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 March 31, 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 May 7, 1998
- --------------------- ----------------------------
Common Stock, Par $.10 1,378,440
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1998
INDEX
Part I CONSOLIDATED FINANCIAL INFORMATION
- ------
Page
Item 1. Financial Statements.............................................. 1
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and September 30, 1997 ................. 1
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997 (Unaudited) ............... 2
Consolidated Statements of Income for the six
months ended March 31, 1998 and 1997 (Unaudited) ............... 3
Consolidated Statements of Cash Flows for the six
months ended March 31, 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>
March 31, September 30,
1998 1997
------------- -------------
Assets
- ------
<S> <C> <C>
Cash and due from banks $ 4,583,591 $ 5,127,320
Federal funds sold 6,350,000 2,675,625
Term deposits with the Federal Home Loan Bank 11,000,000 --
-------------- -------------
Total cash and cash equivalents 21,933,591 7,802,320
------------- -------------
Securities available for sale, at fair value 41,050,515 37,705,373
Investment securities held to maturity 22,176,313 35,263,826
Federal Home Loan Bank of New York stock, at cost 565,300 565,300
Loans receivable 77,964,987 76,927,350
Less: Allowance for loan losses (1,142,231) (1,108,080)
------------- -------------
Net loans receivable 76,822,756 75,819,270
------------- -------------
Accrued interest receivable 1,322,478 1,405,687
Premises and equipment, net 1,786,212 1,659,444
Other assets 268,208 186,066
------------- -------------
Total assets $ 165,925,373 $ 160,407,286
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits 138,892,716 135,316,322
Federal Home Loan Bank of New York long term
borrowings 1,705,611 1,415,625
Escrow accounts 319,603 266,656
Accrued expenses and other liabilities 4,878,484 2,789,562
------------- -------------
Total liabilities 145,796,414 139,788,165
------------- -------------
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 13,525,263 13,465,092
Retained earnings, substantially restricted 9,456,008 9,048,824
Common stock acquired by ESOP (969,325) (1,080,105)
Unearned Restricted Stock Plan (654,638) (733,194)
Treasury stock, at cost (1,379,541) (238,125)
Net unrealized gain on securities available for sale, net of tax 5,717 11,154
------------- -------------
Total stockholders' equity 20,128,959 20,619,121
------------- -------------
Total liabilities and stockholders' equity $ 165,925,373 $ 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 March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,548,607 $1,518,471
Interest on federal funds sold 127,815 87,595
Interest on FHLB term deposits 67,888 35,149
Interest on securities available for sale 571,998 269,149
Interest on investment securities 420,887 704,153
Dividends on Federal Home Loan Bank of NY stock 10,315 8,851
---------- ----------
Total interest and dividend income 2,747,510 2,623,368
---------- ----------
Interest expense:
Deposits and escrow accounts 1,419,692 1,294,221
Federal Home Loan Bank of New York long term
borrowings 29,476 28,678
---------- ----------
Total interest expense 1,449,168 1,322,899
---------- ----------
Net interest income 1,298,342 1,300,469
Provision for loan losses 15,000 70,000
---------- ----------
Net interest income after provision for loan losses 1,283,342 1,230,469
---------- ----------
Non-interest income:
Service charges on deposit accounts 87,000 88,698
Other 13,800 16,409
---------- ----------
Total non-interest income 100,800 105,107
---------- ----------
Non-interest expenses:
Compensation and benefits 482,861 365,270
Occupancy and equipment 139,808 139,355
FDIC deposit insurance premium 21,588 20,696
Data processing fees 74,540 72,107
