UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1998 Commission File No. 0-21113
AFSALA BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 14-1793890
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
161 CHURCH STREET, AMSTERDAM, NY 12010
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (518) 842-5700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares of outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares outstanding
Class of Common Stock as of August 7, 1998
--------------------- ----------------------------
Common Stock, Par $.10 1,319,018
Transitional Small Business Disclosure Format (Check One): Yes No X
----- -----
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1998
INDEX
Part I CONSOLIDATED FINANCIAL INFORMATION Page
- ------
Item 1. Financial Statements...............................................1
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and September 30, 1997 ....................1
Consolidated Statements of Income for the three
months ended June 30, 1998 and 1997 (Unaudited) ...................2
Consolidated Statements of Income for the nine
months ended June 30, 1998 and 1997 (Unaudited) ...................3
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997 (Unaudited)....................4
Notes to unaudited consolidated interim financial statements.......5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................8
Part II OTHER INFORMATION
- -------
Item 1. Legal
Proceedings.................................................................23
Item 2. Changes in Securities and Use of
Proceeds....................................................................23
Item 3. Defaults Upon Senior
Securities..................................................................23
Item 4. Submission of Matters to a Vote of Security Holders...............23
Item 5. Other
Information.................................................................23
Item 6. Exhibits and Reports on Form 8-K. ..............................23
Signatures..................................................................24
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Assets
Cash and due from banks $ 5,309,168 $ 5,127,320
Federal funds sold 12,500,000 2,675,000
Term deposits with the Federal Home Loan Bank 3,000,000 --
------------- -------------
Total cash and cash equivalents 20,809,168 7,802,320
------------- -------------
Securities available for sale, at fair value 45,901,769 37,705,373
Investment securities held to maturity 16,619,065 35,263,826
Federal Home Loan Bank of New York stock, at cost 565,300 565,300
Loans receivable 81,118,419 76,927,350
Less: Allowance for loan losses (1,147,901) (1,108,080)
------------- -------------
Net loans receivable 79,970,518 75,819,270
------------- -------------
Accrued interest receivable 1,388,204 1,405,687
Premises and equipment, net 1,747,141 1,659,444
Other assets 300,226 186,066
------------- -------------
Total assets $ 167,301,391 $ 160,407,286
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits 144,546,188 135,316,322
Federal Home Loan Bank of New York long term
borrowings 1,599,272 1,415,625
Escrow accounts 486,676 266,656
Accrued expenses and other liabilities 1,594,583 2,789,562
------------- -------------
Total liabilities 148,226,719 139,788,165
------------- -------------
Commitments and contingent liabilities
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 13,556,761 13,465,092
Retained earnings, substantially restricted 9,485,393 9,048,824
Common stock acquired by ESOP (969,325) (1,080,105)
Unearned Restricted Stock Plan (615,359) (733,194)
Treasury stock, at cost (2,561,731) (238,125)
Net unrealized gain on securities available for sale, net of tax 33,458 11,154
------------- -------------
Total stockholders' equity 19,074,672 20,619,121
------------- -------------
Total liabilities and stockholders' equity $ 167,301,391 $ 160,407,286
============= =============
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
-1-
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the three months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,605,241 $1,522,309
Interest on federal funds sold 124,078 80,516
Interest on FHLB term deposits 117,670 --
Interest on securities available for sale 672,898 432,366
Interest on investment securities 310,537 674,214
Dividends on Federal Home Loan Bank of NY stock 10,500 8,809
---------- ----------
Total interest and dividend income 2,840,924 2,718,214
---------- ----------
Interest expense:
Deposits and escrow accounts 1,502,532 1,372,241
Federal Home Loan Bank of New York long term
borrowings 27,985 28,907
---------- ----------
Total interest expense 1,530,517 1,401,148
---------- ----------
Net interest income 1,310,407 1,317,066
Provision for loan losses 5,000 60,000
---------- ----------
Net interest income after provision for losses 1,305,407 1,257,066
---------- ----------
Non-interest income:
Service charges on deposit accounts 83,849 83,136
Other 2,638 2,237
---------- ----------
Total non-interest income 86,487 85,373
---------- ----------
Non-interest expenses:
Compensation and benefits 516,637 402,668
Occupancy and equipment 144,166 134,255
FDIC deposit insurance premium 21,439 20,519
Data processing fees 76,280 63,889
Professional services fees 51,824 81,967
Advertising 21,129 18,534
Supplies 22,212 35,654
Acquisition-related expenses 126,522 --
Other 140,757 115,032
---------- ----------
Total non-interest expenses 1,120,966 872,518
---------- ----------
Income before income tax expense 270,928 469,921
Income tax expense 155,000 160,000
---------- ----------
Net income $ 115,928 $ 309,921
========== ==========
Earnings per share:
Basic $ 0.10 $ 0.23
========== ==========
Diluted $ 0.09 $ 0.23
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
- 2 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the nine months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $4,718,477 $4,559,434
Interest on federal funds sold 306,007 278,163
Interest on FHLB term deposits 185,558 142,037
Interest on securities available for sale 1,882,266 936,270
Interest on investment securities 1,249,721 2,014,125
Dividends on Federal Home Loan Bank of NY stock 30,860 27,053
---------- ----------
Total interest and dividend income 8,372,889 7,957,082
---------- ----------
Interest expense:
Deposits and escrow accounts 4,351,568 3,968,968
Federal Home Loan Bank of New York long term
borrowings 86,886 88,482
---------- ----------
Total interest expense 4,438,454 4,057,450
