United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1933
For the Fiscal Year Ended December 31, 1997 Commission File No. 0-19843
ALBANK Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware 14-1746910
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10 North Pearl Street, Albany, NY 12207
(Address of principal executive offices)
Registrant's telephone number, including area code: (518) 445-2100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section l3 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K._________________________________________________
As of March 25, 1998, the aggregate market value of the shares of common stock
of the Registrant outstanding was $616,249,817 excluding 459,392 shares held by
affiliates of the Registrant.* This figure is based on the closing price for a
share of the Registrant's common stock on March 25, 1998, which was $49.75 as
reported in the Wall Street Journal on March 26, 1998. The number of shares of
the Registrant's common stock outstanding as of March 25, 1998, was 12,846,323.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1998, and the Annual Report to Stockholders
(which includes two segments; a "1997 Summary Annual Report" and a
"1997 Annual Report Supplement") for the year ended December 31,
1997, are incorporated herein by reference - Parts I, II, III and IV.
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* Solely for purposes of this calculation, all executive officers and
directors of the Registrant are considered to be affiliates. Also included are
certain shares held by various employee benefit plans where the trustees are
required to vote a portion of unallocated shares at the direction of executive
officers and directors.
PART I
ITEM 1 Business
Forward-Looking Statements
ALBANK Financial Corporation ("Registrant", "Company" or "ALBANK") may
from time to time make "forward-looking statements" in its periodic reports to
the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K, in its
Annual Report to stockholders, in its proxy statements, in press releases and
other written materials, and in oral statements made by senior management to
analysts, institutional investors, representatives of the media and others.
Certain statements contained in this Annual Report on Form 10-K and in the
Company's Annual Report to Stockholders, portions of which are incorporated
herein by reference, that are not statements of historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Such statements are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Act.
Forward-looking statements include (1) financial projections and
estimates (including projections of revenues, expenses, income or loss, earnings
or loss per share, the payment or nonpayment of dividends, capital structure and
other financial items); (2) statements regarding plans, objectives and
expectations of ALBANK with respect to future operations, products or services;
(3) statements regarding future economic performance; and (4) statements
relating to the assumptions underlying such projections, estimates, plans,
objectives, expectations and performance. Words such as "believe," "anticipate,"
"plan," "expect," "intend," "target," "estimate," and similar expressions are
intended to identify, but are not the exclusive means of identifying,
forward-looking statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements.
Moreover, ALBANK's plans, objectives and intentions are subject to change based
on various factors (some of which are beyond the Company's control). Among the
uncertainties to which ALBANK's forward-looking statements are subject are risks
related to credit quality, interest rate sensitivity and liquidity. Other
factors that could cause actual results to differ from those discussed in the
forward-looking statements include (1) the strength of the U.S. economy in
general and the strength of the local economies where ALBANK is located; (2) the
effects of, and changes in, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System;
(3) inflation, interest rate, market and monetary fluctuations; (4) the timely
development of new products and services and customer perception of the overall
value thereof (including features, pricing and quality) compared to competing
products and services; (5) changes in consumer spending, borrowing and savings
habits; (6) technological changes; (7) acquisitions and the costs and
difficulties associated therewith; (8) the ability to increase market share and
control expenses; (9) the effect of changes in laws and regulations (including
laws and regulations concerning taxes, banking, securities and insurance) and
generally accepted accounting principles; (10) changes in ALBANK's organization,
compensation and benefit plans and in the availability of, and compensation
levels for, employees in its geographic markets; (11) the costs and effects of
litigation and of any adverse outcome in such litigation; and (12) the success
of ALBANK at managing the risks of the foregoing.
The foregoing list of important factors is not exclusive. Such
forward-looking statements speak only as of the date on which they are made and
ALBANK does not undertake any obligation to update any forward-looking
statement, whether written or oral, to reflect events or circumstances after the
date on which such statement is made. If ALBANK does update or correct one or
more forward-looking statements, investors and others should not conclude that
ALBANK will make additional updates or corrections with respect thereto or with
respect to other forward-looking statements.
General
ALBANK was formed as a savings and loan holding company under Delaware
Law. On October 10, 1997, the Company became a bank holding company as a result
of the formation of ALBANK Commercial, a newly chartered New York commercial
bank. The information and consolidated financial statements in this report of
ALBANK include the accounts of ALBANK Financial Corporation, its wholly owned
subsidiaries, ALBANK, FSB and ALBANK Commercial, and the wholly owned
subsidiaries of ALBANK, FSB and ALBANK Commercial. The executive offices of
ALBANK are located at the main office of ALBANK, FSB at 10 North Pearl Street,
Albany, New York 12207.
On April 1, 1992, ALBANK Financial Corporation completed its public
offering for 15,697,500 shares of common stock (the "Common Stock") at $10.00
per share, realizing net proceeds of $150.8 million after expenses, and
concurrently acquired ALBANK, FSB as part of its conversion from a mutual to a
stock form savings bank. ALBANK used $75.4 million of the net proceeds to
acquire all of the issued and outstanding stock of ALBANK, FSB. The remaining
net proceeds were used by the Company for general corporate purposes which, to
date, have included the repurchase of shares of ALBANK's Common Stock.
ALBANK's business currently consists primarily of the business of its
constituent financial institutions. ALBANK, FSB was organized as the second
mutual savings bank in New York State on March 24, 1820, and is currently the
oldest operating savings bank in the state. On June 30, 1982, ALBANK, FSB
converted to a federally chartered mutual savings bank, retaining the leeway
investment authority and broader investment powers available to a New York State
chartered mutual savings bank. ALBANK, FSB's principal business has been and
continues to be attracting retail and corporate deposits and investing those
deposits, together with funds generated from operations and borrowings, in
various loan products and investment securities. With regard to loans, ALBANK,
FSB originates and purchases primarily one- to four-family adjustable rate
mortgage loans ("ARMs"). ALBANK, FSB currently also engages in the provision of
Savings Bank Life Insurance ("SBLI"). Additionally, through ALVEST Financial
Services, Inc. "ALVEST"), a wholly owned brokerage and insurance
subsidiary of ALBANK, FSB that was transferred to ALBANK Commercial on October
31, 1997, ALBANK offers a wide range of financial products and services. (See
"Subsidiaries" regarding the possible cessation of certain insurance activities
of ALBANK, FSB and ALVEST). ALBANK Commercial's business consists
primarily of attracting deposits from retail and corporate customers and
municipal/public entities and investing those deposits together with funds
available from operations, in various loan products and investment securities.
The results of operations of both ALBANK, FSB and ALBANK Commercial are
dependent primarily on net interest income, provisions for loan losses, the
levels of noninterest income earned and noninterest expense incurred and the
effect of income taxes. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of the regulatory authorities.
ALBANK is a legal entity separate and distinct from ALBANK, FSB and
ALBANK Commercial. The principal sources of the Company's revenues are
dividends and interest derived from its investments and dividends the Company
receives from ALBANK, FSB and, in the future, from ALBANK Commercial. The
right of the Company to participate as a shareholder in any distribution of
assets of any subsidiary upon its liquidation or reorganization or otherwise
is subject to the prior claims of creditors of any such subsidiary.
As of December 31, 1997, a total of 1,291 full-time employees and 293
part-time employees were employed by ALBANK, FSB and ALBANK Commercial. Employee
relations are considered to be good.
Acquisition activity during the past three years follows:
On June 3, 1995, ALBANK, FSB completed the purchase of $18 million in
deposits from The Dime Savings Bank of New York's Galleria Mall office in
Poughkeepsie, New York. ALBANK, FSB is servicing these accounts at its existing
office in the Galleria Mall.
On January 3, 1996, ALBANK, FSB acquired all of the outstanding common
stock of Marble Financial Corporation of Rutland, Vermont (the "Marble
acquisition") for $18.00 per share in cash or approximately $61 million in total
consideration. On the date of closing, Marble Financial and its banking
subsidiary, Marble Bank, had consolidated assets and deposits of approximately
$396 million and $327 million, respectively. The transaction, which was
accounted for under the purchase method of accounting, generated accounting
goodwill of $20.1 million, which is being amortized over 15 years.
On September 27, 1996, ALBANK, FSB assumed the deposit liabilities of
and purchased loans owned and serviced by six banking offices formerly operated
by the Green Mountain Bank of Rutland, Vermont, a wholly owned subsidiary of
Arrow Financial Corporation (the "Green Mountain acquisition"). The acquisition
included $108 million in deposits and loans. This acquisition, which was
accounted for under the purchase method of accounting, generated goodwill
amounting to $8.2 million, which is being amortized over a period of 15 years.
The Rutland banking office of Green Mountain was consolidated with the existing
Rutland banking office acquired from Marble Bank. The remaining Green Mountain
Banking offices, together with the seven former Marble Bank banking offices, are
currently operating as the Marble division of ALBANK, FSB.
On November 10, 1997, ALBANK Commercial purchased 35 New York State banking
offices formerly operated by KeyBank National Association (the "Key Branch
acquisition"). The offices are located in northern New York, the greater Hudson
Valley and the Binghamton area. The acquisition, which included $540.9 million
in deposits (for which ALBANK Commercial paid a deposit premium of 7%) and $52.2
million in small business, consumer and mortgage loans, was accounted for under
the purchase method of accounting and generated goodwill of $40.6 million, which
is being amortized over 15 years.
On August 13, 1997, ALBANK, FSB entered into a purchase agreement relating
to the purchase of the assets and assumption of the deposit liabilities of three
branches of First Union National Bank located in the greater Hudson Valley. With
the approval of the Banking Department of the State of New York and the FDIC, on
January 23, 1998, ALBANK Commercial acquired $21.2 million in deposits and $0.4
million in loans from two of the former First Union offices and consolidated one
office with an existing branch. It was initially contemplated that ALBANK, FSB
would acquire approximately $12 million in deposits of the remaining branch.
However, ALBANK, FSB withdrew its application to the Office of Thrift
Supervision ("OTS") and ALBANK Commercial has submitted an application to the
FDIC and the State of New York to acquire that branch.
At year-end 1997, ALBANK, FSB operated through 73 banking offices, 52
of which are located in 17 upstate New York counties, 9 of which are located in
the metropolitan area of Springfield, Massachusetts and 12 of which are located
primarily in central Vermont. ALBANK Commercial operated 36 banking offices, all
located in New York State, which extended ALBANK's presence to nine
additional counties.
The Company regularly engages in discussions with other depository
institutions with respect to possible acquisition transactions.
Subsidiaries
Until November 1, 1997, ALBANK, FSB's principal operating subsidiary
was ALVEST, which offers brokerage, investment and insurance products and
services. At that time, ALBANK, FSB transferred all of ALVEST's voting stock to
ALBANK Commercial. As a condition to becoming a bank holding company, the
Company committed to the Federal Reserve Board to cause ALVEST to discontinue
selling life insurance (but not annuities) within two years of ALBANK becoming a
bank holding company (October 10, 1997), unless during that period it becomes
permissible under applicable state or federal banking law for ALVEST to conduct
such business. The Company also committed to cause ALBANK, FSB to discontinue
underwriting SBLI within two years of ALBANK becoming a bank holding company,
unless during that period the activity becomes permissible to ALBANK, FSB (as a
subsidiary of a bank holding company) under applicable law.
ALBANK, FSB owned 100% of the voting common stock of ASBANY Funding
Corporation, a real estate investment trust which invested primarily in
residential real estate mortgage loans originated by ALBANK, FSB, until December
31, 1997, at which time a plan of liquidation was approved and commenced. Such
plan was completed shortly after year end. Another wholly-owned subsidiary of
ALBANK, FSB is ASBANY Corp., the assets of which consist primarily of its
investments in two subsidiaries -- Page-ASBANY Corp. and CDC-ASBANY Corp.
Page-ASBANY Corp. owns certain office premises located in the
State of Massachusetts. (The Company committed to the Federal Reserve Board to
have Page-ASBANY Corp. divest its property within two years of ALBANK becoming a
bank holding company.) CDC-ASBANY Corp. owns limited partnership interests in
real estate development projects that generate low-income housing and historic
preservation income tax benefits that accrue to the Company. A third subsidiary
of ASBANY Corp., Gables CVF, Inc., was incorporated in the State of Nebraska,
has no assets, and is inactive. ALBANK Capital Trust I is a 100% owned
subsidiary business trust of ALBANK Financial Corporation. It's sole
purpose was to issue $50 million of 9.27% capital securities. (See footnote 14
in the 1997 Annual Report Supplement for further information on the capital
securities.)
Market Area
ALBANK has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. Originally operating in the Capital District,
ALBANK now serves communities that extend south through most of the lower Hudson
Valley, north along the Hudson River and Lake Champlain to the Canadian Border,
west through the Mohawk Valley to Syracuse and, since the Key Branch
acquisition, southwest to Binghamton. ALBANK's market also extends eastward
to include communities in and surrounding the greater metropolitan area of
Springfield, Massachusetts and, since the 1996 Marble and Green Mountain
acquisitions, ALBANK's market has expanded to include communities in the
central and northern regions of Vermont and in western New Hampshire.
The population level overall has remained relatively stable in ALBANK's
market area. Major employers include the New York State Government,
educational institutions and health care organizations throughout New York
State; General Electric and Albany International in the Capital District; IBM in
the lower Hudson Valley; major paper and paper products manufacturers in our
northern region; the insurance industry and manufacturers in our western region;
IBM in the Binghamton area; educational institutions and the insurance industry
in western Massachusetts; and a variety of small to medium sized businesses in
Vermont and New Hampshire.
The economy of the Northeast, in general, has felt the impact of corporate
restructuring and downsizing in recent years. In New York State, for instance,
General Electric and IBM have reduced the number of local positions, and the New
York State Government has also restructured. Following a nationwide pattern,
however, many "replacement jobs" are being created among smaller companies.
Furthermore, ALBANK's strategy of controlled growth into contiguous markets
through acquisition has diversified its customer deposit base and loan
portfolio, and helped to protect ALBANK from a concentration in any one market
area.
Competition
ALBANK faces strong competition in its market areas, both in attracting
deposits and making real estate and other loans. ALBANK's most direct
competition for deposits historically has come from savings associations,
commercial banks and credit unions which are located, or have branches, in those
areas. ALBANK also faces additional competition for deposits from national
brokerage houses, short-term money market funds and other corporate and
government securities funds. Factors affecting the acquisition of deposits
include pricing, office location and hours of operation, the variety of deposit
accounts offered, and the quality of customer service provided. Competition for
loans has been especially keen during the past five years. Commercial banks,
savings institutions, insurance companies, traditional mortgage bankers,
mortgage bankers owned by national nonfinancial conglomerates, and mortgage
brokers affiliated with local, but nationally franchised, real estate brokers
are all active and aggressive competitors.
ALBANK competes in this environment by providing a full range of financial
services based on a tradition of financial strength and integrity dating from
the inception of ALBANK, FSB. ALBANK's subsidiaries compete for loans
principally through the interest rates and loan fees they charge and the
efficiency and quality of services they provide to borrowers.
Regulation and Supervision
General. As a bank holding company, ALBANK is subject to the regulation
and supervision of the Federal Reserve Board under the Bank Holding Company Act
of 1956 (the "BHC Act") and must file reports with the Federal Reserve Board.
