financial condition of the borrower, the borrower's credit history, the
reliability and predictability of the cash flows generated by the property
securing the loan and the value of the property itself. The Company generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing
commercial and multi-family real estate loans originated by the Company are
performed by independent fee appraisers approved by the Board of Directors.
At December 31, 1997, the Company's largest multi-family or commercial real
estate lending relationship consisted of a $1.4 million loan secured by a strip
shopping center. The next largest multi-family or commercial lending
relationships at December 31, 1997 were a $1.2 million loan secured by a motel,
and a $1.1 million loan secured by a day treatment center for the mentally
retarded and developmentally disabled individuals, all of which were current as
of December 31, 1997. At December 31, 1997, $1.1 million , or 3.4% of the
Company's multi-family and commercial real estate loan portfolio was
non-performing. See "Asset Quality - Non-Performing Assets".
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effect of general economic conditions
on income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be impaired
and the value of the property may be reduced. The balances of these types of
loans have declined over the past five years with a significant decrease from
$50.1 million at December 31, 1995 to $30.7 million at December 31, 1997, due
primarily to the bulk sale of certain performing and non-performing loans in
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management Strategy -- Asset Quality" in the Annual
Report. The Company currently plans to continue to de-emphasize the origination
of commercial and multi-family real estate loans, thereby reducing its credit
risk exposure associated with these types of loans.
10
<PAGE>
Consumer Lending
The Company offers a variety of secured consumer loans, including loans
secured by automobiles and recreational vehicles ("RV's"). In addition, the
Company offers other secured and unsecured consumer loans. The Company no longer
originates manufactured home loans. The Company currently originates
substantially all of its consumer loans in its primary market area. The Company
originates consumer loans on a direct basis only, where the Company extends
credit directly to the borrower. At December 31, 1997 the Company's consumer
loan portfolio totaled $27.1 million, or 9.6% of the gross loan portfolio. At
December 31, 1997, 96.8% of the Company's consumer loans were fixed-rate loans
and 3.2% were adjustable-rate loans.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Terms to maturity range
up to 15 years for manufactured homes and certain RV's and up to 60 months for
other secured and unsecured consumer loans. The Company offers both open- and
closed-end credit. Open-end credit is extended through lines of credit that are
generally tied to a checking account. These credit lines currently bear interest
up to 18% and are generally limited to $10,000.
The underwriting standards employed by the Company for consumer loans
include, a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
At December 31, 1997, automobile loans and RV loans (such as motor homes,
boats, motorcycles, snowmobiles and other types of recreational vehicles)
totaled $16.2 million and $6.8 million or 59.8% and 25.0% of the Company's total
consumer loan portfolio, and 5.7% and 2.4% of its gross loan portfolio,
respectively.
During 1997 and 1996, the Company placed more emphasis on originating
automobile loans secured by both new and used automobiles, thereby experiencing
approximately $3.8 million and $3.1 million in net growth in 1997 and 1996,
respectively. In the past, originations were generated primarily through
advertising and lobby displays. In 1996, the Company increased the number of
relationships with local automobile dealerships in order to further enhance
automobile originations through their referrals. The Company's maximum
loan-to-value ratio on new automobiles is 100% of the borrower's cost including
sales tax, and on used automobiles up to 5 years old, 100% of the vehicle
average retail value, based on NADA (National Auto Dealers Association)
valuation. Non-performing automobile loans as of December 31, 1997 totaled
$36,000 or 0.1% of the Company's consumer loan portfolio.
Of the RV loan balance, approximately $4.8 and $2.0 million were secured by
new and used RVs, respectively. Approximately 75% of the RV portfolio consists
of loans that were originated through the Company's relationship with Alpin
Haus, Inc., a retail RV dealer formerly owned by one of the Company's directors.
The Company's maximum loan-to-value ratio on new and used RV loans is the lesser
of (i) 85% of the borrower's cost, which includes such items as sales tax and
dealer options or (ii) 115% of either the factory invoice for a new RV or the
wholesale value, plus sales tax, for a used RV. In the case of used RV's, the
wholesale value is determined using published guide books. At December 31, 1997,
RV loans totaling $195,000 or 2.9% of the total RV portfolio were
non-performing.
11
<PAGE>
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, e.g. RVs and automobiles. In such cases,
any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of high
initial loan-to-value ratios, repossession, rehabilitation and carrying costs,
and the greater likelihood of damage, loss or depreciation of the underlying
collateral. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on these loans. In the case of RV loans,
which tend to have loan balances in excess of the resale value of the
collateral, borrowers may abandon the collateral property making repossession by
the Company and subsequent losses more likely.
During 1996, the Company sold certain performing and non-performing loans
as part of a bulk sale, including a majority of its manufactured home loan
portfolio, as well as certain RV loans, thereby significantly reducing its
credit risk exposure on these types of loans (see "Loan Originations and
Sales"). However, management expects that delinquencies in its consumer loan
portfolio may increase as RV loans continue to season. At December 31, 1997,
$295,000, or 1.1%, of the Company's consumer loan portfolio was non-performing.
There can be no assurances that additional delinquencies will not occur in the
future.
Commercial Business Lending
The Company also originates commercial business loans, although the
origination of these types of loans has recently been de-emphasized by the Bank.
At December 31, 1997, commercial business loans comprised $3.7 million, or 1.3%
of the Company's gross loan portfolio. Most of the Company's commercial business
loans have been extended to finance local businesses and include primarily short
term loans to finance machinery and equipment purchases and, to a lesser extent,
inventory and accounts receivable. Loans made to finance inventory and accounts
receivable will only be made if the borrower secures such loans with the
inventory and/or receivables plus additional collateral acceptable to the
Company, generally real estate. Commercial loans also involve the extension of
revolving credit for a combination of equipment acquisitions and working capital
in expanding companies.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Secured, non-mortgage lines of credit are available to borrowers
provided that the outstanding balance is paid in full (i.e., the credit line has
a zero balance) for at least 30 consecutive days every year. In the event the
borrower does not meet this 30 day requirement, the line of credit is generally
terminated and the outstanding balance is converted into an amortizing loan.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property, the value of which tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is often dependent upon the general economic
environment). The Company's commercial business loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
12
<PAGE>
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. As part of its commercial business
lending policy, the Company generally requires all borrowers with commercial
business loans to submit annual financial statements to the Company.
The Company's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Consideration of the borrower's
cash flows is also an important aspect of the Company's current credit analysis.
The Company generally obtains personal guarantees on its commercial business
loans. Nonetheless, such loans are believed to carry higher credit risk than
more traditional thrift institution investments.
The balances of these types of loans have declined from $9.7 million in
1995 to $3.7 million in 1997, due primarily to the bulk sale of certain
performing and non-performing loans, and the partial charge-off of the Bennett
Funding Group loan relationship in 1996, as well as the general de-emphasis of
this loan type in 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Management Strategy - Asset Quality" in
the Annual Report. The Company plans to continue to de-emphasize the origination
of commercial business loans, thereby reducing its credit risk exposure
associated with this type of lending.
Loan Originations and Sales
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, dealerships and mortgage brokers, as well as
walk-in customers. Loans are originated by the Company's staff of salaried loan
officers.
While the Company originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon demand for loans in its market.
Demand is affected by the local economy and interest rate environment. The
Company currently retains fixed-rate and adjustable-rate real estate loans it
originates in its portfolio. As a regular part of its business, the Company does
not sell loans and has not purchased a significant amount of loans since 1989.
During 1996, the Company completed the bulk sale of certain performing and
nonperforming loans in order to improve the credit quality of its loan
portfolio. See "Management Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Company's Annual Report.
For the year ended December 31, 1997, the Company originated $91.5 million
of loans compared to $81.4 million and $50.2 million in 1996 and 1995,
respectively. During 1997 and 1996, the Company increased its originations of
one- to four-family mortgages through the referrals of several local brokers. Of
the one- to four-family and home equity originations, approximately $22.6
million were adjustable rate, and $44.9 million were fixed rate loans.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of real estate loans with acceptable underwriting
characteristics may be substantially reduced or restricted with a resultant
decrease in operating earnings.
13
<PAGE>
The following table shows the loan origination, loan sale and repayment
activities of the Company for the periods indicated.
Years Ended December 31,
--------------------------
1997 1996 1995
--------------------------
Origination by Type: (In Thousands)
Real estate-one- to four-family (1) $67,503 $61,982 $16,190
-multi-family 1,490 190 134
-non-residential 3,000 2,838 2,014
Non-real estate-consumer 14,694 7,735 18,359
-commercial business 4,781 8,681 13,472
------ ------ ------
Total loans originated $91,468 $81,426 $50,169
Repayments:
Principal repayments 57,084 52,741 58,374
Proceeds from sale of loans --- 18,929 ---
Net decrease in other items (2) 1,355 11,653 3,385
------ ------ ------
Net increase (decrease) $ 33,029 ($1,897) ($11,590)
======== ======= ======
- -----------------------------------
(1) Includes home equity loans.
(2) Includes net charge-offs, transfers to real estate owned, and additions to
loan loss allowances.
Asset Quality
Generally, when a borrower fails to make a required payment on a loan
secured by residential real estate or consumer products, the Company initiates
collection procedures by mailing a delinquency notice after the account is 15
days delinquent. At 30 days delinquent, a personal letter is generally sent to
the customer requesting him or her to make arrangements to bring the loan
current. If the delinquency is not cured by the 45th day, the customer is
generally contacted by telephone and another personal letter is sent, with the
same procedure being repeated if the loan becomes 60 days delinquent. At 90 days
past due, a demand letter is generally sent. If there is no response, a final
demand letter for payment in full is sent, and unless satisfactory repayment
arrangements are made subsequent to the final demand letter, immediate
repossession or foreclosure procedures are commenced.
Similar collection procedures are employed for loans secured by commercial
real estate and commercial business collateral, except when such loans are 60
days delinquent, a letter is generally sent requesting rectification of the
delinquency within seven days, otherwise foreclosure or repossession procedures,
as applicable, are commenced.
14
<PAGE>
The following table sets forth the Company's loan delinquencies by type,
by amount and by percentage of type at December 31, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------- Total Loans Delinquent
60-89 Days 90 Days and Over 60 Days or More
------------------------------ ------------------------------ ------------------------------
% of Loan % of Loan % of Loan
Number Amount Category Number Amount Category Number Amount Category
-------- ------- --------- -------- ------- -------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to four-family 37 $1,629 0.85% 22 $1,069 0.56% 59 $2,698 1.42%
Home Equity 2 86 0.28% 2 54 0.18% 4 140 0.46%
Multi-family - - - 1 28 0.67% 1 28 0.67%
Commercial 1 23 0.09% 4 278 1.05% 5 301 1.13%
Consumer 28 251 0.93% 37 295 1.09% 65 546 2.01%
Commercial Business 3 60 1.62% 6 603 16.25% 9 663 17.90%
-------- ------- -------- ------- -------- --------
Total 71 $2,049 0.72% 72 $2,327 0.82% 143 $4,376 1.54%
======== ======= ===== ======== ======= ====== ======== ======== ======
</TABLE>
Non-Performing Assets
The table below sets forth the amounts and categories of non-performing
assets at the dates indicated. Loans are generally placed on non-accrual status
when the loan is more than 90 days delinquent (except for FHA insured and VA
guaranteed loans) or when the collection of principal and/or interest in full
becomes doubtful. When loans are designated as non-accrual, all accrued but
unpaid interest is reversed against current period income and, as long as the
loan remains on non-accrual status interest is recognized using the cash basis
method of income recogntion. Accruing loans delinquent 90 days or more include
FHA insured loans, VA guaranteed loans, and loans that are in the process of
negotiating a restructuring with the Bank, excluding troubled debt
restructurings (TDRs), or where the Bank has been notified by the borrower that
the outstanding loan balance plus accrued interest and late fees will be
paid-in-full within a relatively short period of time from the date of such
notification. Foreclosed assets includes assets acquired in settlement of loans.
For further discussion of non-performing assets, and the 1996 bulk sale of
certain non-performing assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset Quality" contained in the
Annual Report.
15
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family (1) $843 $ 259 $1,525 $1,130 $1,705
Multi-family 28 --- 77 563 1,354
Commercial real estate 265 339 1,549 4,096 2,937
Consumer 293 256 605 111 286
Commercial Business 447 2,269 743 404 684
------- ------- ------- ------- -------
Total 1,876 3,123 4,499 6,304 6,966
------- ------- ------- ------- -------
Accruing loans delinquent
more than 90 days:
One- to four-family (1) 280 151 261 480 396
Multi-family --- --- --- --- 54
Commercial real estate 13 568 --- --- 67
Consumer 2 6 --- --- ---
Commercial Business 156 --- --- --- ---
------- ------- ------- ------- -------
Total 451 725 261 480 517
------- ------- ------- ------- -------
Troubled debt restructured loans:
One- to four-family (1) 86 88 89 90 91
Multi-family 34 38 1,626 1,645 1,709
Commercial real estate 761 781 2,185 1,758 1,547
Consumer -- 56 84 62 3
Commercial Business 50 68 51 95 527
------- ------- ------- ------- -------
Total 931 1,031 4,035 3,650 3,877
------- ------- ------- ------- -------
Total non-performing loans: 3,258 4,879 8,795 10,434 11,360
------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family (1) 69 194 459 102 346
Multi-family --- 282 926 1,792 2,405
Commercial real estate --- --- 1,503 1,799 2,707
Consumer 74 239 281 111 42
Commercial Business --- --- --- --- ---
------- ------- ------- ------- -------
Total 143 715 3,169 3,804 5,500
------- ------- ------- ------- -------
Total non-performing assets $3,401 $5,594 $11,964 $14,238 $16,860
======= ======= ======= ======= =======
Total as a percentage of total assets 0.67% 1.18% 2.72% 4.15% 5.06%
<FN>
- --------------------------------------
(1) Includes home equity loans
</FN>
</TABLE>
16
<PAGE>
For the year ended December 31, 1997, gross interest income which would
have been recorded had the year end non-accruing loans been current in
accordance with their original terms amounted to $357,000. The amount that was
included in interest income on such loans was $127,000, which represented actual
receipts.
Similarly, for the year ended December 31, 1997, gross interest income
which would have been recorded had the year end restructured loans paid in
accordance with their original terms amounted to $112,000. The amount that was
included in interest income for the year ended December 31, 1997 was $65,000.
Non-Accruing Loans
At December 31, 1997, the Company had $1.9 million in non-accruing loans,
which constituted 0.7% of the Company's gross loan portfolio. There were no
non-accruing loans or aggregate non-accruing loans-to-one-borrower in excess of
$500,000.
Accruing Loans Delinquent More than 90 Days
As of December 31, 1997, the Company had $445,000 of accruing loans
delinquent more than 90 days. Of these loans, $259,000 were FHA insured or VA
guaranteed one-to-four family residential loans. The remaining $186,000
represented one (1) one-to-four-family real estate loan, one (1) commercial real
estate loan, and two (2) commercial loans for which management believes that all
contractual payments are collectible. These loans are pending restructuring with
the Bank.
Restructured Loans
As of December 31, 1997, the Company had restructured loans of $931,000
with one loan or aggregate lending relationship over $500,000 as discussed
below. The balance of the Company's restructured loans at that date consisted of
one (1) one- to four-family residential mortgage loan, one (1) multi-family real
estate loan, three (3) commercial real estate loans, and three (3) commercial
business loans.
The Company's largest restructured loan or lending relationship at December
31, 1997, was a 58% loan participation interest, secured by a mixed use
office/apartment complex located in Syracuse, New York, on which the Company is
the lead lender. The loan participation was originated for $1.1 million in
February 1986 with a loan to value ratio of 67.0%. The loan had been
experiencing delinquencies since June 1993 due to cash flow problems caused by
high vacancy rates. In December 1993, the Company, based on an October 1993
appraisal, wrote-down the loan balance to $609,000 and in July 1994 restructured
the loan to reduce the principal balance outstanding and interest rate charged.
At December 31, 1997, the outstanding balance on the Company's participation
interest was $583,000. This loan has continued to perform according to the terms
of the restructure; however, tenancy remains a problem and the property is in
need of a significant upgrade that will require a new infusion of capital. The
Company has reached a tentative agreement to sell, at a discount, its share of
the participation loan and transfer its lead lender status to a group of
investors who will bring the needed capital to this project. Current reserves on
the loan are adequate to accommodate the discounted sale and no additional
write-down is anticipated.
17
<PAGE>
Foreclosed Assets
As of December 31, 1997, the Company had $143,000 in carrying value of
foreclosed assets. One-to-four family real estate represents 48.3% of the
company's foreclosed property, consisting of two properties. Repossessed
consumer assets represented 51.7% of the Company's foreclosed properties,
consisting of 12 recreational vehicles.
Other Loans of Concern
As of December 31, 1997, there were $5.8 million of other loans not
included in the table or discussed above where known information about the
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrower to comply with present loan repayment terms. Set forth
below is a description of the largest other loans of concern.
The largest other loan of concern at December 31, 1997 consisted of a
commercial real estate loan secured by a one-story educational facility located
in Amsterdam, New York. This loan was originated in December 1995 as a
$1,000,000 line of credit with a loan-to-value ratio of 25%. The loan is due to
mature on December 31, 1998. Discussions with the borrower indicate that this
loan will not be fully repaid by the maturity date, and negotiations have
commenced to rewrite this loan. At December 31, 1997, the balance was $892,000.
The second largest other loan of concern at December 31, 1997 consisted of
a commercial real estate loan secured by a one-story light industrial facility
in Gates, New York. This loan was originated in May 1988 for $930,000 with a
loan-to-value ratio of 74.4%. The property has experienced tenant vacancies in
the past and based on financial information submitted by the borrower, the cash
flow generated by this property had deteriorated. However, the borrower has been
able to keep the loan current by utilizing other sources of funds. As a result,
the Bank has requested additional financial information from the guarantors on
this loan, to assess their financial position, as the secondary source of
repayment on this lending relationship. The most recent information provided by
the customer indicates that, as of November 1997, this property has been fully
leased. At December 31, 1997, the principal balance of this loan was $876,000.
The third largest other loan of concern at December 31, 1997 consisted of a
multi-family real estate loan secured by a 32-unit apartment building located in
LeRoy, New York. This loan was originated in December 1989 with a loan-to-value
ratio of 72.2%. Although the property was 97% occupied based on a 1996 rent
roll, the cash flow generated was not sufficient to keep the loan current but
the borrower has been able to keep the loan current by utilizing other sources
of funds. Recent financial information obtained from the guarantors for this
loan confirms the resources used to keep this loan current. At December 31,
1997, the principal balance on this loan was $636,000.
As of December 31, 1997, all of the above loans were current.
There were no other loans with a balance in excess of $500,000 being
specially monitored by the Company as of December 31, 1997. The balance of other
loans of concern at that date consisted of 21 commercial and multi-family real
estate loans totaling $2.6 million, 12 commercial business loans totaling
$683,000 and one (1) one-to four-family mortgage loan totaling $72,000. These
loans have been considered by management in conjunction with the analysis of the
adequacy of the allowance for loan losses.
18
<PAGE>
Classified Assets
Federal regulations provide for the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as "substandard," "doubtful" or "loss." An asset is considered "substandard" if
it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may increase general allowances for loan losses in an amount
deemed prudent by management to address the increased risk of loss on such
assets. General allowances represent loss allowances which have been established
to recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review and adjustment by the
OTS and the FDIC, which may order increases in general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Company regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets at December 31, 1997, the Company had
classified $8.1 million as substandard, $326,000 as doubtful, and none as loss.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and changes in the nature and volume of its loan activity, including
those loans which are being specifically monitored by management. Such
evaluation, which includes a review of loans for which full collectability may
not be reasonably assured, considers among other matters, the loan
classifications discussed above, the estimated fair value, less estimated
disposal costs, of the underlying collateral, economic conditions, historical
loan loss experience, and other factors that warrant recognition in providing
for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at fair
value, less estimated disposal costs. If fair value at the date of foreclosure
is lower than the book balance of the related loan, the difference will be
charged to the allowance for loan losses at the time of transfer. Valuations of
the property are periodically updated by management and if the value declines, a
specific provision for losses on such property is recorded by a charge to
operations and the asset's recorded value is written down accordingly.
19
<PAGE>
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Company's allowances will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination. At December 31, 1997, the Company had a total
allowance for loan losses of $3.8 million, representing 117.1% of total
non-performing loans. See Note 5 of the Notes to Consolidated Financial
Statements.
