SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended: September 30, 1997,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to .
Commission File No. 0-21113
AFSALA Bancorp, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 14-1793890
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
161 Church Street, Amsterdam, New York 12010
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(Address of Principal Executive Offices) (Zip Code)
(518) 842-5700
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(Issuer's Telephone Number, Including Area Code)
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, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ].
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $11,174,465
As of December 12, 1997, there were issued and outstanding 1,388,440
shares of the registrant's Common Stock.
Registrant's voting stock is listed on the Nasdaq National Market under
the symbol "AFED." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price of the registrant's
Common Stock on December 12, 1997, was $22.5 million.
Transition Small Business Disclosure Format (check one) YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1997 (Part II).
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the fiscal year ended September 30, 1997 (Part III).
<PAGE>
PART I
Item 1. Business
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General
AFSALA Bancorp, Inc. (the "Company" or the "Registrant") is a
Delaware-chartered corporation organized in June 1996 at the direction of
Amsterdam Federal Bank (the "Bank") to acquire all of the capital stock that the
Bank issued upon the Bank's conversion from the mutual to stock form of
ownership (the "Conversion") on September 30, 1996. As of September 30, 1997,
the Company had total assets of $160.4 million, total deposits of $135.3
million, and stockholders' equity of $20.6 million or 12.85% of total assets
under generally accepted accounting principles ("GAAP"). The only subsidiary of
the Company is the Bank. As such, references herein to the Bank include the
Company unless the context otherwise indicates.
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage, provided that the Bank retains a specified amount of its
assets in housing-related investments. The Company does not employ any persons
other than officers, but utilizes the support staff of the Bank from time to
time.
The Bank attracts deposits from the general public and uses such
deposits primarily to originate loans, including home equity loans, secured by
first mortgages on one- to four-family residences in its market areas. The Bank
also originates consumer loans, consisting of personal loans, home improvement
loans, and passbook loans, and to a much lesser extent, the Bank originates
commercial real estate loans and other commercial loans. Although the total loan
portfolio still consists of a small amount of education loans, the Bank ceased
making such loans in June 1994.
The principal sources of funds for the Bank's lending activities are
deposits, the repayment and maturity of loans and sale, maturity, and call of
securities, and Federal Home Loan Bank ("FHLB") advances. The principal source
of income is interest on loans and securities. The principal expense is interest
paid on deposits.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS") and its deposits have been federally
insured by the Savings Association Insurance Fund ("SAIF") and its predecessor,
the Federal Savings and Loan Insurance Corporation ("FSLIC"), since 1937. The
Bank is a member of and owns capital stock in the FHLB of New York, which is one
of the 12 regional banks in the FHLB System.
Market Area and Competition
The Bank operates five offices and an operations center. The main
office, the operations center, and two branch offices are located in Amsterdam,
New York, in Montgomery County. One branch office which was opened in October
1994, is in a Shop N Save Supermarket located in Gloversville, New York, in
Fulton County, and one branch office, which was opened in May 1995, is in a Shop
N Save Supermarket located in Oneonta, New York, in Otsego County. Based on the
Bank's branch locations and deposit activity, the Bank has two market areas.
Both market areas are defined by existing boundaries. One market area consists
of the Cities of Amsterdam, Gloversville, Johnstown, and the Towns of Amsterdam,
Johnstown, Florida, Mohawk, Broadalbin, Mayfield, and Perth. The other market
area consists of the City of Oneonta and Town of Oneonta. The Bank expects to
open another branch during fiscal 1998 in a Price Chopper supermarket in
Norwich, New York.
2
<PAGE>
Economic growth in the Bank's market areas remains dependent upon the
local economy. The deposit and loan activity of the Bank is significantly
affected by economic conditions in its market areas. The economies of the Bank's
market areas have remained stagnant for several years. The largest employers in
the Bank's market areas are smaller sized manufacturers. Trade, service, and
government related industries are other employers. Because there are no major
employers in these market areas, many residents commute to Schenectady County or
the state capitol for employment. The Bank has been able to increase its market
share in originating first mortgage loans on residential property within its
primary market areas, even though total first mortgage loan originations in the
Bank's market areas have been declining. The Bank has also increased its market
share of deposits and consumer loans for at least the last five years.
The Bank has been able to maintain its position in mortgage loan
originations, market share, and deposit accounts throughout its market areas by
virtue of its local presence, competitive pricing, and referrals from existing
customers. The Bank is one of many financial institutions serving its market
areas.
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Bank's market areas. Competition for funds
also includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other insured financial institutions such as commercial banks, thrift
institutions, credit unions, and multi-state regional banks, and mortgage
bankers, many of whom have far greater resources than the Bank.
Lending Activities
General. The Bank's loan portfolio predominantly consists of mortgage
loans secured by one- to four-family residences. The Bank emphasizes home equity
loans secured by first and second mortgage loans on one- to four-family
residences. The Bank also originates consumer loans, consisting of personal
loans, home improvement loans, and passbook loans. To a lesser extent, the Bank
originates commercial real estate loans and other commercial loans. Although the
loan portfolio still consists of a small amount of education loans, the Bank
ceased making such loans in June 1994.
At September 30, 1997, loans secured by first mortgages on one- to
four-family residences totalled $44.9 million, or 58.38%, of the Bank's total
loan portfolio. Prior to 1988, the Bank purchased loans, however, it is the
current practice of the Bank not to purchase loans. Other than educational loans
which were sold, the Bank does not sell loans, and the Bank is primarily a
portfolio lender. For its mortgage loan portfolio, the Bank originates fixed
rate and adjustable-rate mortgage loans. At September 30, 1997, adjustable-rate
residential mortgage loans totalled approximately 34.27% of the Bank's
residential mortgage loans.
Loan originations are generally obtained from existing customers,
members of the local community, and referrals from real estate brokers, lawyers,
accountants, and current and past customers within the Bank's lending area. The
Bank also advertises on an extensive basis in the local print media and
periodically advertises on radio and television. Mortgage loans originated by
the Bank in its portfolio generally include due-on-sale clauses that provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event that the borrower transfers ownership of the property without the
Bank's consent.
3
<PAGE>
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
$ % $ %
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
Residential.................................. $44,908 58.38% $43,966 61.44%
Commercial................................... 3,665 4.76 3,015 4.21
Home equity ................................. 17,677 22.98 14,666 20.50
------ ----- ------ -----
Total real estate loans................... 66,250 86.12 61,647 86.15
------ ----- ------ -----
Consumer Loans:
Personal secured(1).......................... 3,875 5.04 3,943 5.51
Personal unsecured........................... 475 0.62 432 0.60
Education.................................... 86 0.11 91 0.13
Home improvement............................. 1,790 2.32 1,560 2.18
Passbook..................................... 938 1.22 779 1.09
------ ------ ------ ------
Total consumer loans...................... 7,164 9.31 6,805 9.51
------ ------ ------ ------
Commercial Loans............................... 3,513 4.57 3,104 4.34
------ ------ ------ ------
Total loans............................... 76,927 100.00% 71,556 100.00%
====== ======
Less:
Allowance for loan losses.................... 1,108 879
------ ------
Net loans receivable...................... $75,819 $70,677
====== ======
</TABLE>
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(1) Includes loans secured by, among other things, automobiles, boats, and
mobile homes.
4
<PAGE>
Loan Maturity Tables. The following table sets forth the estimated
maturity of the Bank's loan portfolio at September 30, 1997. The table does not
include the effects of possible prepayments or scheduled repayments. All
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
At September 30, 1997
------------------------------------------------------------------------------------------
Residential Commercial Commercial Other
Real Estate(1) Real Estate Loans Loans Total
-------------- ----------- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-performing................. $ 312 $ -- $ 10 $ 147 $ 469
====== ====== ===== ====== ======
Amounts Due:
Within 1 year.................. $ 281 $ 40 $1,534 $2,057 $ 3,912
1 to 5 years................... 7,221 591 761 2,058 10,631
More than 5 years.............. 55,082 3,034 1,218 3,050 62,384
------ ----- ----- ----- ------
Total due after one year....... 62,303 3,625 1,979 5,108 73,015
------ ----- ----- ----- ------
Total amount due............... $62,584 $3,665 $3,513 $7,165 $76,927
====== ===== ===== ===== ======
Less:
Allowance for loan losses..................................................................................... 1,108
------
Net loans receivable........................................................................................ $75,819
======
</TABLE>
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(1) Includes home equity loans.
The following table sets forth the dollar amount of all loans
contractually due after September 30, 1998, and shows the amount of such loans
which have pre-determined interest rates and which have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
At September 30, 1997
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Residential real estate(1)......... $40,923 $21,380 $62,303
Commercial real estate............. 3,033 592 3,625
Commercial loans................... 1,979 -- 1,979
Other loans........................ 5,066 42 5,108
------ ------ ------
Total............................ $51,001 $22,014 $73,015
====== ====== ======
</TABLE>
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(1) Includes home equity loans.
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market areas. The Bank
generally originates owner-occupied one- to four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. The Bank will
originate a mortgage loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property, however, mortgage insurance is
required for the amount in excess of 80% of such value. Non-owner-
5
<PAGE>
occupied residential mortgage loans are originated up to 75% of the lesser of
the appraised value or selling price of the property on a fixed rate basis only.
The Bank, on a very limited basis, also originates construction permanent loans
on one- to four-family residences. The Bank retains all mortgage loans that it
originates. Adjustable-rate mortgage loans, which can adjust annually or every
three or five years over the life of the loan depending on the terms of the
loan, can have maturities of up to 30 years. Fixed rate loans can have
maturities of up to 15 or 20 years depending on the terms of the loan. The Bank
also originates a fixed rate 8 year balloon loan with principal and interest
payments calculated using a 30 year amortization.
For all adjustable-rate mortgage loans, the Bank requires the borrower
to qualify at the fully indexed rate after the first adjustment. The Bank's
adjustable-rate mortgage loans provide for periodic interest rate adjustments of
plus or minus 1% to 2% per year with a maximum adjustment over the term of the
loan as set forth in the loan agreement and usually ranges from 4% to 6.5% above
the initial interest rate depending on the terms of the loan. Adjustable-rate
mortgage loans typically reprice every year, although some adjust every three or
five years, and provide for terms of up to 30 years with most loans having terms
of between 15 and 30 years. The Bank offers adjustable-rate loans with initial
interest rates set below the fully indexed rate.
The Bank offers adjustable-rate mortgage loans indexed to the one year
U.S. Treasury bill rate. Interest rates charged on mortgage loans are
competitively priced based on market conditions and the Bank's cost of funds.
Generally, the Bank's standard underwriting guidelines for mortgage loans
conform to the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Bank's loans
can be sold in the secondary market. However, it is the current practice of the
Bank to remain a portfolio lender.
Commercial Loans. The Bank originates a limited amount of commercial
real estate and other commercial loans. Commercial real estate loans consist of
loans made for the purpose of purchasing the commercial real estate used as
collateral and includes loans secured by mixed residential and commercial use
property, professional office buildings, and restaurants. Commercial loans,
other than commercial real estate loans, consist of, among other things,
commercial lines of credit, commercial vehicle loans, and working capital loans
and are typically secured by residential or commercial property, receivables or
inventory, or some other form of collateral. The Bank requires a personal
guarantee from the principal of the commercial enterprise on all commercial
loans. Loans secured by commercial property may be originated in amounts up to
75% of the appraised value for a maximum term of 15 years.
Home Equity Loans. The Bank originates home equity loans secured by
first and second mortgages on residential real estate. The loans are originated
as fixed rate loans with terms of 3 to 15 years. The loans are generally subject
to an 80% combined loan-to-value ratio, including any other outstanding
mortgages or liens. However, the Bank may occasionally permit a higher
loan-to-value ratio based on other factors, such as the strength and credit
history of the applicant and the terms of the loan. The Bank has emphasized
these loans as a means of supplementing its mortgage loan origination volume.
Consumer Loans. The Bank offers consumer loans in order to provide a
wider range of financial services to its customers. Federal savings associations
are permitted to make secured and unsecured consumer loans up to 35% of their
assets. In addition, savings associations have lending authority above the 35%
limitation for certain consumer loans, such as home equity, home improvement,
mobile home, and savings account or passbook loans. The Bank originates secured
and unsecured consumer loans, consisting of personal loans, home improvement
loans, and passbook loans.
6
<PAGE>
Loan Underwriting Risks. Adjustable-rate mortgage loans decrease the
risks associated with changes in interest rates by periodically repricing, but
involve other risks because as interest rates increase, the underlying payments
by the borrower increase, thus increasing the potential for default. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic interest rate adjustment permitted by the
adjustable-rate mortgage loan documents, and, therefore is potentially limited
in effectiveness during periods of rapidly rising interest rates. These risks
have not had an adverse effect on the Bank.
While commercial real estate and consumer or other loans provide
benefits to the Bank's asset/liability management program by reducing the Bank's
exposure to interest rate changes, due to their generally shorter terms, and
producing higher yields, such loans may entail significant additional credit
risks compared to owner-occupied residential mortgage lending. However, the Bank
believes that the higher yields and shorter terms compensate the Bank for the
increased credit risk associated with such loans. In addition, home equity loans
provide certain benefits compared to longer term, fixed rate, one- to
four-family residential loans; home equity loans provide reduced interest rate
risk due to their shorter terms and provide higher yields. However, these
benefits may not compensate for the increased credit risk that results from not
holding the first lien on the underlying collateral for home equity loans.
Commercial lending entails significant additional risks when compared
with one- to four-family residential lending. For example, commercial loans
typically involve larger loan balances to single borrowers or groups of related
borrowers, the payment experience on such loans typically is dependent on the
successful operation of the project and these risks can be significantly
impacted by the cash flow of the borrowers and supply and demand conditions in
the market for commercial office, retail, and warehouse space. In periods of
decreasing cash flows, the commercial borrower may permit a lapse in general
maintenance of the property causing the value of the underlying collateral to
deteriorate.
In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk when compared with one- to four-family residential lending. Consumer
lending collections are typically dependent on the borrower's continuing
financial stability, and thus, are more likely to be adversely effected by job
loss, divorce, illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower and is
usually turned over to a collection agency.
Loan Approval Authority and Underwriting. The Bank has established
various lending limits for its officers and maintains an Executive Loan
Committee comprised of the President, Chief Lending Officer and two members of
the Board of Directors. A report of all mortgage loans originated is presented
to the Board of Directors monthly. Upon receipt of a completed loan application
from a prospective borrower, a credit report is generally ordered, income and
certain other information is verified and, if necessary, additional financial
information is requested. An appraisal from an independent licensed fee
appraiser of the real estate intended to be used as security for a proposed loan
is obtained. For construction/permanent loans, funds advanced during the
construction phase are held in a loan-in-process account and disbursed based
upon various stages of completion in accordance with the results of inspection
reports that are based upon physical inspection of the construction by a loan
officer. For real estate loans, each title is reviewed by the attorney for the
Bank to determine the necessity for title insurance. Historically, the Bank has
not required title insurance except in those instances where the attorney has
seen a need for title insurance. Borrowers must also obtain fire and
7
<PAGE>
casualty insurance (for loans on property located in a flood zone, flood
insurance is required) prior to the closing of the loan. The Bank is named as
mortgagee/loss payee of this insurance.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved mortgage loans which generally expire within 60 days
of the date of issuance. The Bank charges no commitment fees or points to lock
in rates or to secure commitments. In some instances, after a review of the
rate, terms, and circumstances, commitments may be renewed or extended beyond
the 60 day limit. At September 30, 1997, the Bank had $866,000 of outstanding
commitments on residential mortgage loans, $150,000 of outstanding commitments
on commercial real estate loans, and $589,000 in undisbursed funds related to
construction loans. Management believes that less than 5% of loan commitments
expire. Furthermore, at September 30, 1997, the Bank had $277,000 in unused
personal lines of credit and $40,000 in standby letters of credit.
Loans to One Borrower. Regulations limit loans-to-one borrower or an
affiliated group of borrowers in an amount equal to 15% of unimpaired capital
and unimpaired surplus of the Bank. The Bank is authorized to lend up to an
additional 10% of unimpaired capital and unimpaired surplus if the loan is fully
secured by readily marketable collateral. The Bank's maximum loan-to-one
borrower limit as set by the Board of Directors is 10% of unimpaired capital and
surplus.
At September 30, 1997, the Bank's largest lending relationship was
comprised of loans secured by commercial and residential properties, in addition
to, equipment, inventory and receivables aggregating approximately $830,000
located in the Bank's market areas. The second largest lending relationship
consisted of loans secured by commercial and residential properties aggregating
approximately $730,000 at September 30, 1997, located in the Bank's market
areas. Likewise, the third largest lending relationship consisted of loans
secured by commercial and residential properties aggregating approximately
$610,000 at September 30, 1997 located in the Bank's market areas. At September
30, 1997, all of these loans were performing in accordance with their terms.
Loan Delinquencies. Loans are reviewed on a monthly basis and are
placed on non-accrual status when considered doubtful of collection by
management. Generally, loans past due 90 days or more as to principal or
interest and, in the opinion of management, not adequately secured to ensure the
collection of the entire outstanding balance of the loan, including accrued
interest, are placed on non-accrual status. Interest accrued and unpaid at the
time a loan is placed on non-accrual status is charged against interest income.
Subsequent cash payments, if any, are generally applied to reduce the
outstanding principal balance.
8
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, accruing loans which are past due 90 days or more
as to principal or interest payments, and foreclosed assets. As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring.
<TABLE>
<CAPTION>
At September 30,
-------------------------
1997 1996
------- -------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans:
Residential real estate(1).................................... $ 312 $ 624
Commercial real estate........................................ 0 0
Consumer and commercial loans................................. 157 92
--- ---
Total $469 $716
=== ===
Accruing loans past due 90 days or more:
Residential real estate(1).................................... $ 0 $ 0
Commercial real estate........................................ 0 0
Consumer and commercial loans................................. 0 66
--- ---
Total...................................................... $ 0 $ 66
=== ===
Total non-performing loans...................................... $ 469 $ 782
=== ===
Foreclosed assets:
Residential real estate(1).................................... 31 0
Commercial real estate........................................ 0 0
Consumer and commercial....................................... 0 0
--- ---
Total...................................................... 31 0
=== ===
Total non-performing assets..................................... $ 500 $ 782
=== ===
Allowance for loan losses....................................... $1,108 $ 879
===== ===
Coverage of non-performing loans(2)............................. 236.09% 112.40%
====== ======
Non-performing assets as a percentage of total assets........... 0.31% 0.51%
===== =====
</TABLE>
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(1) Includes home equity loans.
(2) Calculated as the period end allowance for loan losses as a percentage
of the period end non-performing loans.
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was $30,000 and
$33,000 for the years ended September 30, 1997 and 1996, respectively and $9,000
and $29,000 was collected and included in the Bank's interest income from
non-accrual loans for the years ended September 30, 1997 and 1996.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current equity 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 as 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
9
<PAGE>
warranted. Assets may be designated "special mention" because of potential
weakness that does not currently warrant classification in one of the
aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. 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 by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Bank
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 September 30, 1997, the Bank had
classified $402,000 of loans as substandard, $363,000 of loans as doubtful, and
none as loss.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as other real estate
owned until it is sold. When property is acquired, it is recorded at the fair
value at the date of foreclosure less estimated costs of disposition.
The Bank records loans as in-substance foreclosures if the Bank has
taken possession of the collateral regardless of whether formal foreclosure
proceedings have been instituted. In-substance foreclosures are accounted for as
real estate acquired through foreclosure, however, title to the collateral has
not been acquired by the Bank. There may be significant other expenses incurred
such as legal and other servicing costs involved with in substance foreclosures
and foreclosed real estate. At September 30, 1997, other real estate owned
consisted of one residential one-to-four family property and amounted to
$31,000. There was no other real estate owned at September 30, 1996.
Allowances for Loan Losses. Management regularly performs an analysis
to identify the inherent risk of loss in its loan portfolio. This analysis
includes evaluation of concentrations of credit, past loss experience, current
economic conditions, amount and composition of the loan portfolio (including
loans being specifically monitored by management), estimated fair value of
underlying collateral, loan commitments outstanding, delinquencies, and other
factors.
The Bank will continue to monitor its allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Bank maintains its allowance for loan
losses at a level that it considers to be adequate to provide for the inherent
risk of loss in its loan portfolio, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, the Bank's determination as
to the amount of its allowance for loan losses is subject to review by the OTS,
as part of its examination process, which may result in the establishment of an
additional allowance based upon the judgment of the OTS after a review of the
information available at the time of the OTS examination.