---------- ----------
Net interest income 3,934,435 3,899,632
Provision for loan losses 55,000 210,000
---------- ----------
Net interest income after provision for loan losses 3,879,435 3,689,632
---------- ----------
Non-interest income:
Service charges on deposit accounts 260,582 282,172
Other 19,241 31,657
---------- ----------
Total non-interest income 279,823 313,829
---------- ----------
Non-interest expenses:
Compensation and benefits 1,462,034 1,139,741
Occupancy and equipment 407,536 407,048
FDIC deposit insurance premium 64,455 96,532
Data processing fees 222,026 205,963
Professional service fees 115,975 213,591
Advertising 48,264 43,024
Supplies 81,792 85,295
Acquisition-related expenses 155,943 --
Other 432,419 485,163
---------- ----------
Total non-interest expenses 2,990,444 2,676,357
---------- ----------
Income before income tax expense 1,168,814 1,327,104
Income tax expense 485,825 464,731
---------- ----------
Net income $ 682,989 $ 862,373
========== ==========
Earnings per share:
Basic $ 0.56 $ 0.64
========== ==========
Diluted $ 0.54 $ 0.64
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
- 3 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash
Flows For the nine months ended June 30,
1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 682,989 $ 862,373
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 119,556 129,857
Provision for loan losses 55,000 210,000
Allocation of ESOP stock 170,951 32,406
RSP compensation expense 117,835 13,093
Decrease (increase) in accrued interest receivable 17,483 (218,082)
(Increase) decrease in other assets (114,160) 232,048
Increase (decrease) in accrued expenses and other liabilities 471,425 (3,758,615)
------------ ------------
Total adjustments 838,090 (3,359,293)
------------ ------------
Net cash provided by (used in) operating activities 1,521,079 (2,496,920)
------------ ------------
Cash flows from investing activities:
Proceeds from the maturity and call of securities
available for sale 19,687,398 8,132,062
Purchases of securities available for sale (29,350,000) (18,000,000)
Proceeds from the maturity and call of investment securities 19,184,102 6,088,234
Purchases of investment securities (539,340) (11,485,060)
Net loans made to customers (4,206,248) (3,422,015)
Capital expenditures (207,254) (113,957)
------------ ------------
Net cash provided by ( used in) investing activities 4,568,658 (18,800,736)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 9,229,866 8,787,040
Borrowing from the Federal Home Loan Bank 500,000 --
Repayments on long term borrowings from the
Federal Home Loan Bank (316,353) (303,125)
Net increase (decrease) in escrow accounts 220,020 (73,937)
Purchase of treasury stock (2,470,002) --
Cash dividends paid on common stock (246,420) (53,870)
------------ ------------
Net cash provided by financing activities 6,917,111 8,356,108
------------ ------------
Net increase (decrease) in cash and cash equivalents 13,006,848 (12,941,548)
Cash and cash equivalents at beginning of period 7,802,320 27,016,392
------------ ------------
Cash and cash equivalents at end of period $ 20,809,168 $ 14,074,844
============ ============
Additional Disclosures Relative to Cash Flows:
Interest paid $ 4,437,120 $ 4,066,692
============ ============
Taxes paid $ 882,268 $ 307,738
============ ============
Supplemental schedule of non-cash investing and financing activities:
Change in net unrealized gain on securities available for sale, net of tax $ 22,304 $ (829)
============ ============
Decrease in amounts due to broker from purchases of
securities available for sale $ (1,500,000) $ --
============ ============
Tax benefit associated with the vesting of Restricted Stock Plan shares $ 31,498 $ --
============ ============
Decrease in amounts due to broker from purchases of treasury stock $ (146,396) $ --
============ ============
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
-4 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements include the
accounts of AFSALA Bancorp, Inc. and its subsidiary (the Company) Amsterdam
Federal Bank. The accompanying unaudited consolidated interim financial
statements have been prepared in accordance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accounting and reporting policies of the Company conform in all
material respects to generally accepted accounting principles and to general
practice within the savings bank industry. It is the opinion of management that
the accompanying unaudited consolidated interim financial statements reflect all
adjustments which are considered necessary to report fairly the financial
position as of June 30, 1998, the Consolidated Statements of Income for the
three months and nine months ended June 30, 1998 and 1997, and the Consolidated
Statements of Cash Flows for the nine months ended June 30, 1998 and 1997. The
results of operations for the nine months ended June 30, 1998, are not
necessarily indicative of results that may be expected for the entire year
ending September 30, 1998. The accompanying unaudited consolidated interim
financial statements should be read in conjunction with AFSALA Bancorp, Inc.'s
September 30, 1997 consolidated financial statements, including the notes
thereto, which are included in AFSALA Bancorp, Inc's 1997 Annual Report on Form
10-KSB.
NOTE 2. Proposed Merger
On April 23, 1998, AFSALA Bancorp, Inc. ("AFSALA") jointly announced that it had
entered into a Reorganization and Merger Agreement (the "Agreement") with Ambanc
Holding Co., Inc., Amsterdam, New York ("Ambanc") for the merger of AFSALA with
and into Ambanc and the merger of AFSALA's wholly-owned subsidiary, Amsterdam
Federal Bank, with and into Ambanc's wholly-owned subsidiary, Amsterdam Savings
Bank, FSB (collectively, the "Merger"). The parties to the Agreement will in the
future jointly rename the resulting bank. In consideration of the merger, each
outstanding share of common stock of AFSALA will be exchanged for 1.07 shares of
Ambanc common stock. Consummation of the Merger is subject to satisfaction of a
number of conditions, including, among other things, stockholder and regulatory
approval and the receipt of a written fairness opinion by AFSALA that the
consideration offered pursuant to the Agreement is fair from a financial point
of view to the stockholders of AFSALA. It is anticipated that the Merger will be
consummated during the fourth quarter of calendar 1998 and will be accounted for
as a purchase transaction.