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
For the year
ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $3,438 $2,647 $2,235 $3,248 $3,089
Charge-offs:
One- to four-family (1) (15) (530) (31) (28) (24)
Multi-family (51) (1,174) (171) (668) (257)
Commercial real estate (372) (2,564) (568) (1,336) (641)
Consumer (316) (1,834) (400) (196) (409)
Commercial business (460) (2,616) (46) (232) (399)
----------- ----------- ----------- ----------- -----------
Total Charge offs (1,214) (8,718) (1,216) (2,460) (1,730)
-----------------------------------------------------------
Recoveries:
One- to four-family (1) 1 10 --- 27 13
Multi-family -- -- 64 --- 1
Commercial real estate 26 -- 1 193 ---
Consumer 76 49 41 110 128
Commercial business 392 -- --- 10 58
----------- ----------- ----------- ----------- -----------
Total Recoveries 495 59 106 340 200
-----------------------------------------------------------
Net Charge-offs (719) (8,659) (1,110) (2,120) (1,530)
Provisions charged to operations 1,088 9,450 1,522 1,107 1,689
----------- ----------- ----------- ----------- -----------
Balance at end of period $3,807 $3,438 $2,647 $2,235 $3,248
=========== =========== =========== =========== ===========
Ratio of net charge-offs during
the period to average loans
outstanding during period 0.25% 3.30% 0.42% 0.88% 0.65%
====== ====== ====== ====== ======
<FN>
- -------------------------------------
(1) Includes home equity loans.
</FN>
</TABLE>
20
<PAGE>
No portion of the allowance is restricted to any loan or group of loans,
and the entire allowance is available to absorb realized losses. The amount and
timing of realized losses and future allowance allocations may vary from current
estimates. The following table summarizes the distribution of the Company's
allowance for losses on loans at the dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- -------------------- -------------------- -------------------- -------------------
Percent Percent Percent Percent Percent
Amount of loans Amount of loans Amount of loans Amount of loans Amount of loans
of in each of in each of in each of in each of in each
Loan category Loan category Loan category Loan category Loan category
Loss to total Loss to total Loss to total Loss to total Loss to total
Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family (1) $897 77.55% $ 157 72.26% $268 60.18% $207 60.02% $175 59.41%
Multi-family and
Commercial real estate 1,818 10.84% 1,599 13.84% 1,097 19.97% 1,260 21.18% 2,607 28.01%
Construction and
development --- 0.73% --- 0.89% --- 0.43% --- 1.84% - 0.36%
Consumer 449 9.57% 355 10.29% 718 15.55% 454 13.65% 330 9.04%
Commercial Business 483 1.31% 1,327 2.72% 268 3.87% 114 3.31% 127 3.18%
Unallocated 160 ---- --- ---- 296 ---- 200 ---- 9 ----%
------ ------- ------ ------- ------ ------- ------ ------- ----- -------
Total $3,807 100.00% $3,438 100.00% $2,647 100.00% $2,235 100.00% $3,248 100.00%
====== ======= ====== ======= ====== ======= ====== ======= ====== =======
<FN>
- -------------------------------
(1) Includes home equity loans.
</FN>
</TABLE>
Investment Activities
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Bank has maintained liquid assets at
levels above the minimum requirements imposed by the OTS regulations and above
levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. At December 31, 1997, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 37.05%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" contained in the Annual Report.
In December 1995 the Company reclassified its entire portfolio of
investment and mortgage-backed securities to the available for sale category.
This reclassification was made in response to a one time transfer allowed by the
Financial Accounting Standards Board and the various federal banking regulators.
See Note 1(d) of the Notes to Consolidated Financial Statements contained in the
Annual Report.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, to provide collateral for borrowings and to fulfill the
Company's asset/liability management policies. To date, the Company's investment
strategy has been directed toward high-quality mortgage-backed securities.
21
<PAGE>
Substantially all of the mortgage-backed securities owned by the Company are
issued, insured or guaranteed either directly or indirectly by a federal agency.
At December 31, 1997, all of the Company's securities were classified as
available for sale. The fair value (excluding FHLB stock) and amortized cost of
the Company's securities at December 31, 1997 were $205.8 million and $206.3
million, respectively. For additional information on the Company's securities,
see Note 4 of the Notes to Consolidated Financial Statements in the Annual
Report.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them. Such securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. At December 31, 1997, $111.2
million or 78.3% of the Company's mortgage-backed securities were pledged to
secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities. The prepayment risk associated with mortgage-backed securities is
monitored periodically, and prepayment rate assumptions adjusted as appropriate
to update the Company's mortgage-backed securities accounting and
asset/liability reports. Classification of the Company's mortgage-backed
securities portfolio as available for sale is designed to minimize that risk.
At December 31, 1997, the contractual maturity of 96.2% of all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of the mortgage-backed security is typically less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
different than anticipated will affect the yield to maturity. The yield is based
upon the interest income and the amortization of any premium or discount related
to the mortgage-backed security. In accordance with generally accepted
accounting principles, premiums and discounts are amortized/accreted over the
estimated lives of the securities, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the
amortization/accretion period for premiums and discounts can significantly
affect the yield of the mortgage-backed security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because to the extent that the Company's
mortgage-backed securities amortize or prepay faster than anticipated, the
Company may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
22
<PAGE>
The following table sets forth the composition of the Company's securities
at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------
Carrying Carrying Carrying
Value (1) %of Total Value (1) %of Total Value (1) %of Total
----------- -------- ------------ -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Federal Agency Obligations $ 63,145 30.19% $43,773 21.65% $ 9,967 13.06%
Municipal Bonds 766 0.37% 505 0.25% --- ----%
Other investment securities (2) --- ---- --- ---% 11,422 14.97%
Mortgage-backed securities 141,897 67.85% 156,261 77.10% 53,033 69.49%
---------- ------- ---------- ------- --------- ------
Total debt securities 205,808 98.41% 200,539 99.00% 74,422 97.52%
FHLB stock 3,291 1.57% 2,029 1.00% 1,892 2.48%
Other equity securities (3) 34 .02% --- ----% --- ----%
---------- ------- ---------- ------- --------- ------
Total securities and FHLB stock $ 209,133 100.00% $202,568 100.00% $ 76,314 100.00%
========== ======= ========== ======= ========= ======
Other interest-earning assets:
Interest-bearing deposits with banks $ 4,598 100.00% $ 2,051 31.31% $ 5,259 6.39%
Federal Funds Sold --- ---- 4,500 68.69% 77,100 93.61%
---------- ------- ---------- ------- ---------- ------
Total $ 4,598 100.00% $ 6,551 100.00% $ 82,359 100.00%
========== ======= ========== ======= ========= ======
<FN>
-------------------------------------
(1)At December 31, 1997, 1996 and 1995, debt securities are classified as
available for sale and are carried at fair value. The FHLB stock is
non-marketable and accordingly is carried at cost.
(2)Primarily comprised of debt securities of Fortune 500 companies initially
rated A or better. These securities generally contain greater risk than U.S.
Government securities and Federal agency obligations.
(3)Comprised of municipal bond mutual funds.
</FN>
</TABLE>
23
<PAGE>
The composition and contractual maturities of the securities portfolio (all
of which are categorized as available for sale), excluding FHLB stock and other
equity securities, are indicated in the following table. The Company's
securities portfolio at December 31, 1997, contained no securities of any issuer
with an aggregate book value in excess of 10% of the Company's equity, excluding
those issued by the United States Government or its agencies. Securities are
stated at their contractual maturity date (mortgage backed securities are
included by final contractual maturity). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------------
Over One Over Five
One Year Year through Years through Over
or less Five Years Ten Years 10 Years Total Securities
-------------- -------------- -------------- -------------- ---------------------------
Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value
-------------- -------------- -------------- -------------- -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations $ 3,998 $ 13,000 $ 31,200 $ 15,000 $ 63,198 $ 63,145
Municipal Bonds --- 755 --- --- 755 766
Mortgage-backed securities --- --- 5,433 136,879 142,312 141,897
------- ------- ------- ------- ------- -------
Total investment securities $ 3,998 $ 13,755 $ 36,633 $151,879 $206,265 $205,808
======= ======= ======= ======= ======= =======
Weighted average yield .... 5.74% 6.05% 7.06% 7.35% 7.18% 7.18%
======= ======= ======= ======= ======= =======
</TABLE>
Sources of Funds
General
The Company's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan and mortgage-backed security principal,
maturities of investment securities, short-term investments, and funds provided
from operations.
Deposits
The Company offers a variety of deposit accounts having a range of interest
rates and terms. The Company's deposits consist of savings accounts, money
market accounts, transaction accounts, and certificate accounts currently
ranging in terms from 91 days to 60 months. The Company primarily solicits
deposits from its primary market area and at December 31, 1997, did not have
brokered deposits. The Company relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits. The
Company has utilized premiums and promotional gifts for new accounts in
connection with the opening of new branches or with club accounts. At times the
Company also uses small advertising give-aways in the aisles of the supermarkets
where it maintains branches. For information regarding average balances and rate
information on deposit accounts, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report and for
information on the dollar amount of deposits in the various deposit types
offered by the Company, see Note 8 of the Notes to Consolidated Financial
Statements in the Annual Report.
24
<PAGE>
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Company has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management, liquidity and profitability objectives. Based on
its experience, the Company believes that its savings accounts and transaction
accounts are relatively stable sources of deposits. However, the ability of the
Company to attract and maintain money market accounts and certificates of
deposit and the rates paid on these deposits have been and will continue to be
significantly affected by market conditions.
The following table sets forth the deposit flows at the Company during the
periods indicated. The net increase in deposits for the year ended December 31,
1995, was primarily the result of the Company's having opened two new branches
in 1995 and the Company's decision to raise the interest rates offered on six
month certificates of deposit in order to replace borrowed funds. Management
believes that the net decrease in deposits during 1996 was the result, in part,
to some of the Bank's depositors deciding to pursue alternative opportunities,
such as stock mutual funds, with a portion of their investable funds. The net
increase in deposits during 1997 was attributable, in part, to the reverse of
1996 with depositors shifting investable funds into certificates of deposit to
obtain the relatively higher interest rates paid by the Bank and its market area
competitors. Also contributing to the increase were new account relationships
that resulted from the opening of three new branch offices in May 1997.
Years Ended December 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(Dollars in thousands)
Opening balance $298,082 $311,238 $293,152
Deposits 924,133 860,011 841,042
Withdrawals 902,595 885,591 835,404
Interest credited 13,645 12,424 12,448
========== ========= ========
Ending balance $333,265 298,082 $311,238
========== ========= ========
Net increase (decrease) $35,183 ($13,156) $ 18,086
========== ========= ========
Percent increase (decrease) 11.80% (4.23)% 6.17%
========== ========= ========
25
<PAGE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1997.
Certificate Accounts 0.00- 4.01 - 6.01 - Percent
Maturing in Quarter Ending: 4.00% 6.00% 8.00 Total of Total
- --------------------------- ------- -------- -------- -------- --------
(Dollars in Thousands)
March 31, 1998 $ 999 $ 43,640 $ 1,189 $ 45,828 25.00%
June 30, 1998 12 41,571 3,255 44,838 24.46%
September 30, 1998 --- 23,597 383 23,980 13.08%
December 31, 1998 --- 24,443 14 24,457 13.34%
March 31, 1999 --- 8,389 996 9,385 5.12%
June 30, 1999 --- 4,295 994 5,289 2.88%
September 30, 1999 --- 3,897 177 4,074 2.22%
December 31, 1999 --- 2,173 1,098 3,271 1.78%
March 31, 2000 --- 2,091 5,294 7,385 4.03%
June 30, 2000 --- 1,305 5,070 6,375 3.48%
September 30, 2000 --- 1,541 85 1,626 .89%
December 31, 2000 --- 764 13 777 .42%
Thereafter --- 3,359 2,688 6,047 3.30%
------ ----- ----- ----- -------
Total $ 1,011 $161,065 $ 21,256 $183,332 100.00%
======== ======== ======== ======== =======
Percent of Total 0.55% 87.86% 11.59% 100.00%
======== ======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1997.
Maturity
-------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
--------- -------- -------- -------- --------
(In thousands)
Certificates of deposit
less than $100,000 $42,611 $39,724 $43,066 $40,083 $165,484
Certificates of deposit
of $100,000 or more 3,217 5,114 5,371 4,146 17,848
--------- -------- -------- -------- --------
Total certificates of deposit $45,828 $44,838 $48,437 $44,229 $183,332
========= ======== ======== ======== ========
26
<PAGE>
Borrowings
Although deposits are the Company's primary source of funds, the Company's
policy generally has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Company needs additional funds to satisfy loan demand.
The Company's borrowings historically have consisted of advances from the
FHLB of New York. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
December 31, 1997, the Company had $12.3 million in FHLB advances. During 1996,
the Company significantly increased its other borrowings by $102.8 million.
These borrowings were used to purchase various investments including Federal
agency obligations and mortgage-backed securities which were simultaneously
pledged as securities sold under agreements to repurchase. At December 31, 1997,
pledged securities totaled $111.2 million. The positive interest rate spread
between the volume of pledged securities and the related borrowings has produced
an increase in net interest income but at an interest rate spread that is less
than the Company has earned on other asset to funding spreads. The increased
level of borrowings coupled with a reduction in the interest rate spread related
to the borrowings has resulted in a narrowing in the Company's overall net
interest margin from 3.66% for the year ended December 31, 1996 to 3.36% for the
year ended December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Operating Results" contained in
the Annual Report. See Note 9 of the Notes to Consolidated Financial Statements
contained in the Annual Report.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings for the periods indicated.
Years Ended December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Maximum Balance:
FHLB Advances $ 14,400 $28,000 $15,000
Securities sold under agreements to repurchase 99,410 102,780 4,000
Average Balance:
FHLB Advances 3,667 9,757 3,922
Securities sold under agreements to repurchase 95,261 57,815 958
27
<PAGE>
The following table sets forth certain information as to the Company's
borrowings at the dates indicated:
December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
FHLB advances $ 12,300 $ 6,000 $------
Securities sold under agreements to repurchase 99,250 102,780 ------
--------- -------- --------
Total borrowings $111,550 $108,780 $------
========= ======== ========
Weighted average interest rate of FHLB advances 6.38% 6.88% ----%
Weighted average interest rate of securities sold
under agreements to repurchase 6.04% 5.96% ----%
Subsidiary and Other Activities
As a federally chartered savings association, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or $10.2 million at December 31,
1997, in the stock of, or loans to, service corporation subsidiaries. As of such
date, the Bank had no investments in service corporation subsidiaries. The Bank
may invest an additional 1% of its assets in service corporations where such
additional funds are used for inner-city or community development purposes and
up to 50% of its total capital in conforming loans to service corporations in
which it owns more than 10% of the capital stock. Federal associations also are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
The Bank organized a single service corporation in 1984, which is known as
ASB Insurance Agency, Inc. ("ASB Insurance"). In November 1996, the Company
purchased the service corporation from the Bank for $1,000. ASB Insurance offers
mutual funds, annuity and brokerage services through a registered broker-dealer
to the Company's customers and members of the general public. ASB Insurance
recognized gross revenues of $60,800 for the year ended December 31, 1997.
Regulation
General
The Bank, organized in 1886, is a federally chartered savings bank, the
deposits of which are federally insured by the FDIC and backed by the full faith
and credit of the United States Government. Accordingly, the Bank is subject to
broad federal regulation and oversight by the OTS extending to all its
operations. The Bank is a member of the FHLB of New York and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As a savings and loan holding company, the
Company also is subject to federal regulation and oversight. The Bank is a
member of the Bank Insurance Fund ("BIF"), which is administered by the FDIC.
Its deposits are insured up to applicable limits by the FDIC. As a result, the
FDIC also has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
28
<PAGE>
Federal Regulation of Savings Association.
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS, its
primary federal banking regulator, and the FDIC. The last regular OTS
examination of the Bank was as of December 31, 1996. When these examinations are
conducted by the OTS and the FDIC, the examiners, if they deem appropriate, may
require the Bank to provide for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. The
Bank's OTS assessment for the fiscal year ended December 31, 1997, was $110,000.
The OTS also has extensive enforcement authority over savings associations
and their holding companies, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including the
filing of misleading or untimely reports with the OTS.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal law. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1997, the Bank's lending limit was $7.4 million. The Bank is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The OTS and the other federal banking agencies have also proposed
additional guidelines on asset quality and earnings standards. No assurance can
be given as to whether or in what form the proposed regulations will be adopted.
29
<PAGE>
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines, by regulation or order, to pose a serious risk to the insurance
fund. The FDIC also has the authority to initiate enforcement actions against
savings associations, after giving the OTS an opportunity to take such action,
and may terminate deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium, while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) or considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually.
The FDIC is authorized to adjust the insurance premium rates for banks that
are insured by the BIF, such as the Bank, in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. The ranges of BIF premium rates in
effect during fiscal 1997 was 0% to 0.27%. In addition, BIF insured institutions
are required to contribute to the cost of financial bonds that were issued to
finance the cost of resolving the thrift failures in the 1980s (the "FICO
Premium"). The rate currently set for the FICO Premium for BIF insured banks,
such as the Bank, is 1.3 basis points.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. The OTS is also authorized to impose capital requirements
in excess of these standards on a case-by-case basis. At December 31, 1997, the
Bank was in compliance with its regulatory capital requirements. See Note 15 of
the Notes to Consolidated Financial Statements contained in the Annual Report.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
30
<PAGE>
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
or the Company may have a substantial adverse effect on the Company's operations
and profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution of a
shareholder's percentage ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the retained earnings of the association would
be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
31
<PAGE>
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMELS 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified under Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1997, the Bank met the test and has always met
the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
32
<PAGE>
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was last examined for CRA
compliance in June 1996 and received a rating of "satisfactory".
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, which authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any savings association) would become
subject to activity restrictions unless such other associations each qualify as
a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any savings association. Such acquisitions are generally prohibited if they
result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
33
<PAGE>
Federal Taxation
Savings associations such as the Bank that meet certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction is computed under the experience method. Under the experience method,
the bad debt reserve deduction is an amount determined under a formula based
generally upon the bad debts actually sustained by the savings association over
a period of years.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent prior years earnings appropriated to a savings association's
bad debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses).
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1988. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. The IRS is currently examining the Company, including returns of
subsidiaries and predecessors, for the years ended 1990 through 1996. In the
opinion of management, any examination of still open returns (including returns
of subsidiaries and predecessors of, or entities merged into, the Bank) would
not result in a deficiency which could have a material adverse effect on the
financial condition of the Bank and its consolidated subsidiaries.
34
<PAGE>
New York Taxation
The Bank and its subsidiaries that operate in New York are subject to New
York state taxation. The Bank is subject to the New York State Franchise Tax on
Banking Corporations in an annual amount equal to the greater of (i) 9% of the
Bank's "entire net income" allocable to New York State during the taxable year,
or (ii) the applicable alternative minimum tax. The alternative minimum tax is
generally the greater of (a) 0.01% of the value of the Bank's assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State, or (c) $250. Entire net income
is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward) and alternative entire net income is equal to entire net income without
certain modifications. The Bank and its consolidated subsidiaries have been
audited by the New York State Department of Taxation and Finance through
December 31, 1994.
Delaware Taxation
As a Delaware holding company, the Company is exempted from Delaware
corporate income tax but is required to file an annual report with and pay an
annual fee to the State of Delaware. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.
Competition
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks, credit
unions and mortgage brokers making loans secured by real estate located in the
Company's primary market area. Other savings institutions, commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending.
The Company attracts substantially all of its deposits through its branch
offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from mutual
funds and other savings institutions, commercial banks and credit unions doing
business in the same communities. The Company competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges. Automated teller machine facilities are also available.
Employees
At December 31, 1997, the Company had a total of 189 employees, including
26 part-time employees. The Company's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
35
<PAGE>
Executive Officers of the Company and the Bank Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company and
the Bank who do not serve on the Company's or the Bank's Board of Directors.
There are no arrangements or understandings between such persons named and any
persons pursuant to which such officers were selected.
Harold A. Baylor, Jr. Mr. Baylor, age 55, is Vice President, Chief
Financial Officer and the Treasurer of the Company and the Bank, positions he
has held with the Company since June 1995 and with the Bank since 1990 and 1987,
respectively.