10
<PAGE>
Analysis of Allowance for Loan Losses. The following table sets forth
information with respect to the Bank's allowance for loan losses at the dates
indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding (end of period) ................... $ 76,927 $ 71,556
======== ========
Average total loans outstanding (period to date) .......... $ 73,678 $ 68,878
======== ========
Allowance for loan loss at beginning of period ............ 879 678
Loan charge-offs:
Residential real estate(1) .............................. (1) (11)
Commercial real estate .................................. 0 0
Consumer and commercial loans ........................... (22) (18)
-------- --------
Total charge-offs .................................... (23) (29)
-------- --------
Total recoveries .......................................... 2 0
-------- --------
Loan charge-offs, net of recoveries ....................... (21) (29)
Provision charged to operations ........................... 250 230
-------- --------
Allowance for loan losses at end of period ................ $ 1,108 $ 879
======== ========
Ratio of net charge-offs during the period to average loans
outstanding during the period ........................... 0.03% 0.04%
======== ========
Provision as a percentage of average loans ................ 0.34% 0.33%
======== ========
Allowance as a percentage of total loans (end of period) .. 1.44% 1.23%
======== ========
</TABLE>
- --------------
(1) Includes home equity loans.
Allocation of the Allowance for Loan Losses. The following table sets
forth the allocation of the allowance for loan losses by category as prepared by
the Bank. In management's opinion, the allocation has, at best, a limited
utility. It is based on management's assessment as of a given point in time of
the risk characteristics of each of the component parts of the total loan
portfolio and is subject to changes as and when the risk factors of each such
component part change. The allocation is not indicative of either the specific
amounts or the loan categories in which future charge-offs may be taken, nor
should it be taken as an indicator of future loss trends. In addition, by
presenting the allocation, management does not mean to imply that the allocation
is exact or that the allowance has been precisely determined from the
allocation. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in any category.
11
<PAGE>
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1997 1996
--------------------------------------- -----------------------------------
Percent of Percent of
Amount of Loans in Each Amount of Loans in Each
Loan Loss Category to Loan Loss Category to
Allowance Total Loans Allowance Total Loans
--------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Allocation of allowance for loan losses(1):
Residential real estate(2)................... $ 231 81.36% $201 81.94%
Commercial real estate....................... 31 4.76 23 4.21
Consumer and commercial loans ............... 403 13.88 232 13.85
Unallocated.................................. 443 0.00 423 0.00
----- ------ --- ------
Total................................... $1,108 100.00% $879 100.00%
===== ====== === ======
</TABLE>
- -------------------
(1) Percentages represent loans to gross loans in each category.
(2) Includes home equity loans.
Investment Activities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. See " Regulation of the Bank -
Liquidity Requirements." The Bank has maintained a liquidity portfolio in excess
of regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of future yield levels, as well as
management's projections as to the short term demand for funds to be used in the
Bank's loan origination and other activities. The Bank classifies its
investments as securities available for sale or investments securities held to
maturity in accordance with SFAS No. 115. At September 30, 1997, the Bank's
investment portfolio policy allowed investments in instruments such as U.S.
Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits (up to six months), as well as investment grade corporate
bonds, commercial paper and the mortgage derivative products described below.
The Board of Directors may authorize additional investments.
The Bank's securities available for sale and investment securities held
to maturity portfolios at September 30, 1997 did not contain securities of any
issuer with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
12
<PAGE>
The Bank's mortgage-backed securities, other than collateralized
mortgage obligations ("CMOs"), are classified as investment securities held to
maturity at September 30, 1997 and were all issued by GNMA, FHLMC, or FNMA and
represented participating interests in direct pass-through pools of long-term
mortgage loans originated and serviced by the issuers of the securities.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
The Bank also invests in CMOs, a type of mortgage-backed security, and
as of September 30, 1997 maintains CMOs classified as securities available for
sale. Substantially all of the Bank's CMOs were issued by GNMA, FHLMC, or FNMA.
CMOs have been developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by government agencies, government
sponsored enterprises, and special purpose entities established by financial
institutions and other similar institutions. Some CMO instruments are most like
traditional debt instruments because they have stated principal amounts and
traditionally defined interest rate terms. Purchasers of certain other CMO
instruments are entitled to the excess, if any, of the issuer's cash inflows,
including reinvestment earnings, over the cash outflows for debt servicing and
administrative expenses. CMOs may include instruments designated as residual
interests, which represent an equity ownership interest in the underlying
collateral, subject to the first lien of the investors in the other classes of
the CMO and may be riskier than many regular CMO interests. At September 30,
1997, all of the Bank's CMOs consisted of regular interests and did not include
any residual interests or interest-only or principal only securities. The
securities are backed by mortgages on one- to four-family residential real
estate and have contractual maturities up to 30 years in the case of adjustable
rate and 15 years in the case of fixed rate mortgage-backed securities.
At September 30, 1997, the Bank held CMOs in its securities available
for sale portfolio with a fair value of $5.0 million resulting in a net
unrealized loss of approximately $85,000. The Bank held mortgage-backed
securities in its investment securities held to maturity portfolio with an
amortized cost of $11.2 million at September 30, 1997. The average yield on CMOs
available for sale and mortgage-backed securities held to maturity at September
30, 1997 was 6.54% and 7.17%, respectively.
Securities Portfolio. The following table sets forth the carrying value
of the Bank's securities at the dates indicated. At September 30, 1997, the
approximate fair value of the Bank's securities available for sale was $37.7
million resulting in a net unrealized gain of $11,000, net of taxes.
13
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Securities available for sale, at fair value:
U.S. Government and agency securities....................... $29,158 $ 8,779
States and political subdivisions........................... 3,536 4,993
Collateralized mortgage obligations......................... 5,011 3,360
------ ------
Total securities available for sale...................... $37,705 $17,132
====== ======
Investment securities held to maturity, at amortized cost:
U.S. Government and agency securities....................... $24,036 $22,787
Mortgage-backed securities.................................. 11,182 12,172
Other....................................................... 46 41
------ ------
Total investment securities held to maturity............. $35,264 $35,000
====== ======
</TABLE>
14
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's securities portfolio at September 30, 1997 by contractual
maturity. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1997
Less than 1 to Over 5 to Over 10 Total
1 year 5 years 10 years years Securities
------------------- ----------------- ----------------- ------------------ ---------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Fair
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
---------- ------- --------- ------- --------- ------- ---------- ------- ---------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available
for sale:
U.S. Government and
agencies securities .... $ 1,501 5.62% $14,049 6.58% $13,506 7.16% $ -- --% $29,056 6.80% $29,158
States and political
subdivisions ........... 1,944 4.03 1,592 3.83 -- -- -- -- 3,536 3.93 3,536
Collateralized mortgage
obligations ............ -- -- -- -- -- -- 5,096 6.54 5,096 6.54 5,011
------- ------- ------- ----- ------- ------ ------- ------- ------- ------ ---------
Total securities
available for sale .. $ 3,445 4.72% $15,641 6.30% $13,506 7.16% $ 5,096 6.54% $37,688 6.49% $37,705
======= ======= ======= ===== ======= ====== ======= ======= ======= ====== =========
Investment securities
held to maturity:
U.S. Government and
agencies securities .... $ 6,295 5.32% $11,240 6.35% $ 5,501 7.22% $ 1,000 7.60% $24,036 6.33% $24,074
Mortgaged-backed
securities ............. 41 8.71 315 6.45 1,241 7.72 9,585 7.12 11,182 7.17 11,350
Other .................... -- -- -- -- -- -- 46 -- 46 -- 46
------- ------- ------- ----- ------- ------ ------- ------- ------ ------ -------
Total investment
securities held to
maturity ............ $ 6,336 5.34% $11,555 6.35% $ 6,742 7.31% $10,631 7.13% $35,264 6.59% $35,470
======= ======= ======= ===== ======= ====== ======= ======= ====== ====== =======
</TABLE>
15
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The Bank also derives funds from the (1)
amortization and prepayment of loans, (2) sales, maturities, and calls of
securities, and (3) operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. The Bank may also borrow funds from the FHLB as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market areas through the offering of a selection
of deposit instruments including savings accounts, NOW accounts, money market
accounts, and time deposits or certificate of deposit accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Bank on deposits are set weekly at the
direction of the asset/liability management committee. The Bank determines the
interest rate to offer the public on new and maturing accounts by reviewing the
market interest rates offered by competitors, the Bank's need for funds, and the
current cost of money. The Bank reviews, weekly, the interest rates being
offered by other financial institutions within its market areas.
Regular savings, money market, and NOW accounts constituted $57.7
million, or 42.7%, of the Bank's deposit portfolio at September 30, 1997.
Non-interest bearing deposits constituted $7.9 million or 5.8%of the Bank's
deposit portfolio at September 30, 1997. Time deposits constituted $69.7 million
or 51.5% of the deposit portfolio of which $8.6 million or 6.4% of the deposit
portfolio were time deposits with balances of $100,000 or more. As of September
30, 1997, the Bank had no brokered deposits.
Time Deposits. The following table indicates the amount of the Bank's
time deposits of $100,000 or more by time remaining until maturity as of
September 30, 1997.
Amount of
Maturity Period Time Deposits
--------------- -------------
(In Thousands)
Within three months......................... $3,344
Three through six months.................... 931
Six through twelve months................... 2,145
Over twelve months.......................... 2,229
-----
Total.................................. $8,649
=====
Borrowings. The Bank may obtain advances from the FHLB of New York to
supplement its supply of lendable funds. Advances from the FHLB of New York are
typically secured by a pledge of the Bank's stock in the FHLB of New York and a
portion of the Bank's first mortgage loans. Each FHLB borrowing has its own
interest rate, which may be fixed or variable, and range of maturities. The
Bank, if the need arises, may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At September 30, 1997, the Bank had $1.4 million in fixed rate
long-term borrowings outstanding from the FHLB of New York. At September 30,
1997, the Bank had no other borrowings outstanding.
16
<PAGE>
Subsidiary Activity
The Company has one wholly-owned subsidiary, the Bank, which is
organized under the laws of the United States and conducts business as Amsterdam
Federal Bank. The Bank is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At September 30, 1997,
the Bank had one wholly-owned subsidiary, AFS Service Corp., organized under the
laws of New York. AFS Service Corp. was formed in October 1995 to act as an
agent for the sale of Savings Bank Life Insurance. The Bank's investment in its
subsidiary totaled $1,000 at September 30, 1997. As of September 30, 1997, AFS
Service Corp. had not conducted any business.
Personnel
The Company has no employees other than officers. At September 30,
1997, the Bank had 36 full-time and 17 part-time employees. None of the Bank's
employees are represented by a collective bargaining group.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. 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, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of a domestic building and loan association pursuant to section 7701
of the Internal Revenue Service of 1986, as amended (the "Code"). 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 other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless the other associations each also
qualify as a QTL or meet the definition of a domestic building and loan
association and were acquired in a supervisory acquisition. See "- Regulation of
the Bank - Qualified Thrift Lender Test."
Federal Securities Law. The Company is subject to filing and reporting
requirements by virtue of having its common stock registered under the
Securities Exchange Act of 1934. Furthermore, company stock held by persons who
are affiliates (generally officers, directors, and principal stockholders) of
the Company may not be resold without registration or unless sold in accordance
with
17
<PAGE>
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits prior to September 30, 1996.
The FDIC also maintains another insurance fund, The Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF members placed SAIF members at a competitive disadvantage to BIF
members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed on the Bank declined by
approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. The Bank's regulatory capital
exceeded all minimum regulatory capital requirements applicable to it as of
September 30, 1997.
Savings associations with a greater than "normal" level of interest
rate exposure may, in the future, be subject to a deduction from capital for an
interest rate risk ("IRR") component for purposes of calculating their
risk-based capital requirement.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of
18
<PAGE>
another institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 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, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. At
September 30, 1997, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount required for the liquidation account established in
connection with the Conversion.
Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS regulations or the definition of a domestic building
and loan association in section 7701 of the Code. If the Bank maintains an
appropriate level of certain specified investments (primarily residential
mortgages and related investments, including certain mortgage-related
securities) and otherwise qualifies as a QTL or a domestic building and loan
association, it will continue to enjoy full borrowing privileges from the FHLB
of New York. The required percentage of investments under the QTL test is 65% of
portfolio assets while the Code requires investments of 60% of portfolio assets.
An association must be in compliance with the QTL test or definition of domestic
building and loan association on a monthly basis in 9 out of every 12 months. As
of September 30, 1997, the Bank was in compliance with its QTL requirement and
met the definition of a domestic building and loan association. There can be no
assurance that the Bank will continue to meet the QTL requirements or the
definition of a domestic building and loan association in future periods.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to
19
<PAGE>
satisfy the liquidity requirements that are imposed by the OTS. At September 30,
1997, the Bank was in compliance with these requirements.
Item 2. Description of Property
- ---------------------------------
(a) Properties.
The Company owns no real property but utilizes the offices of the Bank.
The Bank operates from its main office and four branch offices. In addition, the
Bank leases space in the Amsterdam Riverfront Center. A majority of this space
is used as an operations center and houses the loan servicing, accounting,
bookkeeping and proof departments, marketing and business development, and
branch operations. The remaining space is used as a branch office with an ATM.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business - Lending Activities," "Item 1. Business - Regulation of the Bank,"
and "Item 2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities" and "Item 1. Business - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities,"
"Item 1. Business - Regulation of the Bank," and "Item 1. Business - Subsidiary
Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- ---------------------------
The Company and the Bank, from time to time, are parties to ordinary
routine litigation, which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Company and the
Bank. No claims or lawsuits were pending or threatened at September 30, 1997
that would be considered material to the financial position of the Bank and the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1997.
20
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The information contained under the section captioned "Stock Price
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1997 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
Registrant's financial statements listed under Item 13 are incorporated
herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
- --------------------------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" and "Voting Securities and Principal Holders Thereof --
Security Ownership of Certain Beneficial Owners" in Registrant's definitive
proxy statement for Registrant's Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" and to the first table under
"Proposal 1 -- Election of Directors" in the Proxy Statement.
21
<PAGE>
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of
independent accountants of Registrant included in Registrant's Annual Report to
Stockholders are incorporated herein by reference and also in Item 7 hereof.
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1997 and 1996.
Consolidated Statements of Income for the Years Ended September 30,
1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules for which provision is made
in the applicable accounting regulations of the SEC are not required under the
related instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3.1 Articles of Incorporation of AFSALA Bancorp, Inc.*
3.2 Bylaws of AFSALA Bancorp, Inc.*
10.1 Employment contract with John M. Lisicki
10.2 Supplemental Retirement Benefit Agreement with
John M. Lisicki*
10.3 Restricted Stock Plan
22
<PAGE>
10.4 1997 Stock Option Plan
13 Portions of 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333- 06399) declared effective by the SEC on August 9,
1996.
23
<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.
AFSALA BANCORP, INC.
Dated: December 29, 1997 By: /s/ John M. Lisicki
---------------------------
John M. Lisicki
President, Chief Executive
Officer and Director (Duly
Authorized Representative)
Pursuant to the requirement 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/ John M. Lisicki By: /s/ Dr. Daniel J. Greco
-------------------------------------------- ---------------------------------------
John M. Lisicki Dr. Daniel J. Greco
President, Chief Executive Officer Director
and Director (Principal Executive
Officer)
Date: December 29, 1997 Date: December 29, 1997
By: /s/ Dr. Ronald S. Tecler By: /s/ John A. Tesiero, Jr.
-------------------------------------------- ---------------------------------------
Dr. Ronald S. Tecler John A. Tesiero, Jr.
Director Director
Date: December 29, 1997 Date: December 29, 1997
By: /s/ Joseph G. Opalka By: /s/ Florence B. Opiela
-------------------------------------------- ---------------------------------------
Joseph G. Opalka Florence B. Opiela
Director Director
Date: December 29, 1997 Date: December 29, 1997
By: /s/ James J. Alescio By:
-------------------------------------------- ---------------------------------------
James J. Alescio John A. Kosinski, Jr.
Treasurer and Chief Financial Officer Director
(Principal Financial and Accounting Officer)
Date: December 29, 1997 Date: December ____, 1997
</TABLE>
EXHIBIT 10.1
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 11th day of September, 1997
("Effective Date"), by and between Amsterdam Federal Bank (the "Bank") and John
M. Lisicki (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
President & Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
President & Chief Executive Officer of the Bank. The Employee shall render such
administrative and management services to the Bank and any parent or HOLDING
COMPANY or subsidiary as are currently rendered and as are customarily performed
by persons situated in a similar executive capacity. The Employee shall also
promote, by entertainment or otherwise, as and to the extent permitted by law,
the business of the Bank and Parent. The Employee's other duties shall be such
as the Board of Directors for the Bank may from time to time reasonably direct,
including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $150,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Employee shall be entitled to participate
in an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
Further, the Employee shall be entitled to receive the benefit of a
Deferred Compensation Agreement previously entered into between Employee and
Bank, dated November 26, 1993, under the terms outlined in that agreement.
4. (a) The Employee shall be entitled to participate in any plan of the
Bank relating to pension, profit-sharing, or other retirement benefits and
medical coverage or reimbursement plans
<PAGE>
that the Bank may adopt for the benefit of its employees. Additionally,
Employee's dependent family shall be eligible to participate in medical and
dental insurance plans sponsored by the Bank or Parent with the cost of such
premiums paid by the Bank.
(b) Employee Benefits; Expenses. The Employee shall be
eligible to participate in any fringe benefits which may be or may become
applicable to the Bank's senior management employees, including by example,
participation in any stock option or incentive plans adopted by the Board of
directors of Bank or Parent, club memberships, a reasonable expense account, use
of a company owned automobile, and any other benefits which are commensurate
with the responsibilities and functions to be performed by the Employee under
this Agreement. The Bank shall reimburse Employee for all reasonable
out-of-pocket expenses which Employee shall incur in connection with his service
for the Bank.
5. Term. The term of employment of Employee under this Agreement shall
be for the period commencing of the Effective Date and ending thirty-six (36)
months (not to exceed thirty-six (36) months) thereafter. Additionally, on each
annual anniversary date from the Effective Date, the term of employment under
this Agreement shall be extended for an additional one year period beyond the
then effective expiration date upon a determination and resolution of the Board
of Directors that the performance of the Employee has met the requirements and
standards of the Board, and that the term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of this employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business or interests of the Bank or
Parent.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organization and as may be established
from time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this
2
<PAGE>
Agreement, with all such voluntary absences to count as vacation time; provided
that:
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board of
Directors for senior management employees of the Bank, which in the case of
Employee shall be a minimum of four weeks.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which Employee's
death shall have occurred, and for three months thereafter.
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than termination
for Just Cause, shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal
3
<PAGE>
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of the
Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term (including any renewal term) of this Agreement and the
cost of Employee obtaining all health, life, disability, and other benefits
which the Employee would be eligible to participate in through such date based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
4
<PAGE>
(h) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Employee's
full compensation as set forth in the Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Employee returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Paragraph 2 of this Agreement) shall be reduced in proportion to
the time spent in said employment, or as shall otherwise be agreed to by the
parties.