In connection with the Agreement, AFSALA and Ambanc have entered into a Stock
Option Agreement dated April 24, 1998, pursuant to which Ambanc has the right to
purchase 344,500 shares of AFSALA common stock at a price of $20.75 per share
exercisable under certain circumstances.
-5 -
<PAGE>
NOTE 3. Earnings Per Share
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share (EPS).
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share" and related interpretations. SFAS No. 128 requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and specifies additional disclosure
requirements.
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. Unvested restricted stock awards are considered outstanding
common shares and included in the computation of basic EPS as of the date that
they are fully vested. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity (such as the Company's stock options).
All prior period EPS data has been restated to conform to the provisions of this
Statement.
The following tables provide the calculation of basic and diluted EPS:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ ---------------------------------------
Weighted Per- Share Weighted Per- Share
Income Avg. Shares Amount Income Avg. Shares Amount
------ ----------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders $ 115,928 1,201,259 $ 0.10 $ 309,921 1,346,740 $ 0.23
========= =========
Effect of Dilutive Securities:
Stock options 37,813 2,699
Unvested restricted stock awards 15,596 945
------- ---------
Diluted EPS $ 115,928 1,254,668 $ 0.09 $ 309,921 1,350,384 $ 0.23
========= ========= ========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 30,
----------------------------------------------------------------------------------------
1998 1997
------------------------------------------ --------------------------------------
Weighted Per- Share Weighted Per- Share
Income Avg. Shares Amount Income Avg. Shares Amount
------ ----------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders $ 682,989 1,219,410 $ 0.56 $ 862,373 1,345,817 $ 0.64
========== ==========
Effect of Dilutive Securities:
Stock options 35,130
900
Unvested restricted stock awards 15,379 315
--------- ---------
Diluted EPS $ 682,989 1,269,919 $ 0.54 $ 862,373 1,347,031 $ 0.64
============ =========== ========== ========= =========== ==========
</TABLE>
-6 -
<PAGE>
NOTE 4. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (`FASB") issued SFAS No.
130, "Reporting Comprehensive Income" (Statement 130), which establishes
standards for reporting and display of comprehensive income and its components
in financial statements. Statement 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 fiscal
years beginning after December 15, 1997. As required, the Company will adopt
Statement 130 in the first quarter of fiscal 1999, and will report and display
comprehensive income in accordance with the new statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131), which establishes standards
for reporting by public companies about operating segments of their business.
Statement 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. Management does not anticipate
that the adoption of this statement will have a material effect on the Company's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
-7 -
<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 aquire 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 and dividend 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 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 loans to assets ratio and a high
proportion of lower-costing, non-time deposit accounts in the deposit portfolio.
At June 30, 1998, the Bank's loans receivable, net, to assets ratio was 47.8%,
up from 47.3% at September 30, 1997. At June 30, 1998 and September 30, 1997,
$70.7 million or 48.9% and $65.6 million or 48.5%, respectively of total
deposits were in non-time deposits accounts.
Forward-Looking Statements
This Form 10-QSB includes forward-looking statements that involve inherent risks
and uncertainties. The Company cautions readers that a number of important
factors could cause actual results to differ materially from those in the
forward-looking statements. Those factors include fluctuations in interest
rates, inflation, government regulations, and economic conditions and
competition in the geographic and business areas in which the Company conducts
its operations. The interim financial information should be read in conjunction
with the Company's 1997 Annual Report on Form 10-KSB.
- 8 -
<PAGE>
Mergers and Acquisitions
On April 23, 1998, AFSALA Bancorp, Inc. ("AFSALA") jointly announced that it had
entered into a Reorganization and Merger Agreement (the "Agreement") with Ambanc
Holding Co., Inc., Amsterdam, New York ("Ambanc") for the merger of AFSALA with
and into Ambanc and the merger of AFSALA's wholly-owned subsidiary, Amsterdam
Federal Bank, with and into Ambanc's wholly-owned subsidiary, Amsterdam Savings
Bank, FSB (collectively, the "Merger"). The parties to the Agreement will in the
future jointly rename the resulting bank. In consideration of the merger, each
outstanding share of common stock of AFSALA will be exchanged for 1.07 shares of
Ambanc common stock. Consummation of the Merger is subject to satisfaction of a
number of conditions, including, among other things, stockholder and regulatory
approval and the receipt of a written fairness opinion by AFSALA that the
consideration offered pursuant to the Agreement is fair from a financial point
of view to the stockholders of AFSALA. It is anticipated that the Merger will be
consummated during the fourth quarter of calendar 1998 and will be accounted for
as a purchase transaction.
In connection with the Agreement, AFSALA and Ambanc have entered into a Stock
Option Agreement dated April 24, 1998, pursuant to which Ambanc has the right to
purchase 344,500 shares of AFSALA common stock at a price of $20.75 per share
exercisable under certain circumstances.
Consolidated Financial Condition
Total assets increased by $6.9 million or 4.3% to $167.3 million at June 30,
1998 from $160.4 million at September 30, 1997. This increase was primarily
attributable to an increase in federal funds sold of $9.8 million or 367.3%, an
increase in term deposits with the Federal Home Loan Bank from $0 to $3.0
million, and an increase in net loans receivable of $4.2 million or 5.5% to
$80.0 million. The increase in net loans receivable was due to increased loan
activity primarily in residential mortgage and home equity loans. These
increases where offset by a decrease in total securities (securities available
for sale and investment securities held to maturity) of $10.4 million or 14.3%.