Robert Kelly. Mr. Kelly, age 51, is Vice President, Secretary and General
Counsel to the Company, positions he has held with the Company since its
incorporation in June 1995. Mr. Kelly has been Vice President and General
Counsel to the Bank since July 1994. In January 1995 he was appointed Secretary
of the Bank. Prior to joining the Bank in 1994, Mr. Kelly was self-employed in
the general practice of law in the State of New York.
Nancy S. Virkler. Ms. Virkler, age 48, is Vice President of Operations/MIS
at the Bank. She was appointed Vice President in June 1994. Ms. Virkler has
served the Bank in various capacities since she began as a management trainee in
1977.
Richard C. Edel. Mr. Edel, age 48, is a Vice President of the Bank, a
position he has held since 1987. Mr. Edel is also currently serving as the
Community Reinvestment Act Officer of the Bank.
Cynthia M. Proper. Ms. Proper, age 35, was appointed Vice President and
Director of Lending of the Bank in July 1995. Prior to such appointment, Ms.
Proper was the Director of Internal Audit. She also served the Bank in various
other capacities, primarily in the lending and savings areas. Ms. Proper has
been employed at the Bank since 1985.
Item 2. Description of Property
The Company conducts its business at its main office, eleven other banking
offices and an operations office in its primary market area. The Company owns
its Main Office, its operations center and two branch offices and leases the
remaining nine branch offices. The Company also owns a parking lot located at
18-22 Division Street, Amsterdam, New York, which is used to service the main
office. The net book value of the Company's premises and equipment (including
land, building and leasehold improvements and furniture, fixtures and equipment)
at December 31, 1997 was $3.1 million. See Note 7 of Notes to Consolidated
Financial Statements in the Annual Report. The Company believes that its current
facilities are adequate to meet the present and foreseeable needs of the Bank
and the Company, subject to possible future expansion.
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Company in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Company's results of operations. For more information on certain
legal proceedings, see Note 13(a) of the Notes to Consolidated Financial
Statements contained in the Annual Report.
36
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Page 61 of the Annual Report is herein incorporated by reference.
Item 6. Selected Financial Data
Pages 3 and 4 of the Annual Report is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 5 through 20 of the Annual Report are herein incorporated by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pages 17 through 19 of the Annual Report are herein incorporated by
reference.
Item 8. Financial Statements and Supplementary Data
Pages 21 through 60 of the Annual Report are herein incorporated by
reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent consolidated financial statements reporting a
change of accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
37
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
- ---------
Information concerning Directors of the Registrant is incorporated herein
by reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 22, 1998, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Executive Officers
- ------------------
Information concerning executive officers of the Company is set forth under
the caption "Executive Officers of the Company and the Bank who are not
Directors" contained in Part 1 of this Form 10-K.
Compliance with Section 16(a)
- -----------------------------
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more that 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based soley on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 22, 1998, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
38
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Corporation's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
May 22, 1998, except for information contained under the heading "Compensation
Committee Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Shareholders scheduled to be held on May 22,
1998, except for information contained under the heading "Compensation Committee
Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- --------
Independent Auditors' Report ........................................ 22
Consolidated Statements of Financial Condition at
December 31, 1997 and 1996 ..................................... 23
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ............................... 24
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995 ............... 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ............................... 26-27
Notes to Consolidated Financial Statements .......................... 28-60
39
<PAGE>
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
(a) (3) Exhibits:
See Index to Exhibits
(b) Reports on Form 8-K:
Current reports on form 8-K were filed as follows:
On November 20, 1997, a Press Release dated November 19, 1997 announcing
regular quarterly cash dividend.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMBANC HOLDING CO., INC.
Date: March 30, 1998 By: /s/ Robert J. Brittain
------------------------------ ----------------------
Robert J. Brittain, President
and Chief Executive Officer
(Duly Authorized Representative)
41
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Robert J. Brittain /s/ Paul W. Baker
- ----------------------------------- -------------------------------------
Robert J. Brittain, President Paul W. Baker, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 1998 Date: March 30, 1998
----------------------------- --------------------------------
/s/ William A. Wilde, Jr. /s/ Lauren T. Barnett
- ----------------------------------- -------------------------------------
William A. Wilde, Jr., Director Lauren T. Barnett, Director
Date: March 30, 1998 Date: March 30, 1998
----------------------------- --------------------------------
/s/ Robert J. Dunning /s/ Carl A. Schmidt, Jr.
- ----------------------------------- -------------------------------------
Robert J. Dunning, DDS, Director Carl A. Schmidt, Jr., Director
Date: March 30, 1998 Date: March 30, 1998
----------------------------- --------------------------------
/s/ Charles S. Pedersen /s/ Lionel H. Fallows
- ----------------------------------- -------------------------------------
Charles S. Pedersen, Director Lionel H. Fallows, Director
Date: March 30, 1998 Date: March 30, 1998
----------------------------- --------------------------------
/s/ John J. Daly /s/ Harold A. Baylor, Jr.
- ----------------------------------- -------------------------------------
John J. Daly, Director Harold A. Baylor, Jr., Vice
President and Treasurer (Principal
Financial and Accounting Officer)
Date: March 30, 1998 Date: March 30, 1998
----------------------------- --------------------------------
/s/ Marvin R. LeRoy, Jr.
- -----------------------------------
Marvin R. LeRoy, Jr., Director
Date: March 30, 1998
-----------------------------
42
<PAGE>
Index to Exhibits
Exhibit
Number Document
- ------ ------------------------------------------------------------
3(i) Registrants's Certificate of Incorporation as currently in
effect, filed as an exhibit to Registrants's Registration
Statement of Form S-1 (File No. 33-96654), is incorporated
herein by reference.
3(ii) Registrants's Bylaws as currently in effect, filed as an
exhibit to Registrant's Registration Statement on Form S-1
(File No. 33-96654), is incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed as an exhibit
to Registrant's Registration Statement on Form S-1 (File No.
33-96654), is incorporated herein by reference.
10.1 Employment Agreements between the Registrant's operating
subsidiary and Robert J. Brittain, Harold A. Baylor, Jr.,
Richard C. Edel, Nancy S. Virkler, Cynthia M. Proper and
Robert Kelly, filed as exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-96654), are incorporated
herein by reference.
10.2 Registrant's Employee Stock Ownership Plan, filed as an
exhibit to Registrant's Registration Statement on Form S-1
(File No. 33-96654), is incorporated herein by reference.
10.3 Registrant's 1997 Stock Option and Incentive Plan, Filed as
Exhibit A to Registrant's Proxy Statement filed with the
Commission on March 26, 1997, pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended (File No.
0-27036), is incorporated herein by reference.
10.4 Registrant's Recognition and Retention Plan, filed as
Exhibit B to Registrant's Proxy Statement filed with the
Commission on March 26, 1997, pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended (File No.
0-27036), is incorporated herein by reference.
11 Statement re: computation of per share earnings (see Notes
1(n) and 17 of the Notes to Consolidated Financial
Statements contained in the Annual Report to Shareholders
filed as Exhibit 13 herein).
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
________________________________________________________________________________
1997 ANNUAL REPORT
________________________________________________________________________________
[LOGO]
AMBANC HOLDING CO., INC.
AMSTERDAM, NEW YORK
<PAGE>
1997 ANNUAL REPORT
TABLE OF CONTENTS
President's Message to Shareholders ...........................................2
Selected Consolidated Financial Information ...................................3
Management's Discussion and Analysis of Financial Condition and
Results of Operations .........................................................5
Independent Auditors' Report .................................................22
Consolidated Statements of Financial Condition ...............................23
Consolidated Statements of Income ............................................24
Consolidated Statements of Changes in Shareholders' Equity ...................25
Consolidated Statements of Cash Flows ........................................26
Notes to Consolidated Financial Statements ...................................28
Corporate and Shareholder Information ........................................61
Directors and Executive Officers .............................................62
1
<PAGE>
MESSAGE FROM THE PRESIDENT
To Our Shareholders:
I am pleased to present the third Annual Report to shareholders of Ambanc
Holding Co., Inc., the parent holding company of Amsterdam Savings Bank, FSB.
During 1997, as part of our ongoing commitment to expand the Company's core
business, we opened our fourth and fifth supermarket branch offices, both
located in Saratoga County, N.Y., and a traditional branch located in
Guilderland, Albany County, N.Y.
The Company continues to focus on enhancing shareholder value. Since the
Company's initial public offering ("IPO") in December 1995, the Company's
outstanding shares of common stock have been reduced to 4,306,418 shares at
December 31, 1997 through stock repurchases of 1,115,832 shares, representing
20.6% of the shares issued in the IPO. In addition to the stock repurchase
programs, the Company paid its first regular quarterly cash dividend in August
1997 of $0.05 per share. Total cash dividends paid in 1997 totaled $0.10 per
share, or 14.3% of 1997 basic earnings per share. The Company's closing stock
price increased to $18.75 at December 31, 1997 from $11.25 at December 31, 1996,
an increase of $7.50 per share, or 67%. The total return on the Company's stock,
including cash dividends, for the year ended December 31, 1997, was in excess of
67%. As we move further into our third year as a public company, your Board of
Directors, officers and staff remain dedicated to maintaining the Company's
financial strength, expanding its core business and enhancing shareholder value.
Your Company's directors, officers and staff are also committed to making a
positive difference in the communities in which they live and work. Many of
these individuals are actively involved in their communities participating in
service clubs and a variety of charitable civic and cultural organizations.
We optimistically look forward to the future and, on behalf of the Board of
Directors, I wish to thank our customers, staff and shareholders for your
continued support of Ambanc Holding Co., Inc.
Sincerely,
Robert J. Brittain
President and Chief Executive Officer
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of the
Company. This financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes to the
Consolidated Financial Statements of the Company presented elsewhere in this
Annual Report. All references to the Company, unless otherwise indicated, at or
before December 26, 1995 refer to the Bank.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Selected Consolidated (In Thousands)
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets ..................... $ 510,444 $ 472,421 $ 438,944 $ 343,334 $ 332,902
Securities available for sale .... 205,842 200,539 74,422 -- --
Investment securities ............ -- -- -- 53,390 57,797
Loans receivable, net ............ 281,123 248,094 249,991 261,581 220,647
Deposits ......................... 333,265 298,082 311,239 293,152 294,780
Borrowed funds ................... 111,550 108,780 -- 19,000 --
Shareholders' equity ............. 61,202 61,518 76,015 27,414 25,464
Years Ended December 31,
1997 1996 1995 1994 1993
--------- --------- --------- -------- ---------
Selected Consolidated (In Thousands)
Operations Data:
Total interest and dividend income $ 35,566 $ 32,348 $ 25,582 $ 23,806 $ 23,789
Total interest expense ........... 19,654 16,435 12,746 10,192 10,885
--------- --------- --------- --------- ---------
Net interest income .............. 15,912 15,913 12,836 13,614 12,904
Provision for loan losses ........ 1,088 9,450 1,522 1,107 1,689
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ....... 14,824 6,463 11,314 12,507 11,215
Other income ..................... 1,826 920 1,512 905 1,196
Other expenses ................... 12,197 13,148 11,383 11,340 9,659
--------- --------- --------- --------- ---------
Income (loss) before taxes and
cummulative effect of a change
in accounting principle ......... 4,453 (5,765) 1,443 2,072 2,752
Income tax provision (benefit) ... 1,693 (1,929) 586 122 71
Cummulative effect of a change in
accounting principle related to
SFAS No. 109 .................... -- -- -- -- 600
--------- --------- --------- --------- ---------
Net income (loss) ................ $ 2,760 ($ 3,836) $ 857 $ 1,950 $ 2,681
========= ========= ========= ========= =========
Basic earnings (loss) per share* . $ 0.70 ($ 0.81) N/A N/A N/A
========= ========= ========= ========= =========
Diluted earnings (loss) per share* $ 0.69 ($ 0.81) N/A N/A N/A
========= ========= ========= ========= =========
Dividend payout ratio ............ 14.3% N/A N/A N/A N/A
========= ========= ========= ========= =========
</TABLE>
*Earnings per share were not calculated for 1995 and prior periods since
the Company had no stock outstanding prior to its initial public offering
completed on December 26, 1995.
3
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
------------------------------------------
Selected Consolidated Financial
Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return (loss) on average assets (1) ....... 0.56% (0.84)% 0.25% 0.59% 0.83%
Return (loss) on average equity (1) ....... 4.52 (5.24) 3.00 7.36 11.00
Interest rate spread information:
Average during period .................. 2.58 2.74 3.36 4.01 3.85
Net interest margin (2) ................ 3.36 3.66 3.87 4.34 4.19
Efficiency ratio (3) ...................... 69.81 62.50 68.18 63.46 61.06
Ratio of other expenses to average
total assets (1) ....................... 2.48 2.86 3.37 3.38 2.97
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................. 118.93 124.26 113.31 110.24 109.53
Asset Quality Ratios:
Non-performing assets to total assets
at end of period (1) .................... 0.67 1.18 2.72 4.15 5.06
Non-performing loans to total loans ....... 1.16 1.94 3.48 3.97 5.07
Allowance for loan losses to
non-performing loans .................... 117.07 70.47 30.10 21.42 28.59
Allowance for loan losses to loans
receivable .............................. 1.34 1.37 1.05 0.85 1.47
Capital Ratios:
Equity to total assets at end of period (1) 11.99 13.02 17.32 7.98 7.65
Average equity to average assets (1) ...... 12.42 15.95 8.30 7.96 7.52
Other Data:
Number of full-service offices ............ 12 9 9 7 6
<FN>
(1) Period end and average asset and equity amounts reflect securities available
for sale at fair value, with net unrealized gains/losses, net of tax, included
as a component of equity.
(2) Net interest income divided by average interest-earning assets.
(3) The efficiency ratio represents other expenses (excluding real estate owned
and repossessed assets expenses, net), divided by the sum of net interest income
and other income (excluding net gains (losses) on securities transactions).
</FN>
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Ambanc Holding Co., Inc. ("Ambanc" or the "Company"), a savings institution
holding company is the parent corporation of Amsterdam Savings Bank, FSB (the
"Bank"). Ambanc was formed as a Delaware Corporation to act as the holding
company for the Bank upon the completion of the Bank's conversion from the
mutual to stock form on December 26, 1995 (the "Conversion"). As such, the
Company had no material results of operations during 1995. Accordingly, the
discussion herein for periods prior to 1996 relates primarily to the Bank's
results of operations.
The Company's primary business, through the Bank, consists of attracting
deposits from the general public and originating real estate loans and other
types of investments. The Bank services a five-county area in upstate New York
through the Bank's main office, eleven other banking offices and its operations
center. The Company also has a wholly-owned subsidiary, ASB Insurance Agency,
Inc., which offers mutual funds, annuity products and brokerage services to the
Bank's customers and the general public.
Like all thrift institutions, the Bank's (and therefore the Company's)
operations are materially affected by general economic conditions, the monetary
and fiscal policies of the federal government and the policies of the various
regulatory authorities, including the Office of Thrift Supervision (the "OTS")
and the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). Its results of operations are largely dependent upon its net interest
income, which is the difference between (i) the interest its receives on its
loan portfolio and its securities portfolio and (ii) the interest it pays on its
deposit accounts and borrowings. The operations of the Company can also be
affected by the economic conditions in its market area, upstate New York.
The Company's main office is located at 11 Division Street, Amsterdam, New
York 12010. The Company's telephone number at this address is (518)842-7200.
Forward Looking Statements
When used in this annual report, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties -- including, changes
in economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
5
<PAGE>
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake -- and specifically disclaims any obligation
- -- to release publicly the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000
The Company has established a committee (the "Y2K Committee") to conduct a
comprehensive review of its computer systems to identify the systems that could
be affected by the "Year 2000" problem. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time sensitive software
may recognize a date using "00" as the year 1900 rather that the year 2000. This
could result in a major system failure or miscalculations. The Company is also
aware of these risks to third parties, including vendors (and to the extent
appropriate, depositors and borrowers), and the potential adverse impact on the
Company resulting from failures by these parties to adequately address the Year
2000 problem. The Company has been communicating with its outside data
processing service bureau, as well as other third party service providers (and
to the extent appropriate, depositors and borrowers), to assess their progress
in evaluating their systems and implementing any corrective measures required by
them to be prepared for the year 2000. To date, the Company has not been advised
by any of its primary vendors that they do not have plans in place to address
and correct the issues associated with the Year 2000 problem; however, no
assurance can be given as to the adequacy of such plans or to the timeliness of
their implementation. The Y2K Committee reports on a quarterly basis to the
Audit Committee of the Board of Directors as to the Company's progress in
resolving any Year 2000 problems.
Based on the Company's current knowledge and investigations, the expense of
the year 2000 problem as well as the related potential effect on the Company's
earnings is not expected to have a material effect on the Company's financial
position or results of operations. Furthermore, the Company expects any
corrective measures required to be prepared for the Year 2000 to be implemented
on a timely basis.
Management Strategy
Management's primary goal is to improve the Company's profitability while
minimizing its risks. To meet these goals, the Company's strategies focus on:
(i) emphasizing lending secured by one- to four- family residential mortgages,
home equity, and consumer products, especially automobile loans; (ii) asset
quality; (iii) increasing the Bank's presence in its market area primarily
through the establishment of low-cost supermarket branches; and (iv) managing
interest rate risk.
6
<PAGE>
Emphasizing Lending Secured by One- to Four-Family Residential Mortgages,
---------------------------------------------------------------------------
Home Equity and Consumer Products
---------------------------------
The Bank has emphasized and plans to continue to emphasize originating
traditional one- to four-family residential mortgage, home equity and consumer
loans in its primary market area.
During 1997, 1996, and 1995, the Bank originated $67.5 million, $62.0
million and $16.2 million, respectively, of loans secured by one-to four-family
residences, including home equity loans, and $14.7 million, $7.7 million and
$18.4 million, respectively, of consumer loans. At December 31, 1997, the Bank
had $189.7 million of loans secured by one- to four-family residences, $30.2
million of home equity loans and $27.1 million of consumer loans representing
66.9%, 10.7% and 9.6%, respectively, of the Bank's gross loan portfolio.
Asset Quality
-------------
The Bank's loan portfolio consists primarily of one- to four-family
residential and home equity loans, which are considered to have less risk than
commercial and multi-family real estate or consumer loans. The Bank has
de-emphasized its commercial and multi-family real estate lending, with the
portfolio shrinking as a percentage of the Bank's total loan portfolio to 10.8%
of total loans at December 31, 1997 from 13.8% and 28.0% at December 31, 1996
and 1993, respectively. During the same period, the Bank's portfolio of loans
secured by one- to four-family and home equity mortgage loans has grown as a
percentage of the Bank's total loan portfolio to 77.6% of total loans at
December 31, 1997 from 72.3%, and 59.4% at December 31, 1996 and 1993,
respectively.
The Bank's non-performing assets consist of non-accruing loans, accruing
loans delinquent more than 90-days, troubled debt restructurings and foreclosed
and repossessed assets. Prior to 1997, the Company's performance had been
significantly hampered by the level of its non-performing assets. During 1996,
the Company decided to dispose of certain non-performing and higher credit risk
performing assets in a bulk sale versus continuing to resolve the problems on an
asset specific basis in order to accelerate the reduction in loan portfolio
credit risk, reduce the drag on earnings that resulted from these assets,
enhance overall asset quality and better position the Company to achieve its
strategic goals. The net sales proceeds totaled $20.4 million, resulting in a
pre-tax loss of $6.6 million, which was charged against the allowance for loan
losses (approximately $5.6 million) and to other real estate owned expense
(approximately $1.0 million).
Primarily as a result of the bulk sale in 1996, the ratio of non-performing
assets to total assets declined from 2.72% at December 31, 1995 to 1.18% at
December 31, 1996. This ratio experienced further improvement in 1997, dropping
to 0.67% at December 31, 1997.
In addition, the Bank's ratios of non-performing loans to total loans and
the allowance for loan losses to non-performing loans also improved. The ratio
of non-performing loans to total loans at December 31, 1997 was 1.16% compared
to 1.94% and 3.48% at December 31, 1996 and 1995, respectively. The ratio of the
allowance for loan losses to non-performing loans increased to 117.1% at
December 31, 1997 compared to 70.5% and 30.1% at December 31, 1996 and 1995,
respectively.
7
<PAGE>
Increasing the Bank's Presence in its Market Area Primarily through the
---------------------------------------------------------------------------
Establishment of Low-Cost Supermarket Branches
----------------------------------------------
Since November 1994, the Bank has opened five branch offices in
supermarkets, with one located in each of Schenectady, Albany and Montgomery
Counties, and two in Saratoga County, New York. Management believes that these
supermarket branch offices are an effective way to service its customers due to
their size, efficiency and convenient, high traffic locations.