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twelve (12) months after, any
change in control of the Bank or Parent, Employee shall be paid an amount equal
to the product of 2.99 times the Employee's "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder. Said sum shall be paid, at the option of
Employee, either in one (1) lump sum within thirty (30) days of such termination
discounted to the present value of such payment using as the discount rate the
"prime rate"
5
<PAGE>
as published in the Wall Street Journal Eastern Edition as of the date of such
payment, or in periodic payments over the next 36 months or the remaining term
of this Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
ownership, holding or power to vote more than 25% of the Parent's or Bank's
voting stock, the control of the election of a majority of the Parent's or
Bank's directors, or the exercise of a controlling influence over the management
or policies of the Parent or Bank by any person or by persons acting as a group
within the meaning of Section 13(d) of the Securities Exchange Act of 1934. The
term "person" means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntary terminate his employment under this Agreement
within twelve (12) months following a change in control of the Bank or Parent,
and Employee shall thereupon be entitled to receive the payment described in
Section 12(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the Board
of the Bank or Parent; (iii) if the Bank or Parent should fail to maintain
Employee's base compensation in effect as of the date of the Change in Control
and the existing employee benefits plans, including material fringe benefit,
stock option and retirement plans; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; (v) if Employee would not be elected or
reelected to the Board of Directors of the Bank; or (vi) if Employee's
responsibilities or authority have in any way been materially diminished or
reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Bank ("AAA") nearest to the home office of the Bank, and judgment
upon the award rendered
6
<PAGE>
may be entered in any court having jurisdiction hereof, except to the extent
that the parties may otherwise reach a mutual settlement of such issue. The Bank
shall incur the cost of all fees and expenses associated with filing a request
for arbitration with the AAA, whether such filing is made on behalf of the Bank
or the Employee, and the costs and administrative fees associated with employing
the arbitrator and related administrative expenses assessed by the AAA. The Bank
shall reimburse Employee for all costs and expenses, including reasonable
attorney's fees, arising from such dispute, proceedings or actions,
notwithstanding the ultimate outcome thereof, following the delivery of the
decision of the arbitrator or upon delivery of other legal judgment or
settlement of the matter. Such reimbursement shall be paid within ten (10) days
of Employee furnishing to the Bank or Parent evidence, which may be in the form,
among other things, of a canceled check or receipt, of any costs or expenses
incurred by the Employee. Any such request for reimbursement by Employee shall
be made no more frequently than at sixty (60) day intervals.
13. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of New York, except to the extent that Federal law shall be
deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
7
EXHIBIT 10.3
<PAGE>
Amsterdam Federal Bank
Restricted Stock Plan
and Trust Agreement
Article I
---------
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Amsterdam Federal Bank ("Savings Bank") hereby establishes the
Restricted Stock Plan (the "Plan") and Trust (the "Trust") upon the terms and
conditions hereinafter stated in this Restricted Stock Plan and Trust Agreement
(the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and to retain personnel of
experience and ability in key positions of responsibility with the Savings Bank
and its subsidiaries, by providing such personnel of the Savings Bank and its
subsidiaries with an equity interest in the parent corporation of the Savings
Bank, AFSALA Bancorp Inc. ("Parent"), as compensation for their prior and
anticipated future professional contributions and service to the Savings Bank
and its subsidiaries.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by the
Participant to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if
any, or if none, the Participant's estate.
3.02 "Board" means the Board of Directors of the Savings Bank, or any
successor corporation thereto.
3.03 "Cause" means the personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profits, intentional
failure to perform stated duties, willful violation of a material provision of
any law, rule or regulation (other than traffic violations and similar offense),
or a material violation of a final cease-and-desist order or any other action
which results in a substantial financial loss to the Parent, Savings Bank or its
Subsidiaries.
B-1
<PAGE>
3.04 "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Parent or Savings Bank; (ii) the merger or
recapitalization of the Parent or the Savings Bank whereby the Parent or Savings
Bank is not the surviving entity; (iii) a change in control of the Parent or
Savings Bank, as otherwise defined or determined by the Office of Thrift
Supervision ("OTS") or regulations promulgated by it; or (iv) the acquisition,
directly or indirectly, of the beneficial ownership (within the meaning of that
term as it is used in Section 13(d) of the 1934 Act and the rules and
regulations promulgated thereunder) of twenty-five percent (25%) or more of the
outstanding voting securities of the Parent or Savings Bank by any person,
trust, entity or group. This limitation shall not apply to the purchase of
shares of up to 25% of any class of securities of the Parent or Savings Bank by
a tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a Change
in Control has occurred shall be conclusive and binding.
3.05 "Committee" means the Board of Directors of the Parent or the
Restricted Stock Plan Committee appointed by the Board of Directors of the
Parent pursuant to Article IV hereof.
3.06 "Common Stock" means shares of the common stock, $.10 par value
per share, of the Savings Bank or any successor corporation or Parent thereto.
3.07 "Conversion" means the effective date of the stock charter of the
Savings Bank and simultaneous acquisition of all of the outstanding stock of the
Savings Bank by the Parent.
3.08 "Director" means a member of the Board of the Savings Bank.
3.09 "Director Emeritus" means a person serving as a director emeritus,
advisory director, consulting director, or other similar position as may be
appointed by the Board of Directors of the Savings Bank or the Parent from time
to time.
3.10 "Disability" means any physical or mental impairment which renders
the Participant incapable of continuing in the employment or service of the
Savings Bank or the Parent in his current capacity as determined by the
Committee.
3.11 "Employee" means any person who is employed by the Savings Bank or
a Subsidiary.
3.12 "Effective Date" shall mean the date of stockholder approval of
the Plan by the Parent's stockholders.
3.13 "Parent" shall mean AFSALA Bancorp Inc., the parent corporation of
the Savings Bank.
3.14 "Participant" means an Employee, Director or Director Emeritus who
receives a Plan Share Award under the Plan.
3.15 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Participant pursuant to the Plan.
B-2
<PAGE>
3.16 "Plan Share Award" or "Award" means a right granted to a
Participant under this Plan to earn or to receive Plan Shares.
3.17 "Plan Share Reserve" means the shares of Common Stock held by the
Trust pursuant to Sections 5.03 and 5.04.
3.18 "Savings Bank" means Amsterdam Federal Bank, and any successor
corporation thereto.
3.19 "Subsidiary" means those subsidiaries of the Savings Bank which,
with the consent of the Board, agree to participate in this Plan.
3.20 "Trustee" or "Trustee Committee" means that person(s) or entity
nominated by the Committee and approved by the Board pursuant to Sections 4.01
and 4.02 to hold legal title to the Plan assets for the purposes set forth
herein.
Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Board of Directors of the Parent or a Committee appointed by
said Board, which shall consist of not less than two non-employee members of the
Board, which shall have all of the powers allocated to it in this and other
sections of the Plan. All persons designated as members of the Committee shall
be "Non-Employee Directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and
construction by the Committee of any provisions of the Plan or of any Plan Share
Award granted hereunder shall be final and binding. The Committee shall act by
vote or written consent of a majority of its members. Subject to the express
provisions and limitations of the Plan, the Committee may adopt such rules,
regulations and procedures as it deems appropriate for the conduct of its
affairs. The Committee shall report its actions and decisions with respect to
the Plan to the Board at appropriate times, but in no event less than one time
per calendar year. The Committee shall recommend to the Board one or more
persons or entity to act as Trustee in accordance with the provision of this
Plan and Trust and the terms of Article VIII hereof.
4.02 Role of the Board. The members of the Committee and the Trustee
shall be appointed or approved by, and will serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from, or add
members to, the Committee, and may remove, replace or add Trustees. The Board
shall have all of the powers allocated to it in this and other sections of the
Plan, may take any action under or with respect to the Plan which the Committee
is authorized to take, and may reverse or override any action taken or decision
made by the Committee under or with respect to the Plan, provided, however, that
the Board may not revoke any Plan Share Award already made except as provided in
Section 7.01(b) herein.
4.03 Limitation on Liability. No member of the Board, the Committee or
the Trustee shall be liable for any determination made in good faith with
respect to the Plan or any Plan Share Awards granted. If a member of the Board,
Committee or any Trustee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by any reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Parent and
the Savings Bank shall indemnify such member against
B-3
<PAGE>
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in the best interests of the Parent, the
Savings Bank and its Subsidiaries and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Notwithstanding anything herein to the contrary, in no event shall the Savings
Bank take any actions with respect to this Section 4.03 which is not in
compliance with the limitations or requirements set forth at 12 CFR 545.121, as
may be amended from time to time.
Article V
---------
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board of Directors of the
Savings Bank shall determine the amounts (or the method of computing the
amounts) to be contributed by the Savings Bank to the Trust established under
this Plan. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Participants shall be permitted
except with respect to amounts necessary to meet tax withholding obligations.
5.02 Initial Investment. Any funds held by the Trust prior to
investment in the Common Stock shall be invested by the Trustee in such
interest-bearing account or accounts at the Savings Bank as the Trustee shall
determine to be appropriate.
5.03 Investment of Trust Assets. Following approval of the Plan by
stockholders of the Parent and receipt of any other necessary regulatory
approvals, the Trust shall purchase Common Stock of the Parent in an amount
equal to up to 100% of the Trust's assets, after providing for any required
withholding as needed for tax purposes, provided, however, that the Trust shall
not purchase more than 58,190 shares of Common Stock, representing 4% of the
aggregate shares of Common Stock issued by the Parent in the Conversion. The
Trustee may purchase shares of Common Stock in the open market or, in the
alternative, may purchase authorized but unissued shares of the Common Stock or
treasury shares from the Parent sufficient to fund the Plan Share Reserve.
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Sections 6.02 and 6.05,
or the decision of the Committee to return Plan Shares to the Parent, the Plan
Share Reserve shall be reduced by the number of Shares subject to the Awards so
allocated or returned. Any Shares subject to an Award which are not earned
because of forfeiture by the Participant pursuant to Section 7.01 shall be added
to the Plan Share Reserve.
Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees and Directors Emeritus are eligible to
receive Plan Share Awards within the sole discretion of the Committee. Directors
who are not otherwise Employees shall receive Plan Share Awards pursuant to
Section 6.05.
6.02 Allocations. The Committee will determine which of the Employees
will be granted Plan Share Awards and the number of Shares covered by each
Award, provided, however, that in no event
B-4
<PAGE>
shall any Awards be made which will violate the Charter or Bylaws of the Savings
Bank or its Parent or Subsidiaries or any applicable federal or state law or
regulation. In the event Shares are forfeited for any reason or additional
Shares are purchased by the Trustee, the Committee may, from time to time,
determine which of the Employees will be granted Plan Share Awards to be awarded
from forfeited Shares. In selecting those Employees and Directors Emeritus to
whom Plan Share Awards will be granted and the number of shares covered by such
Awards, the Committee shall consider the prior and anticipated future position,
duties and responsibilities of the Employees, the value of their prior and
anticipated future services to the Savings Bank and its Subsidiaries, and any
other factors the Committee may deem relevant. All actions by the Committee
shall be deemed final, except to the extent that such actions are revoked by the
Board. Notwithstanding anything herein to the contrary, in no event shall any
Participant receive Plan Share Awards in excess of 25% of the aggregate Plan
Shares authorized under the Plan.
6.03 Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 or Section 6.05 that a Plan Share
Award is to be made, the Committee shall notify the Participant in writing of
the grant of the Award, the number of Plan Shares covered by the Award, and the
terms upon which the Plan Shares subject to the award may be earned. The date on
which the Committee makes its award determination or the date the Committee so
notifies the Participant shall be considered the date of grant of the Plan Share
Awards as determined by the Committee. The Committee shall maintain records as
to all grants of Plan Share Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary
at Sections 6.01, 6.02 or 6.05, no Employee shall have any right or entitlement
to receive a Plan Share Award hereunder, such Awards being at the sole
discretion of the Committee and the Board, nor shall the Employees as a group
have such a right. The Committee may, with the approval of the Board (or, if so
directed by the Board) return all Common Stock in the Plan Share Reserve to the
Savings Bank at any time, and cease issuing Plan Share Awards.
6.05 Awards to Directors. Notwithstanding anything herein to the
contrary, upon the Effective Date, a Plan Share Award consisting of 2,909 Plan
Shares shall be awarded to each Director of the Savings Bank that is not
otherwise an Employee. Such Plan Share Award shall be earned and non-
forfeitable at the rate of one-fifth as of the one-year anniversary of the
Effective Date and an additional one-fifth following each of the next four
successive years during such periods of service as a Director or Director
Emeritus. Further, such Plan Share Award shall be immediately 100% earned and
non- forfeitable in the event of the death or Disability of such Director or
Director Emeritus, or upon a Change in Control of the Savings Bank or Parent;
provided that such accelerated vesting is not inconsistent with applicable
regulations of the Office of Thrift Supervision ("OTS") or other applicable
banking regulatory agency at the time of such Change in Control. Subsequent to
the Effective Date, Plan Share Awards may be awarded to newly elected or
appointed Directors of the Savings Bank by the Committee, provided that total
Plan Share Awards granted to non-employee Directors of the Savings Bank shall
not exceed 30% of the total Plan Share Reserve in the aggregate under the Plan
or 5% of the total Plan Share Reserve to any individual non-employee Director.
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<PAGE>
Article VII
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EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earnings Plan Shares; Forfeitures.
(a) General Rules. Unless the Committee shall specifically state to the
contrary at the time a Plan Share Award is granted, Plan Shares subject to an
Award shall be earned and non-forfeitable by a Participant at the rate of
one-fifth of such Award following one year after the granting of such Award, and
an additional one-fifth following each of the next four successive years;
provided that such Participant remains an Employee, Director, or Director
Emeritus during such period. Notwithstanding anything herein to the contrary, in
no event shall a Plan Share Award granted hereunder be earned and non-
forfeitable by a Participant more rapidly than at the rate of one-fifth of such
Award as of the one year anniversary of the date of grant and an additional
one-fifth following each of the next four successive years.
(b) Revocation for Misconduct. Notwithstanding anything herein to the
contrary, the Board shall, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent Plan Shares have not been delivered thereunder to the
Participant, whether or not yet earned, in the case of a Participant who is
discharged from the employ or service of the Parent, Savings Bank or a
Subsidiary for Cause, or who is discovered after termination of employment or
service to have engaged in conduct that would have justified termination for
Cause. A determination of Cause shall be made by the Board within its sole
discretion.
(c) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Participant whose employment or
service with the Parent, Savings Bank or a Subsidiary terminates due to death or
Disability, shall be deemed earned and nonforfeitable as of the Participant's
last date of employment or service with the Parent, Savings Bank or Subsidiary
and shall be distributed as soon as practicable thereafter.
(d) Exception for Termination after a Change in Control.
Notwithstanding the general rule contained in Section 7.01 above, all Plan
Shares subject to a Plan Share Award held by a Participant shall be deemed to be
immediately 100% earned and non-forfeitable in the event of a Change in Control
of the Parent or Savings Bank and shall be distributed as soon as practicable
thereafter; provided that such accelerated vesting is not inconsistent with
applicable regulations of the OTS or other applicable banking regulatory agency
at the time of such Change in Control.
7.02 Accrual and Payment of Dividends. A holder of a Plan Share Award,
whether or not earned, shall also be entitled to receive an amount equal to any
cash dividends declared and paid with respect to shares of Common Stock
represented by such Plan Share Award between the date the relevant Plan Share
Award was granted to such Participant and the date the Plan Shares are
distributed. Such cash dividend amounts shall be held in arrears under the Trust
and distributed upon the earning of the applicable Plan Share Award. Such
payment shall also include an appropriate amount of earnings, if any, of the
Trust assets with respect to any cash dividends so distributed.
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<PAGE>
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
Subsections (d) and (e) below, Plan Shares shall be distributed to the
Participant or his Beneficiary, as the case may be, as soon as practicable after
they have been earned. No fractional shares shall be distributed.
Notwithstanding anything herein to the contrary, at the discretion of the
Committee, Plan Shares may be distributed prior to such Shares being 100%
earned, provided that such Plan Shares shall contain a restrictive legend
detailing the applicable limitations of such shares with respect to transfer and
forfeiture.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned. Payments
representing cash dividends (and earnings thereon) shall be made in cash.
Notwithstanding anything within the Plan to the contrary, upon a Change in
Control whereby substantially all of the Common Stock of the Company shall be
acquired for cash, all Plan Shares associated with Plan Share Awards, together
with any shares representing stock dividends associated with Plan Share Awards,
shall be, at the sole discretion of the Committee, distributed as of the
effective date of such Change in Control, or as soon as administratively
feasible thereafter, in the form of cash equal to the consideration received in
exchange for such Common Stock represented by such Plan Shares.
(c) Withholding. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts of cash or shares of Common
Stock necessary to cover any applicable withholding and employment taxes, and if
the amount of such payment or distribution is not sufficient, the Trustee may
require the Participant or Beneficiary to pay to the Trustee the amount required
to be withheld in taxes as a condition of delivering the Plan Shares. The
Trustee shall pay over to the Parent, Savings Bank or Subsidiary which employs
or employed such Participant any such amount withheld from or paid by the
Participant or Beneficiary.
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsection
(a) above, no Plan Shares may be distributed prior to the date which is five
years from the effective date of the Conversion to the extent the Participant or
Beneficiary, as the case may be, would after receipt of such Shares own in
excess of ten percent (10%) of the issued and outstanding shares of Common Stock
held by parties other than Parent, unless such action is approved in advance by
a majority vote of disinterested directors of the Board of the Parent. Any Plan
Shares remaining undistributed solely by reason of the operation of this
Subsection (d) shall be distributed to the Participant or his Beneficiary on the
date which is five years from the effective date of the Conversion.
(e) Regulatory Exceptions. No Plan Shares shall be distributed,
however, unless and until all of the requirements of all applicable law and
regulation shall have been fully complied with, including the receipt of
approval of the Plan by the stockholders of the Parent by such vote, if any, as
may be required by applicable law and regulations as determined by the Board.
7.04 Voting of Plan Shares. After a Plan Share Award has become earned
and non- forfeitable, the Participant shall be entitled to direct the Trustee as
to the voting of the Plan Shares which are associated with the Plan Share Award
and which have not yet been distributed pursuant to Section 7.03, subject to
rules and procedures adopted by the Committee for this purpose. All shares of
Common Stock held by the Trust as to which Participants are not entitled to
direct, or have not directed, the voting of such Shares, shall be voted by the
Trustee as directed by the Committee.
B-7
<PAGE>
Article VIII
------------
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
the Plan.
8.02 Management of Trust. It is the intention of this Plan and Trust
that the Trustee shall have complete authority and discretion with respect to
the management, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust, except those attributable to cash dividends paid
with respect to Plan Shares not held in the Plan Share Reserve, in Common Stock
to the fullest extent practicable, except to the extent that the Trustee
determines that the holding of monies in cash or cash equivalents is necessary
to meet the obligations of the Trust. In performing their duties, the Trustees
shall have the power to do all things and execute such instruments as may be
deemed necessary or proper, including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
the Common Stock without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and
in making such investment, the Trustee is authorized to purchase Common
Stock from the Parent or from any other source, and such Common Stock
so purchased may be outstanding, newly issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of deposit
(including those issued by the Savings Bank), obligations of the United
States government or its agencies or such other investments as shall be
considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any time
held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in the
name of a nominee, without the addition of words indicating that such
security is an asset of the Trust (but accurate records shall be
maintained showing that such security is an asset of the Trust).
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the Plan
and Trust.
(f) To employ brokers, agents, custodians, consultants and accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services or
representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Participant or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets.
B-8
<PAGE>
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of a court for the exercise of any power
herein contained, or to maintain bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 Earnings. All earnings, gains and losses with respect to Trust
assets shall be allocated in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Participants or to the general
account of the Trust, depending on the nature and allocation of the assets
generating such earnings, gains and losses. In particular, any earnings on cash
dividends received with respect to shares of Common Stock shall be allocated to
accounts for Participants, except to the extent that such cash dividends are
distributed to Participants, if such shares are the subject of outstanding Plan
Share Awards, or, otherwise to the Plan Share Reserve.
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan, including those incurred by the Trustee, shall be
paid by the Savings Bank.
8.06 Indemnification. Subject to the requirements and limitations of
applicable laws and regulations, the Parent and the Savings Bank shall
indemnify, defend and hold the Trustee harmless against all claims, expenses and
liabilities arising out of or related to the exercise of the Trustee's powers
and the discharge of their duties hereunder, unless the same shall be due to
their gross negligence or willful misconduct.
Article IX
----------
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan
Shares available for issuance pursuant to the Plan Share Awards and the number
of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the effective date of the Plan resulting
from any split, subdivision or consolidation of the Common Stock or other
capital adjustment, change or exchange of the Common Stock, or other increase or
decrease in the number or kind of shares effected without receipt or payment of
consideration by the Parent.
9.02 Amendment and Termination of the Plan. The Board may, by
resolution, at any time, amend or terminate the Plan. The power to amend or
terminate the Plan shall include the power to direct the Trustee to return to
the Parent all or any part of the assets of the Trust, including shares of
Common Stock held in the Plan Share Reserve, as well as shares of Common Stock
and other assets subject to Plan Share Awards which have not yet been earned by
the Participants to whom they have been awarded. However, the termination of the
Trust shall not affect a Participant's right to earn Plan Share Awards and to
the distribution of Common Stock relating thereto, including earnings thereon,
in accordance with the terms of this Plan and the grant by the Committee or the
Board. Notwithstanding the foregoing, no action of the Board may increase (other
than as provided in Section 9.01 hereof) the maximum number of Plan Shares
permitted to be awarded under the Plan as specified at Section 5.03, materially
increase
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<PAGE>
the benefits accruing to Participants under the Plan or materially modify the
requirements for eligibility for participation in the Plan unless such action of
the Board shall be subject to ratification by the stockholders of the Parent.