Prior to its registration as a bank holding company in late 1997, ALBANK, as a
savings and loan holding company, was subject to the regulation of the OTS under
the Savings and Loan Holding Company Act. As a bank holding company, ALBANK is
no longer subject to OTS holding company regulation. ALBANK, FSB, as a federally
chartered savings bank, is subject to comprehensive regulation, examination and
supervision by the OTS as its primary federal regulator and by the FDIC as the
administrator of the deposit insurance funds. ALBANK, FSB's deposit accounts are
insured by the FDIC, principally through the Savings Association Insurance Fund
("SAIF"). As a New York chartered commercial bank, ALBANK Commercial is subject
to comprehensive regulation, examination and supervision by th New York
Superintendent of Banks (the "Superintendent") and the New York State Banking
Department under the New York Banking Law. As a state-chartered bank that is not
a member of the Federal Reserve System (a "state non-member bank"), ALBANK
Commercial's primary federal regulator is the FDIC. ALBANK Commercial's deposit
accounts are insured by the FDIC through the Bank Insurance Fund ("BIF").
ALBANK, FSB must file reports with the OTS and the FDIC and ALBANK Commercial
must file reports with the Superintendent and the FDIC concerning their
activities and financial condition and must obtain regulatory approvals prior to
entering into certain transactions, including mergers with, or acquisitions of,
other financial institutions. ALBANK, FSB also is a member of the Federal Home
Loan Bank of New York (the "FHLB-NY"). Both institutions are subject to certain
limited regulation by the Federal Reserve Board.
Virtually every aspect of the business of ALBANK, FSB and ALBANK
Commercial is subject to numerous requirements and restrictions with respect to
such matters as, for example, the nature and amount of loans and investments
that may be made, the issuance of securities, investment portfolio policy and
other accounting regulations and policies, transactions with affiliates and
insiders, reserves against deposits, the establishment of branches, mergers,
non-banking activities and other operations. This supervision and regulation
establish a comprehensive framework of activities in which the institutions can
engage and is intended primarily for the protection of the insurance funds and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.
Federal legislation and regulation have significantly affected the
operations of federally insured savings associations and other federally
regulated financial institutions in the past several years and have increased
competition among savings associations, commercial banks and other financial
institutions.
In particular, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") included numerous provisions that affected the operation
of all federally insured depository institutions. Among other things, FDICIA
required annual on-site regulatory examinations of insured depository
institutions, required that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandated the
establishment of a risk-based deposit insurance assessment system and required
imposition of numerous additional operational standards and restrictions. FDICIA
also included consumer-oriented incentives and consumer protections.
The federal banking agencies and, under certain circumstances, the FDIC
as deposit insurer have substantial enforcement authority with respect to
institutions they regulate. This enforcement authority includes, among other
things, the ability to assess substantial civil money penalties, to terminate or
suspend insurance of the institution's accounts, to initiate injunctive actions
and to issue prohibition, removal or cease-and-desist orders. In general, these
enforcement actions may be initiated for violations of laws and regulations and
engaging in unsafe or unsound practices. In addition, banking regulators are
provided with great flexibility to take enforcement action against an
institution that fails to comply with applicable capital requirements.
Capital Requirements. Each of ALBANK, FSB, ALBANK Commercial and ALBANK are
subject to federal regulatory capital requirements, administered respectively by
the OTS, the FDIC and the Federal Reserve Board.
The OTS requires savings associations such as ALBANK, FSB to comply
with each of three separate capital adequacy standards. They must have
"tangible" capital equal to at least 1.5% of adjusted total assets and
"risk-based capital" equal to at least 8% of risk-weighted assets (including
certain off-balance sheet items), of which 4% must be "core capital." In
addition, savings associations must maintain a "leverage ratio" of core capital
(principally common equity, retained earnings and certain types of preferred
stock) equal to 3% of adjusted total assets. The OTS has proposed that the 3%
core capital requirement apply only to the strongest institutions and that all
other institutions maintain core capital of at least 4% of adjusted total assets
or more, depending on the circumstances and the institution's risk profile.
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies (on a consolidated basis with their subsidiaries), and
the FDIC has adopted comparable guidelines for state non-member banks such as
ALBANK Commercial. These guidelines are similar but not identical to the OTS
standards. For holding companies and state non-member banks, the minimum ratio
of qualifying total capital to risk-weighted assets (including certain
off-balance-sheet items) is 8%, with "Tier 1 capital" (analogous to "core
capital") comprising at least half that amount. In addition, the Federal Reserve
Board has established a minimum leverage ratio (Tier 1 capital to average total
assets) to supplement its risk-based ratio, and the FDIC has adopted
substantially similar requirements. The applicable capital guidelines provide
for a minimum leverage ratio of 3% for bank holding companies and banks that
meet certain specified criteria, including those having the highest regulatory
ratings. All other institutions are required to maintain a leverage ratio of at
least 4%. The Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
In addition, in order to qualify as "well-capitalized" institutions
under the "prompt corrective action" requirements discussed below, the OTS and
the FDIC require savings associations and state non-member banks, respectively,
to maintain, among other requirements, a leverage ratio of at least 5% of
adjusted total assets, a ratio of "Tier 1" (or "core") capital to risk-weighted
assets of at least 6% and a ratio of total capital to risk-weighted assets of at
least 10%. As of December 31, 1997, ALBANK, FSB's leverage ratio, tangible
capital ratio, Tier 1 risk-based capital ratio and total risk-based capital
ratio were 6.67%, 6.67%, 10.81% and 11.99%, respectively. ALBANK Commercial's
leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital
ratio were 7.91%, 14.95% and 16.01% respectively. ALBANK's leverage ratio, Tier
1 risk-based capital ratio and total risk-based capital ratio were 8.38%, 12.97%
and 14.15%, respectively.
FDICIA required the federal banking agencies to revise risk-based
capital standards to ensure that they take account of interest-rate risk
("IRR"). The OTS adopted a rule in 1994 that established a methodology for
measuring IRR pursuant to which savings associations have been calculating and
reporting to the OTS since that time. The OTS has not required savings
associations to make an automatic deduction from their capital for IRR, pending
the decision of the other federal banking agencies to require such a deduction.
In 1995 the other federal banking agencies, including the FDIC and the Federal
Reserve Board, issued an IRR rule that requires them to review IRR when
assessing an institution's capital adequacy. In 1996 those agencies issued an
IRR policy statement that sets forth the key elements of sound interest rate
risk management and prudent practices for each of these elements, but does not
establish a standardized measure of, or require an explicit capital charge for,
IRR.
In addition, in 1995 the OTS and the other federal banking agencies
revised their risk-based capital standards to take account of concentration of
credit risk and the risk of nontraditional activities. The OTS rule authorizes
the OTS to take account of such risks, as well as such other factors as a record
of operational losses, management deficiencies and poor record of supervisory
compliance, in setting individual capital requirements for a thrift institution.
Finally, in 1996 the FDIC and the Federal Reserve Board amended their capital
guidelines to require bank holding companies and banks with significant trading
activity to measure and hold capital for exposure to general market risk arising
from fluctuations in interest rates, foreign exchange rates and certain price
risks.
Under law and regulations specifically applicable to savings
associations, the OTS may impose a number of sanctions on savings associations
that are not in compliance with the OTS capital requirements. Among other
things, the OTS might impose restrictions on asset growth and issue a capital
directive that may require, among other things, an increase in regulatory
capital; reduction of rates paid on savings accounts; cessation of or
limitations on deposit-taking, lending, purchasing loans, making specified
investments, or issuing new accounts; limits on operational expenditures; an
increase in liquidity; and/or such other restrictions or corrective actions as
the OTS may deem necessary or appropriate. In addition, an insured financial
institution such as ALBANK, FSB or ALBANK Commercial must provide its federal
regulators with prior notice before it adds any new director or senior executive
officer if the institution is not meeting its capital requirements or is
otherwise determined to be in a troubled condition. An institution not meeting
its capital requirements is prohibited from making capital distributions without
regulatory approval, could be required to file an appropriate capital plan and
may not accept, renew or roll over brokered deposits. Furthermore, deposits of
employee benefit plans in such an institution are not eligible for
"pass-through" deposit insurance. FDIC regulations permit only well-capitalized
depository institutions to accept, renew or roll over brokered deposits without
restriction.
Prompt Corrective Regulatory Action. FDICIA established five capital
zones ("well- capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") in which
insured depository institutions such as ALBANK, FSB and ALBANK Commercial would
be placed, and authorized (and, in certain circumstances, required) the
appropriate federal banking agency to take "prompt corrective action" to resolve
an institution's problems, with the nature and extent of such action dependent
primarily on the zone in which the institution is placed.
In general, an insured depository institution may not make a capital
contribution (including a payment of a dividend) or pay any management fee to
its holding company if the institution would thereafter be undercapitalized. The
severity of the other actions required to be taken by the appropriate federal
banking agency increases as an institution's capital position deteriorates.
Among other things, these actions could include, under certain circumstances,
requiring recapitalization of or a capital restoration plan by a depository
institution; restricting transactions between such an institution and its
affiliates; restricting interest rates, asset growth, activities or investments
in subsidiaries; ordering a new election for directors; dismissing directors or
senior executive officers; and/or requiring the employment of additional
qualified senior executive officers. If the agency determines that an
institution is in an unsafe and unsound condition or if the institution is
deemed by the agency to be engaging in an unsafe and unsound practice by virtue
of having received a less-than-satisfactory rating for asset quality,
management, earnings or liquidity in its most recent examination, the agency
may, if the institution is "well-capitalized," reclassify it to "adequately
capitalized," if the institution is "adequately capitalized," require it to
comply with restrictions applicable to "undercapitalized" institutions and if
the institution is "undercapitalized," require it to comply with restrictions
applicable to "significantly undercapitalized" institutions.
Each company having control of a capital deficient depository
institution must (i) guarantee that the institution will comply with a required
capital restoration plan until the institution has been adequately capitalized
on average during each of four consecutive calendar quarters, and (ii) provide
appropriate assurances of performance. The aggregate guarantee liability of all
companies having control of a depository institution will be the lesser of 5% of
the institution's total assets when it becomes undercapitalized or the amount
that is necessary to bring the institution into compliance with the capital
standards as of the time the institution fails to comply with the capital
restoration plan.
FDICIA also significantly expanded the grounds for the appointment of a
conservator or receiver for an insured depository institution, including grounds
based upon the institution's compliance with the prompt corrective action
provisions.
Restrictions on Dividends and other Capital Distributions. OTS
regulations limit the ability of a savings association to pay dividends and make
other capital distributions according to the association's level of capital and
income, with the greatest flexibility afforded to an institution that meets or
exceeds its capital requirements. A savings association that exceeds its capital
requirements both before and after a proposed distribution (a "Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision could, after prior notice to the OTS, make capital
distributions during a calendar year up to the higher of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the association's excess capital over its
capital requirement) at the beginning of the calendar year, or (ii) 75% of its
net income to date over the most recent four-quarter period. In addition, a Tier
1 Association may make capital distributions in excess of the foregoing limits
if it gives the OTS 30 days' notice of the proposed distribution and the OTS
does not object. Bank management believes that ALBANK, FSB at December 31, 1997,
met the requirements to qualify as a Tier 1 Association. An institution not
qualifying as a Tier 1 Association is subject to more stringent restrictions on
its capital distributions. The OTS may also prohibit a capital distribution that
would otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice. In addition, a savings association,
such as ALBANK, FSB, that has converted from mutual to stock form may not
declare or pay a dividend on or repurchase any of its capital stock if the
effect of such action would be to reduce the regulatory capital of the
association below the amount required for the liquidation account established
for the benefit of certain of its depositors in connection with such conversion.
In January 1998 the OTS proposed to amend its capital distribution
regulation. In general, well-capitalized savings associations that meet certain
other criteria and that would be at least adequately capitalized after making a
capital distribution could make most types of capital distributions without
prior notice or application to the OTS so long as all distributions (including
the proposed distribution) for the applicable calendar year did not exceed net
income for that year to date plus retained net income for the preceding two
years. Subsidiaries of savings and loan holding companies would be required to
give notice to the OTS.
ALBANK Commercial is subject to dividend limitations under the New York
Banking Law, including a requirement that prior regulatory approval be obtained
for dividends paid in any year that would exceed ALBANK Commercial's net profits
for such year combined with retained net profits for the prior two years.
All insured depository institutions, including ALBANK, FSB and ALBANK
Commercial, are prohibited from making a capital distribution if, following such
distribution, an institution would be "undercapitalized" under the prompt
corrective action provisions discussed above.
Deposit Insurance and Other Assessments. As of December 31, 1997, 58%
of ALBANK's consolidated deposit accounts were insured up to applicable limits
by the FDIC through the SAIF and 42% of deposits were insured up to applicable
limits by the FDIC through the BIF. Under FDICIA, the FDIC has established a
risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities. Depository institutions are placed into one of nine
confidential risk assessment categories using a two-step process based first on
capital ratios and then on other factors derived from reviews by the
institution's primary federal and, if applicable, state regulator and other
information deemed by the FDIC to be relevant. The disclosure of the
confidential supervisory subgroup to which an institution is assigned is
prohibited by FDIC regulation. Until mid-1995, the range of deposit insurance
premiums paid with respect to BIF-insured deposits was the same as that for
SAIF-insured deposits. However, as a result of a series of actions taken by the
FDIC, from mid-1995 through 1996 BIF premiums were substantially lower than SAIF
premiums. Indeed, beginning in 1996, institutions with the most favorable
capital and risk categories paid only the statutory minimum of $2,000 annually
with respect to BIF-insured deposits (the assessment range was $0 to $0.27 per
$100 of deposits), while SAIF-insured deposits were subject to an assessment
that ranged from $0.23 to $0.31 per $100 of deposits. As a result of the
recapitalization of the SAIF (discussed below) that occurred effective October
1, 1996, the FDIC reduced the premiums on SAIF deposits to a range of $0 to
$0.27 per $100 of deposits (the same as for BIF-insured deposits), except that
SAIF-member savings associations (such as ALBANK, FSB) were subject from October
1, 1996 through December 31, 1996, to a premium range of $0.18 to $0.27 per $100
of SAIF deposits. Throughout 1997 and in the first quarter of 1998, all
deposits, SAIF or BIF, were subject to the same range of $0 to $0.27, with no
statutory minimum.
In September 1996 Congress passed and the President signed the Deposit
Insurance Funds Act of 1996 (the "Funds Act"), which, among other things,
required the FDIC to impose a one-time special assessment on SAIF-insured
deposits in an amount that would recapitalize the SAIF at its required reserve
ratio of 1.25%. Certain institutions, including ALBANK, FSB, were permitted to
reduce the amount of deposits to which the assessment was applied by 20%.
ALBANK, FSB paid a special assessment in the amount of $10.4 million. The Funds
Act provides that the FDIC may not set semiannual assessments with respect to
SAIF or BIF in excess of the amount needed (i) to maintain the 1.25% designated
reserve ratio, or, if the reserve ratio is less than the designated reserve
ratio, (ii) to increase the reserve ratio to the designated level.