Professional services fees 43,670 72,874
Advertising 10,003 10,101
Supplies 30,583 23,803
Acquisition-related expenses 29,421 --
Other 133,017 191,018
---------- ----------
Total non-interest expenses 965,491 895,224
---------- ----------
Income before income tax expense 418,651 440,352
Income tax expense 162,500 157,500
---------- ----------
Net income $ 256,151 $ 282,852
========== ==========
Earnings per share:
Basic $ 0.21 $ 0.21
========== ==========
Diluted $ 0.20 $ 0.21
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
- 2 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the six months ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $3,113,236 $3,037,125
Interest on federal funds sold 181,929 197,647
Interest on FHLB term deposits 67,888 142,037
Interest on securities available for sale 1,209,368 503,904
Interest on investment securities 939,184 1,339,911
Dividends on Federal Home Loan Bank of NY stock 20,360 18,244
---------- ----------
Total interest and dividend income 5,531,965 5,238,868
---------- ----------
Interest expense:
Deposits and escrow accounts 2,849,036 2,596,727
Federal Home Loan Bank of New York long term
borrowings 58,901 59,575
---------- ----------
Total interest expense 2,907,937 2,656,302
---------- ----------
Net interest income 2,624,028 2,582,566
Provision for loan losses 50,000 150,000
---------- ----------
Net interest income after provision for loan losses 2,574,028 2,432,566
---------- ----------
Non-interest income:
Service charges on deposit accounts 176,733 199,036
Other 16,603 29,420
---------- ----------
Total non-interest income 193,336 228,456
---------- ----------
Non-interest expenses:
Compensation and benefits 945,397 737,073
Occupancy and equipment 263,370 272,793
FDIC deposit insurance premium 43,016 76,013
Data processing fees 145,746 142,074
Professional service fees 64,151 131,624
Advertising 27,135 24,490
Supplies 59,580 49,641
Acquisition-related expenses 29,421 --
Other 291,662 370,131
---------- ----------
Total non-interest expenses 1,869,478 1,803,839
---------- ----------
Income before income tax expense 897,886 857,183
Income tax expense 330,825 304,731
---------- ----------
Net income $ 567,061 $ 552,452
========== ==========
Earnings per share:
Basic $ 0.46 $ 0.41
========== ==========
Diluted $ 0.44 $ 0.41
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
- 3 -
<PAGE>
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the six months ended March 31, 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 $ 567,061 $ 552,452
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 77,560 91,273
Provision for loan losses 50,000 150,000
Allocation of ESOP stock 170,951 32,406
RSP compensation expense 78,556 --
Decrease (increase) in accrued interest receivable 84,834 (207,821)
(Increase) decrease in other assets (82,142) 204,061
Decrease in accrued expenses and other liabilities (263,505) (3,416,891)
------------ ------------
Total adjustments 116,254 (3,146,972)
------------ ------------
Net cash provided by (used in) operating activities 683,315 (2,594,520)
------------ ------------
Cash flows from investing activities:
Proceeds from the maturity and call of securities
available for sale 13,746,619 4,180,531
Purchases of securities available for sale (14,600,000) (10,550,000)
Proceeds from the maturity and call of investment securities 13,626,853 4,089,885
Purchases of investment securities (539,340) (11,001,844)
Net loans made to customers (1,053,486) (1,892,465)
Capital expenditures (204,328) (46,269)
------------ ------------
Net cash provided by (used in) investing activities 10,976,318 (15,220,162)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 3,576,394 1,896,369
Borrowing from the Federal Home Loan Bank 500,000 --
Repayments on long term borrowings from the
Federal Home Loan Bank (210,014) (193,750)
Net increase (decrease) in escrow accounts 52,947 (158,689)