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Participant, and during the lifetime of the
Participant, Plan Shares may only be earned by and paid to the Participant who
was notified in writing of the Award by the Committee pursuant to Section 6.03.
No Participant or Beneficiary shall have any right in or claim to any assets of
the Plan or Trust, nor shall the Parent, Savings Bank, or any Subsidiary be
subject to any claim for benefits hereunder.
9.04 No Employment Rights. Neither the Plan nor any grant of a Plan
Share Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Participant to continue in the
employ or service of the Parent, Savings Bank, or a Subsidiary thereof.
9.05 Voting and Dividend Rights. No Participant shall have any voting
or dividend rights of a stockholder with respect to any Plan Shares covered by a
Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above,
prior to the time said Plan Shares are actually distributed to such Participant.
9.06 Governing Law. The Plan and Trust shall be governed by and
construed under the laws of the State of New York, except to the extent that
Federal Law shall be deemed applicable.
9.07 Effective Date. The Plan shall be effective as of the date of
approval of the Plan by stockholders of the Parent, subject to the receipt of
approval or non-objection by the OTS or other applicable banking regulator, if
applicable.
9.08 Term of Plan. This Plan shall remain in effect until the earlier
of (i) termination by the Board, (ii) the distribution of all assets of the
Trust, or (iii) 21 years from the Effective Date. Termination of the Plan shall
not effect any Plan Share Awards previously granted, and such Plan Share Awards
shall remain valid and in effect until they have been earned and paid, or by
their terms expire or are forfeited.
9.09 Tax Status of Trust. It is intended that the Trust established
hereby shall be treated as a grantor trust of the Savings Bank under the
provisions of Section 671 et seq. of the Internal Revenue Code of 1986, as
amended, as the same may be amended from time to time.
B-10
EXHIBIT 10.4
<PAGE>
AFSALA BANCORP, INC.
1997 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the AFSALA Bancorp
Inc. ("Corporation") 1997 Stock Option Plan (the "Plan"). The purpose of the
Plan is to attract and retain qualified personnel for positions of substantial
responsibility and to provide additional incentive to officers, directors, key
employees and other persons providing services to the Corporation, or any
present or future parent or subsidiary of the Corporation to promote the success
of the business. The Plan is intended to provide for the grant of "Incentive
Stock Options," within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") and Non-Incentive Stock Options, options that
do not so qualify. The provisions of the Plan relating to Incentive Stock
Options shall be interpreted to conform to the requirements of Section 422 of
the Code.
2. Definitions. The following words and phrases when used in this Plan
with an initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the masculine
pronoun shall include the feminine pronoun and the singular shall include the
plural.
(a) "Award" means the grant by the Committee of an Incentive
Stock Option or a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Board" shall mean the Board of Directors of the
Corporation, or any successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Corporation; (ii) the merger or
recapitalization of the Corporation whereby the Corporation is not the surviving
entity; (iii) a change in control of the Corporation, as otherwise defined or
determined by the Office of Thrift Supervision or regulations promulgated by it;
or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Corporation by any person, trust, entity or group. This
limitation shall not apply to the purchase of shares by underwriters in
connection with a public offering of Corporation stock, or the purchase of
shares of up to 25% of any class of securities of the Corporation by a
tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a Change
in Control has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder.
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<PAGE>
(e) "Committee" shall mean the Board or the Stock Option
Committee appointed by the Board in accordance with Section 5(a) of the Plan.
(f) "Common Stock" shall mean common stock, par value $.10 per
share, of the Corporation, or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of
employment with the Corporation or any present or future Parent or Subsidiary of
the Corporation. Employment shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the
Corporation or in the case of transfers between payroll locations, of the
Corporation or between the Corporation, its Parent, its Subsidiaries or a
successor.
(h) "Corporation" shall mean the AFSALA Bancorp Inc., the
parent corporation of the Savings Bank, or any successor or Parent thereof.
(i) "Director" shall mean a member of the Board of the
Corporation, or any successor or parent corporation thereto.
(j) "Director Emeritus" shall mean a person serving as a
director emeritus, advisory director, consulting director or other similar
position as may be appointed by the Board of Directors of the Savings Bank or
the Corporation from time to time.
(k) "Disability" means (a) with respect to Incentive Stock
Options, the "permanent and total disability" of the Employee as such term is
defined at Section 22(e)(3) of the Code; and (b) with respect to Non-Incentive
Stock Options, any physical or mental impairment which renders the Participant
incapable of continuing in the employment or service of the Savings Bank or the
Parent in his then current capacity as determined by the Committee.
(l) "Effective Date" shall mean the date specified in Section
15 hereof.
(m) "Employee" shall mean any person employed by the
Corporation or any present or future Parent or Subsidiary of the Corporation.
(n) "Fair Market Value" shall mean: (i) if the Common Stock is
traded otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the mean between the last bid and ask price of
such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a bid and
ask price. If no such bid and ask price is available, then the Fair Market Value
shall be determined by the Committee in good faith; or (ii) if the Common Stock
is listed on a national securities exchange, then the Fair Market Value per
Share shall be not less than the average of the highest and lowest selling price
of such Common Stock on such exchange on such date, or if there were no sales on
said date, then the Fair Market Value shall be not less than the mean between
the last bid and ask price on such date.
(o) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify as an incentive stock option under Section 422 of the Code.
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<PAGE>
(p) "Non-Incentive Stock Option" or "Non-ISO" shall mean an
option to purchase Shares granted pursuant to Section 9 hereof, which option is
not intended to qualify under Section 422 of the Code.
(q) "Option" shall mean an Incentive Stock Option or
Non-Incentive Stock Option granted pursuant to this Plan providing the holder of
such Option with the right to purchase Common Stock.
(r) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(s) "Optionee" shall mean any person who receives an Option or
Award pursuant to the Plan.
(t) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Sections 424(e) and (g) of
the Code.
(u) "Participant" means any director, Director Emeritus,
officer or key employee of the Corporation or any Parent or Subsidiary of the
Corporation or any other person providing a service to the Corporation who is
selected by the Committee to receive an Award, or who by the express terms of
the Plan is granted an Award.
(v) "Plan" shall mean the AFSALA Bancorp, Inc. 1997 Stock
Option Plan.
(w) "Savings Bank" shall mean Amsterdam Federal Bank,
Amsterdam, New York, or any successor corporation thereto.
(x) "Share" shall mean one share of the Common Stock.
(y) "Subsidiary" shall mean any present or future corporation
which constitutes a "subsidiary corporation" as defined in Sections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 145,475 Shares.
Such Shares may either be from authorized but unissued shares, treasury shares
or shares purchased in the market for Plan purposes.
If an Award shall expire, become unexercisable, or be forfeited for any
reason prior to its exercise, new Awards may be granted under the Plan with
respect to the number of Shares as to which such expiration has occurred.
4. Six Month Holding Period.
Subject to vesting requirements, if applicable, except in the
event of death or disability of the Optionee, a minimum of six months must
elapse between the date of the grant of an Option and the date of the sale of
the Common Stock received through the exercise of such Option.
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<PAGE>
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be
administered by the Board of Directors of the Corporation or a Committee which
shall consist of not less than two Directors of the Corporation appointed by the
Board and serving at the pleasure of the Board. All persons designated as
members of the Committee shall meet the requirements of a "Non-Employee
Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, as amended, as found at 17 CFR ss.240.16b-3.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Corporation and such other officers as
shall be designated by the Committee are hereby authorized to execute written
agreements evidencing Awards on behalf of the Corporation and to cause them to
be delivered to the Participants. Such agreements shall set forth the Option
exercise price, the number of shares of Common Stock subject to such Option, the
expiration date of such Options, and such other terms and restrictions
applicable to such Award as are determined in accordance with the Plan or the
actions of the Committee.
(c) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
6. Eligibility for Awards and Limitations.
(a) The Committee shall from time to time determine
the officers, Directors, Directors Emeritus, key employees and other persons who
shall be granted Awards under the Plan, the number of Awards to be granted to
each such persons, and whether Awards granted to each such Participant under the
Plan shall be Incentive and/or Non-Incentive Stock Options. In selecting
Participants and in determining the number of Shares of Common Stock to be
granted to each such Participant, the Committee may consider the nature of the
prior and anticipated future services rendered by each such Participant, each
such Participant's current and potential contribution to the Corporation and
such other factors as the Committee may, in its sole discretion, deem relevant.
Participants who have been granted an Award may, if otherwise eligible, be
granted additional Awards.
(b) The aggregate Fair Market Value (determined
as of the date the Option is granted) of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by each Employee
during any calendar year (under all Incentive Stock Option plans, as defined in
Section 422 of the Code, of the Corporation or any present or future Parent or
Subsidiary of the Corporation) shall not exceed $100,000. Notwithstanding the
prior provisions of this Section 6, the Committee may grant Options in excess of
the foregoing limitations, provided said Options shall be clearly and
specifically designated as not being Incentive Stock Options.
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<PAGE>
(c) In no event shall Shares subject to Options
granted to non-employee Directors
in the aggregate under this Plan exceed more than 30% of the total number of
Shares authorized for delivery under this Plan pursuant to Section 3 herein or
more than 5% to any individual non-employee Director. In no event shall Shares
subject to Options granted to any Employee exceed more than 25% of the total
number of Shares authorized for delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless sooner terminated pursuant to
Section 18 hereof. No Option shall be granted under the Plan after ten (10)
years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each Incentive Stock
Option granted pursuant to the Plan shall comply with, and be subject to, the
following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive
Stock Option granted by the Committee under the Plan may be exercised shall not,
as to any particular Incentive Stock Option, be less than the Fair Market Value
of the Common Stock on the date that such Incentive Stock Option is granted.
(ii) In the case of an Employee who owns Common
Stock representing more than ten percent (10%) of the outstanding Common Stock
at the time the Incentive Stock Option is granted, the Incentive Stock Option
exercise price shall not be less than one hundred and ten percent (110%) of the
Fair Market Value of the Common Stock on the date that the Incentive Stock
Option is granted.
(b) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Incentive Stock Option granted under the Plan
shall be made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at the Fair Market Value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment has been received by the Corporation, and no
Optionee shall have any of the rights of a stockholder of the Corporation until
Shares of Common Stock are issued to the Optionee.
(c) Term of Incentive Stock Option. The term of exercisability
of each Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such Incentive Stock Option is granted,
provided that in the case of an Employee who owns stock representing more than
ten percent (10%) of the Common Stock outstanding at the time the Incentive
Stock Option is granted, the term of exercisability of the Incentive Stock
Option shall not exceed five (5) years.
(d) Exercise Generally. Except as otherwise provided in
Section 10 hereof, no Incentive Stock Option may be exercised unless the
Optionee shall have been in the employ of the Corporation at all times during
the period beginning with the date of grant of any such Incentive Stock Option
and ending on the date three (3) months prior to the date of exercise of any
such Incentive Stock
A-5
<PAGE>
Option. The Committee may impose additional conditions upon the right of an
Optionee to exercise any Incentive Stock Option granted hereunder which are not
inconsistent with the terms of the Plan or the requirements for qualification as
an Incentive Stock Option. Except as otherwise provided by the terms of the Plan
or by action of the Committee at the time of the grant of the Options, the
Options will be first exercisable at the rate of 20% on the one year anniversary
of the date of grant and 20% annually thereafter during such periods of service
as an Employee, Director or Director Emeritus.
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Incentive Stock Option for at least six
months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(f) Transferability. An Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
Non-Incentive Stock Option granted pursuant to the Plan shall comply with and be
subject to the following terms and conditions.
(a) Options Granted to Directors. Subject to the limitations
of Section 6(c), Non- Incentive Stock Options to purchase 7,273 shares of Common
Stock will be granted to each Director who is not an Employee as of the
Effective Date, at an exercise price equal to the Fair Market Value of the
Common Stock on such date of grant. The Options will be first exercisable at the
rate of 20% on the one year anniversary of the Effective Date and 20% annually
thereafter during such periods of service as a Director or Director Emeritus.
Upon the death or Disability of the Director or Director Emeritus, such Option
shall be deemed immediately 100% exercisable. Such Options shall continue to be
exercisable for a period of ten years following the date of grant without regard
to the continued services of such Director as a Director or Director Emeritus.
In the event of the Optionee's death, such Options may be exercised by the
personal representative of his estate or person or persons to whom his rights
under such Option shall have passed by will or by the laws of descent and
distribution. Options may be granted to newly appointed or elected non-employee
Directors within the sole discretion of the Committee. The exercise price per
Share of such Options granted shall be equal to the Fair Market Value of the
Common Stock at the time such Options are granted. All outstanding Awards shall
become immediately exercisable in the event of a Change in Control of the
Savings Bank or the Company, provided that such accelerated vesting is not
inconsistent with applicable regulations of the Office of Thrift Supervision or
other appropriate banking regulatory agency at the time of such Change in
Control. Unless otherwise inapplicable, or inconsistent with the provisions of
this paragraph, the Options to be granted to Directors hereunder shall be
subject to all other provisions of this Plan.
(b) Option Price. The exercise price per Share of Common Stock
for each Non-Incentive Stock Option granted pursuant to the Plan shall be at
such price as the Committee may
A-6
<PAGE>
determine in its sole discretion, but in no event less than the Fair Market
Value of such Common Stock on the date of grant as determined by the Committee
in good faith.
(c) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Non-Incentive Stock Option granted under the
Plan shall be made at the time of exercise of each such Non-Incentive Stock
Option and shall be paid in cash (in United States Dollars), Common Stock or a
combination of cash and Common Stock. Common Stock utilized in full or partial
payment of the exercise price shall be valued at its Fair Market Value at the
date of exercise. The Company shall accept full or partial payment in Common
Stock only to the extent permitted by applicable law. No Shares of Common Stock
shall be issued until full payment has been received by the Company and no
Optionee shall have any of the rights of a stockholder of the Company until the
Shares of Common Stock are issued to the Optionee.
(d) Term. The term of exercisability of each Non-Incentive
Stock Option granted pursuant to the Plan shall be not more than ten (10) years
from the date each such Non-Incentive Stock Option is granted.
(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
Except as otherwise provided by the terms of the Plan or by action of the
Committee at the time of the grant of the Options, the Options will be first
exercisable at the rate of 20% on the one year anniversary of the date of grant
and 20% annually thereafter during such periods of service as an Employee,
Director or Director Emeritus.
(f) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Company written notice of the exercise of the
Option together with an order to a registered broker-dealer or equivalent third
party, to sell part or all of the Optioned Stock and to deliver enough of the
proceeds to the Company to pay the Option exercise price and any applicable
withholding taxes. If the Optionee does not sell the Optioned Stock through a
registered broker-dealer or equivalent third party, the Optionee can give the
Company written notice of the exercise of the Option and the third party
purchaser of the Optioned Stock shall pay the Option exercise price plus any
applicable withholding taxes to the Company.
(g) Transferability. Any Non-Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on
Incentive Stock Options.
(a) Termination of Employment. In the event that any
Optionee's employment with the Company shall terminate for any reason, other
than Disability or death, all of any such Optionee's Incentive Stock Options,
and all of any such Optionee's rights to purchase or receive Shares of Common
Stock pursuant thereto, shall automatically terminate on (A) the earlier of (i)
or (ii): (i) the respective expiration dates of any such Incentive Stock
Options, or (ii) the expiration of not more than three (3) months after the date
of such termination of employment; or (B) at such later date as is determined by
the Committee at the time of the grant of such Award based upon the Optionee's
continuing status as a
A-7
<PAGE>
Director or Director Emeritus of the Savings Bank or the Company, but only if,
and to the extent that, the Optionee was entitled to exercise any such Incentive
Stock Options at the date of such termination of employment, and further that
such Award shall thereafter be deemed a Non-Incentive Stock Option. In the event
that a Subsidiary ceases to be a Subsidiary of the Company, the employment of
all of its employees who are not immediately thereafter employees of the Company
shall be deemed to terminate upon the date such Subsidiary so ceases to be a
Subsidiary of the Company.
(b) Disability. In the event that any Optionee's employment
with the Company shall terminate as the result of the Disability of such
Optionee, such Optionee may exercise any Incentive Stock Options granted to the
Optionee pursuant to the Plan at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of such termination of employment, but only
if, and to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any
Incentive Stock Options granted to such Optionee may be exercised by the person
or persons to whom the Optionee's rights under any such Incentive Stock Options
pass by will or by the laws of descent and distribution (including the
Optionee's estate during the period of administration) at any time prior to the
earlier of (i) the respective expiration dates of any such Incentive Stock
Options or (ii) the date which is two (2) years after the date of death of such
Optionee but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of death. For purposes of
this Section 10(c), any Incentive Stock Option held by an Optionee shall be
considered exercisable at the date of his death if the only unsatisfied
condition precedent to the exercisability of such Incentive Stock Option at the
date of death is the passage of a specified period of time. At the discretion of
the Committee, upon exercise of such Options the Optionee may receive Shares or
cash or a combination thereof. If cash shall be paid in lieu of Shares, such
cash shall be equal to the difference between the Fair Market Value of such
Shares and the exercise price of such Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes
of Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment without regard to the Disability or death
of the Participant.
(e) Termination of Incentive Stock Options. Except as may be
specified by the Committee at the time of grant of an Option, to the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Company terminates shall not have been exercised within the
applicable period set forth in this Section 10, any such Incentive Stock Option,
and all rights to purchase or receive Shares of Common Stock pursuant thereto,
as the case may be, shall terminate on the last day of the applicable period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment or
service, Disability of an Optionee or his death shall be such terms and
conditions as the Committee shall, in its sole discretion, determine at the time
of termination of service, unless specifically provided for by the terms of the
Agreement at the time of grant of the Award.
A-8
<PAGE>
12. Withholding Tax. The Company shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options any
taxes required by law to be withheld with respect to such cash payments. Where a
Participant or other person is entitled to receive Shares pursuant to the
exercise of an Option, the Company shall have the right to require the
Participant or such other person to pay the Company the amount of any taxes
which the Company is required to withhold with respect to such Shares, or, in
lieu thereof, to retain, or to sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
13. Recapitalization, Merger, Consolidation, Change in Control and
Other Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Company, within the sole discretion of the Committee, the
aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a Change in Control of the Company, as
determined by the Committee, provided that such accelerated vesting is not
inconsistent with applicable regulations of the Office of Thrift Supervision or
other appropriate banking regulatory agency at the time of such Change in
Control. In the event of such a Change in Control, the Committee and the Board
of Directors will take one or more of the following actions to be effective as
of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the acquiring or
succeeding corporation (or an affiliate thereof), provided that: (A) any such
Substitute Options exchanged for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code, and (B) the shares of stock issuable
upon the exercise of such Substitute Options shall constitute securities
registered in accordance with the Securities Act of 1933, as amended, ("1933
Act") or such securities shall be exempt from such registration in accordance
with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively, "Registered
Securities"), or in the alternative, if the securities issuable upon the
exercise of such Substitute Options shall not constitute Registered Securities,
then the Optionee will receive upon consummation of the Change in Control
transaction a cash payment for each Option surrendered equal to the difference
between (1) the Fair Market Value of the consideration to be received for each
share of Common Stock in the Change in Control transaction times the number of
shares of Common Stock subject to such surrendered Options, and (2) the
aggregate exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which
the holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment (the "Merger Price") for each share of Common Stock
exchanged in the Change in Control transaction, to make or to provide for a cash
payment to the Optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such Options held by each
Optionee (to the extent then exercisable
A-9
<PAGE>
at prices not in excess of the Merger Price) and (B) the aggregate exercise
price of all such surrendered Options in exchange for such surrendered Options.
(c) Extraordinary Corporate Action. Notwithstanding any
provisions of the Plan to the contrary, subject to any required action by the
stockholders of the Company, in the event of any Change in Control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the Option exercise price per Share of
Common Stock, and the consideration to be given or received by the Company upon
the exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Optionee in connection
therewith; and/or
(iii) make such other adjustments in connection with
the Plan as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause Incentive Stock Options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code without the
consent of the Optionee.
(d) Acceleration. The Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan; provided that such action is not contrary to regulations of the OTS or
other appropriate banking regulatory agency then in effect.