In addition to the two new supermarket branch offices opened in 1997 in
Saratoga County, the Bank also opened a "traditional" branch office in 1997.
With the opening of the three branch offices in 1997, the Bank operates
12 full-service branch locations in its primary market area, all of which
provide customers with 24-hour access to ATMs. Two offsite ATMs were also placed
into service in 1997.
Managing Interest Rate Risk
---------------------------
The Bank has an asset/liability management committee that meets weekly to
develop, implement and review policies to manage interest rate risk. The Bank
has endeavored to manage its interest rate risk through the pricing and
diversification of its loans, including the introduction of new, first mortgage
loan products with shorter terms to maturity or with different interest rate
adjustment periods, the origination of consumer loans with shorter average lives
or which reprice at shorter intervals than fixed and adjustable-rate, one- to
four-family residential loans and, from time to time, the purchase of short- to
intermediate-term securities available for sale.
Financial Condition
Comparison of Financial Condition at December 31,1997 and December 31,
1996. Total assets at December 31, 1997, were $510.4 million, an increase of
$38.0 million, or 8.1%, compared to total assets of $472.4 million at December
31, 1996. The growth in total assets was primarily attributable to a $33.4
million, or 13.3%, increase in loans receivable, including net deferred costs,
fees and loan discounts. One-to four-family mortgage loans increased by $31.5
million, or 19.9% and home equity loans expanded by $7.4 million, or 32.6%.
Partially offsetting these increases were declines in multi-family,
non-residential and construction loans.
An increase of $1.4 million, or 5.3%, in consumer loans, primarily auto
loans which increased by $3.8 million, or 30.8% also contributed to total
growth. These increases were partially offset by a net decline in all other
consumer loan categories, mainly loans for recreational vehicles which declined
by $2.6 million.
Total deposits at December 31, 1997, were $333.3 million, an increase of
$35.2 million, or 11.8%, compared to $298.1 million at December 31, 1996. The
increase in total deposits was attributable primarily to a $31.4 million, or
20.7%, increase in certificates of deposit. "NOW" accounts increased $3.8
million, or 20.4%, to $22.7 million and demand deposits grew to $22.7 million,
an increase of $2.5 million, or 12.2% increase. These increases were partially
offset by a $2.5 million or 2.4% decline in savings and money market accounts.
8
<PAGE>
Results of Operations
Comparison of Fiscal Years Ended December 31, 1997 and 1996
General. The Company recorded net income of $2.8 million for the fiscal
year ended December 31, 1997 compared to a net loss of $3.8 million for the
prior year. Net interest income for 1997 and 1996 was unchanged at $15.9
million. The net loss in 1996 was due primarily to the $9.5 million provision
for loan losses and the $2.6 million of expenses incurred in connection with the
Company's real estate owned and repossessed assets. The large provision was
necessitated to replenish and increase the Company's allowance for loan losses
which was depleted as a result of write-offs associated with the Company's bulk
sale of certain loans in 1996 and the commercial bankruptcy of a large
commercial borrower. See "Management Strategy - Asset Quality" and "Results of
Operations - Provision for Loan Losses."
Interest and Dividend Income. Interest and dividend income increased $3.2
million, or 9.9%, to $35.5 million in 1997 from $32.3 million in 1996. The
increase in interest income resulted from a $38.5 million, or 8.9%, increase in
the Company's average interest-earning assets, primarily securities available
for sale, which increased $38.0 million, or 24.3% in 1997, to $194.1 million
compared to $156.1 million in 1996. The increase in securities available for
sale was primarily funded with increased borrowings.
The average yield earned on interest-earning assets increased by 8 basis
points to 7.52% in 1997 from 7.44% in the prior year. The increase in the
average yield earned was attributable primarily to a change in the composition,
or mix, of the Company's interest-earning assets, mainly average securities
available for sale which increased in 1997 to 41.0% of total interest-earning
assets from 35.9% in 1996. The average yield earned on the Company's securities
also increased by 19 basis points to 7.19% in 1997 compared to 7.00% in 1996.
Interest Expense. Interest expense increased by $3.2 million, or 19.6%, to
$19.6 million in 1997 compared to $16.4 million in 1996. Average
interest-bearing liabilities increased by $48.1 million, or 13.8%, to $397.8
million in 1997 compared to $349.7 million during the prior year. During the
same periods, the average rate paid on interest-bearing liabilities increased by
24 basis points to 4.94% from 4.70%.
The increase in interest expense was attributable primarily to a $31.3
million, or 46.4%, increase in the average balance of borrowed funds to $98.9
million from $67.6 million in 1996 and an increase in average certificates of
deposit which grew by $22.0 million, or 14.7%, to $172.3 million from $150.3
million. The average rates paid on borrowed funds and certificates of deposit
during 1997 also increased over 1996 by 13 basis points on borrowed funds and 8
basis points on certificates of deposit. Borrowings consisted primarily of
securities sold under agreements to repurchase, with an increase in the average
balance of $37.5 million, or 64.9%, to $95.3 million in 1997 from $57.8 million
in 1996, partially offset by a decline in average advances from the Federal Home
Loan Bank ("FHLB") of New York. These borowings were primarily used to fund the
growth in the Company's securities available for sale.
Net Interest Income. Net interest income before provision for loan losses
was $15.9 million for 1997 and 1996. During 1997, the Company's average
interest-earning assets grew by $38.5 million, or 8.9%, to $473.1 million. The
9
<PAGE>
average yield on these assets also increased when compared to 1996, improving by
8 basis points to 7.52% from 7.44%. However, the increase in average
interest-bearing liabilities exceeded the growth in average interest-earning
assets, increasing by $48.1 million to $397.8 million. The increase in the
average interest-bearing liabilities was accompanied by a 24 basis point
increase in the average rate paid on these funds to 4.94% for 1997 from 4.70%
for 1996.
Ambanc Holding Co., Inc. operates in an environment of intense competition
for deposits and loans. The competition in today's environment is not limited to
other local banks and thrifts, but also includes a myriad of financial services
providers that are located both within and outside the Company's local market
area. Due to this heightened level of competition to attract and retain
customers, the Company must continue to offer competitive interest rates on
loans and deposits. As a consequence of these competitive pressures, from
time-to-time, the relative spreads between interest rates earned and interest
rates paid will tighten, exerting downward pressure on net interest income, net
interest rate spread and the net interest margin. This is especially true during
periods when the growth in interest-earning assets lags behind the growth in
interest-bearing liabilities, the environment that the Company experienced in
1997. However, management does not want to discourage, by offering
noncompetitive interest rates, the creation of new customer relationships or
jeopardize existing relationships thereby curtailing customer base and loan
growth and the attendant benefits to be derived from them. Management believes
that the longer-term benefits to be derived from this position will outweigh the
shorter term costs associated with attracting, cross-selling and retaining an
expanding customer base. The Company's growing customer base provides Ambanc
with the potential for future, profitable customer relationships, which should
in turn increase the value of the franchise.
Provision for Loan Losses. The provision for loan losses decreased $8.4
million to $1.1 million in 1997 from $9.5 million during 1996. The higher
provision in 1996 resulted primarily from the Company's bulk sale of certain
performing and non-performing loans in the fourth quarter of 1996 and the
aggregate lending relationship with the Bennett Funding Group, a company that
filed for Chapter 11 bankruptcy protection on March 29, 1996. In order to
accelerate its objective of reducing credit risk in the loan portfolio and
better position the Company to achieve its strategic goals, management
considered it to be prudent to complete the bulk sale of certain non-performing
and performing commercial loans and manufactured home loans (which are
considered a higher credit risk consumer product) at a loss, versus continuing
to address these problem assets on an asset specific basis.
The Company's provision for loan losses is based upon its analysis of the
adequacy of the allowance for loan losses. Management determines the adequacy of
the allowance for loan losses based upon its analysis of risk factors in the
loan portfolio. This analysis includes evaluation of concentrations of credit,
historical loss experience, current economic conditions, estimated fair value of
underlying collateral, delinquencies, and other factors.
At December 31, 1997, the Bank's allowance for loan losses totaled $3.8
million, or 1.3% of total loans and 117.1% of non-performing loans, compared to
$3.4 million, or 1.4% of total loans and 70.5% of non-performing loans at
December 31, 1996.
Other Income. Other income increased $906,000, or 98.5%, to $1.8 million
for the year ended December 31, 1997, from $920,000 in 1996. The primary reason
10
<PAGE>
for the increase in other income was the net gains on securities transactions of
$775,000, compared to a net loss of $102,000 in 1996. As the general level of
interest rates declined during 1997, management decided that it would be prudent
to sell securities and record the net gains on the transactions. One condition
adhered to in determining the selection and timing of the securities to be sold
was that the yield obtained on the reinvestment of the sale proceeds would not
be significantly lower than the foregone yield. A second condition was that the
credit rating of the replacement securities would be no lower than the quality
of the securities sold.
Other Expenses. Other expenses decreased $951,000, or 7.2%, to $12.2
million for the year ended December 31, 1997 from $13.1 million in the same 1996
period. The primary reason for the improvement was a $2.2 million decline in the
net costs associated with the Company's real estate owned and repossessed
assets. The decrease in these expenses resulted from one-time charges in 1996
related to the bulk sale of certain foreclosed real estate properties.
Excluding the expenses related to real estate owned and repossessed assets,
other expenses increased $1.2 million, or 11.9%, to $11.8 million in 1997 from
$10.6 million in 1996, mainly due to a higher level of salaries, wages and
benefits which increased $989,000, or 19.4%, to $6.1 million from $5.1 million
the prior year. Salaries, wages and benefits increased $250,000 as a result of
the opening of three branch offices in May 1997. Also contributing to the higher
level of salaries, wages and benefits was a $239,000 increase in the
compensation costs related to the Employee Stock Ownership Plan (ESOP) and a
$137,000 expense associated with awards of Company common stock under the
Recognition and Retention Plan (RRP) to officers. The remainder of the increase
was attributable to higher payroll taxes, employee insurance premiums and normal
cost of living and merit increases.
Occupancy and equipment expenses increased $211,000, or 15.9%, to $1.5
million, as a result of the opening of three branch offices in 1997. In
addition, other expenses increased $135,000 in 1997 as a result of awards of
Company Common Stock under the RRP to directors.
Income Tax Expense. Income tax expense increased $3.6 million to $1.7
million in 1997 due to a pre-tax loss of $5.8 million incurred in 1996 as
compared to pre-tax income of $4.5 million in 1997.
Results of Operations
Comparison of Fiscal Years Ended December 31, 1996 and 1995
General. For the fiscal year ended December 31, 1996, the Company recorded
a net loss of $3.8 million compared to net income of $857,000 for the prior
year. The net loss for 1996 was attributable primarily to the provision for loan
losses of $9.5 million; which was primarily related to the bulk sale of certain
performing and non-performing loans and the Company's aggregate lending
relationship with the Bennett Funding Group ("Bennett"). See "--Provision for
Loan Losses."
Interest and Dividend Income. Interest and dividend income increased $6.8
million, or 26.4%, to $32.3 million in 1996 from $25.6 million in 1995. The
11
<PAGE>
increase in interest income resulted from a $103.2 million, or 31.2%, increase
in the Company's average interest-earning assets, primarily securities available
for sale, which increased $106.5 million, or 214% in 1996, to $156.1 million at
December 31, 1996, compared to $49.6 million of securities held to maturity in
1995. The average yield earned on the Company's securities increased 89 basis
points to 7.00% in 1996 compared to 6.11% in 1995.
However, overall the average yield earned on interest-earning assets
decreased 28 basis points to 7.44% in 1996 from 7.72% in the prior year. The
decrease in the average yield earned was mainly the result of the change in the
mix of average interest-earning assets with lower yielding securities available
for sale increasing as a percent of the total mix, rising to 36.4% during 1996
from 15.5% in 1995, while the percentage of higher yielding loans to total
interest-earning assets declined to 60.3% from 78.9% for the same periods.
Interest Expense. Interest expense increased by $3.7 million, or 28.9%, to
$16.4 million in 1996 compared to $12.7 million in 1995. Average
interest-bearing liabilities increased $57.3 million, or 19.6%, to $349.7
million in 1996 compared to $292.4 million during the prior year. During the
same periods, the average rate paid on interest-bearing liabilities increased by
34 basis points to 4.70% from 4.36%. The increase in interest expense was due
primarily to a $62.7 million increase in the average outstanding balance of
borrowed funds to $67.6 million from $4.9 million in 1995, mainly resulting from
an increase in securities sold under agreements to repurchase, which grew $56.8
million to $57.8 million in 1996 from $1.0 million in 1995. Average borrowed
funds, with an average rate of 5.94%, increased to 19.3% of total
interest-bearing liabilities for 1996 up from 1.7% in 1995 while average savings
accounts, with an average rate of 3.04% in 1996, declined to 29.5% from 37.2% in
1995 and average certificates of deposit, with an average rate of 5.65% in 1996,
decreased to 43.0% of the funding mix in 1996 from 50.4% the prior year.
Net Interest Income. Net interest income before provision for loan losses
increased $3.1 million, or 24.0%, to $15.9 million for the year ended December
31, 1996, compared to $12.8 million for 1995. As a result of implementing the
Company's strategy to enhance net interest income through the restructuring of
its balance sheet through the use of leveraged reverse repurchase agreements,
net interest income increased approximately $1.4 million. Partially offsetting
the increased net interest income attributable to average net earning asset
growth was a decline in the net yield on average interest-earning assets of 21
basis points to 3.66% in 1996 from 3.87% in 1995, primarily the result of the
changes in the composition of average interest-earning assets and average
interest-bearing liabilities as discussed above. See "Financial
Condition","Interest Income", "Interest Expense" and "Asset Liability
Management" herein.
Provision for Loan Losses. The provision for loan losses increased $8.0
million to $9.5 million in 1996 from $1.5 million during 1995. The increase
resulted primarily from the Company's bulk sale of certain performing and
non-performing loans in the fourth quarter of 1996, (see "Asset Quality"
herein), the aggregate lending relationship with the Bennett Funding Group, a
company that filed for Chapter 11 bankruptcy protection on March 29, 1996, as
well as the Company's continual review of its loan portfolio. In order to
accelerate its objective of reducing credit risk in the loan portfolio and
better position the Company to achieve its strategic goals, management
considered it to be more prudent to complete the bulk sale of certain
non-performing commercial type loans and manufactured home loans (which are
considered a higher credit risk consumer product), versus continuing to address
these assets on an asset specific basis (see "Asset Quality" herein).
12
<PAGE>
The Bank records a provision for loan losses based upon its analysis of the
adequacy of the allowance for loan losses. Management determines the adequacy of
the allowance for loan losses based upon its analysis of risk factors in the
loan portfolio. This analysis includes evaluation of concentrations of credit,
historical loss experience, current economic conditions, estimated fair value of
underlying collateral, delinquencies, and other factors.
While the increase in the 1996 provision for loan losses was primarily due
to the Bennett relationship and the result of the bulk loan sale, it was also
due to weaknesses in the economy in the Bank's primary market area, decreases in
the value of real estate (the primary collateral securing many loans) in the
region, as well as increases in charge-offs, even after excluding the effects of
the bulk loan sales and the Bennett relationship.
At December 31, 1996, the Bank's allowance for loan losses totaled $3.4
million, or 1.4% of total loans and 70.5% of non-performing loans, compared to
$2.6 million, or 1.1% of total loans and 30.1% of non-performing loans at
December 31, 1995.
Other Income. Other income decreased by $592,000 to $920,000 for the year
ended December 31, 1996, from $1.5 million in 1995. The primary reasons for the
decline in non-interest income were the receipt by the Bank of a non-recurring
FDIC deposit insurance premium refund of $189,000 in 1995, net losses on the
sale of securities available for sale of $102,000 in 1996 compared to a net gain
in the prior year of $225,000 and the receipt in 1995 of non-recurring insurance
proceeds related to a fire loss on a real estate owned property in the amount of
$76,000. In late 1995, the Bank's securities portfolio was yielding below market
rates. As a result, the Bank decided in early January 1996 to sell $34 million
of its holdings and reinvest the proceeds in then current higher yielding
securities, based on a projection that the losses on the sales would be
recovered in approximately six-months.
Other Expense. Other expense increased $1.8 million to $13.1 million for
the year ended December 31, 1996, an increase of 15.5%, from $11.4 million in
1995. The primary reasons for the increase were a $962,000 increase in the net
costs associated with the Bank's real estate owned and repossessed assets and an
increase in salaries, wages, and benefits of $694,000, or 15.8% over the prior
year.
The increase in the expenses related to real estate owned and repossessed
assets resulted primarily from the bulk sale of certain foreclosed real estate
properties at an amount below book value, which increased expenses by
approximately $1.0 million. Although these assets had been carried at fair
value, the Bank was willing to accept a price lower than book value as part of
this bulk sale in order to reduce the drag on earnings that resulted from
carrying these non-performing assets. This increase was partially offset by a
decline in other write-downs of real estate owned of $377,000 to $877,000 for
1996 compared to $1.3 million during 1995. Also contributing to the increase was
an increase in expenses related to holding these assets.
The increase in salaries, wages, and benefits was primarily attributable to
the Company's Employee Stock Ownership Plan ("ESOP"), that was established at
the time of conversion. The year ended December 31, 1996, was the first year in
which the Company was required to recognize compensation expense related to the
13
<PAGE>
ESOP. The amount of the expense recorded for 1996 was $527,000. Excluding the
ESOP expense, salaries, wages, and benefits increased $167,000, or 3.8%, to $4.6
million from $4.4 million in 1995 due mainly to normal cost of living and merit
increases.
All other non-interest expenses increased by $109,000, or 2.0%, to $5.5
million in 1996 from $5.4 million the prior year. Increases related to occupancy
and equipment, data processing, professional fees, and certain other expense
categories totaling $974,000 were offset almost entirely by decreases of
$865,000 in certain other expense categories, primarily FDIC deposit insurance
premiums, which declined by $531,000 from $533,000 in 1995 to $2,000 in 1996 due
to a decrease in the rates charged to well-capitalized, Bank Insurance Fund
(BIF) member institutions such as the Bank, and the recording of non-recurring
expenses of $205,000 in 1995 pertaining to the seizure and liquidation of
Nationar by the Superintendent of Banks of N.Y.S.
Income Tax Expense. Due to the pre-tax loss of $5.8 million incurred in
1996 as compared to pre-tax income of $1.4 million in 1995, the Company recorded
a tax benefit of $1.9 million for 1996 compared to an expense of $586,000 in
1995.