Purchase of treasury stock (1,287,812) --
Cash dividends paid on common stock (159,877) --
------------ ------------
Net cash provided by financing activities 2,471,638 1,543,930
------------ ------------
Net increase (decrease) in cash and cash equivalents 14,131,271 (16,270,752)
Cash and cash equivalents at beginning of period 7,802,320 27,016,392
------------ ------------
Cash and cash equivalents at end of period $ 21,933,591 $ 10,745,640
============ ============
Additional Disclosures Relative to Cash Flows:
Interest paid $ 2,905,770 $ 2,664,664
============ ============
Taxes paid $ 608,268 $ 135,228
============ ============
Supplemental schedule of non-cash investing and financing activities:
Change in net unrealized gain on securities available for sale, net of tax $ 5,437 $ 88,840
============ ============
Net increase in amounts due to broker from purchases of
securities available for sale $ 2,501,625 $ --
============ ============
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 March 31, 1998, the Consolidated Statements of Income for the
three months and six months ended March 31, 1998 and 1997, and the Consolidated
Statements of Cash Flows for the six months ended March 31, 1998 and 1997. The
results of operations for the six months ended March 31, 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 March 31,
-----------------------------------------------------------------------------------
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 $ 256,151 1,223,374 $ 0.21 $ 282,852 1,346,740 $ 0.21
========== ==========
Effect of Dilutive Securities:
Stock options 33,321 -
Unvested restricted stock awards 16,216 -
----------- -----------
Diluted EPS $ 256,151 1,272,911 $ 0.20 $ 282,852 1,346,740 $ 0.21
============ =========== ========== ========= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended March 31,
------------------------------------------------------------------------------------
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 $ 567,061 1,228,485 $ 0.46 $ 552,452 1,345,355 $ 0.41
========== ==========
Effect of Dilutive Securities:
Stock options 33,789 -
Unvested restricted stock awards 15,271 -
----------- -----------
Diluted EPS $ 567,061 1,277,545 $ 0.44 $ 552,452 1,345,355 $ 0.41
============ =========== ========== ========= =========== ==========
</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.
-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 March 31, 1998, the Bank's loans receivable, net, to assets ratio was 46.3%.
At March 31, 1998, $67.1 million or 48.3% 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 $5.5 million or 3.4% to $165.9 million at March 31,
1998 from $160.4 million at September 30, 1997. This increase was primarily
attributable to an increase in federal funds sold of $3.7 million or 137.4%, and
an increase in term deposits with the Federal Home Loan Bank from $0 to $11.0
million or 100.0%, offset by a decrease in total securities (securities
available for sale and investment securities held to maturity) of $9.7 million
or 13.4%. 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 net loans receivable increased by $1.0 million or 1.3% to
$76.8 million at March 31, 1998 up from $75.8 million at September 30, 1997 due
to increased loan activity primarily in residential mortgage and home equity
loans.
The Company's deposits increased by $3.6 million or 2.6% to $138.9 million at
March 31, 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 $290 thousand or 20.5% to
$1.7 million at March 31, 1998 from $1.4 million at September 30, 1997, due to
an additional borrowing of $500 thousand, offset by repayments of $210
thousands. Accrued expenses and other liabilities increased $2.1 million or
74.9% to $4.9 million at March 31, 1998 from $2.8 million at September 30, 1997,
primarily due to securities purchases which are due to brokers at March 31,
1998.