The Funds Act also provided that beginning in 1997, both BIF deposits
and SAIF deposits will be assessed by the Financing Corporation ("FICO") for
interest payments due on bonds issued by FICO for purposes of recapitalizing the
Federal Savings and Loan Insurance Corporation in the late 1980s. The Funds Act
provides that through the earlier of December 31, 1999, or the date as of which
the last savings association ceases to exist, BIF deposits will be assessed for
FICO at a rate that is one-fifth the rate applicable to SAIF deposits. After
that date, the FICO assessment will be the same for both BIF and SAIF deposits.
For 1997, the FICO assessment (payable quarterly) on SAIF deposits ranged from
$0.063 to $0.065 per $100 of deposits and for BIF deposits was $0.0126 to $0.013
per $100 of deposits. The FICO assessment for the first quarter of 1998 was
$0.0622 per $100 of SAIF deposits and $0.0124 per $100 of BIF deposits for
ALBANK, FSB and $0.0249 per $100 of BIF deposits for ALBANK Commercial.
Prior to enactment of the Funds Act, institutions were generally
prohibited from changing from BIF membership to SAIF membership or vice versa.
Since October 1, 1996, institutions have been permitted to change insurance
funds but must pay exit and entrance fees to the respective funds. However, a
SAIF member may acquire deposits from a BIF member or vice versa in a merger or
assumption of deposits without changing funds, so long as the acquired deposits
continue to be treated as deposits insured by the fund of the selling
institution and assessments go to that fund. Another provision of the Funds Act
requires the federal banking agencies to take "appropriate actions" (including
denial of applications, enforcement actions and the imposition of entrance and
exit fees) to prevent insured depository institutions and holding companies from
"facilitating or encouraging" the shifting of deposits from SAIF-assessable
deposits to BIF-assessable deposits for the purpose of evading the assessments
applicable to SAIF-assessable deposits. The provision terminates on the earlier
of December 31, 1999, or the date on which the last savings association ceases
to exist.
Savings associations are required by OTS regulation to pay assessments to
the OTS to fund its operations. The general assessment is computed on the basis
of a savings association's total assets, including consolidated subsidiaries. A
premium assessment is charged for associations designated as troubled
institutions. ALBANK, FSB's general assessment for the year ended December 31,
1997, totaled $522,000.
Safety and Soundness Standards. Pursuant to FDICIA and subsequent
legislation, the federal banking agencies have prescribed standards relating to,
among other things, internal controls and audit systems, credit underwriting and
loan documentation, interest rate exposure, asset growth, compensation of
directors and officers, asset quality and earnings.
The federal banking agencies require each insured depository
institution to establish and maintain written internal real estate lending
standards consistent with safe and sound banking practices, taking into account
the size of the institution and the nature and scope of its real estate lending
activities. Subject to certain exceptions, the policies of each institution must
also be consistent with accompanying interagency guidelines, which include
loan-to-value ratios for the following types of real estate loans: raw land
(65%); land development (75%); nonresidential construction (80%); improved
property (85%); and one- to four-family residential construction (85%). One- to
four-family mortgage and home equity loans do not have maximum loan-to-value
ratio limits, but those with a loan-to-value ratio at origination of 90% or
greater are expected to be backed by private mortgage insurance or readily
marketable collateral. Institutions are also permitted to make a limited amount
of loans that do no conform to the loan-to-value limitations.
Consumer Laws and Regulations. Numerous laws and regulations set forth
special restrictions and procedural requirements applicable to ALBANK, FSB and
ALBANK Commercial with respect to extensions of credit, credit practices, the
disclosure of credit and savings account terms and discrimination in credit
transactions. For example, under the Community Reinvestment Act ("CRA") and
implementing regulations, ALBANK, FSB and ALBANK Commercial have an obligation
to help meet the credit needs of their local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
the institutions. In May 1995, the federal banking agencies issued revisions to
the rules governing CRA compliance. The new rules, which became effective July
1, 1997, were intended to give financial institutions guidance regarding their
CRA obligations and to simplify CRA evaluations by establishing
performance-based criteria. The rules establish a methodology for evaluating an
institution's CRA compliance in three broad areas, lending, investment and
service, with the actual criteria applied being dependent on the type of
institution (retail or wholesale) and the nature of its service area.
Under a consent decree filed in the U.S. District Court for the
Northern District of New York on August 13, 1997, entered into by the U.S.
Department of Justice, the Company and ALBANK, FSB concerning allegations of
fair lending violations relating to certain of ALBANK, FSB's arrangements with
unaffiliated "correspondent" mortgage bankers or brokers from which ALBANK, FSB
purchased loans originated in Connecticut and in Westchester County, New York,
ALBANK, FSB agreed to make available $35 million of home mortgage loans at 1.5%
below market rates to homebuyers in the Connecticut cities of Bridgeport,
Hartford, New Britain, New Haven, Norwalk, Stamford and Waterbury over a period
of five years. In Westchester County below I-287, ALBANK, FSB will make
available $20 million in similarly discounted loans over two years. ALBANK, FSB
will also contribute $350,000 over five years to support homebuying counseling
and education programs provided by local organizations in these areas, and will
spend another $350,000, primarily in the form of services, for ALBANK,
FSB's homebuyer education programs.
In agreeing to the consent decree, ALBANK, FSB denied any and all
allegations that it intentionally violated fair lending laws. In particular,
ALBANK, FSB believes that the loan origination criteria that it set for the
mortgage bankers from whom it purchased loans in Connecticut and Westchester
County were based primarily on credit quality considerations and, initially, the
desire to stay within markets similar to ALBANK, FSB's upstate New York
lending area. ALBANK, FSB agreed to accept the conditions of the consent decree
because it believed that the cost of contesting allegations in the courts would
have been significant, and that protracted litigation would have hampered
ALBANK, FSB's strategic growth plans.
Certain Loss Valuation Policies. Adequate valuation allowances,
consistent with generally accepted accounting principles, are required to be
established for classified assets, and the federal banking agencies have issued
an interagency policy statement relating to allowances for loan and lease
losses. This statement reaffirms that an institution's board of directors and
management are responsible for establishing and maintaining an adequate level of
allowances, and contains general guidance on calculating the allowances. At a
minimum, the allowance should be no less than the sum of (i) estimated credit
losses for the remaining effective lives of loans and leases classified as
"substandard" and "doubtful"; (ii) estimated credit losses for the upcoming 12
months for components of the loan and lease portfolio that are not classified;
and (iii) estimated credit losses resulting from the transfer risk of
international loans. ALBANK, FSB and ALBANK Commercial believe that their
methodologies for establishing a general valuation allowance are in accordance
with the policy statement. (See "Statistical Data - IV. Summary of Loan Loss
Experience".)
Certain Operational Matters Respecting ALBANK, FSB. Savings
associations are required to maintain 65% of their "portfolio assets" (total
assets minus goodwill, intangibles, property used to conduct business and
liquid assets up to 20% of assets) in "qualified thrift investments."
Qualified thrift investments include loans and other investments
related to residential real estate, credit card loans, education
loans and small business loans, and a lesser amount of other
consumer loans. Savings associations that fail the "qualified thrift
lender" ("QTL") test are subject to substantial restrictions on
their activities and to certain other penalties. As a savings bank chartered
under state law prior to October 15, 1982, ALBANK, FSB is exempt from many of
such restrictions and penalties. However, failure by ALBANK, FSB to maintain QTL
status could affect its ability to branch across state lines. As of December 31,
1997, ALBANK, FSB complied with the QTL requirements (with 85.03% of it assets
in qualified thrift investments).
Until they were amended in November 1997, OTS regulations required
savings associations such as ALBANK, FSB to maintain an average daily balance of
liquid assets (including, among other things, cash, certain time deposits,
bankers' acceptances, specified U.S. government, state or federal agency
obligations) equal to at least 5% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month (the "long-term liquidity ratio"). OTS regulations also required each
savings association to maintain an average daily balance of short-term liquid
assets (generally those having maturities of 12 months or less) equal to at
least 1% of the average daily balance of its net withdrawable accounts plus
short-term borrowings during the preceding calendar month (the "short-term
liquidity ratio"). Effective in November 1997, the OTS amended its regulations
to reduce the long-term liquidity ratio to 4% of the average daily balance of
net withdrawable accounts plus short-term borrowings either during or at the end
of the preceding calendar quarter; to add additional qualifying investments,
such as certain mortgage-related securities and mortgages; and to remove the
short-term liquidity ratio requirement. This liquidity requirement may be
changed from time to time by the OTS to an amount within a range of 4% to 10% of
designated accounts and borrowings. Monetary penalties may be imposed for
failure to meet the liquidity ratio requirement. At December 31, 1997, the
liquidity ratio of ALBANK, FSB was 25.2%.
Federal savings associations are also subject to comprehensive
regulation governing their investments and activities. Among other things, a
federal association may invest in (i) mortgage loans in an unlimited amount,
(ii) nonresidential real estate loans up to 400% of capital, (iii) commercial
loans up to 20% of assets so long as the last 10% are small business loans and
(iv) consumer loans, commercial paper and corporate debt securities in the
aggregate up to 35% of assets. In addition, a federal savings association may
invest up to 3% of its assets in service corporations and an unlimited
percentage of its assets in operating subsidiaries (which may engage only in
activities permissible for the association). Other than investment in service
corporations and operating subsidiaries, and stock of government sponsored
enterprises such as the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"), federal savings associations
generally are not authorized to make equity investments.
Until its conversion to a federally chartered savings bank in 1982,
ALBANK, FSB was a New York state chartered savings bank with investment powers
conferred by New York law. Federal law and OTS regulations authorize ALBANK, FSB
to make investments or engage in activities to the degree it was authorized to
do so as a state chartered savings bank under New York law at the time of its
conversion from a state to a federal charter and to the degree permissible for
ALBANK, FSB in its capacity as a federal savings bank prior to October 15, 1982,
in each case to the extent authorized by the OTS and subject to the authority of
the FDIC to limit activities incompatible with deposit insurance. These powers
are in addition to powers that ALBANK, FSB currently possesses as a federally
chartered savings bank.
ALBANK, FSB's grandfathered powers include the authority to
invest in various types of investment securities, including corporate bonds and
stock, and in real estate for development, in each case subject to certain
limitations. In addition, ALBANK, FSB has grandfathered authority to make
so-called "leeway investments," which include any investment not otherwise
authorized under New York law at the time of ALBANK, FSB's charter conversion
(other than investments in the common stock of commercial banks or life
insurance companies), so long as any single investment does not exceed 1% of
ALBANK, FSB's assets and all such investments do not exceed 5% of its assets.
As a "non-bank" subsidiary of a bank holding company, ALBANK, FSB is, as of
October 10, 1997, subject to certain restrictions on its activities. As a
result, ALBANK, FSB is not permitted to exercise certain of its grandfathered
powers, including investment in real estate for development and investment in
more than 5% of the voting stock of certain companies, and (subject to a limited
phase-out ending October 10, 1999) including the conduct of SBLI activities.
(See "Regulation and Supervision - Regulation of Bank Holding Companies".)
Certain Operational Matters Respecting ALBANK Commercial. The New York
Banking Law and Regulations delimit the powers of New York banks, which include
the powers, among others, subject to certain restrictions, to lend money,
including on real and personal security, to discount commercial paper, to
receive deposits and to invest in certain securities. Legislation enacted in New
York in 1997 authorizes the Superintendent to permit New York banks to exercise
any power permissible for national banks. In addition, as a state non-member
bank, ALBANK Commercial is subject to numerous requirements and restrictions
under New York and federal law with respect to its business and operations,
generally of the type applicable to ALBANK, FSB and discussed under "Regulation
and Supervision - General."
The Federal Deposit Insurance Act provides that a state bank, including
a state non-member bank such as ALBANK Commercial, generally may not engage as
principal in any activity that is not permissible for a national bank.
Regulation of Bank Holding Companies. As a bank holding company, the
Company is subject to regulation under the BHC Act, which is administered by the
Federal Reserve Board. As such, the Company is required to file reports with the
Federal Reserve Board and is subject to Federal Reserve Board examination and
notice/application requirements. The BHC Act generally limits activities of a
bank holding company to the ownership and management of banks and companies
engaged in activities that the Federal Reserve Board has determined to be so
closely related to banking as to be a proper incident thereto ("non-banking
subsidiaries"). The activities of the Company conducted directly or through
non-bank subsidiaries are generally limited to furnishing services to its
subsidiaries and activities that qualify under the "closely related" and "proper
incident" tests. Notice to or application to the Federal Reserve Board is
required for new activities and acquisitions of most non-banking subsidiaries.
Among other activities, operating a savings association has been determined by
the Federal Reserve Board to be a permissible non-banking activity, provided the
savings association engages only in activities that are permissible for bank
holding companies under the "closely related" and "proper incident" test. As a
result, ALBANK, FSB cannot take advantage of certain grandfathered powers (see
"Regulation and Supervision - Certain Operational Matters Respecting ALBANK,
FSB") and as a condition to becoming a bank holding company, the Company
committed to the Federal Reserve Board, among other things, to divest or
discontinue the sale of SBLI and certain life insurance products, as well as its
investment in certain office premises, unless during such period such activities
become permissible to ALBANK, FSB (as a "non-bank" subsidiary of a bank holding
company) or ALBANK Commercial, as the case may be, under applicable law. (See
"Subsidiaries".)
Under Federal Reserve Board Policy, a bank holding company is expected
to act as a source of financial strength to its banks and to commit resources to
support such banks in circumstances where it might not do so absent such policy.
In addition, any loans by a bank holding company to its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness of
its banks. Under the Federal Deposit Insurance Act, a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with (i) the default of a
commonly controlled FDIC-insured depository institution, or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. "Default" is defined generally as the
appointment of a conservator or receiver, and "in danger of default" is defined
generally as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
Acquisitions. A bank holding company is not permitted to acquire the
ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company -- including a bank, a bank
holding company, a savings and loan association or a savings and loan holding
company -- or merge or consolidate with another company without the prior
approval (or in some cases, non-objection) of the Federal Reserve Board. The OTS
no longer regulates acquisitions by the Company but it regulates acquisitions by
ALBANK, FSB. The FDIC (under the Bank Merger Act) and the Superintendent (under
the New York Banking Law) regulate acquisitions by ALBANK Commercial.
Under applicable federal law, bank holding companies are permitted to
acquire banks located in states other than their home states without regard to
whether the transaction is permissible under state law. In addition, commencing
June 1, 1997, state and national banks with different home states are permitted
to merge across state lines, with approval of the appropriate federal banking
agency, unless the relevant state passed legislation by May 31, 1997, expressly
prohibiting interstate mergers. A bank may also establish and operate a new
branch in a state in which it does not maintain a branch if that state expressly
permits such de novo branching. By contrast, federal savings associations such
as ALBANK, FSB are permitted to branch nationwide by acquisition or de novo
without regard to state law so long as the institution and the branches meet the
QTL test.