14
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and the
resultant yields, as well as the total dollar amount of interest expense
incurred on average interest-bearing liabilities and the resultant rates. No tax
equivalent adjustments were made. All average balances are daily average
balances. Non-accruing loans have been included in the table as loans with
interest earned on a cash basis only. Securities available for sale are included
at amortized cost.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ------------------------- --------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Inc./Exp. Rate Balance Inc./Exp. Rate Balance Inc./Exp. Rate
------- --------- ------ ------- --------- ------ ------- --------- ------
Interest-Earning Assets (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ........................... $ 267,726 $ 21,011 7.85% $ 262,193 $20,557 7.84% $261,482 $ 21,385 8.18%
Securities available for sale .............. 194,111 13,957 7.19% 156,093 10,921 7.00% -- -- --
Investment securities ...................... -- -- -- -- -- -- 49,598 3,028 6.11%
Federal Home Loan Bank Stock ............... 3,066 204 6.65% 2,013 130 6.46% 1,867 143 7.66%
Federal funds sold and interest-
bearing deposits ......................... 8,162 394 4.76% 14,218 740 5.12% 18,352 1,026 5.59%
------- ------ ------- ------ ------- ------
Total interest-earning assets .......... 473,065 35,566 7.52% 434,517 32,348 7.44% 331,299 25,582 7.72%
------- ------ ------- ------ ------- ------
Allowance for Loan Losses .................... (3,846) (3,686) (2,598)
Due from Brokers ............................. 7,121 14,221 --
Unrealized Gain/(Loss)-AFS Securities ........ (884) (1,475) --
Other Assets ................................. 16,150 15,616 13,620
--------- --------- -----------
Total Average Assets ......................... $ 491,606 $ 459,193 $ 345,021
========= ========= ===========
Interest-Bearing Liabilities
Savings deposits ........................... $ 99,389 $ 3,016 3.03% $103,931 $ 3,162 3.04% $108,747 $ 3,300 3.03%
NOW deposits .............................. 19,990 543 2.72% 19,124 527 2.76% 18,640 511 2.74%
Certificates of deposit .................... 172,319 9,882 5.73% 150,300 8,492 5.65% 147,348 8,272 5.61%
Money Market Accounts ...................... 7,159 204 2.85% 8,765 243 2.77% 10,362 285 2.75%
Borrowed Funds ............................. 98,927 6,009 6.07% 67,572 4,011 5.94% 4,880 299 6.13%
Advances from borrowers for taxes and
insurance, and stock subscription proceeds -- -- -- -- -- -- 2,402 79 3.28%
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities ..... 397,784 19,654 4.94% 349,692 16,435 4.70% 292,379 12,746 4.36%
------- ------ ------- ------ ------- ------
Other Liabilities ............................ 32,757 36,255 24,017
------ ------ ------
Total Liabilities ............................ 430,541 385,947 316,369
Shareholders' Equity ......................... 61,065 73,246 28,625
------ ------ ------
Total Average Liabilities & Equity ........... $ 491,606 $ 459,193 $ 345,021
========= ========= ==========
Net interest income ...................... $ 15,912 $ 15,913 $ 12,836
======== ======== ========
Net interest rate spread ................. 2.58% 2.74% 3.36%
====== ====== =====
Net earning assets ....................... $ 75,281 $ 84,825 $ 38,920
========= ========= ==========
Net yield on average
interest-earning assets ................. 3.36% 3.66% 3.87%
====== ====== =====
Average interest-earning assets/
Average interest/bearing liabilities ... 118.93% 124.26% 113.31%
========== ========== ==========
</TABLE>
15
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and the changes due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1997 vs. 1996 1996 v. 1995
--------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ------------------ Increase
Volume Rate Decrease Volume Rate Decrease
---------- ------- --------- -------- --------- -----------
Interest-Earning Assets (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) ................. $ 434 $ 20 $ 454 $ 58 ($ 886) ($ 828)
Securities available for sale (2) .... 2,726 310 3,036 10,921 -- 10,921
Investment securities ................ -- -- -- (3,028) -- (3,028)
Federal Home Loan Bank Stock ......... 70 4 74 13 (26) (13)
Federal funds sold and interest-
bearing deposits ................... (298) (48) (346) (219) (67) (286)
-------- -------- -------- -------- -------- --------
Total interest-earning assets .... 2,932 286 3,218 7,745 (979) 6,766
-------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities
Savings deposits ..................... (138) (9) (147) (145) 7 (138)
NOW deposits ........................ 23 (6) 17 13 3 16
Certificates of deposit .............. 1,261 129 1,390 167 53 220
Money Market Accounts ................ (46) 7 (39) (44) 2 (42)
Borrowed Funds ....................... 1,902 96 1,998 3,720 (8) 3,712
Advances from borrowers for
taxes and insurance, and stock
subscription proceeds .............. -- -- -- (45) (34) (79)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 3,003 $ 216 $ 3,219 $ 3,666 $ 23 $ 3,689
-------- -------- -------- -------- -------- --------
Net interest income ................ ($ 1) $ 3,077
======== ========
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
(2) Net of securities available for sale pending settlement and net unrealized
gains/(losses).
16
<PAGE>
Market Risk
Interest rate risk ("IRR") is the most significant market risk affecting
the Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The Company does not currently engage in trading activities or use
derivative instruments, such as caps, collars or floors, to control interest
rate risk. Even though such activities may be permitted with the approval of the
Board of Directors, the Company does not intend to engage in such activities in
the immediate future.
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a different
basis or at a different pace from its interest-earning assets. Management of the
Bank believes it is important to manage the effect interest rates have on the
Bank's net portfolio value ("NPV") and net interest income. NPV helps measure
interest rate risk by calculating the difference between the present value of
expected cash flows from assets and the present value of expected cash flows
from liabilities, as well as cash flows from off-balance sheet contracts.
Presented below, as of December 31, 1997, is an analysis of the Bank's
interest rate risk as calculated by the OTS, measured by changes in the Bank's
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis points increments, up and down 400 basis points.
Net Portfolio Value
Change in
Interest Rate $ Amount $ Change % Change
------------- --------- -------- --------
(Basis Points) (Dollars in Thousands)
+400 $ 9,223 $(46,322) (83)%
+300 20,659 (34,887) (63)
+200 32,638 (22,908) (41)
+100 44,675 (10,871) (20)
---- 55,546 ---- --
-100 63,988 8,443 15
-200 70,552 15,007 27
-300 77,133 21,588 39
-400 85,695 30,150 54
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings institutions were employed in preparing the foregoing table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, a change in Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
significantly different changes to the NPV than indicated above. In evaluating
the Bank's exposure to interest rate risk, certain shortcomings inherent in the
method of analysis presented in the foregoing table must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
17
<PAGE>
interest rates on other types may lag behind changes in market rates. Further,
in the event of a change in interest rates, prepayments and early withdrawal
levels would likely deviate significantly from those assumed in calculating the
table. Finally, the ability of many borrowers to service their debt may decrease
in the event of an interest rate increase. As a result, the actual effect of
changing interest rates may differ from that presented in the foregoing table.
The Bank maintains an asset/liability committee which meets weekly to
review interest rate risk management strategy and to review the Bank's
investment strategy for loans and securities, monitor investment performance and
to take any actions necessary for adjusting future investment direction. In
managing its asset/liability mix, and depending on the relationship between
long- and short-term interest rates, market conditions and consumer preference,
the Bank may place more emphasis on limiting interest rate risk than on
enhancing its net interest income. Management believes that the stability which
can be obtained by limiting interest rate risk can more than offset the benefits
which can be derived from seeking to enhance the net interest margin on a
short-term basis.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place greater emphasis on maximizing its net interest
margin than on matching the interest rate sensitivity of its assets and
liabilities, in an effort to improve or maintain its spread. Management believes
that the increased net income resulting from a mismatch in the maturity of its
asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased
vulnerability to sudden and unexpected increases in interest rates which can
result from such a mismatch. As a result, the Bank may at certain times be more
vulnerable to rapid increases in interest rates than some other institutions
which concentrate principally on matching the maturities of their assets and
liabilities.
The Bank also utilizes the FHLB's Interest Rate Risk Service in managing
its IRR. In most cases, the FHLB has followed OTS methodology, however, because
of differences in modeling techniques and assumptions, the FHLB results may
differ from the estimates generated by the OTS for changes in NPV. The FHLB
simulation model, in addition to estimating NPV changes, also estimates the
effect on net interest income ("NII") and net interest margin ("NIM") from the
assumed changes in interest rates and compares the Bank's changes to those of a
similar asset size peer group.
Management believes that the strategy related to the purchase of securities
with borrowed funds and the simultaneous pledging of those securities as
securities sold under agreements to repurchase does not expose the Company's NII
and its NIM to an unacceptable level of sensitivity to changes, either up or
down, in interest rates. See "Financial Condition" and "Net Interest Income"
herein. Management is aware, however, that by pursuing the balance sheet
strategy it followed during 1997, that the Bank's NPV would be more sensitive to
18
<PAGE>
changes in interest rates. Based on the FHLB's Peer Group Report for December
31, 1997, if rates increased 200 basis points, the Bank's NPV would decline
31.5% from its base NPV (compared to the OTS calculated 41.0% in the table
above) while the median decline for its peers would be 20.5%.
When the Bank is compared to its peers by the FHLB in regard to changes in
NII, the Bank is less interest rate sensitive than its peer group. With a 200
basis point increase in interest rates, the Bank's NII would decline by an
estimated 8.2% compared to its peer group's average decline of 8.9%. If rates
increased 400 basis points, the Bank's NII would decline by 18.2% compared to an
average decline of 20.4% for its peer group.
Given a 200 basis point increase in interest rates as of December 31, 1997,
the Bank's NIM would decline 22 basis points from its base margin rate of 2.78%
to 2.56%, compared to a peer group decline from 2.79% to 2.64%, a decline of 15
basis points. If interest rates increased 400 basis points, the Bank's NIM would
decline 50 basis points to 2.28% from the base margin rate of 2.78% while the
peer group's NIM would decline by 39 basis points to 2.40% from 2.79%.
Liquidity and Capital Resources
The Bank's primary sources of funds for operations are deposits from its
market area, principal and interest payments on loans and securities available
for sale, proceeds from the maturity of securities available for sale, advances
from the FHLB of New York and proceeds from the sale of securities sold under
agreements to repurchase ("reverse repo"). While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition.
The primary investing activities of the Company are the origination of
loans and purchase of securities. During 1997, 1996 and 1995 the Bank's loan
originations totaled $91.5 million, $81.4 million and $50.2 million,
respectively. During 1995, the Bank purchased $47.0 million of securities and
classified such securities, consistent with the reclassification of all
investment and mortgage-backed securities at December 31, 1995, as available for
sale. In 1996, the Company purchased $192.6 million of securities and classified
such securities as available for sale. For the year 1997, the Company purchased
$247.4 million of securities, all of which were classified as available for
sale.
The primary financing activity of the Bank is the attraction of deposits.
During the years ended December 31, 1997 and 1995, the Bank experienced net
deposit inflows of $35.2 million and $18.1 million, respectively. However for
the year ended December 31, 1996, the Bank had net deposit outflows of $13.2
million. Management believes that the decrease in deposits in 1996 was the
result, in part, of some of the Bank's depositors deciding to pursue alternative
investment opportunities, such as stock mutual funds, with a portion of their
investable funds. The increase in deposits during 1997 management believes was a
reversal of the 1996 situation as depositors shifted investable funds back into
certificates of deposit to take advantage of the higher interest rates that
prevailed in the Bank's market area during 1997. During the year ended December
31, 1997, the Bank's certificates of deposit increased by $31.4 million, or
20.7%. The net increase of $18.1 million in 1995 resulted from an increase of
$41.2 million in certificates of deposit which was the result of the Bank's
aggressive 1995 marketing campaigns related, in part, to the three supermarket
branches that the Bank opened since November 1994.
19
<PAGE>
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied by the OTS depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits. The required minimum liquidity ratio is currently 4%. The Bank's
average daily liquidity ratio for the month of December 1997 was 37.05%.
The Bank's most liquid assets are cash and cash equivalents, which consist
of federal funds sold and bank deposits. The level of these assets is dependent
on the Bank's operating, financing and investing activities during any given
period. At December 31, 1997, 1996 and 1995 cash and cash equivalents totaled
$10.2 million, $10.9 million and $84.6 million, respectively.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At December 31, 1997, the Bank had commitments to
originate loans of $4.2 million as well as undrawn commitments of $5.4 million
on home equity and other lines of credit. Certificates of deposit which are
scheduled to mature in one year or less at December 31, 1997, totaled $139.1
million. Management believes that a significant portion of such deposits will
remain with the Bank. However, if the Bank is not able to maintain its
historical retention rate on maturing certificates of deposit, it may consider
employing the following strategies: (i) increase its borrowed funds position to
compensate for the deposit outflows; (ii) increase the rates it offers on these
deposits in order to increase the retention rate on maturing certificates of
deposit and/or to attract new deposits; or (iii) attempt to increase
certificates of deposit through the use of deposit brokers. Depending on the
level of market interest rates on the renewal dates of the certificates of
deposit, the employment of one or a combination of these strategies could result
in higher or lower levels of NII and net income.
The Company also has a need for, and sources of, liquidity. Liquidity is
required to fund its operating expenses, as well as for the payment of any
dividends to shareholders. The Company currently has no significant liquidity
commitments as operating costs are modest and dividends to shareholders are
discretionary. At December 31, 1997, the Holding Company had $9.4 in liquid
assets on hand, however, the primary source of liquidity on an ongoing basis is
dividends from the Bank. To date, no dividends have been paid from the Bank to
the Company; however, it is anticipated that the Bank will pay a dividend to the
Company in 1998.
Federally insured savings institutions are required to maintain a minimum
level of regulatory capital. The OTS has established standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements of national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. See Note 15 of the Notes to Consolidated Financial
Statements for information on the Bank's regulatory capital requirements.
20
<PAGE>
<TABLE>
<CAPTION>
Unaudited Consolidated Interim Financial Information
1997 1996
----------------------------------------- ------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income .................... $8,675 $8,773 $8,827 $9,291 $6,915 $7,562 $8,825 $9,046
Net Interest Income ................ 4,020 4,008 3,881 4,003 3,653 3,881 4,231 4,147
Provision for Loan Losses .......... 363 275 225 225 1,628 433 549 6,840
Income/(Loss) Before Income Taxes .. 1,076 889 1,188 1,300 (535) 802 897 (6,929)
Net Income/(Loss) .................. 652 572 736 800 (314) 510 572 (4,604)
Earnings/(Loss)per share - Basic ... 0.16 0.14 0.19 0.21 (0.06) 0.10 0.12 (1.05)
Earnings/(Loss)per share - Diluted . 0.16 0.14 0.19 0.20 (0.06) 0.10 0.12 (1.05)
Average Shares Outstanding - Basic . 4,011,349 4,024,536 3,897,492 3,832,531 4,988,828 4,999,672 4,675,401 4,404,735
Incremental Shares:
Options ....................... -- 3,233 36,300 57,608 -- -- -- --
Unvested RRP Shares ........... -- 2,244 23,642 39,608 -- -- -- --
Average Shares Outstanding - Diluted 4,011,349 4,030,013 3,957,434 3,929,747 4,988,828 4,999,672 4,675,401 4,404,735
</TABLE>
21
<PAGE>
AMBANC HOLDING CO., INC.
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1997 and 1996
and for the three year period ended December 31, 1997
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
Ambanc Holding Co., Inc.:
We have audited the accompanying consolidated statements of financial condition
of Ambanc Holding Co., Inc. and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ambanc Holding Co.,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Albany, N.Y.
February 13, 1998
22
<PAGE>
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31,
Assets 1997 1996
---- ----
(In thousands)
Cash and due from banks ............................. $ 10,225 6,387
Federal funds sold .................................. -- 4,500
-------- --------
Cash and cash equivalents ................. 10,225 10,887
Securities available for sale, at fair value (note 4) 205,842 200,539
Loans receivable, net (note 5) ...................... 281,123 248,094
Accrued interest receivable (note 6) ................ 3,734 3,201
Premises and equipment, net (note 7) ................ 3,121 2,784
Federal Home Loan Bank of New York stock, at cost ... 3,291 2,029
Real estate owned and repossessed assets ............ 143 715
Other assets ........................................ 2,965 4,172
-------- --------
Total assets .............................. $510,444 472,421
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 8) .............................. $333,265 298,082
Advances from borrowers for taxes
and insurance 1,902 1,703
Borrowed funds (note 9) ........................ 111,550 108,780
Accrued interest payable ....................... 819 1,077
Accrued expenses and other liabilities ......... 1,706 1,261
-------- --------
Total liabilities ......................... 449,242 410,903
-------- --------
Commitments and contingent liabilities (notes 10, 11 and 13)
Shareholders' equity:
Preferred stock $.01 par value. Authorized
5,000,000 shares; none outstanding at
December 31, 1997 and 1996 ................... - -
Common stock $.01 par value. Authorized
15,000,000; 5,422,250 shares issued at
December 31, 1997 and 1996 ................... 54 54
Additional paid-in capital ..................... 52,385 52,128
Retained earnings, substantially restricted .... 26,458 24,436
Treasury stock, at cost, (1,115,832 shares
at December 31, 1997 and 1,030,227 at
December 31, 1996) ........................... (12,585) (11,208)
Common stock acquired by ESOP .................. (3,303) (3,812)
Unearned RRP shares issued ..................... (1,533) --
Net unrealized loss on securities available
for sale, net of tax ......................... (274) (80)
--------- ---------
Total shareholder's equity ................ 61,202 61,518
--------- ---------
Total liabilities and shareholders' equity $ 510,444 472,421
========= =========
See accompanying notes to consolidated financial statements.
23
<PAGE>
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
1997 1996 1995
---- ---- ----
(In thousands,
except per share amounts)
Interest and dividend income:
Loans ................................... $21,011 20,557 21,385
Securities available for sale ........... 13,957 10,921 --
Investment securities ................... -- -- 3,028
Federal funds sold ...................... 394 740 1,026
Federal Home Loan Bank stock ............ 204 130 143
------- ------- -------
Total interest and dividend income .... 35,566 32,348 25,582
------- ------- -------
Interest expense:
Deposits (note 8) ....................... 13,645 12,424 12,447
Borrowings .............................. 6,009 4,011 299
------- ------- -------
Total interest expense ......... 19,654 16,435 12,746
------- ------- -------
Net interest income ............ 15,912 15,913 12,836
Provision for loan losses (note 5) ........... 1,088 9,450 1,522
------- ------- -------
Net interest income after
provision for loan losses .............. 14,824 6,463 11,314
------- ------- -------
Other income:
Service charges on deposit accounts ..... 786 764 783
Net gains (losses) on securities
transactions ........................... 775 (102) 225
Other ................................... 265 258 504
------- ------- -------
Total other income ............. 1,826 920 1,512
------- ------- -------
Other expenses:
Salaries, wages and benefits ............ 6,086 5,097 4,403
Occupancy and equipment ................. 1,539 1,328 1,219
Data processing ......................... 923 843 728
Federal deposit insurance premium ....... 39 2 533
Correspondent bank processing fees ...... 126 116 245
Provision for losses on Nationar
related receivable .................... -- -- 205
Real estate owned and repossessed
assets expenses, net .................. 355 2,563 1,601
Professional fees ....................... 429 540 358
Other ................................... 2,700 2,659 2,091
------- ------- -------
Total other expenses ........... 12,197 13,148 11,383
------- ------- -------
Income (loss) before taxes ................... 4,453 (5,765) 1,443
Income tax expense (benefit) (note 10) ....... 1,693 (1,929) 586
------- ------- -------
Net income (loss) .............. $ 2,760 (3,836) 857
======= ======= =======
Basic earnings (loss) per share .............. $ 0.70 $ (0.81) N/A
======= ======= =======
Diluted earnings (loss) per share ............ $ 0.69 $ (0.81) N/A
======= ======= =======
See accompanying notes to consolidated financial statements.