Stockholders' equity decreased by $490 thousand or 2.4% to $20.1 million at
March 31, 1998 from $20.6 million at September 30, 1997. The decrease was
primarily the result of the purchases of treasury stock, offset by net income
for the six months ended March 31, 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 for the three months ended March 31,1998
to 2.83% from 2.97% for the three months ended March 31, 1997. The interest rate
spread for the six months ended March 31, 1998 was 2.81%, as compared to 2.89%
for the six months ended March 31, 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 March 31,
----------------------------------------------------------------------------------------------
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 $ 9,501 128 5.46% $ 6,974 88 5.12%
Term deposits with the FHLB 5,015 68 5.50 2,581 35 5.50
Securities available for sale (2) 35,666 572 6.50 18,286 269 5.97
Investment securities held to maturity 25,420 421 6.72 42,988 704 6.64
FHLB of NY stock 565 10 7.18 565 9 6.46
Net loans receivable (3) 75,787 1,548 8.28 72,292 1,518 8.52
----------- ------ ------- ---------- ------ -------
Total interest-earning assets 151,954 2,747 7.33 143,686 2,623 7.40
------ ------- ------ -----
Non-interest earning assets 7,678 6,679
------ ------
Total assets $ 159,632 $ 150,365
=========== ==========
Interest-bearing liabilities:
Savings accounts $ 35,960 266 3.00 $ 35,696 264 3.00
NOW accounts 12,053 67 2.25 10,781 61 2.29
Money market accounts 10,347 109 4.27 8,818 88 4.05
Time deposit accounts 70,069 976 5.65 63,997 879 5.57
Escrow accounts 314 2 2.58 261 2 3.11
FHLB of NY
long term borrowings 1,745 29 6.74 1,651 29 7.12
----------- ------ ------ ---------- ------ -----
Total interest-bearing liabilities 130,488 1,449 4.50 121,204 1,323 4.43
------ ------ ------ -----
Non-interest bearing deposits 7,847 7,403
Other non-interest bearing liabilities 1,308 756
Equity 19 989 21,002
----------- ----------
Total liabilities and equity $ 159,632 $ 150,365
=========== ==========
Net interest income $ 1,298 $ 1,300
====== =======
Interest rate spread 2.83% 2.97%
======= ========
Net interest margin 3.46% 3.67%
======= ========
Ratio of average interest-earning
assets to average
interest-bearing liabilities 116.45% 118.55%
=========== ==========
</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 Six Months Ended March 31,
---------------------------------------------------------------------------------------
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 $ 6,830 182 5.34% $ 7,630 198 5.20%
Term deposits with the FHLB 2,480 68 5.50 5,220 142 5.46
Securities available for sale (2) 37,319 1,210 6.50 17,536 504 5.76
Investment securities held to maturity 28,764 939 6.55 40,856 1,340 6.58
FHLB of NY stock 565 20 7.10 565 18 6.39
Net loans receivable (3) 75,729 3,113 8.24 71,871 3,037 8.47
-------- ------ ------- --------- ------ -----
Total interest-earning assets 151,687 5,532 7.31 143,678 5,239 7.31
------ ------- ------ -----
Non-interest earning assets 7,423 6,631
-------- ---------
Total assets $159,110 $ 150,309
======== =========
Interest-bearing liabilities:
Savings accounts $ 35,848 536 3.00 $ 35,685 533 3.00
NOW accounts 12,002 136 2.27 10,822 124 2.30
Money market accounts 10,393 219 4.23 8,485 168 3.97
Time deposit accounts 69,412 1,954 5.65 63,641 1,767 5.57
Escrow accounts 327 4 2.45 299 4 2.68
FHLB of NY
long term borrowings 1,721 59 6.88 1,701 60 7.07
-------- ------- ------- --------- ------ -----
Total interest-bearing liabilities 129,703 2,908 4.50 120,633 2,656 4.42
------- ------- ------ -----
Non-interest bearing deposits 8,084 7,569
Other non-interest bearing liabilities 1,286 1,239
Equity 20 037 20,868
-------- ---------
Total liabilities and equity $159,110 $ 150,309
======== =========
Net interest income $ 2,624 $ 2,583
======= =========
Interest rate spread 2.81% 2.89%
======= =====
Net interest margin 3.47% 3.61%
======= =====
Ratio of average interest-earning
assets to average
interest-bearing liabilities 116.95% 119.10%
======== =========
</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 MARCH 31,1998
COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
INCREASE (DECREASE)
-----------------------------------
DUE TO
-----------------------------------