Other Regulatory Requirements. The Federal Home Loan Bank System,
which consists of 12 Federal Home Loan Banks (the "FHLBanks"), provides a
central credit facility primarily for the use of member institutions. The
Federal Housing Finance Board oversees the FHLBanks. ALBANK, FSB is a member of
the FHLB-NY and, as such, is required to acquire and hold shares of capital
stock in the FHLB-NY in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year (assuming for such purposes that at
least 30% of its assets were home mortgage loans), or 5% of its advances
(borrowings) from the FHLB-NY, whichever is greater. ALBANK, FSB is in
compliance with this requirement, with an investment in FHLB-NY stock at
December 31, 1997, of $21.4 million. FHLB-NY advances must be secured by
specified types of collateral, and long-term advances may be obtained only for
the purpose of enabling a member to purchase or fund new or existing
residential housing finance assets.
ALBANK, FSB recorded dividend income of $1.3 million on its FHLB-NY
stock in the year ended December 31, 1997. Since 1989, each of the FHLBanks has
been required to transfer a certain amount of its reserves and undivided profits
to the Resolution Funding Corporation ("REFCORP"), the government entity
established to raise funds to resolve failed savings association cases, to fund
the principal and a portion of the interest on REFCORP bonds and certain other
obligations. In addition, each of the FHLBanks has been required to transfer a
percentage of its annual net earnings to an Affordable Housing Program.
Federal Reserve Board regulations require depository institutions,
including ALBANK, FSB and ALBANK Commercial to maintain noninterest-earning
reserves against certain of their transaction accounts and deposits. For the
calculation period including December 31, 1997, ALBANK, FSB and ALBANK
Commercial were in compliance with the requirement that they maintain $19.1
million in noninterest-earning reserves. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may also be used to
satisfy long-term liquidity requirements imposed by the OTS on savings
associations.
Legislative and Regulatory Proposals. Any changes in the extensive
regulatory structure, whether by the OTS, the FDIC, the Federal Reserve Board,
the Superintendent or Congress, could have a material effect on the Company. The
Company cannot predict what, if any, future actions may be taken by legislative
or regulatory authorities or what impact such actions may have on the Company.
The Funds Act provided for the merger of the BIF and the SAIF on
January 3, 1999, but only if no depository institution was a savings
association by that date. Thus the merger of the two deposit insurance funds was
conditioned upon the conversion of savings associations to bank charters, but
the Funds Act did not provide for the manner of such conversion.
Tax legislation enacted in 1996 repealed the reserve method of
accounting for bad debts by most thrift institutions, such as ALBANK, FSB, and
requires such thrift institutions to recapture their post-1987 additions to
their bad debt reserves ratably over a six-year period. Because ALBANK, FSB
meets certain lending requirements, this recapture did not begin in 1996 or
1997. The recapture began in 1998. The enactment of such tax recapture
legislation should not have a material effect on either the financial condition
or the results of operations of the Company.
The Clinton Administration and Congressional leaders have been
considering measures to restructure elements of the regulation of banks and
savings associations. Legislation pending in the House of Representatives, H.R.
10, would, if ultimately enacted into law, be a sweeping proposal for financial
modernization of the banking system. The stated purposes of H.R. 10 are to
enhance consumer choice in the financial services marketplace, level the playing
field among providers of financial services, and increase competition. H.R. 10
would remove restrictions contained in the Glass-Steagall Act of 1933 and the
BHC Act, thereby allowing qualified financial holding companies to control
banks, securities firms, insurance companies and other financial firms.
Conversely, securities firms, insurance companies and financial firms would be
allowed to own or affiliate with commercial banks. H.R. 10 would also provide
that subsidiaries of national banks may engage in agency activities that are
financial in nature, but only if such bank and all of its depository institution
affiliates are well capitalized and well managed and have a "satisfactory" CRA
rating. Under the new framework, the Federal Reserve Board would serve as an
umbrella regulator to oversee the new financial holding company structure.
Securities affiliates would be required to comply with all applicable federal
securities laws, including registration and other requirements applicable to
broker-dealers. H.R. 10 would also provide that insurance affiliates of banks be
subject to applicable state insurance regulation and supervision. With respect
to the thrift industry, H.R. 10 would, among other things, restrict the
interstate branching authority of federal savings associations to that
applicable to banks, but institutions could keep existing branches. In addition,
the act would merge the OTS and the Office of the Comptroller of the Currency
(the current regulator of national banks) and would also merge the SAIF and the
BIF, effective January 1, 2000. If the bill passes the House, the Senate would
need to approve the bill before it could be sent to the President for his
signature. There can be no assurance of when or if legislation will be enacted
to modernize the financial services industry, or if enacted, what form such
legislation might take.
Statistical Information and Analysis
Reference is made to the "Five Year Selected Financial Data" section on
page 2 of the Company's 1997 Summary Annual Report and the "Management's
Discussion and Analysis" section on pages 1 through 13 of the Company's 1997
Annual Report Supplement (collectively, the "1997 Annual Report") for a
presentation and discussion of certain statistical data relating to ALBANK which
information is incorporated by reference. The information with respect to such
data should not be construed to imply any conclusions on the part of the
management of ALBANK that the results, causes or trends indicated therein will
continue in the future. The nature and effects of governmental monetary policy,
supervision, regulation, future legislation, inflation and other economic
conditions and many other factors which affect interest rates, investments,
loans, deposits and other aspects of ALBANK's operations are extremely complex
and could make historical operations, earnings, assets and liabilities not
indicative of what may occur in the future.
Statistical Data
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
The information set forth on pages 2 and 3 of the 1997 Annual Report
Supplement is incorporated herein by reference.
<PAGE>
II. Investment Portfolio
Securities
The investment policy of the Company, which is established by
senior management and approved by the Board of Directors, is based upon
its asset/liability management goals and is designed primarily to provide
a portfolio of high quality, diversified investments while seeking to
optimize interest income within acceptable limits of safety and liquidity.
ALBANK, FSB and ALBANK Commercial invest in various types of liquid
assets, including U.S. Treasury and state and municipal government obligations,
securities of various federal agencies, federal funds and repurchase agreements.
Subject to various regulatory restrictions, applicable to ALBANK, FSB and ALBANK
Commercial, the Company also invests in investment grade corporate debt
securities, asset-backed securities (which are securities collateralized by
automobile loans, credit card receivables and marine vehicle loans which have
been originated by other financial institutions), mortgage-backed securities,
collateralized mortgage obligations and real estate mortgage investment conduit
securities.
ALBANK, FSB, which until 1982 was a New York State chartered savings
bank, also has grandfathered leeway authority to invest in certain equity and
other securities, although ALBANK, FSB's ability to use such authority has
been restricted since it became a subsidiary of a bank holding company. (See
Regulation and Supervision - "Regulation of Bank Holding Companies").
<PAGE>
The following table sets forth certain information regarding the
amortized cost and market value of the Company's investment securities and
securities available for sale portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities
U.S. Government obligations $ 1,845 1,852 1,744 1,747 1,592 1,627
U.S. Government agency
obligations 55,000 55,221 25,140 25,269 20,393 20,567
Other tax-exempt bonds 7,000 7,034 7,978 8,013 8,916 8,964
Mortgage-backed
securities 19,815 21,163 25,082 26,533 31,030 32,987
Corporate bonds 219 219 219 219 -- --
Collateralized mortgage
obligation and real estate
mortgage investment
conduit securities 7,472 7,390 34,587 34,360 55,446 55,346
Asset-backed securities 3,580 3,562 21,532 21,625 43,540 43,548
Other bonds 40 40 40 40 40 40
Total investment securities $ 94,971 96,481 116,322 117,806 160,957 163,079
Securities available for sale
U.S. Government obligations $ 45,305 46,057 75,910 76,262 120,980 122,486
U.S. Government agency
obligations 3,028 3,004 6,032 6,014 -- --
Mortgage-backed securities 460,939 462,157 200,870 200,042 122,952 122,442
Corporate bonds 193,333 195,103 282,867 283,860 352,727 356,479
Collateralized mortgage
obligation and real
estate mortgage investment
conduit securities 13,385 13,132 19,443 19,051 25,322 25,094
Asset-backed securities 34,689 34,759 23,093 23,156 24,043 24,201
Equity securities 6,832 14,305 6,832 9,558 4,766 6,082
Total securities available
for sale $757,511 768,517 615,047 617,943 650,790 656,784
</TABLE>
At December 31, 1997, the aggregate securities of any single issuer
(other than the U.S. Government and U.S. Government agencies and
corporations) did not exceed 10% of the Company's
stockholders' equity.
<PAGE>
The following table sets forth certain information regarding the amortized
cost, annual weighted-average yields (which have not been calculated on a
tax-equivalent basis) and contractual maturities of the Company's investment
securities and securities available for sale at December 31, 1997.
<TABLE>
<CAPTION>
Within After One Year After Five Years
One Year Through Five Years Through Ten Years
Annualized Annualized Annualized
Weighted- Weighted- Weighted-
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government obligations $ 900 5.82% $ 945 6.33% $ -- --%
U.S. Government agency
obligations -- -- 55,000 6.85 -- --
Other tax-exempt bonds -- -- 6,900 6.04 100 5.64
Mortgage- backed
securities<F1> 43 10.00 1,889 6.91 4,624 7.91
Corporate bonds -- -- 219 5.54 -- --
Collateralized mortgage
obligation and real
estate mortgage
investment conduit
securities<F1> -- -- 48 5.00 1,734 5.10
Asset-backed
securities<F1> 435 5.05 3,145 4.87 -- --
Other bonds -- -- 10 5.31 30 5.62
Total investment securities $ 1,378 5.71% $ 68,156 6.67% $ 6,488 7.11%
Securities available for sale:<F2>
U.S. Government obligations $ 24,991 6.12% $ 19,919 6.69% $ -- --%
U.S. Government agency
obligations -- -- -- -- 3,028 6.51
Mortgage-backed securities<F1> 32,339 5.07 43,628 6.27 161,012 6.85
Corporate bonds 75,013 5.76 117,820 6.91 300 6.44
Collateralized mortgage
obligation and real estate
mortgage investment conduit
securities<F1> -- -- 5,137 4.75 4,887 6.01
Asset-backed securities<F1> 228 5.11 29,464 6.11 4,997 6.20
Total securities available for sale $132,571 5.66% $215,968 6.60% $174,224 6.80%
<FN>
<F1> Maturities of securities in these categories reflect their stated
contractual maturities, that is, the last possible date for repayment
of principal, rather than their shorter expected average lives, which
would be impacted by scheduled amortization and prepayment activity.
<F2> Does not include equity securities.
</FN>
</TABLE>
<TABLE>
<CAPTION>
After
Ten Years Total Securities
Annualized Annualized
Weighted- Weighted-
Amortized Average Amortized Average
Cost Yield Cost Yield
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government
obligations $ -- --% $ 1,845 6.08%
U.S. Government
agency obligations -- -- 55,000 6.85
Other tax-exempt
bonds -- -- 7,000 6.03
Mortgage- backed
securities 13,259 9.19 19,815 8.68
Corporate bonds -- -- 219 5.54
Collateralized mortgage
obligation and real
estate mortgage
investment conduit
securities<F1> 5,690 4.73 7,472 4.82
Asset-backed
securities<F1> -- -- 3,580 4.89
Other bonds -- -- 40 5.54
Total investment securities $ 18,949 7.85% $ 94,971 6.92%
Securities available for sale:<F2>
U.S. Government obligations $ 395 10.88% $ 45,305 6.41%
U.S. Government agency
obligations -- -- 3,028 6.51
Mortgage-backed securities<F1> 223,960 6.83 460,939 6.66
Corporate bonds 200 7.37 193,333 6.46
Collateralized mortgage obligation
and real estate mortgage
investment conduit securities<F1> 3,361 6.17 13,385 5.57
Asset-backed securities<F1> -- -- 34,689 6.12
Total securities available
for sale $227,916 6.83% $750,679 6.55%
<FN>
<F1> Maturities of securities in these categories reflect their stated
contractual maturities, that is, the last possible date for repayment
of principal, rather than their shorter expected average lives, which
would be impacted by scheduled amortization and prepayment activity.
<F2> Does not include equity securities.
</FN>
</TABLE>
III. Lending Activities
Portfolio Composition
One- to Four-Family and Home Equity Loans. The Company offers both
fixed- and adjustable-rate first mortgage loans secured by one- to four-family
dwellings, including townhouses and condominium units, throughout its lending
area. Loan originations are generated through the Company's network of 109
branches generally by a team of mortgage loan consultants who operate in the
Company's primary market area. As of December 31, 1997, approximately 87% of
the Company's residential mortgage loan portfolio related to properties located
in New York State (primarily upstate), and the states of Massachusetts, Vermont
and New Hampshire. Substantially all of the residential mortgage originations
during the twelve months ended December 31, 1997, were for owner-occupied
residences. At December 31, 1997, $2.0 billion, or 70% of the Company's total
loan portfolio, consisted of one- to four-family residential mortgage loans, of
which 75% were ARMs. Adjustable-rate products are typically generated for the
Company's own portfolio, while originated fixed-rate loans are either sold with
servicing retained by the Company or booked for its own portfolio. Total fixed-
rate loans generated in 1997 amounted to $87.6 million; $81.2 million were
originated for the Company's own portfolio and $6.4 million were sold with
servicing retained.
ALBANK, FSB also "buys" mortgage loans from mortgage brokers and mortgage
bankers; most of these loans are on properties located within ALBANK, FSB's
market area, although ALBANK, FSB does buy a certain amount of loans on
properties that are located in selected nonmarket areas including Ohio,
Kentucky, and Connecticut. Mortgage loans acquired from mortgage brokers
and mortgage bankers are underwritten and approved using the same guidelines
as those applicable to ALBANK, FSB's own originations. Purchased loans are
secured by one- to four- family owner-occupied properties, and have been
acquired on a servicing released basis (that is, the loans are serviced
by ALBANK, FSB, not the originator/seller). The origination of loans
through mortgage brokers and mortgage bankers under contract with ALBANK,
FSB was limited to ARMs. During 1997, ALBANK, FSB purchased of $312.1 million
of adjustable-rate, one- to four- family residential mortgages. In recent
years, ther have been no bulk purchases of residential mortgage loans.
Generally, ARM loans pose credit risks different from the risks
inherent in fixed-rate loans, primarily because if interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential for
default. In addition, the marketability of the underlying property may be
adversely affected by higher interest rates. The Company offers some ARMs at an
initial "teaser" rate, which is an interest rate lower than the fully-indexed
rate or the interest rates that are anticipated to follow the initial "teaser"
rate. To better assess underwriting risks, however, the Company qualifies ARM
borrowers at the maximum second-year rate or 7%, whichever is higher.
Fixed-rate mortgages are available throughout the Company's
lending area on one- to four- family residential properties, and generally are
underwritten according to the secondary market guidelines of FHLMC and FNMA.
State of New York Mortgage Agency and Vermont Housing Finance Agency loans are
also available to New York and Vermont borrowers within the Company's
lending area. These agencies offer special programs, such as loans for
first-time home buyers and loans for properties in federally designated
areas, to qualified borrowers at advantageous rates and terms.
The Company originates two types of home equity loans -- revolving
credit line and single disbursement -- which may be secured by a first or second
mortgage on a one- to four-family primary residence. The Company limits the
loan-to-value ratio for these loans (including the first mortgage) to a maximum
of 75%.