Except as expressly provided in Sections 13(a) and 13(b), no Optionee
shall have any rights by reason of the occurrence of any of the events described
in this Section 13.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the grant of an Option shall be
given to each individual to whom an Option is so granted within a reasonable
time after the date of such grant in a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Company, subject to approval or
non-objection by the Office of Thrift Supervision, if applicable. The Committee
may make a determination related to Awards prior to the Effective Date with such
Awards to be effective upon the date of stockholder approval of the Plan.
16. Approval by Stockholders. The Plan shall be approved by
stockholders of the Company within twelve (12) months before or after the date
the Plan is approved by the Board.
17. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on the Optionee by the grant of a
new Option at such time, or shall not materially decrease the Optionee's
benefits under the Option without the consent of the holder of the Option,
except as otherwise permitted under Section 18 hereof.
A-10
<PAGE>
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or
discontinue the Plan, except that no action of the Board may increase (other
than as provided in Section 13 hereof) the maximum number of Shares permitted to
be optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Company.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Option unlawful or subject the Company to any penalty,
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
19. Conditions Upon Issuance of Shares; Limitations on Option Exercise;
Cancellation of Option Rights.
(a) Shares shall not be issued with respect to any Option granted under
the Plan unless the issuance and delivery of such Shares shall comply with all
relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares issuable hereunder shall relieve the Company of
any liability with respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company or its
Subsidiaries for "cause" as defined at 12 C.F.R. 563.39(b)(1) as determined by
the Board of Directors, all Options held by such Participant shall cease to be
exercisable as of the date of such termination of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the Fair
Market Value of the Common Stock on the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended,
and regulations promulgated thereunder.
A-11
<PAGE>
20. Reservation of Shares. During the term of the Plan, the Company
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
22. No Employment Rights. No Director, Employee or other person shall
have a right to be selected as a Participant under the Plan. Neither the Plan
nor any action taken by the Committee in administration of the Plan shall be
construed as giving any person any rights of employment or retention as an
Employee, Director or in any other capacity with the Company, the Savings Bank
or other Subsidiaries.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of New York, except to the extent that
federal law shall be deemed to apply.
A-12
EXHIBIT 13
<PAGE>
Stock Market Information
The Company's common stock has been traded on The Nasdaq Stock Market under the
trading symbol of "AFED" since it commenced trading in October 1996. The
following table reflects the stock sales prices as published in a statistical
report by The Nasdaq Stock Market.
Dividends
High Low Declared
---- --- --------
First Quarter Ending
12/31/96 $12 1/4 $11 1/4 $0.00
Second Quarter Ending
3/31/97 14 3/8 11 3/4 0.00
Third Quarter Ending
6/30/97 14 7/8 12 1/2 0.04
Fourth Quarter Ending
9/30/97 17 7/8 14 11/16 0.04
The number of shareholders of record of common stock is approximately 511. This
does not reflect the number of persons or entities who held stock in nominee or
"street" name through various brokerage firms. On December 12, 1997, there were
1,388,440 shares outstanding. The Company's ability to pay dividends to
stockholders is dependent upon the dividends it receives from the Bank. The Bank
may not declare or pay a cash dividend on any of its stock if the effect thereof
would cause the Bank's regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the
Conversion, or (2) the regulatory capital requirements imposed by the OTS.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
AFSALA Bancorp, Inc. (the Company) is a Delaware corporation organized in June
1996 at the direction of Amsterdam Federal Bank (the Bank) to acquire all of the
capital stock that the Bank issued upon the Bank's conversion from the mutual to
stock form of ownership. On September 30, 1996, the Company completed its
initial public stock offering, issuing 1,454,750 shares of $.10 par value common
stock at $10.00 per share. Net proceeds to the Company were $13.6 million after
conversion costs. Approximately $1.1 million of the proceeds were utilized to
fund a loan by the Company to the Company's Employee Stock Ownership Plan (ESOP)
which purchased 110,780 shares of the Company's common stock during the
offering. The Company is not an operating company and has not engaged in any
significant business to date. As such, references herein to the Bank subsequent
to September 30, 1996 include the Company unless the context otherwise
indicates.
The Bank's results of operations are primarily dependent on its net interest
income, which is the difference between the interest income earned on its
assets, primarily loans and investments, and the interest expense on its
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly those with respect to market
interest rates. The results of operations are also significantly influenced by
the level of non-interest expenses, such as employee salaries and benefits,
other income, such as loan-related fees and fees on deposit-related services,
and the Bank's provision for loan losses.
The Bank has been, and intends to continue to be, a community-oriented financial
institution offering a variety of financial services. Management's strategy has
been to try to achieve a high loan to asset ratio and a high proportion of
lower-costing, non-time deposit accounts in the deposit portfolio. At September
30, 1997, the Bank's loans receivable, net, to assets ratio was 47.3%, up from
46.0% at September 30, 1996. At September 30, 1997, $65.6 million or 48.5% of
total deposits were in non-time deposit accounts.
Asset/Liability Management
The Bank's net interest income is sensitive to changes in interest rates, as the
rates paid on its interest-bearing liabilities generally change faster than the
rates earned on its interest-earning assets. As a result, net interest income
will frequently decline in periods of rising interest rates and increase in
periods of decreasing interest rates.
<PAGE>
To mitigate the impact of changing interest rates on its net interest income,
the Bank manages its interest rate sensitivity and asset/liability products
through its asset/liability management committee. The asset/liability management
committee meets weekly to determine the rates of interest for loans and deposits
and consists of the President and Chief Executive Officer, the Vice President
and Chief Lending Officer, and the Treasurer and Chief Financial Officer. Rates
on deposits are primarily based on the Bank's need for funds and on a review of
rates offered by other financial institutions in the Bank's market areas.
Interest rates on loans are primarily based on the interest rates offered by
other financial institutions in the Bank's primary market areas as well as the
Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the negative
effects of rapid or prolonged changes in interest rates, the Bank has instituted
certain asset and liability management measures, including (i) originating, for
its portfolio, a large base of adjustable-rate residential mortgage loans,
which, at September 30, 1997, totaled 27.9% of total loans, of which 90.8%
reprice annually, and (ii) maintaining substantial levels of interest bearing
term deposits, federal funds, and securities with one to five year terms to
maturity.
The Committee manages the interest rate sensitivity of the Bank through the
determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of its interest earning assets and to
match, as closely as possible, the maturities of interest earning assets with
interest bearing liabilities.
Net Portfolio Value. In order to encourage savings associations to reduce their
interest rate risk, the OTS adopted a rule incorporating an interest rate risk
("IRR") component into the risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ("NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated present value of total assets
("PV") will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The Bank, based on asset size and risk-based
capital, has been informed by the OTS that it is exempt from this rule.
Nevertheless, the following table presents the Bank's NPV at September 30, 1997,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS by the Bank.
<PAGE>
<TABLE>
<CAPTION>
NPV as % of PV
Net Portfolio Value of Assets
---------------------------------- ----------------------------------------------------
Change NPV
in Rates $Amount $Change(1) $Change(2) Ratio(3) Change(4)
------------ ------------- ----------------- ---------------- ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 bp 13,264 (7,482) (36)% 8.59% -404 bp
+300 bp 15,394 (5,352) (26) 9.80 -283 bp
+200 bp 17,419 (3,326) (16) 10.90 -173 bp
+100 bp 19,221 (1,524) (7) 11.86 -77 bp
0 bp 20,745 12.63
-100 bp 22,003 1,258 6 13.24 61 bp
-200 bp 23,865 3,120 15 14.15 152 bp
-300 bp 26,322 5,576 27 15.32 269 bp
-400 bp 29,235 8,489 41 16.67 404 bp
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates,
(2) Calculated as the amount of change in the estimated NPV dividend by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by present value of total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Although the OTS has informed the Bank that is not subject to the IRR component
discussed above, the Bank is still subject to interest rate risk and, as can be
seen above, changes in interest rates may reduce the Bank's NPV. The OTS has the
authority to require otherwise exempt institutions to comply with the rule
concerning interest rate risk.
At September 30, 1997, a change in interest rates of a positive 200 basis points
would have resulted in a 173 basis point decrease in NPV as a percentage of the
present value of the Bank's total assets. A change in interest rates of a
negative 200 basis points would have resulted in a 152 basis point increase in
the NPV as a percentage of the present value of the Bank's total assets.
Utilizing the OTS IRR measurement described above, the Bank, at September 30,
1997, would have been considered by the OTS to have been subject to "normal" IRR
and no additional amount would be required to be deducted from risk-based
capital.
<PAGE>
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous 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, certain shortcomings are inherent in the preceding NPV
tables since the data reflect hypothetical changes in NPV based upon assumptions
used by the OTS to evaluate the Bank as well as other institutions. The
experience of the Bank has been that net interest income declines with increases
in interest rates and that net interest income increases with decreases in
interest rates. Generally, during periods of increasing interest rates, the
Bank's interest rate sensitive liabilities would reprice faster than its
interest rate sensitive assets causing a decline in the Bank's interest rate
spread and margin. This would result from an increase in the Bank's cost of
funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield on earning assets would tend to reduce net interest income. The
Bank's interest rate spread increased for the fiscal year ended September 30,
1997 from the fiscal year ended September 30, 1996 from 2.69% to 2.89%.
In times of decreasing interest rates, fixed rate assets could increase in value
and the lag in repricing of interest rate sensitive assets could be expected to
have a positive effect on the Bank's net interest income.
Average Balance Sheet, Interest Rates, and Yield
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities. Such yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively, for the years
presented. Average balances are derived from daily balances, however, some
balances are derived from month-end balances where management does not believe
the use of month-end balances has caused any material difference in the
information presented. There have been no tax equivalent adjustments made to the
yields.
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1997 1996
------------------------------ --------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Cost Balance Earned/Paid Yield/Cost
------------------------------ ------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 7,625 $ 406 5.32 $ 6,543 $ 334 5.10%
Term deposits with FHLB of NY 2,603 142 5.46 2,369 131 5.53
Securities available for sale (1) 23,147 1,415 6.11 13,640 742 5.44
Investment securities held to maturity 40,360 2,636 6.53 35,734 2,185 6.11
FHLB of NY stock, at cost 565 37 6.55 566 37 6.54
Net loans receivable(2) 72,675 6,133 8.44 68,127 5,736 8.42
-------- --------- --------- -------- --------- -----------
Total interest-earning assets 146,975 10,769 7.33 126,979 9,165 7.22
--------- --------- --------- -----------
Non-interest earning assets 6,906 6,384
-------- --------
Total assets $153,881 $133,363
======== ========
Interest-bearing liabilities:
Savings accounts $ 36,047 1,081 3.00 $ 35,560 1,067 3.00
NOW accounts 11,174 258 2.31 9,871 224 2.27
Money market accounts 9,002 364 4.04 6,681 257 3.85
Time deposit accounts 65,982 3,689 5.59 62,919 3,624 5.76
Escrow accounts 305 8 2.62 440 9 2.05
FHLB of NY long term borrowings 1,627 115 7.07 2,047 144 7.03
-------- --------- --------- -------- --------- -----------
Total interest-bearing liabilities 124,137 5,515 4.44 117,518 5,325 4.53
--------- --------- --------- -----------
Non-interest bearing deposits 7,845 6,640
Other non-interest bearing liabilities 842 924
Equity 21,057 8,281
-------- --------
Total liabilities and equity $153,881 $133,363
======== ========
Net interest income $ 5,254 $ 3,840
========= =========
Interest rate spread 2.89 % 2.69%
========= ===========
Net interest margin 3.57 % 3.02%
========= ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 118.40% 108.05%
======== ========
</TABLE>
- ---------------------
(1) Average securities available for sale are included at approximate fair
value. The adjustment to approximate fair value is not considered
significant.
(2) Calculated net of allowance for loan losses. Includes non-accrual loans.
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (changes in
rate multiplied by old volume). Increases and decreases due 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>
Year Ended September 30,
-------------------------------------------
1997 vs.
1996
-------------------------------------------
Increase (Decrease)
Due to
---------------------------
Total
Increase
Volume Rate (Decrease)
-------------- ------------ ------------
<S> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ 56,699 14,782 71,481
Term deposits with FHLB of NY 12,503 (1,713) 10,790
Securities available for sale 571,824 101,043 672,867
Investment securities held to maturity 294,772 156,514 451,286
FHLB of NY stock, at cost (203) (99) (302)
Net loans receivable 383,508 13,646 397,154
------------- ------------- --------------
Total interest and dividend income 1,319,103 284,173 1,603,276
------------- ------------- --------------
Interest expense:
Savings accounts 13,623 0 13,623
NOW accounts 30,577 4,082 34,659
Money market accounts 93,578 13,291 106,869
Time deposit accounts 173,392 (108,794) 64,598
Escrow accounts (3,138) 2,170 (968)
FHLB of NY long term borrowings (29,790) 812 (28,978)
------------- ------------- --------------
Total interest expense 278,242 (88,439) 189,803
------------- ------------- --------------
Net change in net interest income $ 1,040,861 372,612 1,413,473
============= ============= ==============
</TABLE>
<PAGE>
Financial Condition
Total assets increased by $6.7 million or 4.4% to $160.4 million at September
30, 1997 from $153.7 million at September 30, 1996, primarily due to increases
in net loans receivable of $5.1 million or 7.3%, and securities available for
sale of $20.6 million or 120.1% which were partially offset by decreases in
federal funds sold and term deposits with the Federal Home Loan Bank of $16.5
million or 86.1%, and $3.0 million or 100.0%, respectively. These shifts were
primarily the result of the re-investment of the proceeds from the offering into
higher yielding instruments. The increase in net loans receivable was primarily
due to increased loan activity in residential mortgage and home equity loans.
The Company's deposits increased by $8.9 million or 7.0% to $135.3 million at
September 30, 1997 from $126.5 million at September 30, 1996 primarily due to
various marketing promotions offered in the supermarket branches along with the
opening of a new branch in May 1997. Offsetting this increase in deposits was a
decrease in accrued expenses and other liabilities of $1.7 million or 37.2% to
$2.8 million at September 30, 1997 from $4.4 million at September 30, 1996. This
decrease primarily relates to outstanding cashier checks of $2.6 million which
were issued and outstanding on September 30, 1996 to refund the
over-subscriptions related to the Company's initial public offering, offset
partially by a $1.5 million liability for securities purchases which are due to
brokers at September 30, 1997.
Stockholders' equity remained consistent at $20.6 million at both September 30,
1997 and 1996. An increase in retained earnings of $928 thousand was offset by
purchases of treasury stock and the grant of stock under the Restricted Stock
Plan of $238 thousand and $733 thousand (net of amortization), respectively.
Equity during the period was also effected by 2,770 shares of common stock
committed to be released by the Company's ESOP as of December 31, 1996 and the
change in the net unrealized gain (loss) on securities available for sale, net
of tax.
Comparison of Operating Results for the Fiscal Years Ended September 30, 1997
and 1996.
Net Income. Net income increased by $978 thousand for the fiscal year ended
September 30, 1997 to $1.2 million from $211 thousand for the fiscal year ended
September 30, 1996. Net income for the fiscal year ended September 30, 1997
increased primarily as a result of increased net interest income and
non-interest income along with a decrease in non-interest expenses, offset in
part by an increase in the provision for loan losses and increased income tax
expense. Net interest income increased by $1.4 million or 36.8% to $5.3 million
for the fiscal year ended September 30, 1997 as compared to $3.8 million for the
fiscal year ended September 30, 1996. Non-interest income increased $18 thousand
or 4.5% to $406 thousand for the fiscal year ended September 30, 1997 as
compared to $388 thousand for the fiscal year ended September 30, 1996.
Non-interest expense decreased by $127 thousand or 3.4% to $3.6 million for the
fiscal year ended September 30, 1997 from $3.7 million for the fiscal year ended
September 30, 1996. This decrease was primarily the result of the special
one-time assessment levied by the Federal Deposit Insurance Corporation (FDIC)
on all institutions with Savings Association Insurance Fund (SAIF) insured
deposits to contribute to the recapitalization of the SAIF. On September
<PAGE>
30, 1996, the Bank accrued approximately $702 thousand for the special
assessment. The provision for loan losses increased $20 thousand to $250
thousand for the fiscal year ended September 30, 1997, primarily due to the loan
growth noted above, and local economic trends. Income tax expense increased $560
thousand to $624 thousand due to an increase in income before income tax
expense.
Net Interest Income. Net interest income increased by approximately $1.4 million
or 36.8% to $5.3 million for the fiscal year ended September 30, 1997 from $3.8
million for the fiscal year ended September 30, 1996. The increase in net
interest income was primarily the result of the increase in the amount of
average interest earning assets exceeding the increase in average interest
bearing liabilities. Likewise, the interest rate spread increased to 2.89% for
the fiscal year ended September 30, 1997 from 2.69% for the previous year. This
increase in the interest rate spread is due to a 11 basis point increase in the
average yield on interest earning assets combined with a 9 basis point decrease
in the average cost of interest bearing liabilities.
Interest earning assets primarily consist of loans receivable, federal funds
sold, securities (securities available for sale combined with investment
securities held to maturity), and interest bearing deposits in the FHLB of New
York. Interest bearing liabilities primarily consist of interest bearing
deposits and long term borrowings from the FHLB of New York.
Interest and Dividend Income. Interest and dividend income increased by
approximately $1.6 million or 17.5% to $10.8 million for the fiscal year ended
September 30, 1997 from $9.2 million for the fiscal year ended September 30,
1996. The increase in interest and dividend income was largely the result of an
increase of $20.0 million or 15.7% in the average balance of interest earning
assets to $147 million for the fiscal year ended September 30, 1997 as compared
to $127 million for the fiscal year ended September 30, 1996. This increase was
primarily due to the Company's initial public offering on September 30, 1996,
which generated approximately $13.6 million in net proceeds which have been
redeployed by management into various earning asset categories. Also adding to
the increase in interest and dividend income was an 11 basis point increase in
the average yield on all interest earning assets. The increase in the average
balance of interest earning assets consisted primarily of an increase in the
average balance of total securities (both securities available for sale and
investment securities held to maturity) of $14.1 million or 28.6%, an increase
in the average balance of net loans receivable of approximately $4.5 million or
6.7%, an increase in the average balance of term deposits with the FHLB of NY of
$234 thousand or 9.9%, and an increase in the average balance of federal funds
sold of $1.1 million or 16.5%.
Interest income on securities available for sale increased $673 thousand or
90.7% to $1.4 million for the fiscal year ended September 30, 1997 from $742
thousand for the previous year. The increase in interest income on securities
available for sale is primarily due to an increase of $9.5 million in the
average balance, as well as a 67 basis point increase in the average yield on
these securities. Interest income on investment securities held to maturity
increased $451 thousand or
<PAGE>
20.7% to $2.6 million for the fiscal year ended September 30, 1997 from $2.2
million for the fiscal year ended September 30, 1996 . This increase is
primarily the result of an increase in the average balance of $4.6 million
combined with a 42 basis point increase in the average yield on these
securities.
Interest and fees on loans increased $397 thousand or 6.9% to $6.1 million for
the fiscal year ended September 30, 1997 from $5.7 million for the fiscal year
ended September 30, 1996. This increase was primarily the result of an increase
in the average balance of net loans receivable of $4.5 million combined with a 2
basis point increase in the average yield on net loans receivable.
The yield on the average balance of interest earning assets was 7.33% and 7.22%
for the fiscal years ended September 30, 1997 and 1996, respectively.
Interest Expense. Interest on deposits and escrow accounts increased by
approximately $219 thousand or 4.2% to $5.4 million for the fiscal year ended
September 30, 1997 from $5.2 million for the fiscal year ended September 30,
1996. The increase in interest on deposits and escrow accounts was substantially
due to the increase in interest expense related to money market accounts.
Interest expense on money market accounts was $364 thousand for the fiscal year
ended September 30, 1997, compared to $257 thousand for the fiscal year ended
September 30, 1996. This increase was primarily due to an increase of $2.3
million or 34.7% in the average balance of money market accounts along with a 19
basis point increase in the average rate paid on these deposits in fiscal year
1997 as compared to fiscal 1996. Likewise, interest expense on time deposit and
NOW accounts was $3.7 million and $258 thousand, respectively, for the fiscal
year ended September 30, 1997, compared to $3.6 million and $224 thousand,
respectively, for the fiscal year ended September 30, 1996. These increases were
primarily due to increases in the average balances of the respective deposit
types offset somewhat by a 17 basis point decrease in the average rate paid on
time deposit accounts.
Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased by $29 thousand or 20.2% to $115 thousand for the
fiscal year ended September 30, 1997 when compared to the fiscal year ended
September 30, 1996, as the average amount of borrowings outstanding decreased by
$420 thousand or 20.5%, partially offset by an increase in the average rate paid
by the Company of 4 basis points. The Company uses FHLB advances as a secondary
funding source and generally uses long term borrowings to supplement deposits
which are the Company's primary source of funds.
Provision for Loan Losses. The Company's management monitors and adjusts its
allowance for loan losses based upon its analysis of the loan portfolio. The
allowance is increased by a charge to the provision for loan losses, the amount
of which depends upon an analysis of the changing risks inherent in the Bank's
loan portfolio. The Bank has historically experienced a limited amount of loan
charge-offs. However, there can be no assurance that additions to the allowance
for loan losses will not be required in future periods or that actual losses
will not exceed estimated amounts. The Company's ratio of non-performing loans
to total loans was 0.61% and 1.09% at September 30, 1997 and September 30, 1996,
respectively. The provision for loan
<PAGE>
losses for the fiscal year ended September 30, 1997 increased $20 thousand to
$250 thousand from $230 thousand for the fiscal year ended September 30, 1996.
The increase was primarily due to the growth in the loan portfolio discussed
above, as well as local economic trends, including the general decline in real
estate values in the Bank's market areas.
Non-Interest Income. Non-interest income increased during the fiscal year ended
September 30, 1997 to $406 thousand compared with $388 thousand for the fiscal
year ended September 30, 1996. Increases in service charges on deposit accounts
of $6 thousand and other non-interest income of $12 thousand comprised the
increase from the previous year.
Non-Interest Expenses. Non-interest expenses decreased $127 thousand or 3.4% to
$3.6 million for the fiscal year ended September 30, 1997 from $3.7 million for
the fiscal year ended September 30, 1996. The decrease in non-interest expenses
was primarily due to the one-time special assessment levied by the Federal
Deposit Insurance Corporation (FDIC) as discussed above.
The increase in compensation and benefits expense of $332 thousand or 26.6% was
primarily the result of costs related to the Company's new ESOP totaling $151
thousand for fiscal 1997, the establishment of the Restricted Stock Plan, which
resulted in $52 thousand in expense for fiscal 1997, the opening of a new branch
in May 1997, as well as general cost of living and merit raises to employees.
Occupancy and equipment expenses increased by $45 thousand or 9.2% due primarily
to the new operations center opened in July 1996 and the new branch opened in
May 1997.
FDIC deposit insurance premiums decreased by $851 thousand or 87.9% due
primarily to the one-time special assessment of $702 thousand noted above, as
well as reduced deposit insurance premium rates during the year. The reduced
rates are the result of the capitalization of the SAIF through a one-time
special assessment during September 1996.
Professional service fees for the fiscal year ended September 30, 1997,
increased $190 thousand or 170.8% as a result of additional legal, accounting
and other fees related to being a publicly traded company.
Other non-interest expenses increased $91 thousand or 17.3% from fiscal 1996 to
fiscal 1997 primarily as a result of general expense increases related to the
new branch opened in May 1997 and expenses related to being a public company for
items such as Delaware franchise taxes, stock registrar and transfer agent fees,
annual report preparation, and annual meeting expenses.
Management believes that compensation and benefits expenses will increase in
future periods as a result of the costs related to the Company's ESOP as well as
the Restricted Stock Plan, which was adopted in May 1997. Furthermore, the
Company expects that certain operating expenses will increase as a result of the
costs associated with being a public company, as noted above.
<PAGE>
Income Tax Expense. Income tax expense increased to $624 thousand for the fiscal
year ended September 30, 1997 from $63 thousand for the fiscal year ended
September 30, 1996. The increase was primarily the result of the increase in
income before income tax expense.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain, for each calendar month, a
daily average balance of cash and eligible liquid investments of not less than
5% of the average daily balance of its net withdrawable savings and borrowings
(due in one year or less) during the preceding calendar month. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10%. The Bank's average liquidity ratio was 45.18% and 47.02% at
September 30, 1997 and 1996, respectively.
The Company's sources of liquidity include cash flows from operations,
principal and interest payments on loans, maturities of securities, deposit
inflows, and borrowings from the FHLB of New York. During fiscal 1997 and 1996,
the primary source of funds was cash flows from deposit growth. On September 30,
1996, the Company also had significant cash flows from its initial public
offering on that date which provided investable cash flows for the fiscal year
ended September 30, 1997.
While maturities and scheduled amortization of loans and securities are, in
general, a predictable source of funds, deposit flows and prepayments on loans
and securities are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Bank invests excess funds in
overnight deposits which provide liquidity to meet lending requirements.
In addition to deposit growth, from time-to-time the Company borrows funds from
the FHLB of New York to supplement its cash flows. At September 30, 1997 and
1996, the Company had outstanding borrowings from the FHLB of $1.4 million and
$1.8 million, respectively.
As of September 30, 1997 and 1996, the Company had $37.7 and $17.1 million,
respectively, of securities classified as available for sale and $35.3 and $35.0
million, respectively, of securities classified as held to maturity. The
liquidity of the securities available for sale portfolio provides the Bank with
additional potential cash flows to meet loan growth and deposit flows.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Company's
commitments to make loans and management's assessment of the Company's ability
to generate funds.
<PAGE>
The Bank is subject to federal regulations that impose certain minimum capital
requirements. At September 30, 1997, the Bank's capital exceeded each of the
regulatory capital requirements of the OTS. The Bank is "well capitalized" at
September 30, 1997 according to the regulatory definition. At September 30,
1997, the Company's consolidated tangible and core capital levels were both
$20.6 million (13.0% of total adjusted assets) and its total risk-based capital
level was $21.4 million (30.9% of total risk-weighted assets). The minimum
regulatory capital ratio requirements of the Bank are 1.5% for tangible capital,
3.0% for core capital, and 8.0% for risk based capital.
During fiscal 1997, the stockholders approved the Amsterdam Federal Bank
Restricted Stock Plan, which allows for a stock repurchase of 4% of the
Company's outstanding common stock. Under this plan, 58,190 shares were
repurchased by the Company in open-market transactions at a total cost of $939
thousand or $16.14 per share. In addition, the Company was approved by the OTS
to repurchase up to 5% of its common stock to be used for general corporate
purposes. Under this repurchase plan, as of September 30, 1997, 15,000 shares
had been repurchased by the Company in open-market transactions at a total cost
of $238 thousand or $15.88 per share.
Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a financial-components approach that focuses on control. The
Company adopted SFAS No. 125 as of January 1, 1997. The adoption of SFAS No. 125
did not have a material impact on the Company's consolidated financial
statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share (EPS).
This Statement supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and related interpretations. SFAS No. 128 replaces the presentation
of primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Earlier application is not permitted. This Statement requires
restatement of all prior period EPS data presented. As required, the Company
will adopt SFAS No. 128 in the first quarter of fiscal 1998, and will report and
display EPS in accordance with the new Statement.
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in financial statements. SFAS No. 130 states that
comprehensive income includes reported net income of a company, adjusted for
items that are currently accounted for as direct entries to equity, such as the
net unrealized gain or loss on securities available for sale. This Statement is
effective for both interim and annual periods beginning after December 15, 1997.
As required, the Company will adopt the reporting requirements of this Statement
in the second quarter of fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
by public companies about operating segments of their business. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for periods
beginning after December 15, 1997. As required, the Company will adopt the
reporting requirements of this statement in the second quarter of fiscal 1998.
Impact of The Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Management has
not yet assessed the year 2000 compliance expense and related potential effect
on the Company's earnings.
Effect of Inflation and Changing Prices
The Company's consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
<PAGE>
AFSALA Bancorp, Inc.
The table below sets forth certain performance and financial ratios of
the Company for the years indicated:
- --------------------------------------------------------------------------------
Key Operating Ratios
At or for the Year Ended September 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets
(net income divided by average total assets) 0.77% 0.16% 0.51% 0.60% 0.69%
Return on average equity
(net income divided by average equity) . . . . 5.65 2.55 8.00 9.41 10.97
Net interest rate spread . . . . . . . . . . . 2.89 2.69 2.78 2.89 2.74
Net interest margin . . . . . . . . . . . . 3.57 3.02 3.08 3.17 3.19
.
Yield on average earning assets
for the period ended . . . . . . . . . . . 7.33 7.22 7.06 6.62 7.13
.
Rate on average interest-bearing liabilities . . 4.44 4.53 4.28 3.73 4.39
Average interest-earning assets to average
interest-bearing liabilities . . . . . . . . 118.40 108.05 107.59 107.96 111.41
. .
Efficiency ratio (1) . . . . . . . . . . . 63.21 88.06 72.15 63.58 60.00
. .
Expense ratio (2) . . . . . . . . . . . . 2.32 2.79 2.28 2.01 1.91
. .
Asset Quality Ratios:
Non-performing loans to total assets . . . . . 0.29 0.51 0.47 0.64 1.01
Non-performing loans to total loans . . . . . 0.61 1.09 0.90 1.23 2.00
Allowance for loan losses to
non-performing loans . . . . . . . . . . . . 236.09 112.40 113.57 85.62 39.04
Allowance for loan losses to total
loans receivable . . . . . . . . . . . . 1.44 1.23 1.02 1.05 0.78
. .
Non-performing assets to total assets,
at period end . . . . . . . . . . . . . 0.31 0.51 0.47 0.64 1.08
. .
Capital Ratios:
Equity to total assets at period end . . . . . 12.85 13.40 6.18 6.41 6.33
Average equity to average total assests . . . 13.68 6.21 6.34 6.36 6.29
Dividend payout . . . . . . . . . . . . . . 8.99 N/A N/A N/A N/A
Book value per share (3) . . . . . . . . . . $16.19 15.32 N/A N/A N/A
</TABLE>
(1) Total non-interest expense, excluding other real estate owned expense, as a
percentage of net interest income and total non-interest income, excluding
net gain (loss) on securities transactions. Excluding the affect of a
special one-time SAIF assessment, this ratio would have been 71.45% for
1996.
(2) Total non-interest expense, excluding other real estate owned expense, as a
percentage of total assets. Excluding the affect of a special one-time SAIF
assessment, this ratio would have been 2.27% for 1996.
(3) Excludes unallocated ESOP shares and unvested Restricted Stock Plan shares.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
AFSALA Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of AFSALA Bancorp,
Inc. and subsidiary (the Company) as of September 30, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AFSALA Bancorp, Inc.
and subsidiary as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Albany, New York
November 14, 1997
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Assets
<S> <C> <C>
Cash and due from banks $ 5,127,320 $ 4,816,392
Federal funds sold 2,675,000 19,200,000
Term deposits with the Federal Home Loan Bank -- 3,000,000
------------- -----------
Total cash and cash equivalents 7,802,320 27,016,392
------------- -----------
Securities available for sale, at fair value 37,705,373 17,131,802
Investment securities held to maturity 35,263,826 34,999,930
Federal Home Loan Bank of New York stock, at cost 565,300 565,300
Loans receivable 76,927,350 71,556,754
Less: Allowance for loan losses (1,108,080) (879,463)
------------- -----------
Net loans receivable 75,819,270 70,677,291
------------- -----------
Accrued interest receivable 1,405,687 1,156,466
Premises and equipment, net 1,659,444 1,703,491
Other assets 186,066 426,015
------------- -----------
Total assets $ 160,407,286 153,676,687
============= ===========
Liabilities and Stockholders Equity
Liabilities:
Deposits $ 135,316,322 126,460,081
Federal Home Loan Bank of New York long term borrowings 1,415,625 1,815,625
Escrow accounts 266,656 365,187
Accrued expenses and other liabilities 2,789,562 4,444,922
------------- -----------
Total liabilities 139,788,165 133,085,815
------------- -----------
Commitments and contingent liabilities (note 13)
Stockholders Equity:
Preferred stock, $0.10 par value; authorized 500,000 shares; none issued -- --
Common stock, $0.10 par value; authorized 3,000,000 shares; 1,454,750 shares issued 145,475 145,475
Additional paid-in capital 13,465,092 13,460,381
Retained earnings, substantially restricted 9,048,824 8,120,864
Common stock acquired by ESOP (108,010 shares in 1997 and 110,780 shares in 1996) (1,080,105) (1,107,800)
Unearned Restricted Stock Plan (733,194) --
Treasury stock, at cost (15,000 shares in 1997) (238,125) --
Net unrealized gain (loss) on securities available for sale, net of tax 11,154 (28,048)
------------- -----------
Total stockholders equity 20,619,121 20,590,872
------------- -----------
Total liabilities and stockholders equity $ 160,407,286 153,676,687
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 6,133,225 5,736,071
Interest on federal funds sold 405,441 333,960
Interest on FHLB term deposits 142,037 131,247
Interest on securities available for sale 1,414,978 742,111
Interest on investment securities 2,636,444 2,185,158
Dividends on Federal Home Loan Bank of New York stock 36,670 36,972
----------- ---------
Total interest and dividend income 10,768,795 9,165,519
----------- ---------
Interest expense:
Deposits and escrow accounts 5,400,195 5,181,414
Federal Home Loan Bank of New York long term borrowings 114,669 143,647
----------- ---------
Total interest expense 5,514,864 5,325,061
----------- ---------
Net interest income 5,253,931 3,840,458
Provision for loan losses 250,000 230,000
----------- ---------
Net interest income after provision for loan losses 5,003,931 3,610,458
----------- ---------
Non-interest income:
Service charges on deposit accounts 371,652 365,658
Other 34,018 22,377
----------- ---------
Total non-interest income 405,670 388,035
----------- ---------
Non-interest expenses:
Compensation and benefits 1,577,427 1,245,908
Occupancy and equipment 533,833 488,971
FDIC deposit insurance premium 116,917 967,467
Data processing fees 279,056 268,295
Professional service fees 301,910 111,500
Advertising 58,311 44,552
Supplies 112,664 71,651
Other 616,903 525,731
----------- ---------
Total non-interest expenses 3,597,021 3,724,075
----------- ---------
Income before income tax expense 1,812,580 274,418
Income tax expense 623,551 63,100
----------- ---------
Net income $ 1,189,029 211,318
=========== =========
Net income per share $ 0.89 N/A
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Net unrealized
Common gain (loss) on
Additional stock Unearned securities
Common paid-in Retained acquired Restricted Treasury available for
stock capital earnings by ESOP Stock Plan Stock sale, net of tax Total
---------- ---------- -------- -------- ---------- -------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1995 $ - - 7,909,546 - - - 4,583 7,914,129
Net income - - 211,318 - - - 211,318
Common stock issued 145,475 13,460,381 - - - - - 13,605,856
Acquisition of common
stock by ESOP (110,780
shares) - - - (1,107,800) - - - (1,107,800)
Change in net unrealized
gain (loss) on
securities available
for sale, net of tax - - - - - - (32,631) (32,631)
-------- ---------- --------- ---------- -------- -------- ------- ----------
Balance at September
30, 1996 145,475 13,460,381 8,120,864 (1,107,800) - - (28,048) 20,590,872
Net income - - 1,189,029 - - - - 1,189,029
Dividends paid on
common stock ($0.08 per
share) - - (107,738) - - - - (107,738)
Allocation of ESOP stock
(2,770 shares) - 4,711 - 27,695 - - - 32,406
Grant of restricted stock
under Restricted Stock
Plan (58,190 shares) - 785,565 - - (785,565) - - -
Treasury stock purchased
(73,190 shares) - - - - - (1,177,021) - (1,177,021)
Funding of Restricted
Stock Plan (58,190
shares) - (785,565) (153,331) - - 938,896 - -
Amortization of Unearned
Restricted Stock - - - - 52,371 - - 52,371
Change in net unrealized
gain (loss) on securities
available for sale, net
of tax - - - - - - 39,202 39,202
-------- ---------- --------- ---------- -------- -------- ------- ----------
Balance at September
30, 1997 $145,475 13,465,092 9,048,824 (1,080,105) (733,194) (238,125) 11,154 20,619,121
======== ========== ========= ========== ======== ======== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(Decrease) increase in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 1,189,029 211,318
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation 170,270 166,705
Provision for loan losses 250,000 230,000
Allocation of ESOP stock 32,406 --
RSP compensation expense 52,371 --
Deferred tax benefit (165,416) (24,308)
Increase in accrued interest receivable (249,221) (25,812)
Decrease (increase) in other assets 239,949 (181,505)
(Decrease) increase in accrued expenses and other liabilities (3,156,538) 3,314,561
------------ ----------
Total adjustments (2,826,179) 3,479,641
------------ ----------
Net cash (used in) provided by operating activities (1,637,150) 3,690,959
------------ ----------
Cash flows from investing activities:
Proceeds from the maturity and call of securities available for sale 14,325,277 4,484,510
Purchases of securities available for sale (33,339,448) (2,500,000)
Proceeds from the maturity and call of investment securities held to maturity 11,221,165 10,501,537
Purchases of investment securities held to maturity (11,485,061) (15,381,273)
Redemption of Federal Home Loan Bank of New York stock -- 900
Net loans made to customers (5,391,979) (5,485,197)
Proceeds from sale of other real estate owned -- 25,434
Capital expenditures (126,223) (256,528)
------------ ----------
Net cash used in investing activities (24,796,269) (8,610,617)
------------ ----------
Cash flows from financing activities:
Net increase in deposits 8,856,241 10,387,502
Net decrease in escrow accounts (98,531) (135,336)
Repayments on long term borrowings from the Federal Home Loan Bank (400,000) (487,500)
Purchases of treasury stock (1,030,625) --
Cash dividends paid on common stock (107,738) --
Net proceeds from common stock issued in stock conversion -- 13,605,856
Acquisition of common stock by ESOP -- (1,107,800)
------------ ----------
Net cash provided by financing activities 7,219,347 22,262,722
------------ ----------
Net (decrease) increase in cash and cash equivalents (19,214,072) 17,343,064
Cash and cash equivalents at beginning of year 27,016,392 9,673,328
------------ ----------
Cash and cash equivalents at the end of year $ 7,802,320 27,016,392
============ ==========
</TABLE>
(Continued)
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Additional disclosures relative to cash flows:
Interest paid $ 5,525,197 5,321,830
=========== ===========
Taxes paid $ 374,528 205,460
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to other real estate owned $ 31,389 25,434
=========== ===========
Investment securities held to maturity transferred to securities
available for sale in accordance with the FASB "Special Report," fair
value of securities transferred $16,604,244 $ -- 16,602,489
=========== ===========
Change in net unrealized gain (loss) on securities available for sale, net of tax $ 39,202 (32,631)
=========== ===========
Increase in amounts due to broker from purchases of securities available for sale $ 1,500,000 --
=========== ===========
Increase in amounts due to broker from purchases of treasury stock $ 146,396 --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(1) Summary of Significant Accounting Policies
AFSALA Bancorp, Inc. (the Holding Company or the Company) was
incorporated under Delaware law in June 1996 as a holding company to
purchase 100% of the common stock of Amsterdam Federal Bank (the Bank).
The Bank converted from a mutual form to a stock form institution and
the Holding Company completed its initial public offering on September
30, 1996, at which time the Holding Company purchased all of the
outstanding stock of the Bank. To date, the principal operations of
AFSALA Bancorp, Inc. have been those of the Bank.
The following is a description of the more significant policies which
the Company follows in preparing and presenting its consolidated
financial statements:
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Holding Company and its wholly owned subsidiary, the
Bank. All significant intercompany accounts and transactions have
been eliminated. 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 Company utilizes the accrual method of accounting for
financial reporting purposes.
(b) Use of Estimates
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 other real estate owned
acquired in connection with foreclosures or insubstance
foreclosures. In connection with the determination of the allowance
for loan losses and the valuation of other real estate owned,
management generally obtains independent appraisals for properties.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance for loan losses 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 Companys allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance for loan losses based on their judgments
about information available to them at the time of their examination
which may not be currently available to management.
A substantial portion of the Companys assets are loans secured by
real estate located in Montgomery and neighboring counties in New
York State. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio is dependent
upon market conditions in these market areas. In addition, other
real estate owned, is also generally located in Montgomery and
neighboring counties in New York State.
7
<PAGE>
(1), Continued
(c) 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.