VOLUME RATE NET
------ ---- ---
Interest and dividend income:
Federal funds sold $ 33,991 6,229 40,220
Term deposits with the FHLB 32,739 - 32,739
Securities available for sale 276,978 25,871 302,849
Investment securities held to maturity (291,628) 8,362 (283,266)
FHLB of NY stock - 1,464 1,464
Net loans receivable 73,108 (42,972) 30,136
--------- --------- ---------
Total interest and dividend income 125,188 (1,046) 124,142
--------- --------- ---------
Interest expense:
Savings accounts 1,780 - 1,780
NOW accounts 7,415 (1,028) 6,387
Money market accounts 15,448 4,840 20,288
Time deposit accounts 84,249 12,754 97,003
Escrow accounts 378 (364) 14
FHLB of NY long term borrowings 2,008 (1,210) 798
--------- --------- ---------
Total interest expense 111,278 14,992 126,270
--------- --------- ---------
Net change in net interest income $ 13,910 $ (16,038) $ (2,128)
========= ========= =========
SIX MONTHS ENDED MARCH 31,1998
COMPARED WITH
SIX MONTHS ENDED MARCH 31, 1997
INCREASE (DECREASE)
------------------------------------
DUE TO
------------------------------------
VOLUME RATE NET
------ ---- ---
Interest and dividend income:
Federal funds sold $ (20,984) 5,266 (15,718)
Term deposits with the FHLB (75,182) 1,033 (74,149)
Securities available for sale 633,340 72,124 705,465
Investment securities held to maturity (394,648) (6,079) (400,727)
FHLB of NY stock - 2,116 2,116
Net loans receivable 160,021 (83,910) 76,111
--------- --------- ---------
Total interest and dividend income 302,547 (9,450) 293,097
--------- --------- ---------
Interest expense:
Savings accounts 2,993 - 2,993
NOW accounts 13,978 (1,565) 12,413
Money market accounts 39,105 11,386 50,491
Time deposit accounts 160,838 25,472 186,310
Escrow accounts (311) 102 413
FHLB of NY long term borrowings 785 (1,459) (674)
--------- --------- ---------
Total interest expense 218,112 33,523 251,635
--------- --------- ---------
Net change in net interest income $ 84,435 $ 42,973 $ 41,462
========= ========= =========
- 13 -
<PAGE>
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
1997.
Net Income. Net income decreased by $27 thousand or 9.4% for the three months
ended March 31, 1998 to $256 thousand from $283 thousand for the three months
ended March 31, 1997. Net income for the three months ended March 31, 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 March 31, 1998 and 1997. During the period, total average
interest-earning assets increased $8.3 million or 5.8%, to $152.0 million.
However, the increase in the average balance of total interest-bearing
liabilities of $9.3 million or 7.7%, to $130.5 million, exceeded the increase in
total average interest-earning assets. The increase in the excess of total
interest-bearing liabilities over total interest-earning assets was due
primarily to the Company's repurchase of 76 thousand shares of stock for a total
cost of $1.4 million through March 31, 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.
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 2.83% for the three months ended March 31, 1998 from
2.97% for the three months ended March 31, 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 $124 thousand or 4.7% to $2.7 million for the three months ended
March 31, 1998 from $2.6 million for the three months ended March 31, 1997. The
increase was largely the result of an increase of $8.3 million or 5.8% in the
average balance of interest earning assets to $152.0 million for the three
months ended March 31, 1998 as compared to $143.7 million for the three months
ended March 31, 1997. The increase in the average balance of interest earning
assets consisted primarily of increases in the average balance of federal funds
sold of $2.5 million or 36.2%, term deposits with the FHLB of NY of $2.4 million
or 94.3%, and an increase in the average balance of net loans receivable of $3.5
million or 4.8%. These increases were partially offset by a decrease in the
average balance of total securities (securities available for sale and
investment securities held to maturity) of $188 thousand. 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 all interest earning assets.
The yield on the average balance of interest earning assets was 7.33% and 7.40%
for the three months ended March 31, 1998 and 1997, respectively.