These shifts were primarily the result of the investment of funds from
maturities and calls of securities, in addition to the proceeds from growth in
deposits, into federal fund sold and term deposits with the Federal Home Loan
Bank.
The Company's deposits increased by $9.2 million or 6.8% to $144.5 million at
June 30, 1998 from $135.3 million at September 30, 1997 due in part to the
opening of a new supermarket branch in December 1997. In addition, Federal Home
Loan Bank of New York long term borrowings increased $184 thousand or 13.0% to
$1.6 million at June 30, 1998 from $1.4 million at September 30, 1997, due to an
additional borrowing of $500 thousand, offset by repayments of $316 thousand.
Accrued expenses and other liabilities decreased $1.2 million or 42.8% to $1.6
million at June 30, 1998 from $2.8 million at September 30, 1997, resulting
primarily from the payment of amounts due to brokers from purchases of
securities outstanding on September 30, 1997.
Stockholders' equity decreased by $1.5 million or 7.5% to $19.1 million at June
30, 1998 from $20.6 million at September 30, 1997. The decrease was primarily
the result of purchases of treasury stock and cash dividends paid, offset by net
income for the nine months ended June 30, 1998. In addition, 11,078 shares of
common stock were committed to be released by the Company's ESOP as of December
31, 1997, which increased equity by $171 thousand.
- 9 -
<PAGE>
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.
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 needs 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, 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.
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 decreased to 2.76% for the three months ended June
30,1998 from 2.89% for the three months ended June 30, 1997. The interest rate
spread for the nine months ended June 30, 1998 was 2.80%, as compared to 2.90%
for the nine months ended June 30, 1997.
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.
- 10-
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Average Balance Sheet, Interest Rates and Yields
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Cost(1) Balance Paid Cost(1)
------- ---- ------- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 9,322 124 5.34% $ 6,105 81 5.32%
Term deposits with the FHLB 8,553 118 5.53 -- --
Securities available for sale (2) 41,741 673 6.47 27,465 432 6.31
Investment securities held to
maturity 19,436 311 6.42 41,673 674 6.49
FHLB of NY stock 565 10 7.10 565 9 6.39
Net loans receivable (3) 76,895 1,605 8.37 72,462 1,522 8.42
--------- -------- ----- --------- -------- -----
Total interest-earning assets 156,512 2,841 7.28 148,270 2,718 7.35
-------- ----- -------- -----
Non-interest earning assets 8,337 7,739
--------- ---------
Total assets $ 164,849 $ 156,009
========= =========
Interest-bearing liabilities:
Savings accounts $ 37,649 283 3.00 $ 36,364 272 3.00
NOW accounts 12,238 70 2.29 11,227 65 2.32
Money market accounts 10,786 117 4.35 9,266 95 4.11
Time deposit accounts 73,129 1,031 5.65 67,277 939 5.60
Escrow accounts 376 2 2.13 204 1 1.97
FHLB of NY
long term borrowings 1,639 28 6.85 1,631 29 7.13
---------- ---------- ------ ----------- ---------- ------
Total interest-bearing liabilities 135,817 1,531 4.52 125,969 1,401 4.46
---------- ------ ---------- ------
Non-interest bearing deposits 8,419 7,970
Other non-interest bearing liabilities 1,087 816
Equity 19 526 21,254
---------- -----------
Total liabilities and equity $ 164,849 $ 156,009
========== ===========
Net interest income $ 1,310 $ 1,317
========= ========
Interest rate spread 2.76% 2.89%
====== ======
Net interest margin 3.36% 3.56%
====== ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities 115.24% 117.70%
========== ==========
</TABLE>
(1) Annualized
(2) Average securities available for sale are included at approximate fair
value. The adjustment to approximate fair value is not considered material.
(3) Calculated net of allowance for loan losses. Includes non-accrual loans.
- 11 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Average Balance Sheet, Interest Rates and Yields
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended June 30,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
------- ---- ------- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 7,660 306 5.34% $ 7,121 278 5.22%
Term deposits with the FHLB 4,504 186 5.52 3,480 142 5.46
Securities available for sale (2) 38,793 1,882 6.49 20,846 936 6.00
Investment securities held to
maturity 25,654 1,250 6.51 41,129 2,014 6.55
FHLB of NY stock 565 31 7.34 565 27 6.39
Net loans receivable (3) 76,118 4,718 8.29 72,068 4,560 8.46
-------- ------ ------- -------- ------ -----
Total interest-earning assets 153,294 8,373 7.30 145,209 7,957 7.33
----- ------- ------ -----
Non-interest earning assets 7,729 7,000
-------- --------
Total assets $ 161,023 $ 152,209
======== ========
Interest-bearing liabilities:
Savings accounts $ 36,448 819 3.00 $ 35,911 805 3.00
NOW accounts 12,081 206 2.28 10,957 189 2.31
Money market accounts 10,524 336 4.27 8,745 263 4.02
Time deposit accounts 70,651 2,984 5.65 64,853 2,706 5.58
Escrow accounts 343 6 2.34 267 6 3.00
FHLB of NY
long term borrowings 1,694 87 6.87 1,677 88 7.02
-------- ----- ------- -------- ------- -----
Total interest-bearing liabilities 131,741 4,438 4.50 122,410 4,057 4.43
----- ------- ------- -----
Non-interest bearing deposits 8,196 7,703
Other non-interest bearing liabilities 1,220 1,099
Equity 19,866 20,997
-------- ---------
Total liabilities and equity $ 161,023 $ 152,209
======== =========
Net interest income $ 3,935 $ 3,900
======= =======
Interest rate spread 2.80% 2.90%
======= =====
Net interest margin 3.43% 3.59%
======= =====
Ratio of average interest-earning
assets to average
interest-bearing liabilities 116.36% 118.63%
======= ========
</TABLE>
(1) Annualized
(2) Average securities available for sale are included at approximate fair
value. The adjustment to approximate fair value is not considered material.