Commercial Real Estate and Multi-Family Loans. The Company originates
commercial real estate loans secured by mortgages on income-producing property
in its market area, but does not originate, or plan to originate, such loans
out-of-market. The Company's market is defined as the states of New York and
Vermont, and the western portions of Massachusetts and New Hampshire. The
Company's underwriting guidelines require these properties to produce sufficient
income to satisfy operating expenses and principal and interest payments on the
loan, and to provide a reasonable return to the owners on their investment.
Generally, the Company's commercial real estate loans are collateralized by
office buildings, strip shopping centers and office/warehouse buildings. For
such loans, the Company limits the loan-to-value ratio to a maximum of 75% and
requires borrowers to have demonstrated background experience which would
indicate a high probability of success in managing the property. On
income-producing properties, the Company requires a minimum occupancy rate of
80% and a minimum debt service coverage ratio of 1:1 for construction loans and
1.3:1 for permanent loans.
The following table sets forth the composition of the Company's mortgage
and other loan portfolios in dollar amounts and in percentages at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $1,984,783 69.76% $1,730,059 67.74% $1,362,277 70.31% $1,234,250 69.18% $1,057,274 68.56%
Home equity 164,991 5.80 169,214 6.63 147,136 7.59 152,869 8.57 143,378 9.30
Commercial real estate 111,989 3.94 135,284 5.30 81,448 4.20 77,593 4.35 60,994 3.96
Multi-family 32,968 1.16 31,792 1.24 28,313 1.46 31,574 1.77 35,075 2.27
Construction 16,393 0.57 13,338 0.52 11,577 0.60 10,975 0.61 13,436 0.87
Total mortgage loans 2,311,124 81.23 2,079,687 81.43 1,630,751 84.16 1,507,261 84.48 1,310,157 84.96
Other loans:
Commercial 285,266 10.03 241,002 9.44 108,412 5.60 83,474 4.68 62,052 4.02
Consumer:
Student 96,884 3.40 94,478 3.70 93,816 4.84 89,246 5.00 80,314 5.21
Automobile 68,316 2.40 64,864 2.54 47,556 2.45 35,003 1.96 26,574 1.73
Home improvement 24,737 0.87 23,593 0.92 22,800 1.18 22,230 1.25 18,184 1.18
Personal, secured
and unsecured 23,731 0.83 19,444 0.76 5,071 0.26 17,664 0.99 14,668 0.95
Credit cards 13,428 0.47 14,754 0.58 17,233 0.89 16,920 0.95 18,864 1.22
Overdraft and other 21,799 0.77 16,222 0.63 12,065 0.62 12,362 0.69 11,272 0.73
Total consumer loans 248,895 8.74 233,355 9.13 198,541 10.24 193,425 10.84 169,876 11.02
Total other loans 543,161 18.77 474,357 18.57 306,953 15,84 276,899 15.52 231,928 15.04
Total mortgage and
other loans 2,845,285 100.00% 2,554,044 100.00% 1,937,704 100.00% 1,784,160 100.00% 1,542,085 100.00%
Net discounts, premiums
and deferred loan
fees and costs 10,764 5,605 1,680 (363) (1,621)
Loans receivable 2,856,049 2,559,649 1,939,384 1,783,797 1,540,464
Allowance for loan losses (29,117) (24,114) (15,949) (15,510) (12,984)
Loans receivable, net $2,826,932 $2,535,535 $1,923,435 $1,768,287 $1,527,480
</TABLE>
The Company originates multi-family mortgage loans secured by
properties located in its market area, but does not originate, or plan to
originate, such loans out-of-market. These mortgage loans are generally written
for five-year terms with interest rates tied to either the three-year or the
five-year U.S. Treasury Constant Maturity Index or they may float based on the
prime rate of interest. Amortization periods generally average from fifteen to
twenty years (maximum amortization term is twenty-five years) and vary depending
on property type and other considerations. The Company currently limits the
loan-to-value ratio for these loans to a maximum of 75% and generally requires
the execution of personal guarantees extending for the full term of the loan.
The commercial real estate portfolio declined $2.0 million to $112.0
million during 1997, after excluding a $21.3 million loan reclassification from
commercial real estate to commercial loans during the first quarter.
The multi-family portfolio gained $1.2 million during the year and totaled
$33.0 million at December 31, 1997, as new loan volume was more than
sufficient to offset loan prepayment and scheduled amortization.
At December 31, 1997, the Company had approximately $2.8 million, or
2%, of its commercial real estate portfolio and $3.7 million, or 11%, of its
multi-family mortgage loan portfolio, in out-of-market loans. Most of these
out-of-market loans were purchased from mortgage bankers in the 1970's with the
last such purchase in 1979 (other than purchases which were effected through the
acquisition of loans resulting from the Company's merger and acquisition
activity since 1979).
Construction Loans. The Company originates loans to finance the
construction of one- to four-family homes in its lending area, but does not
originate, or plan to originate, such loans out-of-market. On occasion, the
Company has also financed construction of multi-family residences and commercial
real estate in its lending area. The Company does not currently provide land
acquisition and development financing or construction loans for speculation.
With rare exception, construction loans are made to a builder or to a buyer
under a purchase contract. Construction loans must ordinarily be combined with a
permanent mortgage from the Company, and the maximum loan-to-value ratio the
Company generally allows is 80%. At December 31, 1997, $16.4 million, or less
than 1% of the Company's total loan portfolio, consisted of construction loans.
Other Loans. The Company's other lending activities include commercial and
consumer lending. The Company expects to devote additional resources to the
expansion of these operations in order to further diversify its lending base and
further supplement its mortgage activities.
The Company concentrates its commercial lending efforts on companies
that have the capacity to borrow $100,000 or more, although smaller loans are
considered and encouraged. Loan pricing and terms are set according to the
individual needs and characteristics of each borrower. At December 31, 1997, the
Company's commercial loans outstanding, unused lines of credit and
commitments aggregated $392.1 million. Actual commercial loans outstanding
totaled $285.3 million, or 10% of total loans at December 31, 1997.
The Company offers a variety of consumer loan products to the
communities it serves. These loans include student loans, automobile loans,
personal loans, home improvement loans, credit card loans and overdraft loans.
At December 31, 1997, consumer loans totaled $248.9 million, or just under 9%
of the Company's total loan portfolio.
Loan Participations.
From time to time, on a selective basis, the Company also purchases a
participation interest in multi-family, commercial real estate and commercial
loans; at December 31, 1997, these loan participations represented less than 1%
of the Company's loan portfolio.
<PAGE>
The following table sets forth the Company's loan originations and loan
purchases, sales, principal repayments, transfers of loans to real estate owned
("REO") and repossessed property and reclassification activity for the years
indicated.
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Mortgage loans:
At beginning of year $2,079,687 1,630,751 1,507,261
Mortgage loans originated:
One- to four-family<F1> 217,012 251,369 191,204
Commercial real estate<F2> 33,672 25,354 12,052
Construction 27,673 28,978 27,560
Total mortgage loans originated 278,357 305,701 230,816
Mortgage loans purchased:
One- to four-family 312,095 416,914<F4> 125,894
Commercial real estate 4,382<F3> 55,677<F5> --
Total mortgage loans originated
and purchased 594,834 778,292 356,710
Sale of loans (11,353) (34,024) (17,577)
Principal repayments (325,814) (291,338) (209,933)
Transfer of mortgage loans to REO,
net of writedowns (4,908) (5,346) (5,710)
Reclassification of mortgage loans
to other loans (21,322) -- --
Reclassification of other loans
to mortgage loans -- 1,352 --
Mortgage loans, at end of year $2,311,124 2,079,687 1,630,751
Other loans:
At beginning of year $ 474,357 306,953 276,899
Commercial loans originated 17,874 24,114 28,137
Consumer loans originated 73,882 79,267 74,351
Total other loans originated 91,756 103,381 102,488
Other loans purchase 47,171<F6> 143,418<F7> --
Total other loans originated and purchased 138,927 246,799 102,488
Sale of loans -- -- (13,802)
Principal repayments. (100,418) (77,448) (58,632)
Transfer of other loans to REO -- (595) --
Transfer of other loans to
repossessed property (27) -- --
Reclassification of mortgage loans
to other loans 21,322 -- --
Reclassification of other loans
to mortgage loans -- (1,352) --
Other loans, at end of year $ 534,161 474,357 306,953
<FN>
<F1> Includes home equity loans.
<F2> Includes multi-family loans.
<F3> Includes $4,382 in loans acquired from KeyBank.
<F4> Includes $187,573 in loans acquired from Marble and Green Mountain Banks.
<F5> Represents $55,677 in loans acquired from Marble Bank.
<F6> Represents $47,171 in loans acquired from KeyBank.
<F7> Represents $143,418 in loans acquired from Marble and Green Mountain Banks.
</FN>
</TABLE
Loan Maturity Repricing. The following table shows the maturity or period
to repricing of ALBANK, FSB's loan portfolio at December 31, 1997. Loans that
have adjustable rates are shown as being due in the period during which the
interest rates are next subject to change. The table does not include
anticipated prepayments.
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
One- to Total
Four- Home Commercial Loans
Family Equity Real Estate<F1> Construction Commercial Consumer Receivable
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amount due:
Within one year $ 887,648 107,821 43,579 16,393 185,876 78,812 1,320,129
After one year:
One to five years 708,530 27,312 90,054 -- 72,476 105,991 1,004,363
Over five years 388,605 29,858 11,324 -- 26,914 64,092 520,793
Total due after
one year 1,097,135 57,170 101,378 -- 99,390 170,083 1,525,156
Total amount due $1,984,783 164,991 144,957 16,393 285,266 248,895 2,845,285
Net discounts, premiums
and deferred loan
fees and costs 10,764
Allowance for loan losses (29,117)
Loans receivable, net $2,826,932
<FN>
<F1> Includes multi-family loans.
</FN>
</TABLE>
<PAGE>
The following table sets forth at December 31, 1997, the dollar amount
of fixed- and adjustable-interest rate loans due after December 31, 1998,
(excludes $1.320 billion of loans that mature or reprice within one year).
<PAGE>
<TABLE>
<CAPTION>
Due after December 31, 1998
Fixed Adjustable Total
(in thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family $479,107 618,028 1,097,135
Home equity 56,911 259 57,170
Commercial real estate<F1> 45,828 55,550 101,378
Other loans:
Commercial loans 99,390 -- 99,390
Consumer loans 170,083 -- 170,083
Total mortgage loans and other loans $851,319 673,837 1,525,156
<FN>
<F1> Includes multi-family loans.
</FN>
</TABLE>
Nonperforming Loans and Assets
Loans are placed on a nonaccrual status for the recording of interest
when considered doubtful of collection by management. With respect to
residential mortgage loans, this ordinarily occurs when they become 120 days
delinquent. Loans other than residential mortgage loans past due 90 days or more
as to principal or interest are placed on nonaccrual status except for those
loans which, in management's judgment, are adequately secured and for which
collection is probable. Credit card and other retail consumer loans are
evaluated for collectibility on a monthly basis, at which time (and prior to
their being 150 days delinquent) all accounts (including related accrued
interest) deemed uncollectible are charged off. Delinquent interest on FHA and
VA loans and student loans continues to accrue since these loans are backed by a
government agency guarantee and all interest and principal is ultimately
expected to be received. Once management reaches a decision to place a loan on
nonaccrual status, all previously accrued interest earned but not collected
during the current year on such a loan is reversed against interest income.
The Company periodically reviews its loan portfolio and classifies
loans it considers to be of lesser quality as "substandard," "doubtful," or
"loss." A loan is considered "substandard" if the borrower's current paying
capacity and/or net worth is impaired or weakened, or the underlying collateral,
if any, has been devalued, such that the continuation of sufficient future cash
flow for full repayment of principal and interest on the asset is questionable.
The notion of substandard also includes the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected. Loans
classified as "doubtful" have all the weaknesses inherent in those classified
substandard, with the added characteristic that the weaknesses present make
collection in full highly questionable in light of existing facts, conditions
and values. Loans classified as "loss" are charged off. Management designates a
loan which does not currently have the deficiencies necessary to warrant
classification, but does exhibit some potential weaknesses, as a "special
mention" loan.
On December 31, 1997, criticized loans (including special mention
loans) of the Company, totaled $94.1 million, or approximately 3% of total
loans. These loans were comprised of $3.9 million in the doubtful category,
$60.9 million in the substandard category and $29.3 million in the special
mention category. Of the Company's criticized loans at December 31, 1997,
33% were residential mortgage loans, 49% were commercial loans, 16% were
commercial mortgage loans and 2% were consumer loans. This compared with an
aggregate of $84.2 million of criticized loans, or approximately 3% of total
loans, as of December 31, 1996, of which $4.6 million were in the doubtful
category, $56.4 million were in the substandard category and $23.2 million were
in the special mention category. As of that date, 34% of the Company's
criticized loans were residential mortgages, 34% were commercial loans, 30% were
commercial mortgage loans and 2% were consumer loans.
<PAGE>
The following table sets forth information regarding nonaccrual loans
(including loans restructured as a result of the financial deterioration of the
borrower), and accruing loans delinquent more than 90 days (collectively,
"nonperforming loans") and REO owned by the Company along with repossessed
property (together with nonperforming loans, "nonperforming assets") at the
dates indicated.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual mortage loans $18,477 15,298 12,571 10,231 14,337
Accruing mortgage loans delinquent
more than 90 days 2,871 7,367 5,567 5,104 4,933
Total nonperforming mortgage loans 21,348 22,665 18,138 15,335 19,270
Nonaccrual other loans 6,074 3,933 372 424 152
Accruing other loans delinquent
more than 90 days 4,392 3,218 4,646 4,544 3,492
Total nonperforming other loans 10,466 7,151 5,018 4,968 3,644
Total nonpreforming loans 31,814 29,816 23,156 20,303 22,914
Total REO 3,966 4,012 3,899 3,822 4,418
Total repossessed property 20 -- -- -- --
Total nonperforming assets $35,800 33,828 27,055 24,125 27,332
Total nonperforming loans to
loans receivable 1.11% 1.16% 1.19% 1.14% 1.49%
Total nonperforming assets to
total assets 0.88 0.96 0.91 0.81 0.99
</TABLE>
Over the last five years, the Company's nonperforming loans and assets
have been maintained at average levels that were below industry group averages.
At December 31, 1997, 56% of the Company's repossessed assets consisted of
residential (one- to four-family) properties, 43% resulted from foreclosures
on commercial properties and 1% resulted from consumer loans.
<PAGE>
IV. Summary of Loan Loss Experience
The Company maintains a total valuation allowance for losses on loans
representing allowances with respect to categories of loans which the Company
believes represent risk of loss and an unallocated allowance for future losses
generally. The allowance for loan losses is established and maintained through a
provision for loan losses at a level deemed appropriate by management to provide
adequately for known and inherent risks in the portfolio. The determination of
the amount of the allowance for loan losses includes estimates that are
susceptible to significant modifications due to changes in appraised values of
collateral and general economic conditions. In connection with the determination
of an adequate allowance for loan losses, management periodically obtains
independent appraisals for significant properties. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance for loan losses.