(d) Securities Available for Sale, Investment Securities Held to
Maturity, and Federal Home Loan Bank 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
investment securities held to maturity and are stated at amortized
cost. If securities are purchased for the purpose of selling them in
the near term, they are classified as trading securities and are
reported at fair value with unrealized holding gains and losses
reflected in current earnings. All other debt and equity securities
are classified as securities available for sale and are reported at
fair value, with net unrealized gains or losses reported as a
separate component of stockholders equity, net of tax. The Company
does not maintain a trading portfolio.
Realized gains and losses on the sale of securities are based on the
net proceeds and the amortized cost of the securities sold, using
the specific identification method. The cost of securities is
adjusted for amortization of premium and accretion of discount,
which is calculated on an effective interest method.
Unrealized losses on securities are charged to earnings when the
decline in fair value of a security is determined to be other than
temporary.
Non-marketable equity securities, such as Federal Home Loan Bank of
New York stock, are stated at cost. The investment in Federal Home
Bank of New York stock is required for membership. This investment
is pledged to secure Federal Home Loan Bank of New York long term
borrowings.
(e) Reclassification of Investment Securities
In November 1995, the staff of 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 provisions of this Special Report,
the Company reclassified securities with an amortized cost of
$16,602,489 and an approximate fair value of $16,604,244 from
investment securities held to maturity to securities available for
sale as of December 31, 1995.
8
<PAGE>
(1), Continued
(f) Net Loans Receivable
Loans receivable are stated at the unpaid principal amount, net of
the allowance for loan losses. Loans considered doubtful of
collection by management are placed on a non-accrual status for the
recording of interest. Generally, loans past due 90 days or more as
to principal or interest are considered to be in non-accrual status
except for those loans which, in management's judgment, are
adequately secured and for which collection is probable. Previously
accrued income that has not been collected is generally reversed
from current income. Fees received from and costs incurred for loan
originations are recorded to interest income on loans as received or
incurred. Based upon management's analysis, recording loan
origination fees and costs on the cash basis does not have a
material impact on the Company's consolidated financial statements.
(g) Allowance for Loan Losses
The allowance for loan losses is increased through a provision for
loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that
collectibility of the principal is unlikely. 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
portfolio, past loan loss exposure, estimated value of underlying
collateral, and current and prospective economic conditions that may
affect borrowers' ability to pay.
(h) Loan Impairment
As of October 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. Under
these Statements, a loan (generally commercial-type loans) is
considered impaired when it is probable that the borrower will not
make principal and interest payments according to the original
contractual terms of the loan agreement, or when a loan (of any
type) is restructured in a troubled debt restructuring subsequent to
the adoption of these Statements. These Statements prescribe
recognition criteria for loan impairment and measurement methods for
impaired loans. Impaired loans are included in non-performing loans,
generally as non-accrual commercial type loans.
The allowance for loan losses related to impaired loans is based on
the discounted cash flows using the loans initial effective rate or
the fair value of the collateral for certain loans where repayment
of the loan is expected to be provided solely by the underlying
collateral (collateral dependent loans). The Companys impaired loans
are generally collateral dependent. The Company considers estimated
costs to sell, on a discounted basis, when determining the fair
value of collateral in the measurement of impairment if those costs
are expected to reduce the cash flows available to repay or
otherwise satisfy the loans. The adoption of SFAS Nos. 114 and 118
did not have a significant effect on the Companys consolidated
financial statements.
Other real estate owned includes both formally foreclosed and
insubstance foreclosed real properties. In accordance with SFAS No.
114, 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.
<PAGE>
(1), Continued
At September 30, 1997, other real estate owned consisted of one
residential one-to-four family property and amounted to
approximately $31 thousand. There was no other real estate owned at
September 30, 1996.
(i) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the terms of the
related leases or the useful lives of the assets.
(j) Employee Benefit Plans
The Company has a defined contribution 401(k) plan covering all full
time employees meeting age and service requirements. In addition,
the Company has a supplemental employee retirement plan for certain
executive officers.
The Company also has an employee stock ownership plan (ESOP) which
was established to provide substantially all employees of the
Company the opportunity to also become stockholders. The Company
accounts for the ESOP in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 93-6,
Employers Accounting for Stock Ownership Plans.
The Company accounts for its stock option plan 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 net income per share as if the fair-value-based
method defined in SFAS No. 123 had been applied to stock option
grants made in 1995 and later years. 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 also accounts for its restricted stock plan 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 stockholders equity) and amortized to
compensation expenses as the shares become vested. Any excess of the
cost to fund purchases of restricted stock plan shares over the
grant date fair value is charged to retained earnings.
10
<PAGE>
(1), Continued
(k) Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets are recognized subject to managements judgment
that those assets will more likely than not be realized. A valuation
allowance is recognized if, based on an analysis of available
evidence, management believes that all or a portion of the deferred
tax assets will not be realized. Adjustments to increase or decrease
the valuation allowance are charged or credited, respectively, to
income tax expense. 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.
(l) Financial Instruments
In the normal course of business, 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 Companys policy is to record such instruments
when funded.
(m) Net Income Per Share
Net income per share is computed based on the weighted average
number of shares outstanding, less unallocated ESOP shares, during
the period. The effect of outstanding stock option awards and shares
granted under the restricted stock plan are not material to the
calculation of net income per share. Net income per share is not
presented for periods prior to the initial stock offering as the
Bank was a mutual thrift at the time and no stock was outstanding.
As the conversion of the Bank to stock form was effective as of
September 30, 1996, net income per share is not applicable for the
year ended September 30, 1996. See also note 1(o).
(n) Cashier Checks
The Companys cashier checks (including tellers checks, loan
disbursement checks, expense checks and money orders), are drawn
upon deposit accounts at the Bank and are ultimately paid through
the Banks Federal Reserve correspondent account. Outstanding cashier
checks are classified as accrued expenses and other liabilities on
the consolidated balance sheets.
11
<PAGE>
(1), Continued
(o) Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125 Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities, which provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a
financial-components approach that focuses on control. The Company
adopted SFAS No. 125 as of January 1, 1997. The adoption of SFAS No.
125 did not have a material impact on the Companys consolidated
financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share,
which establishes standards for computing and presenting earnings
per share (EPS). This Statement supersedes Accounting Principals
Board Opinion No. 15, Earnings per Share, and related
interpretations. SFAS No. 128 replaces the presentation of primary
EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the entity. This Statement is effective for financial
statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted.
This Statement requires restatement of all prior period EPS data
presented. As required, the Company will adopt SFAS No. 128 in the
first quarter of fiscal 1998, and will report and display EPS in
accordance with the new Statement.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of
comprehensive income and its components in financial statements.
SFAS No. 130 states that comprehensive income includes reported net
income of a company, adjusted for items that are currently accounted
for as direct entries to equity, such as the net unrealized gain or
loss on securities available for sale. This Statement is effective
for both interim and annual periods beginning after December 15,
1997. As required, the Company will adopt the reporting requirements
of this Statement in the second quarter of fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which establishes
standards for reporting by public companies about operating segments
of their business. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas,
and major customers. This Statement is effective for periods
beginning after December 15, 1997. As required, the Company will
adopt the reporting requirements of this Statement in the second
quarter of fiscal 1998.
12
<PAGE>
(1), Continued
(p) Reclassifications
Amounts in the prior periods consolidated financial statements are
reclassified whenever necessary to conform to the current periods
presentation.
(2) Conversion to Stock Ownership
On September 30, 1996, the Holding Company sold 1,454,750 shares of
common stock at $10.00 per share to depositors, employees of the Bank,
and employee benefit plans of the Bank. Net proceeds from the sale of
stock of the Holding Company, after deducting conversion expenses of
approximately $942 thousand, were approximately $13.6 million and are
reflected as common stock and additional paid-in capital in the
accompanying consolidated balance sheets. The Company utilized
approximately $6.8 million of the net proceeds to acquire all of the
capital stock of the Bank.
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 the 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 Banks capital stock. The Bank may not declare or pay a
cash dividend to the Holding Company, 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 Banks capital exceeds all of the fully phased-in regulatory capital
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 of 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.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Cash Reserve Requirements
The Bank is required to maintain certain cash reserves and other
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately $867
thousand and $767 thousand at September 30, 1997 and 1996, respectively.
13
<PAGE>
(4) Securities Available for Sale
The amortized cost and approximate fair value of securities available
for sale at September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and agency securities $29,056,416 107,678 6,280 29,157,814
States and political subdivisions 3,536,236 6,846 6,338 3,536,744
Collateralized mortgage obligations 5,095,820 14,055 99,060 5,010,815
----------- ------- ------- ----------
Total securities available for sale $37,688,472 128,579 111,678 37,705,373
=========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 8,762,717 27,436 11,470 8,778,683
States and political subdivisions 4,987,667 22,640 17,707 4,992,600
Collateralized mortgage obligations 3,423,917 30,808 94,206 3,360,519
----------- ------ ------- ----------
Total securities available for sale $17,174,301 80,884 123,383 17,131,802
=========== ====== ======= ==========
</TABLE>
Substantially all of the collateralized mortgage obligations at
September 30, 1997 and 1996 consist of Fannie Mae, Freddie Mac, and
Government National Mortgage Association (GNMA) securities.
The amortized cost and approximate fair value of securities available
for sale at September 30, 1997, by contractual maturity, are shown below
(collateralized mortgage obligations are included by final contractual
maturity). Expected maturities may differ from contractual maturities
because certain issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Approximate
Cost Fair Value
--------- -----------
<S> <C> <C>
Due within one year $ 3,445,917 3,451,641
Due one year to five years 15,640,535 15,689,193
Due five years to ten years 13,506,200 13,553,725
Due after ten years 5,095,820 5,010,814
----------- ----------
Total securities available for sale $37,688,472 37,705,373
=========== ==========
</TABLE>
There were no sales of securities available for sale during the years
ended September 30, 1997 and 1996.
14
<PAGE>
(5) Investment Securities Held to Maturity
The amortized cost and approximate fair value of investment securities
held to maturity at September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and agency securities $24,035,484 86,125 47,805 24,073,804
Mortgage-backed securities 11,182,369 229,776 62,388 11,349,757
Other 45,973 -- -- 45,973
----------- ------- ------- ----------
Total investment securities held to maturity $35,263,826 315,901 110,193 35,469,534
=========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and agency securities $22,786,722 25,823 297,575 22,514,970
Mortgage-backed securities 12,172,235 128,219 93,141 12,207,313
Other 40,973 40,973
----------- ------- ------- ----------
Total investment securities held to maturity $34,999,930 154,042 390,716 34,763,256
=========== ======= ======= ==========
</TABLE>
Substantially all of the mortgage-backed securities at September 30,
1997 and 1996, consist of Fannie Mae, Freddie Mac, and GNMA securities.
The amortized cost and approximate fair value of investment securities
held to maturity at September 30, 1997, by contractual maturity, are
shown below (mortgage-backed securities are included by final
contractual maturity). Expected maturities may differ from contractual
maturities because certain issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Approximate
Cost Fair Value
---- ----------
Due within one year $ 6,336,053 6,320,142
Due one year to five years 11,554,527 11,549,920
Due five years to ten years 6,741,945 6,793,561
Due after ten years 10,631,301 10,805,911
----------- ----------
Total $35,263,826 35,469,534
=========== ==========
There were no sales of investment securities held to maturity during the
years ended September 30, 1997 and 1996.
15
<PAGE>
(6) Net Loans Receivable
A summary of net loans receivable at September 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans secured by real estate:
Conventional one-to-four family mortgages $ 44,081,646 42,912,395
Commercial 3,665,186 3,015,220
Home equity 17,676,832 14,665,911
FHA insured 302,477 386,048
VA guaranteed 523,316 667,225
------------ ----------
66,249,457 61,646,799
------------ ----------
Other loans:
Personal secured 3,874,609 3,942,824
Personal unsecured 475,415 432,707
Commercial 3,513,204 3,103,577
Home improvement 1,789,938 1,560,032
Passbook 938,440 779,494
Education 86,287 91,321
------------ ----------
10,677,893 9,909,955
------------ ----------
76,927,350 71,556,754
Less: Allowance for loan losses (1,108,080) (879,463)
------------ ----------
Net loans receivable $ 75,819,270 70,677,291
============ ==========
</TABLE>
Certain conventional mortgage loans held in the Companys loan portfolio
are used to secure Federal Home Loan Bank of New York long term
borrowings.
A summary of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $ 879,463 677,681
Provision for loan losses 250,000 230,000
Charge-offs (23,578) (28,218)
Recoveries 2,195 --
----------- -------
Balance at end of year $ 1,108,080 879,463
=========== =======
</TABLE>
The following table sets forth information with regard to non-performing
loans:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans in non-accrual status $ 469,351 716,461
Loans contractually past due 90 days
or more and still accruing interest -- 65,953
------------ -------
Total non-performing loans $ 469,351 782,414
============ =======
</TABLE>
There were no troubled debt restructurings at September 30, 1997 or
1996.
<PAGE>
(6), Continued
Accumulated interest on non-accrual loans, as shown above, of
approximately $30 thousand and $33 thousand was not recognized in
interest income during the years ended September 30, 1997 and 1996,
respectively. Approximately $9 thousand and $29 thousand of interest on
non-accrual loans, as shown above, was collected and recognized in
interest income during the years ended September 30, 1997 and 1996,
respectively.
As of September 30, 1997 and 1996, the recorded investment in loans that
were considered to be impaired under SFAS No. 114 totaled approximately
$10 thousand and $40 thousand respectively, for which the related
allowance for loan loss was approximately $3 thousand and $4 thousand,
respectively. During the years ended September 30, 1997 and 1996, the
average balance of impaired loans was approximately $43 thousand and $40
thousand, respectively. Interest income collected on the impaired loans
during the years ended September 30, 1997 and 1996 was approximately $6
thousand and $0, respectively.
Certain directors and executive officers of the Company are customers of
and have 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 Companys normal credit terms, including interest rate
and collateralization. The aggregate of such loans totaled approximately
$361 thousand and $301 thousand at September 30, 1997 and 1996,
respectively. Total advances to the directors and executive officers
during the year ended September 30, 1997 were approximately $179
thousand. Total payments made on these loans were approximately $119
thousand for the year ended September 30, 1997.
(7) Accrued Interest Receivable
A summary of accrued interest receivable as of September 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term deposits with the Federal Home
Loan Bank $ -- 43,900
Securities available for sale 373,185 186,706
Investment securities held to maturity 507,444 432,787
Loans receivable 525,058 493,073
---------- ---------
Total accrued interest receivable $1,405,687 1,156,466
========== =========
</TABLE>
(8) Premises and Equipment, Net
Premises and equipment at September 30, 1997 and 1996 is summarized by
major classification as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and land improvements $ 388,044 388,044
Office buildings 1,128,801 1,128,801
Leasehold improvements 371,889 370,511
Furniture, fixtures and equipment 1,043,249 929,751
----------- ---------
Total 2,931,983 2,817,107
Less accumulated depreciation (1,272,539) (1,113,616)
----------- ---------
Premises and equipment, net $ 1,659,444 1,703,491
=========== =========
</TABLE>
17
<PAGE>
(8), Continued
Depreciation included in occupancy and equipment expense amounted to
approximately $170 thousand and $167 thousand for the years ended
September 30, 1997 and 1996, respectively.
(9) Deposits
Deposit account balances at September 30, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
Stated
rate 1997 1996
---- ---- ----
<S> <C> <C> <C>
Savings accounts 3.00% $ 36,180,998 36,916,478
N.O.W. accounts 2.25 - 2.75 11,617,872 10,779,847
Money market
accounts 2.75 - 4.87 9,933,742 7,728,854
Time deposit accounts:
3.00 - 3.99 678,606 --
4.00 - 4.99 2,093,829 14,505,461
5.00 - 5.99 55,659,435 30,823,393
6.00 - 6.99 8,584,559 15,491,537
7.00 - 7.99 2,695,255 3,012,883
------------ -----------
Total time deposit accounts 69,711,684 63,833,274
------------ -----------
Non-interest bearing
accounts 7,872,026 7,201,628
------------ -----------
Total deposits $135,316,322 126,460,081
============ ===========
</TABLE>
The approximate amount of contractual maturities of time deposit
accounts for the years subsequent to September 30, 1997 are as follows:
Years ended September 30,
-------------------------
1998 $51,344,348
1999 9,156,369
2000 5,474,873
2001 2,687,470
2002 1,048,624
-----------
$69,711,684
===========
At September 30, 1997 and 1996, the aggregate amount of time deposit
accounts with balances equal to or in excess of $100 thousand was
approximately $8.6 million and $6.8 million, respectively. Deposits in
excess of $100 thousand are not Federally insured.
18
<PAGE>
(9), Continued
Interest expense on deposits and escrow accounts for the years ended
September 30, 1997 and 1996, is summarized as follows:
1997 1996
---- ----
Savings accounts $1,081,101 1,067,478
N.O.W. accounts 258,396 223,737
Money market accounts 363,605 256,736
Time deposits 3,688,735 3,624,137
Escrow accounts 8,358 9,326
---------- ---------
Total $5,400,195 5,181,414
========== =========
Weighted average
interest rate at end of period 4.19% 4.11%
==== ====
(10) Income Taxes
The following is a summary of the components of income tax expense for
the years ended September 30, 1997 and 1996:
1997 1996
---- ----
Current tax expense:
Federal $ 662,884 73,774
State 126,083 13,634
Deferred tax benefit (165,416) (24,308)
---------- ------
Income tax expense $ 623,551 63,100
========== ======
Income tax expense for financial reporting purposes is greater than the
amount computed by applying the statutory federal income tax rate of 34%
to income before income tax expense for the reasons noted in the table
below:
1997 1996
---- ----
Expense at statutory federal tax rate $ 616,277 93,302
Tax-exempt income (61,948) (49,137)
State income taxes, net of
federal tax benefit 64,700 16,708
Decrease in the deferred tax asset
valuation allowance (30,000) --
Effect of graduated tax rates -- (2,438)
Other, net 34,522 4,665
----------- ------
Income tax expense $ 623,551 63,100
=========== ======
Effective tax rate 34.4% 23.0%
=========== =======
19
<PAGE>
(10), Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Differences in reporting the provision for
loan losses and loan charge-offs $ 444,562 352,841
Other 68,819 36,404
--------- --------
Total gross deferred tax assets 513,381 389,245
Less valuation allowance (120,000) (150,000)
--------- --------
Net deferred tax assets 393,381 239,245
--------- --------
Deferred tax liabilities:
Depreciation (77,079) (75,901)
Prepaid expenses (8,597) (28,463)
Other (22,183) (14,775)
--------- --------
Total deferred tax liabilities (107,859) (119,139)
--------- --------
Net deferred tax asset at end of year 285,522 120,106
Net deferred tax asset at beginning
of year 120,106 95,798
--------- --------
Deferred tax benefit for the year $(165,416) (24,308)
========= ========
</TABLE>
In addition to the deferred tax assets and liabilities noted above, the
Company also had a deferred tax liability of approximately $6 thousand
at September 30, 1997, and a deferred tax asset of approximately $14
thousand at September 30, 1996, related to the net unrealized gain or
loss on securities available for sale.
During the year ended September 30, 1997, the deferred tax asset
valuation allowance was reduced by $30 thousand. In maintaining the
valuation allowance, the Company takes into consideration the nature and
timing of the deferred tax items as well as the amount of available open
tax carrybacks. The Company has fully reserved its New York State
deferred tax asset, which is a significant component of deferred tax
assets, due to the lack of carryback and carryforward provisions
available in New York State. Any changes in the valuation allowance are
based upon the Companys continuing evaluation of the level of such
allowance, the amount of New York State deferred tax assets, and the
realizability of the temporary differences creating the deferred tax
asset. Based on recent historical and anticipated future pre-tax
earnings, management believes it is more likely than not that the
Company will realize its net deferred tax assets.
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. SFAS No. 109 requires recognition of deferred tax
liabilities 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.