24
<PAGE>
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Common Unearned securities
Additional stock RRP available
Common paid-in Retained Treasury acquired shares for sale,
stock capital earnings stock by ESOP issued net of tax Total
----- ------- --------- ----- ------- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .......... $ -- -- 27,415 -- -- -- -- 27,415
Net income ............................ -- -- 857 -- -- -- -- 857
Common stock issued (5,422,250 shares) 54 52,127 -- -- -- -- -- 52,181
Purchase of ESOP shares (433,780) ..... -- -- -- -- (4,338) -- -- (4,338)
Change in net unrealized loss on
securities available for sale,
net of tax .......................... -- -- -- -- -- -- (100) (100)
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1995 .......... 54 52,127 28,272 -- (4,338) -- (100) 76,015
Net loss .............................. -- -- (3,836) -- -- -- -- (3,836)
Purchase of treasury shares (1,030,227) -- -- -- (11,208) -- -- -- (11,208)
Release of ESOP shares (52,964) ....... -- 1 -- -- 526 -- -- 527
Change in net unrealized loss on
securities available for sale, net of
tax ................................. -- -- -- -- -- -- 20 20
Balance at December 31, 1996 .......... 54 52,128 24,436 (11,208) (3,812) -- (80) 61,518
------- ------- ------- ------- ------- ------- ------- -------
Net income ............................ -- -- 2,760 -- -- -- -- 2,760
Release of ESOP shares (50,561) ....... -- 257 -- -- 509 -- -- 766
Purchase of treasury shares (216,890) . -- -- -- (3,488) -- -- -- (3,488)
Issuance of RRP shares (131,285) ...... -- -- (306) 2,111 -- (1,805) -- --
RRP shares earned ..................... -- -- -- -- -- 272 -- 272
Change in net unrealized loss on
securities available for sale, net of
tax ................................. -- -- -- -- -- -- (194) (194)
Cash dividends $0.10 per share ........ -- -- (432) -- -- -- -- (432)
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997 .......... $ 54 52,385 26,458 (12,585) (3,303) (1,533) (274) 61,202
======= ======= ======= ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) ................................ $ 2,760 (3,836) 857
Adjustments to reconcile net income (loss)
to net cash provided (used)
by operating activities:
Depreciation and amortization .................. 652 558 496
Provision for loan losses ...................... 1,088 9,450 1,522
Provision for losses and writedowns on
real estate owned and repossessed assets ...... 171 877 1,254
Provisions for losses on Nationar
related receivables ........................... -- -- 205
Loss on sale of fixed assets ................... -- 64 --
ESOP compensation expense ...................... 766 527 --
RRP expense .................................... 272 -- --
Net loss (gains) on sale and redemptions
of securities available for sale .............. (775) 102 (225)
Net loss on sale of other real estate owned .... 38 1,260 74
Net amortization on securities ................. 320 475 19
(Increase) decrease in accrued interest
receivable and other assets ................... 831 (3,316) (560)
Decrease (increase) in due from broker ......... -- 18,128 (18,128)
Increase (decrease) in accrued expenses
and other liabilities ......................... 187 (1,201) 2,225
Increase (decrease) in due to broker ........... -- (46,880) 46,880
Increase (decrease) in advances from
borrowers for taxes and insurance ............. 199 11 (762)
----- -------- -------
Net cash provided (used) by operating
activities ................................... 6,509 (23,781) 33,857
----- -------- -------
Cash flows from investing activities:
Proceeds from sales and redemptions of
securities available for sale .................... 194,210 34,469 18,372
Purchases of securities available for sale ........(247,424) (192,647) --
Proceeds from principal paydowns and
maturities of securities available for sale ...... 48,029 31,508 --
Proceeds from principal paydowns and
maturities of investment securities .............. -- -- 7,530
Purchase of investment securities ................. -- -- (46,980)
Purchase of FHLB stock ............................ (1,262) (137) (237)
Proceeds from sale of loans ....................... -- 18,929 --
Net (increase) decrease in loans made
to customers ..................................... (34,384) (28,685) 8,205
Capital expenditures .............................. (1,004) (341) (692)
Proceeds from sales of other real estate .......... 631 2,519 1,340
Proceeds from the sale of fixed assets ............ -- 25 --
-------- --------- --------
Net cash used by investing activities ......... (41,204) (134,360) (12,462)
-------- --------- --------
(Continued)
26
<PAGE>
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
<S> <C> <C> <C>
Purchase of ESOP shares ......................... $ -- -- (4,338)
Net proceeds from common stock issued
in stock conversion ........................... -- -- 52,181
Purchase of treasury shares ..................... (3,488) (11,208) --
Dividends paid .................................. (432) -- --
Net increase (decrease) in deposits ............. 35,183 (13,157) 18,087
Advances from (repayments on) FHLB
borrowings, net ............................... 6,300 6,000 (19,000)
Increase (decrease) in other borrowed funds ..... (3,530) 102,780 --
-------- -------- --------
Net cash provided by financing activities 34,033 84,415 46,930
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .. (662) (73,726) 68,325
Cash and cash equivalents at beginning of year ........ 10,887 84,613 16,288
-------- -------- --------
Cash and cash equivalents at end of year .............. $ 10,225 10,887 84,613
======== ======== ========
Supplemental disclosures of cash flow
information - cash paid during the year for:
Interest ..................................... $ 19,912 15,360 12,447
======== ======== ========
Income taxes ................................. $ 1,770 306 1,000
======== ======== ========
Noncash investing activities:
Net reduction in loans receivable resulting
from the transfer to real estate owned ......... $ 268 2,203 1,864
======== ======== ========
Transfer of investment securities to
securities available for sale .................. $ -- -- 45,736
======== ======== ========
Noncash financing activities:
Issuance of RRP shares ........................... $ 2,111 -- --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Ambanc Holding Co. Inc. (the Holding Company) was incorporated under
Delaware law in June 1995 as a Holding Company to purchase 100% of the
common stock of Amsterdam Savings Bank, FSB (the Bank). The Bank
converted from a mutual form to a stock institution in December 1995, and
the Holding Company completed its initial public offering on December 26,
1995, at which time the Holding Company purchased all the outstanding
stock of the Bank.
The following is a description of the more significant policies which
Ambanc Holding Co., Inc. follows in preparing and presenting its
consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Ambanc Holding Co., Inc., and its wholly owned
subsidiaries, Amsterdam Savings Bank FSB, and A.S.B. Insurance
Agency, Inc., collectively referred to as the Company. All
significant intercompany accounts have been eliminated in
consolidation. The accounting and reporting policies of the
Company conform in all material respects to generally accepted
accounting principles and to general practice within the thrift
industry.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for loan losses and the valuation of real estate
owned and repossessed assets acquired in connection with
foreclosures or in satisfactions of loans. In connection with the
determination of the allowance for loan losses, the valuation of
real estate owned, and estimates of fair value for repossessed
assets, management obtained appraisals for significant assets.
(b) Business
A substantial portion of the Company's assets are loans secured by
real estate in the upstate New York area. In addition, all real
estate owned is located in those same markets. Accordingly, the
ultimate collectibility of a considerable portion of the Company's
loan portfolio and the recovery of a substantial portion of the
carrying amount of real estate owned are dependent upon market
conditions in the upstate New York region.
28
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
Management believes that the allowance for loan losses is adequate
and that other real estate owned and repossessed assets are
properly valued. While management uses available information to
recognize losses on loans and other real estate owned and
repossessed assets, future additions to the allowance or
writedowns of other real estate and repossessed assets may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
loan losses and valuation of other real estate owned and
repossessed assets. Such agencies may require the Bank to
recognize additions to the allowance or write downs of other real
estate and repossessed assets based on their judgments about
information available to them at the time of their examination
which may not be currently available to management.
(c) Securities Available for Sale, Investment Securities and FHLB of
New York Stock
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity they are classified as
held to maturity and are stated at amortized cost. All other debt
and marketable equity securities are classified as securities
available for sale and are reported at fair value, with net
unrealized gains and losses reported as a separate component of
shareholders' equity, net of estimated income taxes. The Company
does not maintain a trading portfolio, and at December 31, 1997
and 1996 the Company had no securities classified as securities
held to maturity.
Unrealized losses on securities that reflect a decline in value
that is other than temporary are charged to income.
Non- marketable equity securities, such as Federal Home Loan Bank
(FHLB) of New York stock, is stated at cost. The investment in
FHLB of New York stock is required for membership.
Mortgage backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Corporation ("FNMA"), represent participation interests in direct
pass-through pools of long-term first mortgage loans originated
and serviced by the issuers of the securities.
Gains and losses on the sale and redemption of securities
available for sale are based on the amortized cost of the specific
security sold. The cost of securities is adjusted for amortization
of premium and accretion of discounts, which is calculated on an
effective interest method.
Purchases and sales are recorded on a trade date basis.
Receivables and payables from unsettled transactions are shown as
due from brokers or due to brokers in the consolidated financial
statements.
29
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(d) Reclassification of Investment Securities
In November 1995, the Financial Accounting Standards Board (FASB)
released its Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities." The Special Report contained, among other
things, a unique provision that allowed entities to, as of one
date either concurrent with the initial adoption of the Special
Report (November 15, 1995), but no later than December 31, 1995,
reassess the appropriateness of the classifications of all
securities held at that time. In accordance with the FASB's
Special Report, as of December 31, 1995, the Company reclassified
all investment securities held to maturity, with an amortized cost
of $45,735,971, to securities available for sale.
(e) Loans Receivable and Loan Fees
Loans receivable are stated at unpaid principal amount, net of
unearned discount, deferred loan costs, net, and allowance for
loan losses. Discounts are amortized to income over the
contractual loan life using the level-yield method. Loan fees
received and the related direct cost of originations have been
deferred and are being recorded as yield adjustments over the life
of the related loans using the interest method of amortization.
Non-performing loans include non-accrual loans, restructured loans
and loans which are 90 days or more past due and still accruing
interest. Loans considered doubtful of collection by management
are placed on a nonaccrual status for the recording of interest.
Generally loans past due 90 days or more as to principal or
interest are placed on nonaccrual status except for certain loans
which, in management's judgment, are adequately secured and for
which collection is probable. Previously accrued income that has
not been collected is reversed from current income. Thereafter,
the application of payments received (principal or interest) on
non-accrual loans is dependent on the expectation of ultimate
repayment of the loan. If ultimate repayment of the loan is
expected, any payments received are applied in accordance with
contractual terms. If ultimate repayment of principal is not
expected or management judges it to be prudent, any payment
received on a non-accrual or an impaired loan is applied to
principal until ultimate repayment becomes expected. Loans are
removed from non-accrual status when they are estimated to be
fully collectible as to principal and interest. Amortization of
related deferred fees is suspended when a loan is placed on
non-accrual status.
The allowance for loan losses is maintained at a level deemed
appropriate by management based on an evaluation of the known and
inherent risks in the present portfolio, the level of
non-performing loans, past loan loss experience, estimated value
of underlying collateral, and current and prospective economic
conditions. The allowance is increased by provisions for loan
losses charged to operations.
30
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(f) Loan Impairment
Management considers a loan to be impaired if, based on current
information, it is probable that the Company will be unable to
collect all scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. When a
loan is considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the
fair value of collateral if the loan is collateral dependent.
Except for loans restructured in a troubled debt restructuring
subsequent to January 1, 1995, management excludes large groups of
smaller balance homogeneous loans such as residential mortgages
and consumer loans which are collectively evaluated. Impairment
losses, if any, are recorded through a charge to the provision for
loan losses.
(g) Real Estate Owned and Repossessed Assets
Real estate owned and repossessed assets include assets received
from foreclosures and in-substance foreclosures. A loan is
classified as an insubstance foreclosure when the Company has
taken possession of the collateral regardless of whether formal
foreclosure proceedings have taken place.
Real estate owned and repossessed assets, including in-substance
foreclosures, are recorded on an individual asset basis at net
realizable value which is the lower of fair value minus estimated
costs to sell or "cost" (defined as the fair value at initial
foreclosure). When a property is acquired or identified as
in-substance foreclosure, the excess of the loan balance over fair
value is charged to the allowance for loan losses. Subsequent
write-downs to carry the property at fair value less costs to sell
are included in noninterest expense. Costs incurred to develop or
improve properties are capitalized, while holding costs are
charged to expense.
At December 31, 1997 and 1996, real estate owned and repossessed
assets consisted of primarily residential one to four family
properties, recreational vehicles and boats. The Company had no
in-substance foreclosures at December 31, 1997 and 1996.
(h) Premises and Equipment, Net
Premises and equipment are carried at cost, less accumulated
depreciation applied on a straight-line basis over the estimated
useful lives of the assets. Leasehold improvements are amortized
on a straight-line basis over the respective original lease terms
without regard to lease renewal options.
31
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(i) Income Taxes
Income taxes are recorded on income reported in the consolidated
statements of income regardless of when such taxes are payable.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The
Company's policy is that deferred tax assets are reduced by a
valuation reserve if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax
assets will not be recognized. In considering if it is more likely
than not that some or all of the deferred tax assets will not be
realized, the Company considers temporary taxable differences,
historical taxes and estimates of future taxable income.
(j) Pension Plan
The Company has a defined benefit pension plan covering
substantially all employees. The Company's actuarially determined
annual contribution to the pension plan meets or exceeds the
minimum funding requirements set forth in the Employees Retirement
Income Security Act of 1974.
(k) Off-Balance Sheet Risk
The Company is a party to certain financial instruments with
off-balance sheet risk such as commitments to extend credit,
unused lines of credit and standby letters of credit. The
Company's policy is to record such instruments when funded.
(l) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
32
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(m) Stock Based Compensation Plans
The Company accounts for its stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly,
compensation expense is recognized only if the exercise price of
the option is less than the fair value of the underlying stock at
the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of
all stock-based awards on the date of grant as compensation
expense over the vesting period. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma disclosures of net income and
earnings per share as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
The Company's Recognition and Retention Plan (RRP) is also
accounted for in accordance with APB Opinion No. 25. The fair
value of the shares awarded, measured as of the grant date, is
recognized as unearned compensation (a deduction from
shareholders' equity) and amortized to compensation expense as the
shares become vested.
(n) Earnings per share
On December 31, 1997, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share". The statement supersedes Accounting
Principles Board Opinion No. 15, "Earnings Per Share" and related
interpretations. SFAS No. 128 requires dual presentation of "Basic
EPS" and Diluted EPS" on the face of the income statement for all
entities with complex capital structures and specifies additional
disclosure requirements. Basic earnings per share excludes
dilution and is calculated by dividing net income available to
common shareholders by the weighted average number of shares
outstanding during the period. Unvested restricted stock awards
are considered outstanding common shares and included in the
computation of basic EPS as of the date that they are fully
vested. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised into common stock or resulted in the issuance of common
stock. All prior period EPS data has been restated to conform to
the provisions of this Statement. The adoption of this Statement
did not have a material effect on the Company's financial position
or results of operations.
(o) Official Bank Checks
The Company's treasurer checks (including expense checks) are
drawn upon the Bank and are ultimately paid through the Bank's
Federal Reserve Bank of New York correspondent account and are
included in accrued expenses and other liabilities in the
consolidated statements of financial condition.
33
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
(p) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board (FASB)
issued SFAS No. 125 which provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of
a financial components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Certain aspects of SFAS No.
125 were amended by SFAS No. 127, "Deferral of the Effective Date
of Certain Provision of FAS Statement No. 125." The adoption of
SFAS No. 125 did not have a material impact on the Company's
consolidated financial statements.
(q) Reclassifications
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform to current periods
presentations.
(r) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income. Comprehensive
income includes the reported net income of the company adjusted
for items that are currently accounted for as equity transactions,
such as market value adjustment for securities available for sale,
foreign currency transactions, and minimum pension liability
adjustments. This statement is effective for fiscal years
beginning after December 15, 1997. Management believes that the
adoption of SFAS No. 130 will not have a material impact on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting by public companies of
operating segments within the company, disclosures about products
and services, geographic areas and major customers. This statement
is effective for periods beginning after December 15, 1997.
Management believes that the adoption of SFAS No. 131 will not
have a material impact on the Company's consolidated financial
statements.
(2) Conversion to Stock Ownership
On December 26, 1995, the Holding Company sold 5,422,250 shares of common
stock at $10.00 per share to depositors and employees of the Bank. Net
proceeds from the sale of stock of the Holding Company, after deducting
conversion expenses of approximately $2.0 million, were $52.2 million and
are reflected as common stock and additional paid-in capital in the
accompanying December 31, 1997 and 1996 consolidated statements of
financial condition. The Company utilized $26.0 million of the net
proceeds to acquire all of the capital stock of the Bank.
34
<PAGE>
(2) Conversion to Stock Ownership, Continued
As part of the conversion, the Bank established a liquidation account for
the benefit of eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation
account, in the proportionate amount of the then current adjusted balance
for deposit accounts held, before distribution may be made with respect
to the Bank's capital stock. The Bank may not declare or pay a cash
dividend to the Holding Company on, or repurchase any of, its capital
stock if the effect thereof would cause the retained earnings of the Bank
to be reduced below the amount required for the liquidation account.
Except for such restrictions, the existence of the liquidation account
does not restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision (OTS) regulations provide
that an institution that exceeds all fully phased-in capital requirements
before and after a proposed capital distribution could, after prior
notice but without the approval by the OTS, make capital distributions
during the calendar year of up to 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in
capital requirements) at the beginning of the calendar year. Any
additional capital distributions would require prior regulatory approval.
At December 31, 1997, the maximum amount that could have been paid by the
Bank to the Holding Company was approximately $17.5 million.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Reserves and Investments Required by Law
The Company is required to maintain certain reserves of cash and or
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately
$1,123,000 and $1,069,000 at December 31, 1997 and 1996, respectively.
The Company is required to maintain certain levels of stock in the
Federal Home Loan Bank. The Company has pledged its investment in this
stock, as well as a blanket pledge of qualifying residential real estate
loans, to secure its advances from the Federal Home Loan Bank of New
York.
35
<PAGE>
(4) Securities Available for Sale
The amortized cost, gross unrealized gains and losses and estimated fair
values of securities available for sale at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997
(in thousands)
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 63,198 60 (113) 63,145
Mortgage-backed securities .......... 142,312 100 (515) 141,897
State and political subdivisions .... 755 11 -- 766
-------- -------- -------- --------
Total debt securities ............... 206,265 171 (628) 205,808
-------- -------- -------- --------
Equity securities ................... 34 -- -- 34
-------- -------- -------- --------
Total ............................... $206,299 171 (628) 205,842
======== ======== ======== ========
1996
(in thousands)
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
U.S. Government and agency securities $ 43,968 69 (264) 43,773
Mortgage-backed securities .......... 156,191 705 (635) 156,261
State and political subdivisions .... 500 5 -- 505
-------- -------- -------- --------
Total ............................... $200,659 779 (899) 200,539
======== ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of debt securities available
for sale at December 31, 1997, by contractual maturity, are shown below
(mortgage backed securities are included by final contractual maturity).
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
cost fair value
(In thousands)
Due within one year ................... $ 3,998 3,998
Due after one year through five years . 13,755 13,712
Due after five years through ten years 36,633 36,591
Due after ten years ................... 151,879 151,507
-------- --------
Totals ...................... $206,265 205,808
======== ========
36
<PAGE>
(4) Securities Available for Sale, Continued
The following table sets forth information with regard to sales
transactions of securities available for sale:
1997 1996 1995
---- ---- ----
(In thousands)
Proceeds from sale of securities .... $174,010 34,469 18,372
Gross realized gains from sale
of securities ...................... 1,017 14 319
Gross realized losses from sale
of securities ...................... 242 116 94
Securities available for sale carried at $111,153,000 on December 31,
1997 and at $113,828,000 on December 31, 1996 were pledged to secure
repurchase agreements and other purposes.
(5) Loans Receivable, Net
Loans receivable consist of the following at December 31, 1997 and 1996:
December 31,
1997 1996
(In thousands)
Loans secured by real estate:
1 - 4 Family ................................ $ 189,666 158,182
Home equity ................................. 30,246 22,817
Multi family ................................ 4,152 4,724
Non-residential ............................. 26,585 29,947
Construction ................................ 2,081 2,234
--------- ---------
Total loans secured by real estate .. 252,730 217,904
--------- ---------
Other Loans:
Consumer loans:
Recreational vehicles ..................... 6,775 9,416
Auto loans ................................ 16,237 12,417
Other secured ............................. 1,781 1,866
Unsecured ................................. 1,847 1,445
Manufactured homes ........................ 494 620
--------- ---------
Total consumer loans .................. 27,134 25,764
--------- ---------
Commercial loans:
Secured ................................... 3,233 6,199
Unsecured ................................. 471 620
--------- ---------
Total commercial loans ................ 3,704 6,819
--------- ---------
283,568 250,487
--------- ---------
Allowance for loan losses ................... (3,807) (3,438)
Deferred costs, net of deferred fees and
discounts ................................... 1,362 1,045
--------- ---------
Total loans receivable, net $ 281,123 248,094
========= =========
37
<PAGE>
(5) Loans Receivable, Net, Continued
A summary of the allowance for loan losses is as follows:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Balance at beginning of year .......... $ 3,438 2,647 2,235
Provision charged to operations ....... 1,088 9,450 1,522
Charge-offs ........................... (1,214) (8,718) (1,216)
Recoveries ............................ 495 59 106
------- ------- -------
Balance at end of year ................ $ 3,807 3,438 2,647
======= ======= =======
The following table sets forth the information with regard to
non-performing loans:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Loans in a non-accrual status ......... $1,876 3,123 4,499
Loans contractually past due 90 days
or more and still accruing interest .. 451 725 261
Restructured loans .................... 931 1,031 4,035
------ ------ ------
Total non-performing loans ............ $3,258 4,879 8,795
====== ====== ======
Accumulated interest on the above non-performing loans of $276,848,
$375,459 and $876,524 was not recognized as income in 1997, 1996 and
1995, respectively. Approximately $192,000, $229,000 and $482,000 of
interest on restructured and non-accrual loans was collected and
recognized as income in 1997, 1996 and 1995, respectively.
At December 31, 1997, the recorded investment in loans that are
considered to be impaired totaled $769,095 for which the related
allowance for loan losses is $337,865. At December 31, 1996 the recorded
investment in loans that were considered to be impaired was $2,638,780
for which the related allowance for loan losses was $1,182,838. As of
December 31, 1997 and 1996, there were no impaired loans which did not
have an allowance for loan losses. The average recorded investment in
impaired loans during the years ended December 31, 1997, 1996 and 1995
was approximately $1,445,000, $6,918,000, and $4,106,000, respectively.