(3) Calculated net of allowance for loan losses. Includes non-accrual loans.
- 12 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
RATE/ VOLUME ANALYSIS
(Unaudited)
THREE MONTHS ENDED JUNE 30,1998
COMPARED WITH
THREE MONTHS ENDED JUNE 30, 1997
--------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------------------
DUE TO
------------------------------------------------
VOLUME RATE NET
<S> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ 43,253 309 43,562
Term deposits with the FHLB 117,670 - 117,670
Securities available for sale 229,345 11,188 240,533
Investment securities held to
maturity (356,473) (7,205) (363,678)
FHLB of NY stock - 1,691 1,691
Net loans receivable 92,062 (9,130) 82,932
---------- --------- --------
Total interest and dividend income 125,857 (3,147) 122,710
---------- --------- --------
Interest expense:
Savings accounts 10,528 - 10,528
NOW accounts 5,889 (834) 5,055
Money market accounts 16,593 5,909 22,502
Time deposit accounts 83,441 8,564 92,005
Escrow accounts 183 18 201
FHLB of NY long term borrowings 146 (1,068) (922)
---------- -------- --------
Total interest expense 116,780 12,589 129,369
---------- -------- --------
Net change in net interest income $ 9,077 $ (15,736) $ (6,659)
========= ======== ========
</TABLE>
NINE MONTHS ENDED JUNE 30,1998
COMPARED WITH
NINE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------------------
DUE TO
------------------------------------------------
VOLUME RATE NET
<S> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ 21,356 6,488 27,844
Term deposits with the FHLB 41,954 1,567 43,521
Securities available for sale 864,038 81,958 945,997
Investment securities held to
maturity (752,195) (12,210) (764,405)
FHLB of NY stock - 3,807 3,807
Net loans receivable 252,150 (93,106) 159,044
------------ ----------- -----------
Total interest and dividend income 427,303 (11,496) 415,807
------------ ----------- -----------
Interest expense:
Savings accounts 13,521 - 13,521
NOW accounts 19,868 (2,401) 17,467
Money market accounts 55,902 17,091 72,993
Time deposit accounts 244,071 34,243 278,314
Escrow accounts 1,658 (1,354) 304
FHLB of NY long term borrowings 673 (2,268) (1,595)
----------- ----------- -----------
Total interest expense 335,693 45,311 381,004
----------- ----------- -----------
Net change in net interest income $ 91,610 $ (56,807) $ 34,803
=========== =========== ===========
</TABLE>
- 13 -
<PAGE>
Comparison of Operating Results for the Three Months Ended June 30,
1998 and 1997.
Net Income. Net income decreased by $194 thousand or 62.6% for the three months
ended June 30, 1998 to $116 thousand from $310 thousand for the three months
ended June 30, 1997. Net income for the three months ended June 30, 1998 was
reduced primarily as a result of increased non-interest expenses, offset in part
by a decrease in the provision for loan losses. These and other changes are
discussed in more detail below.
Net Interest Income. Net interest income remained constant at $1.3 million for
the three months ended June 30, 1998 and 1997. During the period, total average
interest-earning assets increased $8.2 million or 5.6%, to $156.5 million.
However, the increase in the average balance of total interest-bearing
liabilities of $9.8 million or 7.8%, to $135.8 million, exceeded the increase in
total average interest-earning assets. Total average interest-bearing
liabilities increased $1.6 million more than total average interest-earning
assets due primarily to the Company's repurchase of 136 thousand shares of stock
for a total cost of $2.6 million through June 30, 1998. The increase in the
average balance of total interest-bearing liabilities was accompanied by a 6
basis point increase in the average rate paid on these funds, while the increase
in the average balance of interest earning assets was offset by a decline of 7
basis points in the average yield on interest-earning assets during the period.
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 with the FHLB of New
York. Interest-bearing liabilities primarily consist of interest-bearing
deposits and long term borrowings from the FHLB of New York.
The interest rate spread, which is the difference between the yield on average
interest-earning assets and the percentage cost of average interest-bearing
liabilities, decreased to 2.76% for the three months ended June 30, 1998 from
2.89% for the three months ended June 30, 1997. The decrease in the interest
rate spread is primarily the result of a decrease in the average yield of
interest-earning assets coupled with an increase in the average cost of
interest-bearing liabilities during this period.
Interest and Dividend Income. Interest and dividend income increased by
approximately $123 thousand or 4.5% to $2.8 million for the three months ended
June 30, 1998 from $2.7 million for the three months ended June 30, 1997. The
increase was largely the result of an increase of $8.2 million or 5.6% in the
average balance of interest earning assets to $156.5 million for the three
months ended June 30, 1998 as compared to $148.3 million for the three months
ended June 30, 1997. The increase in the average balance of interest earning
assets consisted primarily of increases in the average balance of federal funds
sold of $3.2 million or 52.7%, term deposits with the FHLB of NY from $0 to $8.6
million, and an increase in the average balance of net loans receivable of $4.4
million or 6.1%. These increases were offset by a decrease in the average
balance of total securities (securities available for sale and investment
securities held to maturity) of $8.0 million or 11.5%. Also, offsetting the
effects of the increase in the average balance of interest-earning assets was a
7 basis point decrease in the average yield on total interest earning assets.