- 14 -
<PAGE>
Interest income on securities available for sale increased $303 thousand or
112.5% to $572 thousand for the three months ended March 31, 1998 from $269
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 $17.4 million combined with a 53 basis point increase in the average
yield on these securities. Interest income on investment securities held to
maturity decreased $283 thousand or 40.2% to $421 thousand for the three months
ended March 31, 1998 from $704 thousand for three months ended March 31, 1997.
This decrease is primarily the result of a decrease in the average balance of
investment securities held to maturity of $17.6 million offset in part by a 8
basis point increase in the average yield on these securities.
Interest and fees on loans increased $30 thousand or 2.0% to $1.5 million for
the three months ended March 31, 1998. This increase was primarily the result of
an increase in the average balance of net loans receivable of $3.5 million
offset by a 24 basis point decrease in the average yield on net loans
receivable.
Interest Expense. Interest on deposits and escrow accounts increased by $125
thousand for the three months ended March 31, 1998 compared to the three months
ended March 31, 1997. This increase in interest on deposits and escrow accounts
was substantially due to the increase in interest expense related to NOW, money
market, and time deposit accounts. Interest expense on NOW accounts was $67
thousand for the three months ended March 31, 1998, compared to $61 thousand for
the three months March 31, 1997. Likewise, interest expense on money market and
time deposit accounts was $109 thousand and $976 thousand, respectively, for the
three months ended March 31, 1998, compared to $88 thousand and $879 thousand,
respectively, for the three months March 31, 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, was $29 thousand for the three months ended March 31, 1998,
and 1997. The average amount of borrowing outstanding increased by $94 thousand
or 5.7% from the comparable period, offset by an decrease in the average rate
paid by the Company of 38 basis points. 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.
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 March 31, 1998 decreased $55 thousand
from $70 thousand for the three months ended March 31, 1997.
- 15 -
<PAGE>
Non-Interest Income. Non-interest income and its components remained fairly
constant for the three months ended March 31, 1998 and 1997.
Non-Interest Expenses. Non-interest expenses increased $70 thousand or 7.8% to
$965 thousand for the three months ended March 31, 1998 from $895 thousand for
the three months ended March 31, 1997.
Compensation and benefits expense increased by $118 thousand or 32.2% due
primarily to 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 will increase in future periods
as a result of the costs related to the Company's ESOP as well as the Restricted
Stock Plan.
Professional service fees for the three months ended March 31, 1998 were $44
down from $73 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 March 31, 1997 associated with being a newly-formed company.
Non-interest expenses for the three months ended March 31, 1998 included
non-tax-deductible acquisition-related expenses totaling approximately $29
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 $58 thousand or 30.4% to $133 thousand for
the quarter ended March 31, 1998 when compared to the same quarter of 1997. This
decrease is primarily attributed to general expenses incurred during the quarter
ended March 31, 1997, associated with being a newly-formed company.
Income Tax Expense. Income tax expense increased by $5 thousand or 3.2% to $163
thousand for the three months ended March 31, 1998 from $158 thousand for the
three months ended March 31, 1997. However, the effective tax rate increased
from 35.8% for the three months ended March 31, 1997 to 38.8% for the three
months ended March 31, 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 Six Months Ended March 31, 1998 and
1997.
Net Income. Net income increased by $15 thousand or 2.6% for the six months
ended March 31, 1998 to $567 thousand from $552 thousand for the six months
ended March 31, 1997. Net income for the six months ended March 31, 1998
increased primarily as a result of an increase in net interest income and a
decrease in the provision for loan lossess, offset in part by increases in
non-interest expenses and income tax expense and a decrease in non-interest
income. These and other changes are discussed in more detail below.
Net Interest Income. Net interest income increased $41 thousand for the six
months ended March 31, 1998 as compared to the same period in 1997. During the
period, total average interest-earning assets increased $8.0 million or 5.6%, to
$151.7 million. However, the increase in the average balance of total
interest-bearing liabilities of $9.1 million or 7.5%, to $129.7 million,
exceeded the increase in total average interest-earning assets. The increase in
the excess of total interest-bearing liabilities over total interest-earning
assets was due primarily to the Company's repurchase of 76 thousand shares of
stock for a total cost of $1.4 million through March 31, 1998. The increase in
the average balance of total interest-bearing liabilities was accompanied by a 8
basis point increase in the average rate paid on these funds.