Management's evaluation of the risk inherent in its loan portfolio
includes a review of all loans on which full collectibility may not be
reasonably assured considering, among other matters, the estimated net
realizable value of the underlying collateral (if any), economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Other factors considered by
management include the size and risk exposure of each segment of the loan
portfolio, present indicators such as delinquency rates and the borrower's
current financial condition and the potential for losses in future periods. In
evaluating the adequacy of the allowance for loan losses, management recognizes
the risk associated with each type of loan and the current outstanding balance.
The primary risk element considered by management with respect to each consumer,
home equity and one- to four-family real estate mortgage loan is any current
delinquency on the loan. The primary risk elements considered by management with
respect to commercial, commercial real estate and real estate construction loans
are the financial condition of the borrowers, the sufficiency of collateral
(including changes in the appraised value of collateral) and the record of
payment. In general, all properties securing loans delinquent more than 90 days
are physically inspected. A subjective review of all substantial nonperforming
loans, other problem loans and over-all delinquent loans is also made prior to
the end of each calendar quarter to determine the adequacy of the allowance for
loan losses. Additionally, current year charge-offs, charge-off trends, new loan
production and current balances by particular loan categories are factored into
the determination of reserve levels.
<PAGE>
The following table sets forth the Company's allowance for loan losses
at the dates indicated.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $24,114 15,949 15,510 12,984 11,885
Allowance recorded/acquired from
acquisition activity 2,000 11,310 -- 151 --
Provision for loan losses 7,200 5,775 4,500 4,500 4,200
Charge-offs:
Mortgage loans<F1> (1,971) (7,013) (2,685) (1,980) (2,267)
Other loans (3,301) (2,635) (1,736) (1,031) (1,146)
Recoveries:
Mortgage loans 579 223 83 647 --
Other loans 496 505 277 239 312
Balance at end of period $29,117 24,114 15,949 15,510 12,984
Allocation of allowance for specfic
loan types at end of period:
Residential mortgage loans $ 7,281 7,360 7,233 5,724 5,745
Commercial real estate loans<F2> 1,659 2,623 1,502 1,455 1,599
Commercial loans 6,386 4,065 1,714 1,016 896
Consumer loans 5,798 5,000 3,523 2,263 2,225
Unallocated 7,993 5,066 1,977 5,052 2,519
Balance at end of period $29,117 24,114 15,949 15,510 12,984
Ratio of net charge-offs during
the period
to average loans outstanding
during the period 0.16% 0.38% 0.22% 0.13% 0.20%
Ratio of allowance for loan losses
to loans receivable at end of period 1.02 0.94 0.82 0.87 0.84
Ratio of allowance for loan losses
to nonperforming loans at end
of period 91.52 80.88 68.88 76.39 56.67
<FN>
<F1> Of the total loans charged-off in 1996, $4.1 million was related to a
sale of nonperforming loans consummated during the fourth quarter
of 1996.
<F2> Includes multi-family loans.
</FN>
</TABLE>
<PAGE>
V. Deposits and Source of Funds
The Company's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and on its investments in securities.
The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of
passbook and statement savings accounts ("Savings accounts") and NOW accounts,
Super NOW accounts, money market accounts, interest-bearing and
noninterest-bearing demand deposit accounts (collectively, "Transaction
accounts") and fixed-term certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates and competition. The Company's deposits are obtained primarily
from the areas in which its branches are located, and the Company relies
principally on customer service and long-standing relationships with customers
to attract and retain these deposits. The Company does not solicit or accept
brokered deposits.
The following table sets forth the distribution of the Company's deposit
accounts and the respective weighted average nominal interest rates at the dates
indicated. Average balances of certificates by maturity category are not readily
available. Management believes that the use of the year-end balances does not
significantly affect the analysis.
<TABLE>
<CAPTION
At December 31,
1997 1996 1995
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Saving accounts $ 809,546 23.24% 2.84% $ 824,151 27.35% 2.94% $ 826,875 32.32% 2.96%
Transaction accounts 824,005 23.65 1.96 605,053 20.08 1.80 422,555 16.52 1.48
Total 1,633,551 46.89 1,429,204 47.43 1,249,430 48.84
Certificate accounts:
Within one year 1,310,987 37.63 1,114,101 36.98 955,218 37.34
One year to
three years 498,071 14.30 417,300 13.85 232,161 9.07
Over three years 41,182 1.18 52,524 1.74 121,479 4.75
Total 1,850,240 53.11 5.52 1,583,925 52.57 5.37 1,308,858 51.16 5.64
Total deposits $3,483,791 100.00% 4.05% $3,013,129 100.00% 3.99% $2,558,288 100.00% 4.09%
</TABLE>
At December 31, 1997, the following maturities applied to certificate
accounts in amounts of $100,000 or more.
<TABLE>
<CAPTION>
Amount
(in thousands)
<S> <C>
Three months or less $ 65,481
Over three through six months 63,032
Over six through twelve months 51,083
Over twelve months 52,681
Total $232,277
</TABLE>
<PAGE>
VI. Return on Equity and Assets
Information regarding returns on equity and assets appears on page 2 of
the 1997 Summary Annual Report under the caption "Five Year Selected Financial
Data" and is incorporated herein by reference.
VII. Short-Term Borrowings
Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings where appropriate as an
alternative or less costly source of funds. ALBANK, FSB obtains advances from
the FHLB-NY which are collateralized by certain of ALBANK, FSB's mortgage
loans. Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities.
The Company may enter into sales of securities under agreements to
repurchase ("repurchase agreements") with nationally recognized primary
securities dealers. Repurchase agreements are accounted for as borrowings by the
Company and are secured by designated securities. The proceeds of these
transactions are used to meet cash flow or asset/liability needs.
<PAGE>
The following table sets forth certain information regarding the
Company's short-term borrowed funds at or for the periods ended on the dates
indicated.
<TABLE>
<CAPTION>
At or For the Years ended December 31,
1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C>
FHLB-NY advances:
Average balance outstanding $ 57,789 20,838 1,884
Maximum amount outstanding at any month-end during
the period 172,600 73,000 18,000
Balance outstanding at end of period 47,000 36,000 --
Weighted average interest rate at end of period 6.17% 7.17% --%
Weighted average interest rate during the period<F1> 5.68 5.47 6.60
Repurchase agreements:
Average balance outstanding $ 44,532 3,563 --
Maximum amount outstanding at any month-end during
the period 156,294 4,796 --
Balance outstanding at end of period 21,097 4,796 --
Weighted average interest rate at end of period 4.57% 4.00% --%
Weighted average interest rate during the period<F1> 5.47 4.16 --
Other short-term borrowings:
Average balance outstanding $ 985 936 14
Maximum amount outstanding at any month-end during
the period 1,780 1,550 1,290
Balance outstanding at end of period 650 1,550 1,290
Weighted average interest rate at end of period 5.88% 6.00% 4.75%
Weighted average interest rate during the period<F1> 5.41 5.30 5.48
Total short-term borrowings and repurchase agreements:
Average balance outstanding $103,306 25,337 1,898
Maximum amount outstanding at any month-end during
the period 330,674 77,971 18,000
Balance outstanding at end of period 68,747 42,346 1,290
Weighted average interest rate at end of period 5.68% 6.77% 4.75%
Weighted average interest rate during the period<F1> 5.59 5.28 6.59
<FN>
<F1> Computed on the basis of average daily balances.
</FN>
</TABLE>
<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information regarding the
executive officers of the Company, all of whom held substantially identical
positions with ALBANK, FSB, as of December 31, 1997.
<TABLE>
<CAPTION>
Name Age Position Held with the Company
<S> <C> <C>
Herbert G. Chorbajian 59 Chairman of the Board,
President and Chief
Executive Officer
Richard J. Heller 51 Executive Vice President and
Chief Financial Officer
Barry G. Blenis 54 Executive Vice President,
Operations and Strategic Planning
Freling H. Smith 56 Senior Vice President,
Secretary and General Counsel
</TABLE>
None of the individuals named in the above table was selected to his
position as an officer of the Company pursuant to any arrangement or
understanding with any other person nor are there any family relationships
between them. Each of the above officers has held the same or another executive
position with the Company for the past five years.
None of the individuals named above holds a directorship with a company
(except for the Company) registered pursuant to Section 12 of the Securities
Exchange Act of 1934, or subject to the requirements of Section 15 (d) of that
Act, or with a company which is registered as an investment company under the
Investment Company Act of 1940.
Herbert G. Chorbajian has served as Chairman, President and Chief
Executive Officer since 1990.
Richard J. Heller joined the Company in 1991 and since that time has
served as Executive Vice President and Chief Financial Officer.
Barry G. Blenis assumed his current position of Executive Vice
President, Operations and Strategic Planning in 1990.
Freling H. Smith became Senior Vice President, Secretary and General
Counsel to ALBANK, FSB in 1991. Mr. Smith became Secretary to ALBANK Commercial
in September 1997.
ITEM 2 Properties
ALBANK, FSB conducts business through its home office in Albany, New
York, 71 other full service branches and a merchant banking branch at an Albany
area shopping mall; 34 of ALBANK, FSB's branch offices are owned and 39 are
leased. Four other office locations which are owned by ALBANK, FSB are also used
to conduct business; two are located in Albany, New York (a data processing
center which also houses the main office of ALBANK Commercial and an operations
center), one is located in Plattsburgh, New York (a financial center) and a
fourth is located in Rutland, Vermont (an administrative office for ALBANK,
FSB's Marble Division). In addition, ALBANK, FSB leases an office in
Bennington, Vermont through which its investment functions are performed. ALBANK
Commercial conducts business through its home office in Albany, New York and 35
other full service branches in New York, 28 of which are owned and 7 of which
are leased.
ITEM 3 Legal Proceedings
The Company is involved in a number of pending legal proceedings, most
of which represent routine matters occurring in the ordinary course of business.
In the aggregate, all of the Company's pending legal proceedings involve amounts
which are believed by management not to be material to the financial condition
of the Company.
ITEM 4 Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters
The information set forth inside the back cover under the captions
"Stock Listing" and "Stock Price" of the 1997 Summary Annual Report is
incorporated herein by reference.
As of March 25, 1998, the Company had approximately 5,007 stockholders
of record, not including the number of persons or entities whose stock is held
in nominee or "street" name through various brokerage firms or other financial
institutions.
On February 27, 1996, the Board of Directors of the Company declared a
6-for-5 stock split effected as a 20% stock dividend. This stock dividend was
paid April 1, 1996, to shareholders of record on March 15, 1996. By maintaining
the quarterly per share cash dividend at $0.12 following the stock dividend, the
Board effectively increased the dividend by 20%, the second such increase in as
many years. On November 25, 1996, the Company announced that its Board increased
the Company's quarterly cash dividend an additional 25% by initiating payment at
a quarterly rate of $0.15 per share commencing with the dividend paid on January
2, 1997. The Company further increased its quarterly dividend 20% on August 26,
1997, when its Board declared an $0.18 per share cash dividend, which was paid
on October 1, 1997. Declarations of subsequent dividends by the Board will
depend upon a number of factors, including, among other things, investment
opportunities available to the Company or its subsidiaries, capital
requirements, regulatory limitations, the Company and its subsidiaries financial
condition and results of operations, tax considerations and general economic
conditions.
Reference is also made to the "Liquidity and Capital Resources" section
set forth on page 1 of the Annual Report Supplement, which is incorporated
herein by reference. Additional reference is made to Part 1, Item 1.
"Business--Regulation and Supervision--Capital Requirements" and "--Restrictions
on Dividends and Other Capital Distributions" in this Form 10-K for a
description of regulatory restrictions with regard to the future payment of
dividends by the Company's subsidiaries to the Company.
<PAGE>
ITEM 6 Selected Financial Data
The information set forth on page 2 under the caption "Five-Year Selected
Financial Data" of the 1997 Summary Annual Report is incorporated herein by
reference.
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Total assets at December 31, 1997, totaled $4.083 billion, an increase
of $577.0 million (16%) over year-end 1996. The primary reason for the increase
was the Key Branch acquisition on November 10, 1997, which included $540.9
million in deposits.
Cash and due from banks increased $28.5 million (41%) from year-end
1996 levels to $97.4 million at December 31, 1997. Year-end 1997 balances of the
cash and due from bank accounts of ALBANK Commercial of $47.4 million more than
offset a decrease in ALBANK, FSB balances of $18.9 million (28%). The decrease
in ALBANK, FSB's balances primarily reflects lower levels of required reserves
with the Federal Reserve Bank of New York as compared with the previous
year-end.
Securities available for sale increased between year-end 1996 and 1997
by $150.6 million (24%) to $768.5 million. The increase was the result of
purchases of securities for ALBANK Commercial including the Company's effort to
prefund such purchases in anticipation of the November 10, 1997, closing date.
Investment securities totaled $95.0 million at December 31, 1997, a
decrease of $21.4 million (18%) from 1996. Maturing funds not reinvested were
used primarily to fund loan growth.
Loans receivable grew to $2.856 billion at December 31, 1997, an
increase of $296.4 million (12%) over the previous year. An increase of $254.7
million (15%) in one- to four-family mortgage loans comprised most of the
growth. Other loans increased $59.8 million (13%) between 1996 and 1997
primarily as a result of loans acquired in the Key Branch acquisition with a net
book value of $52.2 million. The aforementioned increases were reduced by a net
decrease in commercial real estate loans of $23.3 million (17%).
A provision for loan losses of $7.2 million for the year ended December
31, 1997, and acquired allowances of $2.0 million for ALBANK Commercial more
than offset net charge-offs of $4.2 million, resulting in an increase in
the allowance for loan losses of $5.0 million (21%) to $29.1 million at
December 31, 1997. The increase helped to strengthen the coverage of the
allowance for loan losses to nonperforming loans to 92% at year-end 1997
compared with 81% at year-end 1996.
Goodwill increased $36.7 million (85%) as accounting goodwill generated
from the Key Branch acquisition of $40.6 million was reduced by goodwill
amortization of $3.9 million.
Total deposits at December 31, 1997, of $3.484 billion represent a
$470.7 million (16%) increase over the prior year end. The increase is
reflective of the November 10, 1997, Key Branch acquisition for ALBANK
Commercial of $540.9 million in deposits as reduced by net deposit outflows.
Total certificate accounts increased $266.3 million (17%) from year-end
1996 to $1.850 billion at December 31, 1997, and included $234.6 million
in ALBANK Commercial year-end balances which were augmented
by time deposit growth in ALBANK, FSB. Transaction
accounts including NOW, Super NOW, money market and demand deposit accounts
increased $219.0 million (36%) from year-end 1996 to 1997 reflecting ALBANK
Commercial year-end balances of $222.5 million slightly reduced by net outflow.
Savings accounts decreased $14.6 million (2%) from year-end 1996 levels despite
ALBANK Commercial December 31, 1997, balances of $55.7 million as the result of
net savings deposit outflows. Escrow account balances declined $5.4 million
(20%) from $26.6 million at year-end 1996 to $21.2 million at year-end 1997
primarily as a result of a change in the required method of maintaining escrow
balances for borrowers resulting in lower individual escrow account balances.
Short-term borrowed funds increased $26.4 million (62%) from year-end
1996 to $68.7 million at December 31, 1997, as funding needs outpaced other
funding sources including deposits, capital securities and operating cash flow.
Corporation-obligated manditorily redeemable capital securities (more fully
described in footnote 14 of the Annual Report Supplement) issued in June 1997
totaled $50.0 million at December 31, 1997, and provided funds which were used
for general corporate purposes.