The yield on the average balance of interest earning assets was 7.28% and 7.35%
for the three months ended June 30, 1998 and 1997, respectively.
- 14 -
<PAGE>
Interest income on securities available for sale increased $241 thousand or
55.6% to $673 thousand for the three months ended June 30, 1998 from $432
thousand for the same period of the previous year. This increase is primarily
the result of an increase in the average balance of securities available for
sale of $14.3 million combined with a 16 basis point increase in the average
yield on these securities. Interest income on investment securities held to
maturity decreased $364 thousand or 53.9% to $311 thousand for the three months
ended June 30, 1998 from $674 thousand for three months ended June 30, 1997.
This decrease is primarily the result of a decrease in the average balance of
investment securities held to maturity of $22.2 million offset in part by a 7
basis point increase in the average yield on these securities.
Interest and fees on loans increased $83 thousand or 5.4% to $1.6 million for
the three months ended June 30, 1998. This increase was primarily the result of
an increase in the average balance of net loans receivable of $4.4 million
offset by a 5 basis point decrease in the average yield on net loans receivable.
Interest Expense. Interest on deposits and escrow accounts increased by $130
thousand for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997. This increase in interest on deposits and escrow accounts
was substantially due to the increase in interest expense related to money
market and time deposit accounts. Interest expense on money market and time
deposit accounts was $117 thousand and $1.0 million, respectively, for the three
months ended June 30, 1998, compared to $95 thousand and $939 thousand,
respectively, for the three months June 30, 1997. These increases were due
primarily to increases in the average balances of the respective deposit types.
Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased approximately $1 thousand or 3.2% to $28 thousand
for the three months ended June 30, 1998. This decrease was primarily due to a
decrease of 28 basis points in the average cost of borrowings offset by a $8
thousand increase in the average amount of borrowings outstanding during the
comparable periods. The Company uses FHLB advances as a funding source and
generally uses long term borrowings to supplement deposits, which are the
Company's primary source of funds.
- 15 -
<PAGE>
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. Management determines the adequacy of the allowance for loan
losses based upon its analysis of risk factors in the loan portfolio. This
analysis includes evaluation of credit risk, historical loss experience, current
economic conditions, estimated fair value of underlying collateral,
delinquencies, and other factors. 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 provision
for loan losses for the three months ended June 30, 1998 decreased $55 thousand
from $60 thousand for the three months ended June 30, 1997.
Non-Interest Income. Non-interest income and its components remained fairly
constant for the three months ended June 30, 1998 and 1997.
Non-Interest Expenses. Non-interest expenses increased $248 thousand or 28.5% to
$1.1 million for the three months ended June 30, 1998 from $873 thousand for the
three months ended June 30, 1997.
Compensation and benefits expense increased by $114 thousand or 28.3% due
primarily to increased costs related to the Company's ESOP, the establishment of
the Restricted Stock Plan in May 1997, the opening of a new branch in December
1997, as well as general cost of living and merit raises to employees.
Management believes that compensation and benefits expenses may increase in
future periods as a result of the costs related to the Company's ESOP, as the
expense related to the ESOP is dependent on the Company's average stock price.
Professional service fees for the three months ended June 30, 1998 were down $30
thousand or 36.8% from $82 thousand for the same period in the previous year.
This decrease was due primarily to additional legal and accounting costs
incurred during the three months ended June 30, 1997 associated with being a
newly-formed public company.
Non-interest expenses for the three months ended June 30, 1998 included
non-tax-deductible acquisition-related expenses totaling approximately $127
thousand incurred in connection with the previously announced merger agreement
with Ambanc Holding Co., Inc. Management expects to incur additional
acquisition-related expenses in future periods, which will increase non-interest
expenses.
Income Tax Expense. Income tax expense decreased by $5 thousand or 3.1% to $155
thousand for the three months ended June 30, 1998 from $160 thousand for the
three months ended June 30, 1997. However, the effective tax rate increased from
34.1% for the three months ended June 30, 1997 to 57.2% for the three months
ended June 30, 1998. The increase in the effective tax rate was due primarily to
the non-tax-deductible acquisition-related expenses mentioned above.
- 16-
<PAGE>
Comparison of Operating Results for the Nine Months Ended June 30,
1998 and 1997.
Net Income. Net income decreased by $179 thousand or 20.8% for the nine months
ended June 30, 1998 to $683 thousand from $862 thousand for the nine months
ended June 30, 1997. Net income for the nine months ended June 30, 1998 was
reduced primarily as a result of increased non-interest expenses offset in part
by a decrease in the provision for loan losses. These and other changes are
discussed in more detail below.
Net Interest Income. Net interest income increased $35 thousand for the nine
months ended June 30, 1998 as compared to the same period in 1997. During the
period, total average interest-earning assets increased $8.1 million or 5.6%, to
$153.3 million. However, the increase in the average balance of total
interest-bearing liabilities of $9.3 million or 7.6%, to $131.7 million,
exceeded the increase in total average interest-earning assets. This was due
primarily to the Company's repurchase of 136 thousand shares of stock for a
total cost of $2.6 million through June 30, 1998. The increase in the average
balance of total interest-bearing liabilities was accompanied by a 7 basis point
increase in the average rate paid on these funds, while the increase in the
average balance of interest earning assets was offset by a decline of 3 basis
points in the average yield on interest-eaning assets during the period.