20
<PAGE>
(10), 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 six-year period)
the bad debt reserves in excess of the base-year amounts. The Bank did
not have any federal bad debt reserves in excess of the base-year
amount, thus there was no recapture requirement. The New York State
amendments redesignate the Banks 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.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the December 31, 1996 (the latest date for
which the calculation is available) federal and state base-year reserves
of approximately $2.0 million and $3.4 million, respectively, since the
Company does not expect that these amounts will become taxable in the
foreseeable future. Under the tax laws as amended, events that would
result in taxation of these reserves include (i) redemptions of the
Banks stock or certain excess distributions to the Company and (ii)
failure of the Bank to maintain a specified qualifying assets ratio or
meet other thrift definition tests for New York State tax purposes. The
unrecognized deferred tax liabilities at December 31, 1996 with respect
to the federal and state base-year reserves were approximately $669
thousand and $137 thousand (net of federal benefit), respectively.
(11) Federal Home Loan Bank of New York Long Term Borrowings
The long term borrowings from the Federal Home Loan Bank of New York are
secured by conventional mortgage loans held in the Companys loan
portfolio, as well as the Federal Home Loan Bank of New York stock. The
rates on the various advances ranged from 5.42% to 10.30% and 5.07% to
10.30% at September 30, 1997 and 1996, respectively. The weighted
average rate on the remaining borrowings was 7.01% and 6.83% at
September 30, 1997 and 1996, respectively. The following table sets
forth the remaining maturities of the borrowings at September 30, 1997:
Years ended September 30,
-------------------------
1998 $ 350,000
1999 337,500
2000 321,875
2001 181,250
2002 112,500
2003-2004 112,500
----------
$1,415,625
==========
(12) Related Party Transactions
The law firm of a Director of the Company provides the majority of the
Companys legal services. The Company expensed approximately $62 thousand
in fees to this law firm for legal services for each of the years ended
September 30, 1997 and 1996, respectively.
21
<PAGE>
(12), Continued
The Company leases certain branch facilities and office space from an
entity controlled by a member of the Board of Directors. The leases
expire in February 2001. The terms of the leases provide for increased
payments each year ranging in total from $20 thousand in the first year
to $30 thousand in the last year. Management believes the terms of these
leases to be consistent with normal market terms.
See also note 6.
(13) Commitments and Contingent Liabilities
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 consist of commitments to
extend credit, unused personal 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
balance sheet. The contract amounts of these instruments reflect the
extent of involvement by the Company.
The Companys exposure to credit loss in the event of nonperformance by
the other party to the commitment to extend credit is represented by the
contractual notional amount of those 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 managements credit
evaluation of the customer. Mortgage and construction loan commitments
are secured by a first or second lien on real estate. Collateral on
extensions of credit for commercial loans varies but may include
accounts receivable, inventory, 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.
22
<PAGE>
(13), Continued
Contract amounts of financial instruments that represent credit risk as
of September 30, 1997 and 1996, at fixed and variable interest rates are
as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Commitments outstanding:
Residential mortgages $ 672,000 194,000 866,000
Commercial real estate loans 150,000 -- 150,000
Unadvanced portion of construction
loans 332,245 256,818 589,063
---------- ------- ---------
1,154,245 450,818 1,605,063
---------- ------- ---------
Unused lines and standby letters of credit:
Personal lines of credit 276,944 -- 276,944
Standby letters of credit -- 40,000 40,000
---------- ------- ---------
276,944 40,000 316,944
---------- ------- ---------
$1,431,189 490,818 1,922,007
========== ======= =========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Commitments outstanding:
Residential mortgages $ 300,200 629,000 929,200
Commercial real estate loans 86,500 -- 86,500
Unadvanced portion of construction
loans 208,584 124,018 332,602
--------- ------- ---------
595,284 753,018 1,348,302
--------- ------- ---------
Unused lines and standby letters of credit:
Personal lines of credit 224,263 -- 224,263
Standby letters of credit -- 106,000 106,000
--------- ------- ---------
224,263 106,000 330,263
--------- ------- ---------
$ 819,547 859,018 1,678,565
========= ======= =========
</TABLE>
The range of interest rates on fixed rate commitments outstanding was
7.25% to 8.25% at September 30, 1997. The interest rate on the unused
personal lines of credit was 15.00% at September 30, 1997
Commitments on residential mortgage loans generally expire within 60
days of the date of issuance. Funds for construction loans are advanced
during the construction phase based upon various stages of completion in
accordance with the results of inspection reports. All funds for
construction loans are generally advanced within 180 days.
The Company does not engage in investments in futures contracts,
forwards, swaps, or option contracts or other derivative investments
with similar characteristics.
The Company grants residential, consumer, and commercial loans in
Montgomery and neighboring counties in New York State. Accordingly, a
substantial portion of its debtors ability to honor their contracts is
dependent upon the economy of this region.
23
<PAGE>
(13), Continued
Lease Commitments
-----------------
The Company leases certain branch facilities and office space under
noncancelable operating leases. Total expenses under these leases for
the years ended September 30, 1997 and 1996, were approximately $105
thousand and $97 thousand, respectively.
A summary of the future minimum commitments required under noncancelable
operating leases as of September 30, 1997 are as follows:
Years ending September 30,
--------------------------
1998 $ 134,337
1999 139,763
2000 81,899
2001 39,776
2002 27,400
---------
$ 423,175
=========
Borrowing Arrangements
----------------------
The Company has two lines of credit available with the Federal Home Loan
Bank of New York which expire in January 1998. The first is an overnight
line of credit for approximately $7.7 million with interest based on
existing market conditions. The second is a one-month overnight
repricing line of credit for approximately $7.7 million with interest
based on existing market conditions. There were no amounts outstanding
under these lines at September 30, 1997.
Legal Proceedings
-----------------
The Company is, from time to time, a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of
management, the financial position of the Company will not be affected
materially by the outcome of any pending legal proceedings.
(14) Employee Benefit Plans
The Companys defined contribution 401(k) plan covers all full time
employees meeting age and service requirements. The Company matches
participant contributions up to a maximum of 4.5%. Costs associated with
this plan were approximately $39 thousand and $35 thousand for the years
ended September 30, 1997 and 1996, respectively.
The Company also has a supplemental employee retirement plan (SERP) for
certain executive officers. The expense associated with this plan was
approximately $24 thousand for the year ended September 30, 1997, and
approximately $21 thousand for the year ended September 30, 1996. The
SERP is funded annually.
24
<PAGE>
(14), Continued
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 also become stockholders.
The ESOP borrowed $1,107,800 from the Company and used the funds to
purchase 110,780 shares of the common stock of the Company issued in the
conversion. The loan will be repaid principally from the Companys
discretionary contributions to the ESOP over a period of ten years. At
September 30, 1997, the loan had an outstanding balance of $1,080,105
and an interest rate of 8.5%. Both the loan obligation and the unearned
compensation are reduced by the amount of loan repayments made by the
ESOP. 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 unallocated ESOP shares are pledged as collateral to secure the loan
and are reported as common stock acquired by ESOP in stockholders
equity. The Company reports compensation expense equal to the average
market price of the shares during the applicable service period. The
shares become outstanding for net income per share computations when the
shares are committed to be allocated to employees accounts. The Company
recorded approximately $151 thousand in compensation expense related to
the ESOP during the year ended September 30, 1997. There was no
compensation expense related to the ESOP for the year ended September
30, 1996.
The ESOP shares as of September 30, 1997 were as follows:
Allocated shares 2,770
Shares committed to be allocated --
Unallocated shares 108,010
----------
110,780
==========
Approximate fair value of unallocated shares at
September 30, 1997 $1,930,679
==========
Stock Option Plan
-----------------
On May 30, 1997, the stockholders approved the AFSALA Bancorp, Inc. 1997
Stock Option Plan (Option Plan). Under the Option Plan, options to
purchase a number of shares equal to 10% of the Companys shares issued
in its initial public offering, or 145,475 shares, became available for
award to officers, directors, key employees and other persons from time
to time. Concurrent with the approval of the Option Plan, 145,475 stock
options were granted to officers, directors and key employees of the
Company at an exercise price of $13.875 per share, representing the mean
between the last bid and ask price of the stock on the grant date. The
options have a term of 10 years and vest over a five year period at a
rate of 20% annually, commencing on the one year anniversary of the
grant date. No options were exercised, cancelled, or forfeited during
the year ended September 30, 1997. As of September 30, 1997, the
weighted-average remaining contractual life of the options was
approximately 9.7 years.
25
<PAGE>
(14), Continued
As all options were granted at an exercise price equal to the fair value
of the common stock at the grant date, in accordance with the provisions
of APB Opinion No. 25 related to fixed stock options, no compensation
expense was recognized with respect to the options granted. Under the
alternative fair-value-based method defined in SFAS No. 123, the fair
value of all fixed stock options on the grant date would be recognized
as expense over the vesting period. The estimated weighted average fair
value of options granted during the year ended September 30, 1997 was
$5.17. The fair value was estimated using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of
1.25%; expected volatility rate of 25.0%; risk-free interest rate of
6.69%; and an expected option life of 7.0 years.
The following is a comparison of the Companys net income and net income
per share, as reported, to the pro forma amounts assuming application of
the fair-value-based method of SFAS No. 123 to options granted during
the year ended September 30, 1997:
Net income:
As reported $ 1,189,029
Pro forma 1,143,984
Net income per share:
As reported 0.89
Pro forma 0.85
Restricted Stock Plan
---------------------
On May 30, 1997, the stockholders approved the Amsterdam Federal Bank
Restricted Stock Plan (RSP) for the benefit of officers, directors, and
key employees of the Company. Under the RSP, 4% of the Companys common
stock, or 58,190 shares, became available for award in recognition of
expected future services to the Company by its directors, officers, and
key employees responsible for implementation of the policies adopted by
the Companys Board of Directors and as a means of providing a further
retention incentive. Concurrent with the approval of the RSP, 58,190
shares were awarded and vest over a five year period at a rate of 20%
annually, commencing on the one year anniversary of the grant date. The
fair market value of the shares awarded on the grant date of
approximately $786 thousand is being amortized to compensation expense
as the participants become vested in those shares. For the year ended
September 30, 1997, the Company recognized compensation expense related
to the RSP of approximately $52 thousand. The restricted stock used to
fund the RSP was purchased by the Company in open-market transactions.
(15) Fair Value of Financial Instruments
SFAS No. 107, Disclosure about Fair Value of Financial Instruments
requires the Company to disclose estimated fair values for its financial
instruments. 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 Companys entire
holdings of a particular financial instrument. Because no ready market
exists for a significant portion of the Companys 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.
26
<PAGE>
(15), 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 assets and liabilities and premises and
equipment. In addition, tax ramifications related to the realization of
the unrealized gains and losses, which can have a significant effect on
fair value estimates, have not been considered in the estimates of fair
value under SFAS No. 107.
In addition, there are significant intangible assets that SFAS No. 107
does not recognize, such as the value of core deposits, the Companys
branch network, and other items generally referred to as goodwill.
The following table presents the carrying amounts and estimated fair
values of the Companys financial instruments at September 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,802 7,802 27,016 27,016
Securities available for sale 37,705 37,705 17,132 17,132
Investment securities held to maturity 35,264 35,470 35,000 34,763
Federal Home Loan Bank of New York stock 565 565 565 565
Loans receivable 76,927 77,523 71,556 71,631
Less: Allowance for loan losses (1,108) -- (879) --
-------- ------ ------ ------
Net loans receivable 75,819 77,523 70,677 71,631
======== ====== ====== ======
Accrued interest receivable 1,406 1,406 1,156 1,156
Financial liabilities:
Savings, N.O.W, money market and non-interest bearing accounts 65,605 65,605 62,627 62,627
Time deposit accounts 69,712 70,024 63,833 64,232
Federal Home Loan Bank of New York long term borrowings 1,416 1,447 1,816 1,842
Escrow accounts 267 267 365 365
Accrued interest payable 8 8 19 19
</TABLE>
Financial Instruments with Carrying Amount Equal to Fair Value
--------------------------------------------------------------------
The carrying amount of cash and due from banks, federal funds sold, term
deposits with the Federal Home Loan Bank (collectively defined as cash
and cash equivalents), accrued interest receivable, escrow accounts, and
accrued interest payable is considered to be equal to fair value as a
result of their short-term nature.
27
<PAGE>
(15), Continued
Securities Available for Sale, Investment Securities Held to Maturity
------------------------------------------------------------------------
and Federal Home Loan Bank of New York Stock
--------------------------------------------
Securities available for sale and investment securities held to maturity
are financial instruments which are usually traded in broad markets.
Fair values are based upon bid quotations received from either quotation
services or securities dealers. The estimated fair value of stock in the
Federal Home Loan Bank of New York is assumed to be its cost given the
lack of a public market available for this investment.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one-to-four
family, commercial real estate, consumer and commercial loans. Each loan
category is further segmented into fixed and adjustable interest rate
terms and by performing and non-performing 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, adjusted for estimated
prepayments.
Fair value for 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.
Deposit Liabilities
-------------------
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as savings deposits, N.O.W deposits, money market deposits, and
non-interest bearing deposits are equal to the carrying amounts payable
on demand. The fair value of time deposits 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 estimate of deposit liabilities in the
foregoing table does 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.
Federal Home Loan Bank of New York Long Term Borrowings
-------------------------------------------------------
Fair value is estimated by discounting scheduled cash flows based on
current rates available to the Company for similar types of borrowing
arrangements.
28
<PAGE>
(15), Continued
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
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current level of
interest rates and the committed rates. The fair value of commitments to
extend credit and standby letters of credit is based on fees currently
charged for similar agreements or on the cost to terminate them or
otherwise settle the obligations with the counterparties. Fees such as
these are not a major part of the Companys business and in the Companys
business territory are not currently a normal business practice.
(16) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at
September 30, 1997 and 1996, the Bank was required to maintain a minimum
ratio of tangible capital to tangible assets of 1.5%; a minimum leverage
ratio of core (Tier 1) capital to total adjusted tangible assets of
3.0%; 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 its 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 institutions 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 total adjusted quarterly
average 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 September 30, 1997 and 1996, the Bank
met all capital adequacy requirements to which it was 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 Banks capital classification.
The following is a summary of the Banks actual capital amounts and
ratios as of September 30, 1997 and 1996, compared to the OTS minimum
bank capital adequacy requirements and the OTS requirements for
classification as a well capitalized institution. Although the OTS
capital regulations apply at the Bank level only, the Companys
consolidated capital amounts and ratios are also presented. The OTS does
not have a holding company capital requirement.
29
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16), Continued
<TABLE>
<CAPTION>
OTS Required Capital Ratios
--------------------------------------
1997 1996
-------------------- -----------------
Actual Actual
-------------------- ----------------- For Minimum For Classification
Amount Ratio Amount Ratio Capital Adequacy as Well Capitalized
-------- ----- ------ ----- ---------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital:
Bank only $ 16,636 10.5% 13,816 9.0% 1.5%
Consolidated 20,608 13.0 20,619 13.4 N/A
Core (Tier 1) capital:
Bank only 16,636 10.5 13,816 9.0 3.0 5.0%
Consolidated 20,608 13.0 20,619 13.4 N/A N/A
Risk-based capital:
Core (Tier 1):
Bank only 16,636 24.0 13,816 21.7 6.0
Consolidated 20,608 29.7 20,619 32.4 N/A
Total:
Bank only 17,456 25.2 14,573 22.9 8.0 10.0
Consolidated 21,429 30.9 21,376 33.5 N/A N/A
</TABLE>
30
<PAGE>
(17) Parent Company Financial Information
The following information presents the financial position of AFSALA
Bancorp, Inc. (Parent Company) as of September 30, 1997 and 1996, and
the results of its operations and cash flows for the year ended
September 30, 1997. The results of its operations and cash flows for the
year ended September 30, 1996 are not applicable as there was no
activity prior to its initial public offering on September 30, 1996.
<TABLE>
<CAPTION>
Balance Sheets 1997 1996
-------------- ---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,876,462 --
Loan receivable from subsidiary bank -- 5,695,128
Loan receivable from ESOP 1,080,105 1,107,800
Investment in subsidiary bank 16,647,627 13,787,944
Other assets 9,641 --
------------ ----------
Total assets $ 21,613,835 20,590,872
============ ==========
Liabilities and stockholders equity
Liabilities:
Accrued expenses and other liabilities 994,714 --
------------ ----------
Stockholders Equity:
Preferred stock, $0.10 par value; authorized
500,000 shares; none issued
Common stock, $0.10 par value; authorized
3,000,000 shares; 1,454,750 shares issued 145,475 145,475
Additional paid-in capital 13,465,092 13,460,381
Retained earnings, substantially restricted 9,048,824 8,120,864
Common stock acquired by ESOP (108,010 shares
in 1997 and 110,780 shares in 1996) (1,080,105) (1,107,800)
Unearned Restricted Stock Plan (733,194) --
Treasury stock, at cost (15,000 shares in 1997) (238,125) --
Net unrealized gain (loss) on securities available
for sale, net of tax 11,154 (28,048)
------------ ----------
Total stockholders equity 20,619,121 20,590,872
------------ ----------
Total liabilities and stockholders equity $ 21,613,835 20,590,872
============ ==========
</TABLE>
Statement of Income
Year ended September 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Interest income $ 312,953
Dividends from subsidiary bank 58,190
Interest expense --
----------
Net interest income 371,143
Non-interest expenses 75,013
----------
Income before income tax expense and equity
in undistributed earnings of subsidiary bank 296,130
Income tax expense 95,176
----------
Income before equity in undistributed earnings
of subsidiary bank 200,954
Equity in undistributed earnings of subsidiary bank 988,075
----------
Net income $1,189,029
==========
</TABLE>
31
<PAGE>
(17), Continued
Statement of Cash Flows
Year ended September 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 1,189,029
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed earnings of
subsidiary bank (1,014,668)
Increase in other assets (71,641)
-----------
Net cash provided by operating
activities 102,720
-----------
Cash flows from investing activities:
Payments on loan receivable from subsidiary bank 5,695,128
Payments on loan receivable from ESOP 27,695
-----------
Net cash provided by investing
activities 5,722,823
-----------
Cash flows from financing activities:
Purchases of treasury stock (1,030,625)
Cash dividends paid on common stock (107,738)
-----------
Net cash used in financing activities (1,138,363)
-----------
Net increase in cash and cash equivalents 3,876,462
Cash and cash equivalents at beginning of year --
-----------
Cash and cash equivalents at end of year $ 3,876,462
===========
</TABLE>
These financial statements should be read in conjunction with the
Companys consolidated financial statements and notes thereto.
32
<PAGE>
CORPORATE INFORMATION
EXECUTIVE OFFICERS:
John M. Lisicki Benjamin W. Ziskin James J. Alescio
President and Chief Vice President Treasurer and
Executive Officer Chief Financial Officer
DIRECTORS:
Dr. Ronald S. Tecler John M. Lisicki Dr. Daniel J. Greco
Dentist President and Chief Retired
Executive Officer (School Superintendent)
Joseph G. Opalka John A. Tesiero, Jr. John A. Kosinski, Jr.
Accountant Owner Attorney
Construction Supply Business
Florence B. Opiela
Retired
(Bank Executive)
Stock Transfer Agent
American Stock Transfer & Trust Co.
40 Wall Street 46th Street
New York, New York 10005
Special Legal Counsel
Malizia, Spidi, Sloane & Fisch, P.C.
1301 K Street, N.W.
Washington, D.C. 20005
Independent Auditors
KPMG Peat Marwick LLP
74 North Pearl Street
Albany, New York 12207
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
Amsterdam Federal Bank - chartered by the United States of America
AFS Service Corp.* - chartered by New York
- ---------------
* a subsidiary of Amsterdam Federal Bank
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,127
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,705
<INVESTMENTS-CARRYING> 35,264
<INVESTMENTS-MARKET> 35,470
<LOANS> 76,927
<ALLOWANCE> 1,108
<TOTAL-ASSETS> 160,407
<DEPOSITS> 135,316
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,056
<LONG-TERM> 1,416
0
0
<COMMON> 145
<OTHER-SE> 20,474
<TOTAL-LIABILITIES-AND-EQUITY> 160,407
<INTEREST-LOAN> 6,133
<INTEREST-INVEST> 4,051
<INTEREST-OTHER> 585
<INTEREST-TOTAL> 10,769
<INTEREST-DEPOSIT> 5,400
<INTEREST-EXPENSE> 115
<INTEREST-INCOME-NET> 5,254
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,597
<INCOME-PRETAX> 1,813
<INCOME-PRE-EXTRAORDINARY> 1,813
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,189
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
<YIELD-ACTUAL> 7.33
<LOANS-NON> 469
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 879
<CHARGE-OFFS> 23
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,108
<ALLOWANCE-DOMESTIC> 665
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 443
</TABLE>