Long-term debt decreased $10.0 million (33%) to 20.0 million at
December 31, 1997, as the result of the repayment of Federal Home Loan Bank
advances maturing in 1997.
The increase in total stockholders' equity of $40.5 million (13%) from
year-end 1996 to $359.6 million at December 31, 1997, was primarily the result
of an increase in retained earnings of $34.1 million (16%). The increase in
retained earnings was the combined net effect of net income of $43.4 million,
cash dividends declared of $8.5 million, and reductions relating to stock
option exercises totaling $0.8 million. Most of the remaining net increase in
stockholders' equity was attributable to a $4.8 million (269%) increase in net
unrealized gains on securities available for sale. At December 31, 1997, the
ratio of stockholders' equity to total assets was 8.81%, a 29 basis point
reduction from 9.10% at December 31, 1996.
Book value per common share increased $3.14 per share from December 31,
1996, to $27.86 at year-end 1997. The increase is primarily the result of
additional stockholders' equity of $40.5 million as treasury share repurchases
for 1997 were nearly matched by treasury share issuance for stock option
exercises with a net result of 3,918 additional shares outstanding compared with
the previous year-end. The Company repurchased 154,468 shares of its common
stock during 1997 at a total cost of $5.1 million. At December 31, 1997, the
Company held 2,790,655 of its common stock as treasury stock. Tangible book
value increased $0.29 per share to $21.64 per share at December 31, 1997, as
goodwill generated by the Key Branch acquisition countered the effect of
increased stockholders' equity on this calculation.
Results of Operations
The information set forth on pages 3 through 13 of the 1997 Annual
Report Supplement is incorporated herein by reference.
ITEM 8 Financial Statements and Supplementary Data
The information set forth on pages 14 through 40 of the 1997 Annual
Report Supplement is incorporated herein by reference.
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
The information required by the items in this part has been omitted
since it will be contained in the definitive proxy statement to be filed
pursuant to Regulation 14-A
<PAGE>
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1). Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries, together with the report thereon of KPMG Peat Marwick LLP, dated
January 30, 1998, set out at pages 14 through 40 of the 1997 Annual Report
Supplement, are incorporated herein by reference.
Independent Auditors' Report.
Consolidated Statements of Earnings for each of the years in the three-year
period ended December 31, 1997.
Consolidated Statements of Financial Condition as of December 31, 1997 and
1996.
Consolidated Statements of Changes in Stockholders' Equity for each of the
years in the three-year period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997.
Notes to Consolidated Financial Statements.
The remaining information appearing in the 1997 Annual Report is not deemed
to be filed as part of this Report, except as expressly provided herein.
(a)(2). Financial Statement Schedules
All schedules for the Registrant and its subsidiaries are omitted
because they are not required or are not applicable or the required information
is shown in the Consolidated Financial Statements or Notes thereto.
(a)(3). Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Regulation S-K Exhibit
Reference Number Description
3 3.01 Certificate of Incorporation of ALBANK (incorporated herein by
reference to Exhibit 3.1 to ALBANK's Registration Statement on
Form S-1, as amended, filed on December 23, 1991, Registration
No. 33-44721).
<PAGE>
Exhibits, continued
Regulation S-K Exhibit
Reference Number Description
3.02 Bylaws of ALBANK, as amended (incorporated herein by reference to
Exhibit 3.02 to ALBANK's Annual Report on Form 10-K for the year
ended December 31, 1993, filed on March 31, 1994).
10 10.01 Employment Agreement dated April 1, 1992, between ALBANK and
Herbert G. Chorbajian (incorporated herein by reference to Exhibit
10.1 to ALBANK's Annual Report on Form 10-K for the year ended
June 30, 1992, filed on September 28, 1992, SEC File No. 0-19843).
10.02 Employment Agreement dated April 1, 1992, between ALBANK and
Richard J. Heller (incorporated herein by reference to Exhibit 10.2
to ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
10.03 Employment Agreement dated April 1, 1992, between ALBANK and
Freling H. Smith (incorporated herein by reference to Exhibit 10.3
to ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
10.04 Employment Agreement dated April 1, 1992, between ALBANK and Barry
G. Blenis (incorporated herein by reference to Exhibit 10.4 to
ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
10.05 Employment Agreement dated April 1, 1992, between ALBANK, FSB and
Herbert G. Chorbajian (incorporated herein by reference to Exhibit
10.5 to ALBANK's Annual Report on Form 10-K for the year ended
June 30, 1992, filed on September 28, 1992, SEC File No.
0-19843)
10.06 Employment Agreement dated April 1, 1992, between ALBANK, FSB and
Richard J. Heller (incorporated herein by reference to Exhibit
10.6 to ALBANK's Annual Report on Form 10-K for the year
ended June 30, 1992, filed on September 28, 1992,
SEC File No. 0-19843).
Exhibits, continued
Regulation S-K Exhibit
Reference Number Description
10.07 Employment Agreement dated April 1, 1992, between ALBANK, FSB and
Freling H. Smith (incorporated herein by reference to Exhibit 10.7
to ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
10.08 Employment Agreement dated April 1, 1992, between ALBANK, FSB and
Barry G. Blenis (incorporated herein by reference to Exhibit 10.8
to ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
10.09 Employment Agreement dated April 1, 1992, between ALBANK, FSB and
Clifford M. Apgar (incorporated herein by reference to Exhibit
10.9 to ALBANK's Annual Report on Form 10-K for the year ended
June 30, 1992, filed on September 28, 1992,
SEC File No. 0-19843).
10.10 Employment Agreement dated April 1, 1992, between ALBANK, FSB and
Frank J. Vaselewski (incorporated herein by reference to Exhibit
10.10 to ALBANK's Annual Report on Form 10-K for the year ended
June 30, 1992, filed on September 28, 1992, SEC File No. 0-19843).
10.11 ALBANK Financial Corporation 1992 Stock Incentive Plan for Key
Employees, as Amended and Restated as of December 18, 1995
(incorporated herein by reference to Exhibit 10.11 to ALBANK's
Annual Report on Form 10-K for the year ended December 31, 1995,
filed on March 29, 1996).
10.12 ALBANK Financial Corporation 1992 Stock Incentive Plan for Outside
Directors (incorporated herein by reference to the Proxy Statement
for the 1992 Annual Meeting of the Stockholders of ALBANK held on
October 26, 1992, SEC File No. 0-19843).
10.12.1 ALBANK Financial Corporation 1995 Stock Incentive Plan for Outside
Directors (incorporated herein by reference to Exhibit 10.12.1 to
ALBANK's Annual Report on Form 10-K for the year ended December
31, 1995, filed on March 29, 1996).
<PAGE>
Exhibits, continued
Regulation S-K Exhibit
Reference Number Description
10.13 Albany Savings Bank, FSB Recognition and Retention Plan and Trust
Agreement for Senior Executive Officers (incorporated herein by
reference to Exhibit 10.13 to ALBANK's Annual Report on Form 10-K
for the year ended June 30, 1992, filed on September 28, 1992,
SEC File No. 0-19843).
10.14 Albany Savings Bank, FSB Recognition and Retention Plan and Trust
Agreement for Officers (incorporated herein by reference to
Exhibit 10.14 to ALBANK's Annual Report on Form 10-K
for the year ended June 30, 1992, filed on September 28,
1992, SEC File No. 0-19843).
10.15 Albany Savings Bank, FSB Recognition and Retention Plan and Trust
Agreement for Outside Directors (incorporated herein by reference
to the Proxy Statement for the 1992 Annual Meeting of the
Stockholders of ALBANK held on October 26, 1992,
SEC File No. 0-19843).
10.16 Albany Savings Bank, FSB Incentive Savings and Employee Stock
Ownership Plan, as amended (incorporated herein by reference to
Exhibit 10.16 to ALBANK's Annual Report on Form 10-K for the year
ended December 31, 1994, filed on March 31, 1995).
10.17 Agreement dated June 17, 1985, between ALBANK, FSB and Herbert G.
Chorbajian (Life Insurance Contract) (incorporated herein by
reference to Exhibit 10.10 to ALBANK's Registration Statement on
Form S-1, as amended, filed on December 23, 1991,
Registration No. 33-44721).
10.18 Agreement dated December 22, 1997, between ALBANK, FSB and
Herbert G. Chorbajian (Supplemental Employment Retirement Plan).
10.19 Agreement dated June 17, 1985, between ALBANK, FSB and Herbert G.
Chorbajian (Incentive Savings Contract) (incorporated herein by
reference to Exhibit 10.12 to ALBANK's Registration Statement on
Form S-1, as amended, filed on December 23, 1991,
Registration No. 33-44721).
10.20 Albany Savings Bank Management Incentive Plan for 1997. 10.21
Retirement Restoration Plan of Albany Savings Bank, FSB
(incorporated herein by reference to Exhibit 10.21 to ALBANK's
Registration Statement on Form S-1, as amended, filed on December
23, 1991, Registration No. 33-44721).
Exhibits, continued
Regulation S-K Exhibit
Reference Number Description
10.22 Albany Savings Bank, FSB Supplemental Deferred Compensation Plan, as
amended (incorporated herein by reference to Exhibit 10.22 to
ALBANK's Annual Report on Form 10-K for
the year ended December 31, 1993, filed
on March 31, 1994).
10.23 Albany Savings Bank, FSB Deferred Compensation Plan for Directors, as
amended (incorporated herein by reference to Exhibit 10.23 to
ALBANK's Annual Report on Form 10-K for the year ended
December 31, 1993, filed on March 31, 1994).
10.24 Directors Retirement Plan of Albany Savings Bank, FSB , as amended
(incorporated herein by reference to Exhibit 10.25 to Amendment No.
1 to ALBANK's Registration Statement on Form S-1, as amended, filed
on February 5, 1992, Registration No. 33-44721).
10.24.1 Amendment to Directors Retirement Plan of Albany Savings Bank,
FSB, as amended (incorporated herein by reference to Exhibit
10.24.1 to ALBANK's Annual Report on Form 10-K for the year ended
December 31, 1994, filed on March 31, 1995).
10.25 Loan Agreement between ALBANK and The First National Bank of
Boston, successor trustee to Nationar, as Trustee of Albany Savings
Bank, FSB Employee Stock Ownership Plan (incorporated herein by
reference to Exhibit 10.25 to ALBANK's Annual Report on Form 10-K
for the year ende June 30, 1992, filed on September 28, 1992, SEC
File No. 0-19843).
10.26 Pledge Agreement between ALBANK and The First National Bank of
Boston, successor trustee to Nationar, as Trustee of the Albany
Savings Bank, FSB Employee Stock Ownership Plan (incorporated
herein by reference to Exhibit 10.26 to ALBANK's Annual Report
on Form 10-K for the year ended June 30, 1992, filed on September
28, 1992, SEC File No. 0-19843).
10.27 Trust Agreement "A" between Albany Savings Bank, FSB and The First
National Bank of Boston, successor trustee to Nationar, for the
Albany Savings Bank, FSB, Incentive Savings and Employee Stock
Ownership Plan (incorporated herein by reference to Exhibit 10.27
to ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
Exhibits,continued
Regulation S-K Exhibit
Reference Number Description
10.27.1 First Instrument of Amendment to Trust Agreement "A" between Albany
Savings Bank, FSB and The First National Bank of Boston, successor
trustee to Nationar, for the Albany Savings Bank, FSB Incentive
Savings and Employee Stock Ownership Plan (incorporated herein by
reference to Exhibit 10.27.1 to ALBANK's Annual Report on Form 10-K
for the year ended December 31, 1994, filed on March 31, 1995).
10.28 Trust Agreement "B" between Albany Savings Bank, FSB and The First
National Bank of Boston, successor trustee to Nationar, for the
Albany Savings Bank, FSB Incentive Savings and Employee Stock
Ownership Plan (incorporated herein by reference to Exhibit 10.28
to ALBANK's Annual Report on Form 10-K for the year ended June 30,
1992, filed on September 28, 1992, SEC File No. 0-19843).
10.28.1 First Instrument of Amendment to Trust Agreement "B" between Albany
Savings Bank, FSB and The First National Bank of Boston, successor
trustee to Nationar, for the Albany Savings Bank, FSB Incentive
Savings and Employee Stock Ownership Plan (incorporated herein by
reference to Exhibit 10.28.1 to ALBANK's Annual Report on Form 10-K
for the year ended December 31, 1994, filed on March 31, 1995).
10.29 Indenture, dated as of June 6, 1997, between ALBANK and The Chase
Manhattan Bank, as Trustee, in respect of ALBANK's 9.27% Junior
Subordinated Debentures due 2027 (incorporated herein by reference
to Exhibit 4.1 of ALBANK's Registration Statement on Form S-4,
filed on October 29, 1997, Registration Nos. 333-39017 and
333-39017-01).
10.30 Form of ALBANK's 9.27% Junior Subordinated Debentures due 2027
(included in Exhibit 10.29 hereof).
10.31 Amended and Restated Declaration of Trust of ALBANK Capital
Trust I, dated as of June 6, 1997, among ALBANK, as sponsor, the
Administrators thereof, Chase Manhattan Bank Delaware, as Delaware
Trustee, The Chase Manhattan Bank, as Property Trustee, and the
holders from time to time of undivided interests in the assets of
ALBANK Capital Trust I (incorporated herein by reference to Exhibit
4.4 of ALBANK's Registration Statement on Form S-4, filed on October
29, 1997, Registration Nos. 333-39017 and 333-39017-01).
Exhibits,continued
Regulation S-K Exhibit
Reference Number Description
10.32 Series B Capital Securities Guarantee Agreement, dated as of
December 29, 1997, between ALBANK and the Chase Manhattan Bank,
as Guarantee Trustee.
10.33 Registration Rights Agreement, dated as of June 6, 1997 among
ALBANK, ALBANK Capital Trust I and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, as Representative of the Initial Purchasers
(incorporated herein by reference to Exhibit 4.8 of ALBANK's
Registration Statement of Form S-4, filed on October 29, 1997,
Registration Nos. 333-39017 and 333-39017-01).
13 13.01 Annual Report to Security Holders. Portions of ALBANK's December
31, 1997 Annual Report to Stockholders have been incorporated by
reference into this Form 10-K. The accountant's certificate in such
Annual Report attached as Exhibit 23.01 has been manually signed.
21 21.01 Subsidiaries of the Registrant and Related Subsidiaries.
23 23.01 Consent of KPMG Peat Marwick LLP.
99 99.01 Albany Savings Bank, FSB Recognition and Retention Plan and Trust
Agreement for Other Employees (incorporated herein by reference to
Exhibit 28.1 to ALBANK's Annual Report on Form 10-K for the year
ended June 30, 1992, filed on September 28, 1992, SEC File No.
0-19843).
99.02 Albany Savings Bank, FSB Branch Management Incentive Plan
(incorporated herein by reference to Exhibit 28.7 of ALBANK's
Registration Statement on Form S-1, as amended, filed on December
23, 1991, Registration No. 33-44721).
<PAGE>
ALBANK agrees to file with the Securities and Exchange Commission a
copy of every instrument with respect to long-term debt of ALBANK and its
subsidiaries when the total amount of securities authorized does not exceed 10%
of the total assets of ALBANK and its subsidiaries on a consolidated basis, upon
the request of the Securities and Exchange Commission.