Interest and Dividend Income. Interest and dividend income increased by $293
thousand or 5.6% to $5.5 million for the six months ended March 31, 1998 from
$5.2 million for the six months ended March 31, 1997. The increase in interest
and dividend income was largely the result of an increase of $8.0 million or
5.6% in the average balance of interest earning assets to $151.7 million for the
six months ended March 31, 1998 as compared to $143.7 million for the six months
ended March 31, 1997. The increase in the average balance of interest earning
assets consisted primarily of an increase in the average balance of total
securities (securities available for sale and investment securities held to
maturity) of $7.7 million or 13.2%, and an increase in the average balance of
net loans receivable of $3.9 million or 5.4%. These increases were partially
offset by decreases in the average balance of federal funds sold of $800
thousand, or 10.5%, and term deposits with the FHLB of NY of $2.7 million, or
52.5%.
Interest income on securities available for sale increased $705 thousand or
140.0% to $1.2 million for the six months ended March 31, 1998 from $504
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 $19.8 million combined with a 74 basis point increase in the average
yield on these securities. Interest income on investment securities held to
maturity decreased $401 thousand or 29.9% to $939 thousand for the six months
ended March 31, 1998 from $1.3 million for six months ended March 31, 1997. This
decrease is primarily the result of a decrease in the average balance of
investment securities held to maturity of $12.1 million combined with a 3 basis
point decrease in the average yield on these securities.
Interest and fees on loans increased $76 thousand or 2.5% to $3.1 million for
the six months ended March 31, 1998 from $3.0 million for the six months ended
March 31, 1997. This increase was primarily the result of an increase in the
average balance of net loans receivable of $3.9 million, offset by a 23 basis
point decrease in the average yield on net loans receivable.
-17-
<PAGE>
Interest Expense. Interest on deposits and escrow accounts increased by $252
thousand for the six months ended March 31, 1998 compared to the six months
ended March 31, 1997. This increase in interest on deposits and escrow accounts
was primarily due to the increase in interest expense related to NOW, money
market, and time deposit accounts. Interest expense on NOW accounts was $136
thousand for the six months ended March 31, 1998, compared to $124 thousand for
the six months March 31, 1997. Likewise, interest expense on money market and
time deposit accounts was $219 thousand and $2.0 million, respectively, for the
six months ended March 31, 1998, compared to $168 thousand and $1.8 million,
respectively, for the six months ended March 31, 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 1.1% to $59 thousand
for the six months ended March 31, 1998. This decrease was primarily due to a
decrease of 19 basis points in the average cost of borrowings offset by a $20
thousand or 1.2% increase in the average amount of borrowings outstanding during
the comparable periods.
Provision for Loan Losses. The provision for loan losses decreased $100 thousand
to $50 thousand for the six months ended March 31, 1998 from $150 thousand for
the six months ended March 31, 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 six months ended
March 31, 1998 to $193 thousand compared with $228 thousand for the six months
ended March 31, 1997. Decreases in service charges on deposit accounts of $22
thousand and other non-interest income of $13 thousand comprised the decrease
from the previous period.
Non-Interest Expenses. Non-interest expenses increased $66 thousand or 3.6% to
$1.9 million for the six months ended March 31, 1998 from $1.8 million for the
six months ended March 31, 1997.
Compensation and benefits expense increased by $208 thousand or 28.3% from the
previous period due primarily to 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 will
increase in future periods as a result of the costs related to the Company's
ESOP as well as the Restricted Stock Plan.
FDIC deposit insurance premiums decreased by $33 thousand or 43.4% due primarily
to reduced deposit insurance premium rates for the six months ended March 31,
1998, as compared to the same period in the previous year.