For the years ended December 31, 1997, 1996, and 1995, the Company
recognized interest income on those impaired loans of $14,768, $110,470
and $61,278, respectively, which included $0, $13,633 and $2,787,
respectively, of interest income recognized using the cash basis method
of income recognition.
Certain directors and executive officers of the Company were customers of
and had other transactions with the Company in the ordinary course of
business. Loans to these parties were made in the ordinary course of
business at the Company's normal credit terms, including interest rate
and collateralization. The aggregate of such loans totaled approximately
$1,021,308 and $887,696 at December 31, 1997 and 1996, respectively.
There were $182,750 in advances to the directors and executive officers
during the year ended December 31, 1997. Total payments made on these
loans were $49,138 during the year ended December 31, 1997.
38
<PAGE>
(6) Accrued Interest Receivable
Accrued interest receivable consists of the following:
December 31,
1997 1996
(In thousands)
Loans .................................... $1,347 1,260
Securities available for sale ............ 2,387 1,941
------ ------
$3,734 3,201
====== ======
(7) Premises and Equipment
A summary of premises and equipment is as follows:
December 31,
1997 1996
(In thousands)
Banking house and land ................... $2,362 2,362
Leasehold improvements ................... 1,100 700
Furniture, fixtures and equipment ........ 3,737 3,114
Construction in progress ................. -- 80
------ ------
7,199 6,256
Less accumulated depreciation and
amortization ........................... (4,078) (3,472)
------- ------
$3,121 2,784
======= ======
Amounts charged to depreciation expense were $605,933, $500,833 and
$438,057 for the years ended December 31, 1997, 1996 and 1995.
(8) Deposits
Deposits are summarized as follows:
December 31,
1997 1996
(In thousands)
Regular savings accounts (3.00% at
December 31, 1997 and 1996) ...... $ 97,591 99,569
Certificates of deposit:
3.01 to 4.00% ................... 1,011 994
4.01 to 5.00% ................... 6,688 42,824
5.01 to 6.00% ................... 154,377 88,042
6.01 to 7.00% ................... 10,801 11,330
7.01 to 8.00% ................... 10,455 8,742
-------- --------
183,332 151,932
-------- --------
Money market accounts (2.96% at
December 31, 1997 and 2.86% at
December 31, 1996) .............. 6,877 7,433
NOW accounts (2.75% at December
31, 1997 and 1996) .............. 22,718 18,875
Demand accounts .................. 22,747 20,273
-------- --------
Total deposits................... $333,265 298,082
======== ========
39
<PAGE>
(8) Deposits, Continued
The approximate amount of contractual maturities of certificates of
deposit for the years subsequent to December 31, 1997 are as follows:
(In thousands)
Years ended December 31,
1998 $ 139,103
1999 22,019
2000 16,163
2001 3,688
2002 2,359
---------
$ 183,332
=========
The aggregate amount of certificates of deposits with a balance of
$100,000 or more were approximately $17.9 million and $11.2 million at
December 31, 1997 and 1996, respectively.
Interest expense on deposits for the years ended December 31, 1997, 1996
and 1995, is summarized as follows:
1997 1996 1995
(In thousands)
Regular savings accounts ........ $ 3,016 3,162 3,300
Certificate of deposits ......... 9,882 8,492 8,272
NOW accounts .................... 543 527 511
Money market accounts ........... 204 243 285
Common stock subscriptions escrow -- -- 79
------- ------- -------
Total interest expense .......... $13,645 12,424 12,447
======= ======= =======
(9) Borrowed Funds
At December 31, 1997, the Company had a $24.2 million overnight line of
credit and a $24.2 million 30 day line of credit with the FHLB of New
York. As of December 31, 1997 the Company had taken $12.3 million in
advances on these lines of credit. At December 31, 1996, the Company had
a $22.4 million overnight line of credit and a $22.4 million 30 day line
of credit with the FHLB. As of December 31, 1996 the Company had taken
$6.0 million in advances on these lines of credit. Under the terms of a
blanket collateral agreement with the FHLB, these outstanding balances
are collateralized by certain qualifying assets not otherwise pledged
(primarily first mortgage loans).
The Company enters into sales of securities under repurchase agreements.
Such agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as liabilities on the Company's
consolidated statements of financial condition. During the period of such
agreements, the underlying securities are transferred to a third party
custodian's account that explicitly recognizes the Company's interest in
the securities.
40
<PAGE>
(9) Borrowed Funds, Continued
The following sets forth certain information related to the Company's
borrowings, consisting of FHLB advances and securities sold under
agreements to repurchase:
December 31,
1997 1996
(In thousands)
FHLB advances ...................... $ 12,300 6,000
Securities sold under agreements to
repurchase ........................ 99,250 102,780
------- --------
Total borrowings ................... $111,550 108,780
======== ========
Weighted average interest rate of
FHLB advances ...................... 6.38% 6.88%
======== ========
Weighted average interest rate of
securities sold under agreements to
repurchase ........................ 6.04% 5.96%
======== ========
The following table sets forth the maturities of securities sold under
agreements to repurchase, including the weighted average interest rates,
and the fair value of the securities sold under the repurchase agreements
as of December 31, 1997:
Weighted Fair Value
Repurchase Average of Securities
Liability Interest Rate Sold
(In thousands)
Due after 30 days up to 90 days $ 2,600 5.91% $ 5,402
Due after 91 days up to 365 days 53,650 6.21% 58,370
Due after 365 days ............. 43,000 5.84% 47,381
-------- ---- --------
$ 99,250 6.04% $111,153
======== ==== ========
The following table sets forth the maximum month-end balances and average
balances of FHLB advances and securities sold under agreements to
repurchase for the periods indicated.
Years Ended December 31,
1997 1996 1995
(In thousands)
Maximum Month-end Balance:
FHLB advances ..................... $ 14,400 28,000 15,000
========== ======= ======
Securities sold under agreements
to repurchase .................... 99,410 102,780 4,000
========== ======= ======
Average Balance:
FHLB advances ..................... 3,667 9,757 3,922
========== ======= ======
Securities sold under agreements
to repurchase .................... 95,261 57,815 958
========== ======= ======
Weighted average interest rate of
FHLB advances .................... 5.43% 5.35% 6.06%
========== ======= ======
Weighted average interest rate of
securities sold under agreement to
repurchase ....................... 6.01% 5.94% 6.30%
========== ======= ======
41
<PAGE>
(10) Income Taxes
The components of income tax expense (benefit) are as follows:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Current tax (benefit) expense:
Federal .......................... $ 1,735 (1,421) 955
State ............................ 270 1 208
------- ------- -------
2,005 (1,420) 1,163
Deferred tax benefit .............. (312) (509) (577)
------- ------- -------
Total income tax expense (benefit) $ 1,693 (1,929) 586
======= ======= =======
Actual tax expense (benefit) for the years ended December 31, 1997, 1996
and 1995 differs from expected tax expense (benefit), computed by
applying the Federal corporate tax rate of 34% to income before taxes as
follows:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Expected tax expense (benefit) ... $ 1,514 (1,960) $ 491
State taxes, net of Federal income
tax benefit ..................... 178 1 103
Other items ...................... 1 30 (8)
------- ------- -------
$ 1,693 (1,929) $ 586
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 are presented below:
Temporary Temporary
Deductible Taxable
Differences Differences
(In thousands)
Reserves for loan losses .................. $1,508 216
Nonqualified deferred compensation ........ 227 --
Loan accounting differences ............... 409 --
Property and equipment .................... -- 113
Prepaid expenses .......................... -- 243
Other items ............................... 113 --
------ ------
2,257 572
===== ======
Deferred tax liability .................... 572
------
Net deferred tax asset at December 31, 1997 1,685
Net deferred tax asset at January 1, 1997 . 1,373
------
Deferred tax benefit for the year ended
December 31, 1997 ........................ $ 312
======
42
<PAGE>
(10) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 are presented below:
Temporary Temporary
Deductible Taxable
Differences Differences
(In thousands)
Reserves for loan losses .................. $1,358 65
Nonqualified deferred compensation ........ 233 --
Loan accounting differences ............... 236 --
Property and equipment .................... -- 113
Prepaid expenses .......................... -- 330
Other items ............................... 54 --
------ ------
1,881 508
===== ======
Deferred tax liability .................... 508
------
Net deferred tax asset at December 31, 1996 1,373
Net deferred tax asset at January 1, 1996 . 864
------
Deferred tax benefit for the year ended
December 31, 1996 ........................ $ 509
======
In addition to the deferred tax items described in the preceding table,
the Company also has a deferred tax asset of approximately $183,000 and
$40,000 at December 31, 1997 and 1996, respectively, relating to the
unrealized loss on securities available for sale.
There was no valuation allowance or change in the valuation allowance for
deferred tax assets as of and for the years ended December 31, 1997 and
1996. Management believes that the realization of the recognized net
deferred tax asset at December 31, 1997 and 1996 is more likely than not,
based on historical taxable income, available tax planning strategies,
and expectations as to future taxable income.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience
or a percentage of taxable income. Tax bad debt reserves are maintained
equal to the excess of allowable deductions over actual bad debt losses
and other reserve reductions. These reserves consist of a defined
base-year amount, plus additional amounts ("excess reserves") accumulated
after the base year. Deferred tax liabilities are recognized with respect
to such excess reserves, as well as any portion of the base-year amount
which is expected to become taxable (or "recaptured") in the foreseeable
future.
43
<PAGE>
(10) Income Taxes, Continued
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in July and August 1996. The Federal
amendments include elimination of the percentage of taxable income method
for tax years beginning after December 31, 1995, and imposition of a
requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the base-year
amounts. The Bank previously established, and will continue to maintain,
a deferred tax liability with respect to such excess Federal reserves.
The New York State amendments redesignate the Bank's state bad debt
reserves at December 31, 1995 as the base-year amount and also provide
for future additions to the base-year reserve using the percentage of
taxable income method.
Deferred tax liabilities have not been recognized with respect to the
Federal base-year reserve of approximately $3.3 million at December 31,
1997 and the state base-year reserve of approximately $5.9 million at
December 31, 1997, since the Bank does not expect that these amounts will
become taxable in the foreseeable future. Under New York State tax law,
as amended, events that would result in taxation of these reserves
include the failure of the Bank to maintain a specified qualifying assets
ratio or meet other thrift definition tests for tax purposes. The
unrecognized deferred tax liability at December 31, 1997 with respect to
the Federal base-year reserve was approximately $1.1 million. The
unrecognized deferred tax liability at December 31, 1997 with respect to
the state base-year reserve was approximately $350 thousand (net of
Federal benefit).
(11) Employee Benefit Plans
(a) Pension Plan
The Bank maintains a non-contributory pension plan with the RSI
Retirement Trust, covering substantially all employees aged 21 and
over with 1 year of service with the exception of hourly paid
employees. Benefits are computed as two percent of the highest
three year average annual earnings multiplied by credited service
up to a maximum of 35 years.
The amounts contributed to the plan are determined annually on the
basis of (a) the maximum amount that can be deducted for Federal
income tax purposes or (b) the amount certified by a consulting
actuary as necessary to avoid an accumulated funding deficiency as
defined by the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be
earned in the future. Assets of the plan are primarily invested in
pooled equity funds and fixed income funds.
44
<PAGE>
(11) Employee Benefit Plans, Continued
The following table sets forth the plan's funded status and
amounts recognized in the Company's consolidated statements of
financial condition at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3.7 million in 1997 and $3.1
million in 1996 ....................................... $(3,805) (3,324)
======= =======
Projected benefit obligation ........................... (4,508) (4,060)
Plan assets at fair value .............................. 5,994 5,130
------- -------
Projected plan assets in excess of benefit obligation .. 1,486 1,070
Unrecognized net gain .................................. (806) (301)
Unrecognized prior service cost ........................ 12 15
Unrecognized net asset being recognized over 10.71 years (85) (132)
------- -------
Prepaid pension cost ................................... $ 607 652
======= =======
Net pension costs recognized in the consolidated statements of
income for the years ended December 31, 1997, 1996 and 1995 are
Summarized as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Components of net pension cost:
<S> <C> <C> <C>
Service cost - benefits earned during the period ...... $ 183 187 141
Interest cost on estimated projected benefit obligation 304 288 268
Actual return on plan assets ........................... (1,104) (627) (783)
Net amortization and deferral .......................... 663 222 437
------- ------- -------
Net pension cost ....................................... $ 46 70 63
======= ======= =======
</TABLE>
Significant assumptions used in determining the actuarial present
value of the projected benefit obligation are as follows:
1997 1996 1995
---- ---- ----
Weighted average discount rate .... 7.25% 7.50% 7.50%
Increase in future compensation ... 5.00% 5.50% 5.50%
Expected long term rate of return . 8.00% 8.00% 8.00%
45
<PAGE>
(11) Employee Benefit Plans, Continued
(b) 401(k) Savings Plan
The Bank maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of employment. The Bank had matched 50% of
employee contributions that were less than or equal to 3% of the
employee's salary. As of March 1, 1997, the Bank no longer matched
employee contributions. Total expense recorded during 1997, 1996
and 1995 was $5,321, $37,671 and $33,181, respectively.
(c) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee stock
ownership plan (ESOP) was established to provide substantially all
employees of the Company the opportunity to become shareholders.
The ESOP borrowed $4.3 million from the Company and used the funds
to purchase 433,780 shares of the common stock of the Company
issued in the conversion. The loan will be repaid principally from
the Company's discretionary contributions to the ESOP over a
period of ten years. At December 31, 1997 and 1996, the loan had
an outstanding balance of $3.5 million and $3.9 million,
respectively. The loan obligation is reduced by the amount of loan
repayments made by the ESOP. Shares are released for allocation
and unearned compensation is amortized over the loan repayment
period based on the amount of principal and interest paid on the
loan as a percentage of the total principal and interest to be
paid on the loan over its entire term. Shares purchased with the
loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. Contributions to the ESOP and
shares released from the suspense account are allocated among
participants on the basis of compensation in the year of
allocation.
The Company accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position
No. 93-6 "Employees' Accounting For Stock Ownership Plans" (SOP
93-6). Accordingly, the shares pledged as collateral are reported
as unallocated ESOP shares in shareholders' equity. As shares are
released from collateral, the Company reports compensation expense
equal to the average market price of the shares (during the
applicable service period), and the shares become outstanding for
earnings per share computations. Unallocated ESOP shares are not
included in the earnings per share computations. The Company
recorded approximately $766,000 of compensation expense under the
ESOP during the year ended December 31, 1997 and recorded $527,000
of compensation expense for the year ended December 31, 1996.
The ESOP shares as of December 31, 1997 were as follows:
Allocated shares ............. 52,964
Shares released for allocation 50,561
Unallocated shares ........... 330,255
-------
433,780
=======
Market value of unallocated
shares at December 31, 1997 $6,192,281
==========
46
<PAGE>
(11) Employee Benefit Plans, Continued
(d) Stock Option Plan
On May 23, 1997, the Company's shareholders approved the 1997
Stock Option and Incentive Plan ("Stock Option Plan"). The primary
objective of the Stock Option Plan is to provide officers and
directors with a proprietary interest in the Company as an
incentive to encourage such persons to remain with the Company.
The Stock Option Plan provides for awards in the form of stock
options, stock appreciation rights, and limited stock appreciation
rights. Under the Stock Option Plan, 542,225 authorized but
unissued shares are reserved for issuance upon option exercises.
The Company also has the alternative to fund the Stock Option Plan
with treasury stock. Options under the plan may be either
non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock
at an exercise price equal to the fair value on the date of grant.
Options expire no later than ten years following the date of
grant.
Upon shareholder ratification of the Stock Option Plan, options to
purchase 373,974 shares were awarded at an exercise price of
$13.75 per share. These shares have a ten-year term and vest at a
rate of 25% per year from their respective grant dates. No options
were exercised, cancelled or forfeited during the year ended
December 31, 1997. As of December 31, 1997 no options were vested
and the weighted average remaining contractual life of the options
was approximately 9.6 years.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its Stock Option Plan. Accordingly, no
compensation cost has been recognized for the Stock Option Plan.
SFAS No. 123 requires companies not using a fair value based
method of accounting for employee stock options or similar plans,
to provide pro forma disclosures of net income and earnings per
share as if that method of accounting had been applied. The fair
value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: dividend
yield of 1.32%; expected volatility of 40.90%; risk free interest
rate of 5.48% and expected lives of 5 years. The estimated fair
value of the options granted in 1997 was $5.30.
Pro-forma disclosures for the Company for the year ended December
31, 1997 are as follows:
(in thousands, except per share data)
Net Income:
As reported $ 2,760
Pro-forma 2,578
Earnings per Share:
Basic EPS as reported $ 0.70
Pro-forma 0.65
Diluted EPS as reported 0.69
Pro-forma 0.65
47
<PAGE>
(11) Employee Benefit Plans, Continued
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro-forma net income
amounts presented above because compensation cost is reflected
over the options' vesting period of four years.
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, the existing models, in management's opinion, do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
(e) Recognition and Retention Plan
On May 23, 1997, the Company's shareholders approved the Ambanc
Holding Co., Inc. Recognition and Retention Plan (RRP). The
purpose of the plan is to promote the long-term interests of the
Company and its shareholders by providing a stock based
compensation program to attract and retain officers and directors.
Under the RRP, 216,890 shares of authorized but unissued shares,
are reserved for issuance under the plan. The Company also has the
alternative to fund the RRP with Treasury stock.
On May 23, 1997, 131,285 shares were awarded under the RRP. The
shares vest in four equal installments commencing one year from
the date of grant. The fair market value of the shares awarded
under the plan was $1.8 million at the grant date and is being
amortized to compensation expense on a straight line basis over
the four year vesting period. Compensation expense of $272,000 was
recorded during 1997 with the remaining unearned compensation cost
of $1.5 million shown as a reduction of shareholder's equity at
December 31, 1997.
(f) Post Retirement Benefits
Certain postretirement health insurance benefits have been
committed to a closed group of eleven retired employees. The
Company has formally adopted measures to not offer these benefits
to any additional employees. The annual health insurance increase
and discount rate used to calculate the transition obligation were
6% and 8.5%, respectively. There are no plan assets. The estimated
transition obligation at January 1, 1995 was $260,000. The net
periodic post retirement benefit costs in both 1997 and 1996 were
approximately $26,000.
(g) Directors' Deferred Compensation Agreements
Under the Directors' Deferred Compensation Agreements, the
Company's directors were eligible to elect to defer fees for
services that were otherwise currently payable. Fees were deferred
over a period of five years. The Company utilized the deferred
fees to purchase life insurance policies to fund the benefits on
each director with the Bank listed as the beneficiary. Each
director participating in such agreements deferred their fees over
a five year period with a set amount established as an annual
payout over a ten year period after five years from the date of
the agreement or upon reaching the age of 65, whichever is later.
The present value of the remaining installments due under these
agreements is included in other liabilities in the consolidated
balance sheets. The cash surrender value of the life insurance
policies is included in other assets in the consolidated balance
sheets.
48
<PAGE>
(12) Earnings Per Share
Calculation of basic earnings per share (basic EPS) and diluted earnings
per share (diluted EPS) is as follows:
<TABLE>
<CAPTION>
Weighted
Net Average Per Share
Income (loss) Shares Amount
(In thousands, except share and per share data)
For Year Ended December 31, 1997
Basic EPS
<S> <C> <C> <C>
Income available to common shareholders $ 2,760 3,940,867 0.70
Effect of Dilutive Securities
Stock Options ......................... 24,285
RRP shares ............................ 16,374
Diluted EPS
Income available to common shareholders
plus assumed conversions ............. 2,760 3,981,526 0.69
========= ========= ====
For Year Ended December 31, 1996
Basic EPS
Income available to common shareholders $ (3,836) 4,761,393 (0.81)
Effect of Dilutive Securities
No dilutive securities during 1996
Diluted EPS
Income available to common shareholders (3,836) 4,761,393 (0.81)
========= ========= ====
</TABLE>
The Bank converted from a mutual form to a stock institution in December
1995, and the Holding Company completed its initial public offering on
December 26, 1995, at which time the Holding Company purchased all of the
outstanding stock of the Bank. The Company did not report EPS for 1995
and therefore it is excluded from this footnote.
(13) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Company and its subsidiaries may, from time to time, be
defendants in legal proceedings relating to the conduct of their
business. In the best judgments of management, the consolidated
financial position of the Company and its subsidiaries will not be
affected materially by the outcome of any pending legal
proceedings.