Interest and Dividend Income. Interest and dividend income increased by $416
thousand or 5.2% to $8.4 million for the nine months ended June 30, 1998 from
$8.0 million for the nine months ended June 30, 1997. The increase in interest
and dividend income was largely the result of an increase of $8.1 million or
5.6% in the average balance of interest earning assets to $153.3 million for the
nine months ended June 30, 1998 as compared to $145.2 million for the nine
months ended June 30, 1997. The increase in the average balance of interest
earning assets consisted primarily of increases in the average balance of net
loans receivable of $4.1 million or 5.6%, total securities (securities available
for sale and investment securities held to maturity) of $2.5 million or 4.0%,
and an increase in the average balance of term deposits with the FHLB of NY of
$1.0 million or 29.4%.
Interest income on securities available for sale increased $946 thousand or
101.0% to $1.9 million for the nine months ended June 30, 1998 from $936
thousand for the same period of the previous year. This increase is primarily
the result of an increase in the average balance of securities available for
sale of $17.9 million combined with a 49 basis point increase in the average
yield on these securities. Interest income on investment securities held to
maturity decreased $764 thousand or 38.0% to $1.2 million for the nine months
ended June 30, 1998 from $2.0 million for nine months ended June 30, 1997. This
decrease is primarily the result of a decrease in the average balance of
investment securities held to maturity of $15.5 million combined with a 4 basis
point decrease in the average yield on these securities.
Interest and fees on loans increased $159 thousand or 3.5% to $4.7 million for
the nine months ended June 30, 1998 from $4.6 million for the nine months ended
June 30, 1997. This increase was primarily the result of an increase in the
average balance of net loans receivable of $4.1 million, offset by a 17 basis
point decrease in the average yield on net loans receivable.
-17-
<PAGE>
Interest Expense. Interest on deposits and escrow accounts increased by $383
thousand for the nine months ended June 30, 1998 compared to the nine months
ended June 30, 1997. This increase in interest on deposits and escrow accounts
was primarily due to the increase in interest expense related to money market
and time deposit accounts. Interest expense on money market and time deposit
accounts was $336 thousand and $3.0 million, respectively, for the nine months
ended June 30, 1998, compared to $263 thousand and $2.7 million, respectively,
for the nine months ended June 30, 1997. These increases were due primarily to
increases in the average balances of the respective deposit types combined with
slight increases in the average rate paid on these deposits.
Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased approximately $2 thousand or 1.8% to $87 thousand
for the nine months ended June 30, 1998. This decrease was primarily due to a
decrease of 15 basis points in the average cost of borrowings offset by a $17
thousand or 1.0% increase in the average amount of borrowings outstanding during
the comparable periods.
Provision for Loan Losses. The provision for loan losses decreased $155 thousand
to $55 thousand for the nine months ended June 30, 1998 from $210 thousand for
the nine months ended June 30, 1997. The Company's provision for loan losses is
based upon its analysis of the adequacy of the allowance for loan losses.
Management determines the adequacy of the allowance for loan losses based upon
its analysis of risk factors in the loan portfolio. This analysis includes
evaluation of credit risk, historical loss experience, current economic
conditions, estimated fair value of underlying collateral, delinquencies, and
other factors.
Non-Interest Income. Non-interest income decreased during the nine months ended
June 30, 1998 to $280 thousand compared with $314 thousand for the nine months
ended June 30, 1997. Decreases in service charges on deposit accounts of $22
thousand and other non-interest income of $12 thousand comprised the decrease
from the previous period.
Non-Interest Expenses. Non-interest expenses increased $314 thousand or 11.7% to
$3.0 million for the nine months ended June 30, 1998 from $2.7 million for the
nine months ended June 30, 1997.
Compensation and benefits expense increased by $322 thousand or 28.3% from the
previous period due primarily to increased costs related to the Company's ESOP,
the establishment of the Restricted Stock Plan in May 1997, the opening of a new
branch in December 1997, as well as general cost of living and merit raises to
employees. Management believes that compensation and benefits expenses may
increase in future periods as a result of the costs related to the Company's
ESOP, as the expense related to the ESOP is dependent on the Company's average
stock price.
FDIC deposit insurance premiums decreased by $32 thousand or 33.2% due primarily
to reduced deposit insurance premium rates for the nine months ended June 30,
1998, as compared to the same period in the previous year.
-18-
<PAGE>
Professional service fees for the nine months ended June 30, 1998, decreased by
$98 thousand or 45.7% from $214 thousand for the nine months ended June 30,
1997, primarily as a result of additional legal and accounting costs incurred
during the nine months ended June 30, 1997 associated with being a newly-formed
public company.
Non-interest expenses for the nine months ended June 30, 1998 included
non-tax-deductible acquisition-related expenses totaling approximately $156
thousand incurred to date in connection with the previously announced merger
agreement with Ambanc Holding Co., Inc. Management expects to incur additional
acquisition-related expenses in future periods, which will increase non-interest
expenses.
Other non-interest expenses decreased $53 thousand or 10.9% to $432 thousand for
the nine months ended June 30, 1998 when compared to the same period in the
previous year. The decrease is primarily attributed to general expenses
associated with being a newly-formed public company, in addition to the write
off of certain items deemed uncollectible by management during the previous
period.
Income Tax Expense. Income tax expense increased to $486 thousand for the nine
months ended June 30, 1998 from $465 thousand for the nine months ended June 30,
1997. The increase to income tax expense was due primarily to the effects of the
non-tax-deductible acquisition-related expenses mentioned above offset in part
by the decrease 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 46.67% and 45.18% at
June 30, 1998 and September 30, 1997, 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 the nine months ended June 30, 1998
and 1997, the primary source of funds was cash flows from deposit growth.