-18-
<PAGE>
Professional service fees for the six months ended March 31, 1998, decreased by
$67 thousand or 51.3% from $132 thousand for the six months ended March 31,
1997, primarily as a result of additional legal and accounting costs incurred
during the six months ended March 31, 1997 associated with being a newly-formed
company.
Non-interest expenses for the six months ended March 31, 1998 included
non-tax-deductible acquisition-related expenses totaling approximately $29
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 $78 thousand or 21.2% to $292 thousand for
the six months ended March 31, 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 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 $331 thousand for the six
months ended March 31, 1998 from $305 thousand for the six months ended March
31, 1997. The increase was the result of an increase in income before income tax
expense, as well as the impact of the non-tax-deductible acquisition-related
expenses mentioned above.
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 47.15% and 45.18% at
March 31, 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 six months ended March 31, 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 March 31, 1998 and
September 30, 1997, the Company had outstanding borrowings from the FHLB of $1.7
million and $1.4 million, respectively.
-19-
<PAGE>
As of March 31, 1998 and September 30, 1997, the Company had $41.1 million and
$37.7 million of securities, respectively, classified as available for sale and
$22.2 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 March 31, 1998, the Bank's capital exceeded each of the
regulatory capital requirements of the OTS. The Bank is "well capitalized" at
March 31, 1998 according to regulatory definition. At March 31, 1998, the
Company's consolidated tangible and core capital levels were both $20.1 million
(12.14% of total adjusted assets) and its total risk-based capital level was
$20.7 million (30.66% 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 March 31, 1998, 76,310
shares had been repurchased by the Company in open-market transactions at a
total cost of $1.4 million or $18.08 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. Currently management does not expect a
material impact on the Company's earnings as a result of the year 2000
problem.
- 20 -
<PAGE>
Effect of Inflation and Changing Prices
The Company's consolidated interim 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 six At or for the
months ended year ended
March 31,1998 September 30, 1997
<S> <C> <C>
Performance Ratios:
Earnings per share:
Basic $ 0.46 $ 0.89
Diluted 0.44 0.88
Return on average assets (annualized) 0.71% 0.77%
Return on average stockholders' equity (annualized) 5.68% 5.65%
Interest rate spread 2.81% 2.89%
Net interest margin 3.47% 3.57%
Efficiency ratio (annualized) (1) 64.99% 63.21%
Expense ratio (annualized) (2) 2.30% 2.32%
Asset Quality Ratios:
Non-performing loans to total loans 0.73% 0.61%
Allowance for loan losses to non-performing loans 199.46% 236.09%
Allowance for loan losses to total loans receivable 1.47% 1.44%
Non-performing assets to total assets 0.37% 0.31%
Capital Ratios (3):
Stockholders' equity to total assets at period end 12.13% 12.85%
Average stockholders' equity to average total assets 12.59% 13.68%
Tangible capital 12.14% 13.00%
Core (Tier I) capital 12.14% 13.00%
Total risk-based capital 30.66% 30.90%
Book value per share (4) $ 16.45 $ 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
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 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: May 7, 1998 BY: /s/ John M. Lisicki
---------------------------------------
John M. Lisicki
President (principal executive officer)
DATE: May 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,583
<INT-BEARING-DEPOSITS> 11,000
<FED-FUNDS-SOLD> 6,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,051
<INVESTMENTS-CARRYING> 22,176
<INVESTMENTS-MARKET> 22,278
<LOANS> 77,965
<ALLOWANCE> 1,142
<TOTAL-ASSETS> 165,925
<DEPOSITS> 138,893
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,198
<LONG-TERM> 1,706
0
0
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<INTEREST-TOTAL> 5,532
<INTEREST-DEPOSIT> 2,849
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<INCOME-PRETAX> 898
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<EPS-PRIMARY> .46
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