49
<PAGE>
(13) Commitments and Contingent Liabilities, Continued
The Bank was a defendant in an action by the current owners
of F. H. Doherty Associates, Inc. (the Bank sold F. H. Doherty
Associates, Inc. to the current owners), seeking to rescind the
sale of stock, recover any additional capital contributions made
by the plaintiffs, punitive damages in the amount of $1,000,000,
and indemnification on a potential claim in the amount of $67,500
resulting from a subsequent transfer of a portion of the stock by
plaintiffs to a third party. During 1996, the Bank stipulated to
a settlement and agreed to pay $262,500 to the plaintiffs. The
Bank charged $175,000 against the allowance for probable loss
which was established for this matter in 1995. The remaining
$87,500 was charged to 1996 operations.
(b) Nationar Receivables
On February 6, 1995, the Superintendent of Banks for the State of
New York ("Superintendent") seized Nationar, a check-clearing and
trust company, freezing all of Nationar's assets. On that date,
the Bank had: a demand account balance of $233,000, and a Nationar
debenture of $100,000 collateralized by a $1,000,000 investment
security. On September 26, 1995, the Company entered into a
standby letter of credit with the superintendent for $1,086,250
which replaced the $1,000,000 security that was pledged as
collateral for the capital debenture bonds. As of December 31,
1995, the Company charged off the Nationar debenture of $100,000
and established an additional reserve of $105,000 for potential
losses of the demand account and potential losses related to the
stand by letter of credit.
During 1996 the Company received a cash payment of $233,000 from
the Superintendent relating to its Nationar claim. In addition, on
June 10, 1996 the Company issued a new standby letter of credit
for $150,000 to the Superintendent, and the initial standby letter
of credit was canceled. Concurrent with the new standby letter of
credit, the Company was required to pay $58,000 under the original
standby letter of credit agreement. This amount was charged
against the reserve the Company had previously established.
Subsequently, the Company was informed by the Superintendent's
Office that the $150,000 standby letter of credit was canceled and
that the Company will have no further liability in connection with
its agreement with the Superintendent. During 1997, the Bank
received approximately $45,000 from the Superintendent of Banks as
a partial recovery of the amounts previously charged off and is
included in Other Income.
(c) Lease Commitments
The Company leases office space and equipment under noncancelable
operating leases. Minimum rental commitments under these leases
are as follows:
Years ended December 31,
(In thousands)
1998 $ 330
1999 266
2000 212
2001 182
2002 128
2003 and thereafter 1,010
-------
$ 2,128
=======
50
<PAGE>
(13) Commitments and Contingent Liabilities, Continued
Amounts charged to rent expense were approximately $315,000,
$225,000 and $203,000 for the years ended December 31, 1997, 1996
and 1995.
(d) Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit, unused lines of credit and
standby letters of credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized on the consolidated statement of financial condition.
The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend
credit, unused lines of credit and standby letters of credit is
represented by the contractual notional amount of these
instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Unless otherwise noted, the Company does not require collateral or
other security to support off-balance sheet financial instruments
with credit risk.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being fully
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral, if any, required by the Company upon the extension of
credit is based on management's credit evaluation of the customer.
Mortgage commitments are secured by a first lien on real estate.
Collateral on extensions of credit for commercial loans varies but
may include property, plant and equipment, and income producing
commercial property.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support borrowing
arrangements. The credit risk involved in issuing standby letters
of credit is essentially the same as that involved in extending
loan facilities to customers.
51
<PAGE>
(13) Commitments and Contingent Liabilities, Continued
Contract amounts of financial instruments that represent the
future extension of credit as of December 31, 1997 and 1996 at
fixed and variable interest rates are as follows:
1997
Fixed Variable Total
(In thousands)
Financial instruments whose
contract amounts represent
Credit risk:
Commitments to extend credit $3,797 393 4,190
Unused lines of credit ..... 1,025 4,336 5,361
Standby letters of credit .. -- 100 100
------ ------ ------
$4,822 4,829 9,651
====== ====== ======
1996
Fixed Variable Total
(In thousands)
Financial instruments whose
contract amounts represent
Credit risk:
Commitments to extend credit $1,076 826 1,902
Unused lines of credit ..... 914 4,981 5,895
Standby letters of credit .. -- 100 100
------ ------ ------
$1,990 5,907 7,897
====== ====== ======
The range of interest on fixed rate commitments was 5.50% to 8.75%
at December 31, 1997 and 7.0% to 8.5% at December 31, 1996. The
range of interest on adjustable rate commitments was 6.75% to
7.25% and 5.5% to 9.75% at December 31, 1997 and 1996,
respectively.
(14) Fair Values
A financial instrument is defined as cash, evidence of ownership interest
in an entity, or a contract that imposes on one entity a contractual
obligation to deliver cash or another financial instrument to a second
entity or to exchange other financial instruments on potentially
unfavorable terms with a second entity and conveys to that second entity
a contractual right to receive cash or another financial instrument from
the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected net cash
flows, 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 estimates.
52
<PAGE>
(14) Fair Values, Continued
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax asset and property, plant, and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value. In
addition there are significant intangible assets that the fair value
estimates do not recognize, such as the value of "core deposits," the
Company's branch network and other items generally referred to as
"goodwill."
The specific estimation methods and assumptions used can have a
substantial impact on the resulting fair values ascribed to financial
instruments. The following is a brief summary of the significant methods
and assumptions used:
Securities Available for Sale
The carrying amounts for short-term investments approximate fair
value because they mature in 90 days or less and do not present
unanticipated credit concerns. The fair value of longer-term
investments and mortgage-backed securities, except certain state and
municipal securities, is estimated based on bid prices published in
financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is
not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices
of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued. See note 4 for detail
disclosure of securities available for sale.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
single family loans, consumer loans and commercial loans. Each loan
category is further segmented into fixed and adjustable rate interest
terms and by performing and nonperforming categories.
The fair value of performing loans, is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the
contractual term of the loans to maturity taking into consideration
certain prepayment assumptions.
Fair value for significant non-performing loans is based on recent
external appraisals and discounting of cash flows. Estimated cash
flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower
information.
53
<PAGE>
(14) Fair Values, Continued
Deposit Liabilities
The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, passbook accounts, NOW accounts
and money market accounts must be stated at the amount payable on
demand. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities.
The fair value estimates above do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market.
Borrowed Funds
The fair value of borrowed funds due in 90 days or less, or that
reprice in 90 days or less is estimated to approximate the carrying
amounts. The fair value of longer term borrowed funds is estimated by
discounting scheduled cash flows based on current rates available to
the Company for similar types of borrowing arrangements.
Other Items
The following items are considered to have a fair value equal to book
value due to the nature of the financial instrument and the period
within which it will be settled or repriced: cash and due from banks,
federal funds sold, accrued interest receivable, investments required
by law, due to broker, advances from borrowers for taxes and
insurance, and accrued interest payable.
54
<PAGE>
(14) Fair Values, Continued
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ..... $ 10,225 10,225 10,887 10,887
Securities available for sale . 205,842 205,842 200,539 200,539
Federal Home Loan Bank of
New York stock ............... 3,291 3,291 2,029 2,029
Loans ......................... 284,930 280,765 251,532 249,665
Less: Allowance for loan losses (3,807) -- (3,438) --
--------- --------- --------- ---------
Net loans ............. 281,123 280,765 248,094 249,665
Accrued interest receivable ... 3,734 3,734 3,201 3,201
Financial liabilities:
Deposits:
Demand, passbook, money
market, and NOW accounts . 149,933 149,933 146,150 146,150
Certificates of deposit ... 183,332 184,208 151,932 152,797
Borrowed funds ................ 111,550 111,006 108,780 108,806
Accrued interest payable ...... 819 819 1,077 1,077
Advances from borrowers
for tax and insurance ........ 1,902 1,902 1,703 1,703
</TABLE>
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of standby letters of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the obligations
with the counterparties. Fees, such as these are not a major part of the
Company's business and in the Company's business territory are not a
"normal business practice." Therefore, based upon the above facts the
Company believes that book value equals fair value and the amounts are
not significant.
55
<PAGE>
(15) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at December
31, 1997, the Bank was required to maintain a minimum ratio of tangible
capital to total tangible assets of 1.5%; a minimum leverage ratio of
core (Tier 1) capital to total adjusted tangible assets of 3.0% to 4.0%;
and a minimum ratio of total capital (core capital and supplementary
capital) to risk-weighted assets of 8.0%, of which 4.0% must be core
(Tier 1) capital.
Under the prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a core (Tier 1) capital ratio of at least 5.0%
(based on average total assets); a core (Tier 1) risk-based capital ratio
of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1997 and 1996, the Bank
meets all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
56
<PAGE>
(15) Capital Requirements, Continued
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1997 and 1996. Although the OTS capital
regulations apply at the Bank level only, the Company's consolidated
capital amounts and ratios are also presented. The OTS does not have a
holding company capital requirement.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Actual Actual
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Bank
Tangible capital $ 49,722 9.88% 46,225 10.08%
Tier 1 (core) capital 49,722 9.88 46,225 10.08
Risk-based capital:
Tier 1 49,722 23.42 46,225 23.35
Total 52,390 24.68 48,712 24.61
Actual Actual
Amount Ratio Amount Ratio
Consolidated
Tangible capital $ 61,476 11.99% 61,598 13.04%
Tier 1 (core) capital 61,476 11.99 61,598 13.04
Risk-based capital:
Tier 1 61,476 28.79 61,598 30.66
Total 64,159 30.04 64,098 31.90
</TABLE>
57
<PAGE>
(16) Holding Company Financial Information
The Holding Company began operations on December 26, 1995 in conjunction
with the Bank's mutual-to-stock conversion and the Company's initial
public offering of its common stock. The Holding Company's statements of
financial condition as of December 31, 1997 and 1996 and related
statements of income and cash flows for the years ended December 31,
1997, 1996 and for the period from inception (December 26, 1995) to
December 31, 1995 are as follows (the Holding Company did not have any
income or expenses for the period from December 26, 1995 to December 31,
1995):
Statements of Financial Condition
At December 31,
1997 1996
(in thousands)
Assets
Cash and cash equivalents ...................... $ 1,046 469
Securities available for sale* ................. 9,400 13,956
Loan receivable from subsidiary ................ 3,470 3,904
Accrued interest receivable .................... 115 163
Investment in subsidiary ....................... 49,467 46,312
Other assets ................................... 335 85
Total assets .......................... $63,833 64,889
======= =======
Liabilities and Shareholders' Equity
Liabilities:
Security sold under agreement to
repurchase**............................. $ 2,600 3,000
Other liabilities ........................ 30 371
------- -------
Shareholders' Equity .......................... 61,203 61,518
------- -------
Total liabilities and
shareholders' equity .................. $63,833 64,889
======= =======
* The Holding Company's securities available for sale consist of U.S.
Government Agency and mortgage backed securities with a weighted
average maturity of 3.0 years and 5.0 years at December 31, 1997 and
1996, respectively.
** Weighted average rate at December 31, 1997 and 1996 is 5.91% and
5.60% with a maturity date of February 20, 1998 and March 26, 1997,
respectively.
58
<PAGE>
(16) Holding Company Financial Information, Continued
Statements of Income
Years ended December 31,
1997 1996 1995
(in thousands)
Interest income ........................ $ 868 1,128 --
Interest expense ....................... 170 2 --
------ ------ ------
Net interest income ............... 698 1,126 --
Non interest expense ................... 646 309 --
------ ------ ------
Income before income taxes and
equity in undistributed earnings (loss)
of subsidiary ......................... 52 817 --
------ ------ ------
Income tax expense ..................... 21 328 --
------ ------ ------
Income before equity in undistributed
earnings (loss) of subsidiary ......... 31 489 --
Equity in undistributed (loss) earnings
of subsidiary ......................... 2,729 (4,325) 857
------ ------ ------
Net income (loss) ...................... $2,760 (3,836) 857
====== ====== ======
59
<PAGE>
(16) Holding Company Financial Information, Continued
<TABLE>
<CAPTION>
Statements of Cash Flows
Years ended December 31,
1997 1996 1995
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ............................. $ 2,760 (3,836) 857
Adjustment to reconcile net income
(loss) to net cash (used by) provided
by operating activities:
Equity in undistributed loss
(earnings) of subsidiary ................. (2,729) 4,325 (857)
Net loss on sale and redemptions
of securities available for sale ......... 153 -- --
RRP expense ............................... 272 -- --
(Decrease) increase in other
liabilities .............................. (341) 371 --
Increase in accrued interest
receivable and other assets .............. (274) (163) --
-------- -------- --------
Net cash (used by) provided by
operating activities .............. (159) 697 --
-------- -------- --------
Cash flows from investing activities:
Decrease (increase) in loans receivable
from subsidiary .............................. 434 434 (4,338)
Investment in common stock of subsidiary ...... -- -- (26,090)
Purchases of securities available for sale .... (11,052) (19,985) --
Proceeds from principal paydowns and
maturities of securities available for sale .. 8,159 3,984 --
Proceeds from sales of available for sale
securities ................................... 7,515 1,795 --
-------- -------- --------
Net cash provided by (used in)
investing activities .............. 5,056 (13,772) (30,428)
-------- -------- --------
Cash flows from financing activities:
Net (decrease) increase in borrowed funds ..... (400) 3,000 --
Net proceeds from issuance of common stock .... -- -- 52,180
Dividends paid ................................ (432) -- --
Purchase of treasury shares ................... (3,488) (11,208) --
-------- -------- --------
Net cash provided by (used in)
financing activities .............. (4,320) (8,208) 52,180
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 577 (21,283) 21,752
Cash and cash equivalents:
Beginning of period ........................... 469 21,752 --
-------- -------- --------
End of period ................................. $ 1,046 469 21,752
======== ======== ========
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
</TABLE>
60
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
Company and Bank Address
11 Division Street
Amsterdam, New York 12010-4303
Telephone: (518) 842-7200
Fax: (518) 842-7500
Stock Price Information
The Company's stock is traded on The Nasdaq National Market System under
the symbol "AHCI". The table below shows the range of high and low bid prices of
the Company's Common Stock during 1996 and 1997. The information set forth in
the table below was provided by The Nasdaq Stock Market. Such information
reflects interdealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
High Low High Low
1996 First Quarter 10.500 9.375 1997 First Quarter 14.875 11.125
1996 Second Quarter 10.000 9.375 1997 Second Quarter 10.000 12.500
1996 Third Quarter 10.625 9.500 1997 Third Quarter 16.625 15.125
1996 Fourth Quarter 11.750 10.000 1997 Fourth Quarter 19.750 15.375
For information regarding restriction on dividends, see Note 2 to the Notes to
Consolidated Financial Statements.
As of March 27, 1998, the Company had approximately 1,119 shareholders of record
and 4,258,148 outstanding shares of Common Stock.
Special Counsel
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
Telephone: (202) 414-6100
61(a)
<PAGE>
Investor Relations
Shareholders, investors and analysts interested in additional information may
contact:
Harold A. Baylor, Jr., CFO
Ambanc Holding Co., Inc.
11 Division Street
Amsterdam, New York 12010-4303
Telephone: (518) 842-7200
Fax: (518) 842-1688
Annual Report on Form 10-K
Copies of Ambanc Holding Co., Inc.'s Annual Report for year ended December
31, 1997 on Form 10-K filed with the Securities and Exchange Commission are
available without charge to shareholders upon written request to:
Investor Relations
Ambanc Holding Co., Inc.
11 Division Street
Amsterdam, New York 12010-4303
Annual Meeting
The annual meeting of shareholders will be held at 10:00 a.m., New York
time, on Friday, May 22, 1998 at the Best Western, located at 10 Market Street,
Amsterdam, New York.
Stock Transfer Agent and Registrar
Ambanc Holding Co., Inc.'s transfer agent, American Stock Transfer & Trust,
maintains all shareholder records and can assist with stock transfer and
registration address changes, changes or corrections in social security or tax
identification numbers and 1099 tax reporting questions. If you have questions,
please contact the stock transfer agent at the address below:
American Stock Transfer & Trust
40 Wall Street, 46th Floor
New York, New York 10005
Telephone: (718) 921-8290
61(b)
<PAGE>
Amsterdam Savings Bank, FSB Offices
Corporate 11 Division Street
Amsterdam, N.Y. 12010
(518) 842-7200
Amsterdam Route 30N
Amsterdam, N.Y. 12010
Price Chopper Supermarket
Sanford Farms Plaza
Amsterdam, N.Y. 12010
Ballston Spa Grand Union Plaza, Rte. 50
Ballston Spa, N.Y. 12020
Clifton Park Village Plaza
Clifton Park, N.Y. 12065
Fort Plain 19 River Street
Fort Plain, N.Y. 13339
Gloversville Arterial at Fifth Avenue
Gloversville, N.Y. 12078
Latham Price Chopper Supermarket
873 New Loudon Road
Latham, N.Y. 12110
Schenectady Price Chopper Supermarket
1640 Eastern Parkway
Schenectady, N.Y. 12309
Saratoga Price Chopper Supermarket
115 Ballston Avenue
Saratoga Springs, N.Y. 12866
Guilderland 5 New Karner Road
Guilderland, N.Y. 12084
Wilton Price Chopper Supermarket
Route 50
Saratoga Springs, N.Y. 12866
Operations Center 35 East Main Street
Amsterdam, N.Y. 12010
62(a)
<PAGE>
DIRECTORS AND OFFICERS
Board of Directors
- ------------------
(Ambanc Holding Co., Inc. and Year appointed
Amsterdam Savings Bank, FSB) to Bank Board
Paul W. Baker, Chairman of the Board 1963
Robert J. Brittain, President and Chief Executive Officer 1988
Lauren T. Barnett, Barnett Agency, Inc. 1966
John J. Daly, Alpin Haus 1988
Robert J. Dunning D.D.S., Dentist 1972
Lionel H. Fallows, Retired, Lieutenant Colonel 1981
Marvin R. LeRoy, Jr., Alzheimers Association, Northeastern NY Chapter 1996
Charles S. Pedersen, Independent Manufacturers' Representative 1977
Carl A. Schmidt, Jr., Sofco, Inc. 1974
William A. Wilde, Jr., Amsterdam Printing and Litho Corp. 1966
Executive Officers of Ambanc Holding Co., Inc.
- ----------------------------------------------
Robert J. Brittain President/Chief Executive Officer
Harold A. Baylor, Jr. Vice President/Treasurer/Chief Financial Officer
Robert Kelly Vice President/General Counsel/Secretary
Executive Officers of Amsterdam Savings Bank, FSB
- -------------------------------------------------
Robert J. Brittain President/Chief Executive Officer
Harold A. Baylor, Jr. Vice President/Treasurer/Chief Financial Officer
Robert Kelly Vice President/General Counsel/Secretary
Nancy S. Virkler Vice President of Operations
Richard C. Edel Vice President
Cynthia M. Proper Vice President/Director of Lending
62(b)
<PAGE>
Subsidiary Name State of Incorporation
- ------------------------------- ----------------------
Amsterdam Savings Bank, FSB New York
ASB Insurance Agency, Inc. New York
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1997 OF AMBANC HOLDING
CO., INC. AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,627
<INT-BEARING-DEPOSITS> 4,598
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,842
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 284,930
<ALLOWANCE> 3,807
<TOTAL-ASSETS> 510,444
<DEPOSITS> 333,265
<SHORT-TERM> 68,550
<LIABILITIES-OTHER> 4,427
<LONG-TERM> 43,000
0
0
<COMMON> 54
<OTHER-SE> 61,148
<TOTAL-LIABILITIES-AND-EQUITY> 510,444
<INTEREST-LOAN> 21,011
<INTEREST-INVEST> 13,957
<INTEREST-OTHER> 598
<INTEREST-TOTAL> 35,566
<INTEREST-DEPOSIT> 13,645
<INTEREST-EXPENSE> 19,654
<INTEREST-INCOME-NET> 15,912
<LOAN-LOSSES> 1,088
<SECURITIES-GAINS> 775
<EXPENSE-OTHER> 12,197
<INCOME-PRETAX> 4,453
<INCOME-PRE-EXTRAORDINARY> 4,453
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,760
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 3.36
<LOANS-NON> 1,876
<LOANS-PAST> 445
<LOANS-TROUBLED> 931
<LOANS-PROBLEM> 5,813
<ALLOWANCE-OPEN> 3,438
<CHARGE-OFFS> 1,214
<RECOVERIES> 495
<ALLOWANCE-CLOSE> 3,807
<ALLOWANCE-DOMESTIC> 3,807
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