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 June 30, 1998 and
September 30, 1997, the Company had outstanding borrowings from the FHLB of $1.6
million and $1.4 million, respectively.
-19-
<PAGE>
As of June 30, 1998 and September 30, 1997, the Company had $45.9 million and
$37.7 million of securities, respectively, classified as available for sale and
$16.6 million and $35.3 million of investment securities, respectively,
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 saving 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.
The Bank is subject to federal regulations that impose certain minimum capital
requirements. At June 30, 1998, the Bank's capital exceeded each of the
regulatory capital requirements of the OTS. The Bank is "well capitalized" at
June 30, 1998 according to regulatory definition. At June 30, 1998, the
Company's consolidated tangible and core capital levels were both $19.0 million
(11.38% of total adjusted assets) and its total risk-based capital level was
$19.1 million (25.73% 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 total risk-based capital.
During fiscal 1997, the stockholders approved the 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 as been approved by the OTS to repurchase up to 10% of its common
stock to be used for general corporate purposes. As of June 30, 1998, 135,732
shares (which represents the maximum number of shares approved by the OTS) had
been repurchased by the Company in open-market transactions at a total cost of
$2.6 million or $18.87 per share.
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. Moreover,
testing has begun with its outside data processing service bureau. Furthermore,
the Company expects any corrective measures required to be prepared for the year
2000 to be implemented on a timely basis. The Company's Y2K Committee reports on
a quarterly basis to the Board of Directors as to the Company's progress in
resolving any year 2000 problems. Expected costs related to the Year 2000
problem are estimated between $35 and $50 thousand. Subsequent to June 30, 1998
and through August 7, 1998, the Company has incurred approximately $10 thousand
in expense.
- 20 -
<PAGE>
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.
- 21 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Key Operating Ratios
(unaudited)
The table below sets forth certain performance and financial ratios
of the Company for the periods indicated:
<TABLE>
<CAPTION>
At or for the nine At or for the
months ended year ended
June 30,1998 September 30, 1997
<S> <C> <C>
Performance Ratios:
Earnings per share:
Basic $ 0.56 $ 0.89
Diluted 0.54 0.88
Return on average assets (annualized) 0.57% 0.77%
Return on average stockholders' equity (annualized) 4.60% 5.65%
Interest rate spread 2.80% 2.89%
Net interest margin 3.43% 3.57%
Efficiency ratio (1) 66.81% 63.21%
Expense ratio (annualized) (2) 2.34% 2.32%
Asset Quality Ratios:
Non-performing loans to total loans 0.63% 0.61%
Allowance for loan losses to non-performing loans 223.02% 236.09%
Allowance for loan losses to total loans receivable 1.42% 1.44%
Non-performing assets to total assets 0.33% 0.31%
Capital Ratios (3):
Stockholders' equity to total assets at period end 11.40% 12.85%
Average stockholders' equity to average total assets 12.34% 13.68%
Tangible capital 11.38% 13.00%
Core (Tier I) capital 11.38% 13.00%
Total risk-based capital 25.73% 30.90%
Book value per share (4) $ 16.23 $ 16.19
</TABLE>
(1) Total non-interest expenses, excluding other real estate owned expense and
acquisition-related expenses, as a percentage of net interest income and
total non-interest income.
(2) Total non-interest expenses, excluding other real estate owned expense and
acquisition-related expenses, as a percentage of average total assets.
(3) Capital ratios are presented for the consolidated Company.
(4) Excludes unallocated ESOP shares and unvested Restricted Stock Plan shares.
- 22 -
<PAGE>
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Registrant filed proxy material concerning its proposed merger
with Ambanc Holding Co., Inc. (By means of Form S-4 filed by
Ambanc Holding Co., Inc.)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A Form 8-K (item 5 & 7) dated April 23, 1998 was filed
during the quarter.
- 23 -
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements 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.
--------------------
DATE: August 7, 1998 BY: /s/ John M. Lisicki
-------------------
John M. Lisicki
President (principal executive officer)
DATE: August 7, 1998 BY: /s/ James J. Alescio
--------------------
James J. Alescio
Treasurer (principal financial officer)
- 24 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM
THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<CIK> 0001016931
<NAME> AFSALA BANCORP, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,309
<INT-BEARING-DEPOSITS> 3,000
<FED-FUNDS-SOLD> 12,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,902
<INVESTMENTS-CARRYING> 16,619
<INVESTMENTS-MARKET> 16,734
<LOANS> 81,118
<ALLOWANCE> 1,148
<TOTAL-ASSETS> 167,301
<DEPOSITS> 144,546
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,081
<LONG-TERM> 1,599
0
0
<COMMON> 145
<OTHER-SE> 18,930
<TOTAL-LIABILITIES-AND-EQUITY> 167,301
<INTEREST-LOAN> 4,718
<INTEREST-INVEST> 3,132
<INTEREST-OTHER> 523
<INTEREST-TOTAL> 8,373
<INTEREST-DEPOSIT> 4,352
<INTEREST-EXPENSE> 87
<INTEREST-INCOME-NET> 3,934
<LOAN-LOSSES> 55
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,990
<INCOME-PRETAX> 1,169
<INCOME-PRE-EXTRAORDINARY> 1,169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 683
<EPS-PRIMARY> .56
<EPS-DILUTED> .54
<YIELD-ACTUAL> 3.43
<LOANS-NON> 515
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,108
<CHARGE-OFFS> 16
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,148
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<ALLOWANCE-UNALLOCATED> 628
</TABLE>