(b). Reports on Form 8-K
The Company did not file any Report on Form 8-K during the fourth
quarter of 1997.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
ALBANK Financial Corporation
(Registrant)
/s/ Herbert G. Chorbajian
By: Herbert G. Chorbajian
Chairman of the Board,
President and Chief
Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, March 31, 1998
Herbert G. Chorbajian President and Chief
(principal executive officer) Executive Officer
/s/ Richard J. Heller Executive Vice President March 31, 1998
Richard J. Heller and Chief Financial Officer
(principal accounting officer)
(principal financial officer)
/s/ William J. Barr Director March 31, 1998
William J. Barr
/s/ Karen R. Hitchcock, Ph.D Director March 31, 1998
Karen R. Hitchcock, Ph.D
/s/ John E. Maloy, Sr. Director March 31, 1998
John E. Maloy, Sr.
/s/ Francis L. McKone Director March 31, 1998
Francis L. McKone
/s/ John J. Nigro Director March 31, 1998
John J. Nigro
/s/ Susan J. Stabile, Esq. Director March 31, 1998
Susan J. Stabile, Esq.
/s/ Anthony P. Tartaglia, M.D. Director March 31, 1998
Anthony P. Tartaglia, M.D.
</TABLE>
<PAGE>
SUPPLEMENTAL EMPLOYMENT RETIREMENT PLAN
HERBERT G. CHORBAJIAN
THIS AGREEMENT made this 22nd day of December, 1997, by and
between ALBANK, FSB, a stock savings bank, having its principal office at the
corner of State and North Pearl Streets, in the City and County of Albany and
State of New York (hereinafter called the "Bank"), ALBANK FINANCIAL CORPORATION,
a Delaware corporation and the parent corporation of the Bank ("ALBANK") and
HERBERT G. CHORBAJIAN (hereinafter called ("Executive");
WITNESSETH:
WHEREAS, HERBERT G. CHORBAJIAN is the Chairman of the
Board, President and Chief Executive Officer of the Bank and ALBANK
and has been an executive officer of the Bank since June 1, 1984 and of
ALBANK since its incorporation; and
WHEREAS the Executive participates in the Retirement Plan of
ALBANK, FSB in RSI Retirement Trust as amended from time to time (the
"Retirement Plan"); and
WHEREAS, pursuant to the terms of the Retirement Plan, the
Executive shall be entitled to receive benefit payments upon his retirement from
the Bank and ALBANK (the "Retirement Plan Benefits"); and
WHEREAS, the Board of Directors of ALBANK and the Bank have
determined that it is in the best interests of ALBANK and the Bank to provide
the Executive with supplemental retirement benefit payments (the "Supplemental
Payments") in addition to the Retirement Plan Benefits in order to provide the
Executive with an appropriate level of retirement income and to enable the
Executive to avoid the loss of retirement benefits due to his termination of
employment with Norstar Bancorp Inc. ("Norstar Bancorp") and his employment by
the Bank by granting the Executive credit for his service with Norstar Bancorp
prior to his employment with the Bank; and
WHEREAS, the Executive and the Bank previously executed an
agreement, dated June 17, 1985 (the "Prior Supplemental Agreement"), regarding
certain supplemental payments to be made to the Executive upon his retirement in
order to make up for any reduction in Retirement Plan Benefits by reason of the
receipt by the Executive of Social Security benefits or by reason of any
changes in the formula for computation of the Retirement Plan Benefits adopted
subsequent to the date of the Prior Supplemental Agreement and the Executive,
the Bank and ALBANK previously executed and agreement dated May 8, 1996 (the
"May 8, 1996 Agreement"), which provided for certain of the Supplemental
Payments to be made and which superseded and replaced the Prior Supplemental
Agreement; and
WHEREAS, the Board of Directors of ALBANK and the Bank have
determined that it is in the best interests of ALBANK and the Bank to provide
certain Supplemental Payments; and
WHEREAS, the Executive, ALBANK and the Bank agree that the
May 8, 1996 Agreement should be superseded and replaced by this Agreement.
NOW, THEREFORE, it is agreed as follows:
1. The Bank agrees to make the Supplemental Payments to the
Executive as hereinafter described in Paragraph 2.
2. The Supplemental Payments shall be equal to (a) the amount
of benefits which would have been payable to the Executive under the Retirement
Plan if his 14.67 years of service with Norstar Bancorp were taken into account
as "Credited Service" (as defined in the Retirement Plan) and, for purposes of
Section 7.4 of the Retirement Plan, as "Vested Service" (as defined in the
Retirement Plan) under the Retirement Plan in the calculation of such amount,
minus (b) the actual amount of Retirement Plan Benefits payable to the Executive
under the Retirement Plan, and minus (c) the amount of the deferred vested
pension payable to the Executive by Norstar Bancorp under the Norstar Bankcorp's
Employees' Retirement Plan (and any successor plan thereto), as set forth in the
October 15, 1986 letter from Norstar Bancorp to the Executive, attached hereto
as Appendix A. All calculations in the previous sentence shall be made as if
each amount were payable in the form of a "Straight Life Annuity" (as defined in
the Retirement Plan) commencing at Normal Retirement Age (as defined in the
Retirement Plan). The Supplemental Payments paid hereunder shall be made in the
same form of benefit as the form in which the Executive receives his benefits
under the Retirement Plan and the amount of such Supplemental Payments actually
payable to the Executive hereunder shall be adjusted to the applicable
"Actuarial Equivalent" (as defined in the Retirement Plan and determined using
the actuarial assumptions specified in the Retirement Plan) of the amount of the
Straight Life Annuity determined in accordance with the first sentence of this
Paragraph 2. The Supplemental Payments will be made to the Executive or, in the
event of his death, to his beneficiary, from time to time as benefits under the
Retirement Plan become payable.
In no event shall the Supplemental Payments be less than the
payments that the Executive would have received under the Prior Supplemental
Agreement, provided such payments were calculated only with respect to changes
in the formula for computation of retirement benefits (as set forth in the Prior
Supplemental Agreement) made prior to the date of this Agreement.
For purposes of this paragraph, the Executive's beneficiary
shall be the same person, if any, entitled to receive benefits under the
Retirement Plan in the event of the Executive's death.
3. The Executive's rights under this Agreement shall be
limited to those of an unsecured general creditor of the Bank and ALBANK, and
neither the Bank nor ALBANK shall have any obligation to fund the payments
provided for hereunder.
4. The right of the Executive or any person to the payment
provided for under this Agreement shall not be assigned, transferred, pledged or
encumbered except by will or by the laws of descent and distribution.
5. The terms, provisions and conditions of the Agreement shall
be binding upon any successor to the Bank or ALBANK, as the case may be, by
merger or otherwise. This Agreement may be amended only by a writing signed by
each party hereto.
6. Nothing contained herein shall be construed as conferring
upon the Executive the right to continue in the employ of the Bank or ALBANK as
an executive or in any other capacity.
7. This Agreement is made and shall be construed, interpreted
and enforced in acordance with the laws of the State of New York.
8. Any dispute between the Bank and ALBANK, on the one hand,
and the Executive, his designated beneficiary or his estate, on the other hand,
as to the proper interpretation or application of any provisions of the
Agreement shall be settled by arbitration as follows: One arbitrator shall be
selected by each of the disputants and the third by the two so selected, and the
decision of a majority of the persons so selected shall be final and binding
upon all parties to such dispute upon compliance with the then applicable
statute, if any, relating to an agreement ot arbitrate disputes.
9. The Bank or ALBANK shall withhold from the Supplemental
Payments or otherwise all federal, state, city and other taxes and withholdings
that the Bank or ALBANK determines may be required to be withheld pursuant to
any applicable law or regulation.
10. This Agreement supersedes any and all other oral or
written agreements heretofore made relating to the subject matter hereof,
including without limitation the Prior Supplemental Agreement and the May 8,
1996 Agreement, and constitutes the entire agreement of the parties relating to
the subject matter hereof.
11. All payments provided for in this Agreement shall be
timely paid from the general funds of the Bank. ALBANK, however, guarantees
payment and provision of all amounts due hereunder to the Executive and, if such
amounts due for the Bank are not timely paid or provided by the Bank, such
amounts shall be paid or provided by ALBANK.
12. This Agreement shall be effective as of December 22, 1997.
IN WITNESS WHEREOF, the parties have executed this
Agreement under seal, in duplicate, each of which shall be deemed to be an
original for all purposes, all as of the day and year first above written.
ALBANK, FSB ALBANK FINANCIAL CORPORATION
By: /s/ HG Chorbajian By: /s/ HG Chorbajian
Title: Title:
JOHN E. MALOY, SR. HERBERT G. CHORBAJIAN
/s/ John E. Maloy /s/ HG Chorbajian
Chairman, Human Resources Committee Chairman, President and CEO
ALBANK, FSB
Joseph F. Pelgrin, Jr. EXHIBIT A
Assistant Vice President
One Norstar Plaza NORSTAR
Albany, NY 12207-2796 BANKCORP
518-447-4489
October 15, 1986
Mr. Herbert G. Chorbajian
18 Sandlewood Drive
Loudonville, New York 12211
Re: Notice of Vested Pension Benefit Under
Norstar Bankcorp's Employees' Retirement Plan
Dear Herb:
In accordance with the plan formula and other provisions in effect on
June 13, 1984, the date of your termination of employment, you are eligible to
receive a deferred vested benefit of $1,390.87 per month. Payment of this
benefit will begin on October 1, 2003 the first of the month following your
65th birthday, and will continue monthly thereafter for as long as you live.
Our records indicate that you had at least ten years of service when you
left. Therefore, you may elect to have your deferred benefit commence as early
as age 55. In this case, your benefit will be reduced to reflect the longer
period of time benefits are expected to be paid due to the fact that payment of
benefits would commence before your normal retirement date. The reduction is
1/2 of 1% for each month of early start.
You should contact the Plan's Retirement Committee three months before
payment of your deferred vested pension is to start, at the address shown
below, to obtain an application for benefit payment. Benefits will not
commence until you complete such application.
If you have any questions, either now or in the future, about how your
deferred vested pension is computed, or paid, please write to the Retirement
Committee for the Norstar Bancorp's Employees' Retirement Plan, One Norstar
Plaza, Albany, New York 12207.
Very truly yours,
/s/ Joseph Pelgrin
Joseph F. Pelgrin, Jr.
Assistant Vice President
EXHIBIT 10.20
ALBANK, FSB
1997 MANAGEMENT INCENTIVE PLAN
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Section Item Page
<S> <C> <C>
1 Plan Objectives and Eligibility 1
2 Definitions 2
3 Description of the Plan 4
Fund Generation 4
4 Allocation and Payment of Awards 5
Allocation 5
Payment of Incentives 5
If Participant Retires or Becomes
Disabled 5
If a Participant Dies 6
Beneficiary Designation 6
5 Administration 7
6 Rights and Interest Under the Plan 10
</TABLE>
Exhibit I 1996 Plan Goals
Exhibit II 1996 Target Incentive Table
Exhibit III Modification Factor -
Performance vs. Payout
SECTION 1
PLAN OBJECTIVES AND ELIGIBILITY
The executive compensation program at ALBANK, FSB provides rewards that maintain
a balance of focus on both annual executive performance increases in long-term
shareholder value. The major components of the program are a base salary, an
annual incentive plan and a long-term
<PAGE>
stock-based incentive plan. This document describes the annual incentive plan
which is designed to:
Create a direct incentive for key officers to continue to
deliver superior returns to the shareholders and to
continually improve key aspects of the business
Provide compensation opportunities which are competitive and
support efforts to recruit and retain outstanding top
executives.
The annual management incentive plan will be based upon those measures of annual
bank performance which ultimately lead to the enhancement of shareholder value,
and be leveraged in such a manner to reward executives competitively only for
competitively superior results.
Eligibility
Selected key executives are eligible to participate in the plan. Participation
will be authorized by the Committee and approved by the Board.
SECTION 2
DEFINITIONS
The following are definitions of terms used throughout this document to describe
key components of the Management Incentive Plan.
(a) "Approved Incentive": The incentive which has been approved by the
chief executive officer and the Human Resources Committee of the Board
of Directors to be paid by ALBANK, FSB to the individual.
(b) "Award Date": The last day of each fiscal year.
(c) "Board": The full Board of Directors of ALBANK, FSB. In cases which
require approval of matters relating to this Incentive Plan, the
"Board" will mean and constitute those members of the Board of
Directors who are classified as disinterested persons pursuant to
SEC Rule 16b-3(c)(2)(i).
(d) "Committee": The Human Resource Committee of the Board, which will be
composed of two or more Directors, each of whom is a disinterested
person.
(e) "Company": ALBANK, FSB, its subsidiaries and divisions.
(f) "Formula Incentive": The individual standard award modified by
organizational performance.
(g) "Maximum Incentive": the award for any award year that is 200% of the
standard incentive. In no event may an award to any participant for
an award year exceed the maximum.
(h) "Normal Retirement Date": The first day of the month following a
participant having attained age 65 and, for participants hired after
10/1/88, the later of attaining age 65 or the fifth anniversary of
participant's initial participation in the retirement plan.
(i) "Participant": Any officer who is selected by the Committee to receive
an award under this plan.
(j) "Plan": ALBANK, FSB Management Incentive Plan.
(k) "Recommended Incentive Award": The individual incentive awards
recommended by the chief executive officer.
(l) "Standard Incentive": The award that has been established for each
executive level category (see Exhibit II). Standard incentives are
expressed as a percentage of salary. By design, these are the award
levels that plan participants can expect to earn when ALBANK, FSB
achieves its goals.
(m) "Threshold Incentive": The minimum award to be paid, if any award is
indicated. This amount is 75% less than the standard incentive.
(n) "Salary": Salary shall be defined as the weighted base salary of the
executive over the plan year in which the incentive award is
designated.
SECTION 3
DESCRIPTION OF THE PLAN
The annual management incentive plan will provide compensation based on the
achievement of performance goals that will be defined each year by the Committee
and approved by the Board.
The goals for the current year are shown in Exhibit I.
Standard Incentive Awards will be defined for each salary grade. If the Bank
achieves its target performance goals, participants will receive the Standard
Incentive for their salary grade. Standard Incentives for the current year are
shown in Exhibit II.
If the Bank does not achieve its performance target but some award is
indicated, payouts may be prorated with a minimum (Threshold Incentive)
equal to 25% of the Standard Incentive. If the Bank exceeds
its target, awards may be increased up to 200% of the
Standard Incentive (Maximum Incentives). Threshold and Maximum
Incentives are shown in Exhibit III.
FUND GENERATION
An "Incentive Fund" will be created and accrued during the year for payment of
awards to officers participating in the Plan. This fund will be the sum of the
target award percentages multiplied by aggregate weighted base salary of all
eligible executives for the year. The accrual may be adjusted during the year
with the approval of the Committee as the bank's performance versus goals
becomes known.
SECTION 4
ALLOCATION AND PAYMENT OF AWARDS
Allocation
Allocation of the award will be recommended by the chief executive officer with
the approval of the Human Resources Committee of the Board of Directors.
Individual executives' awards may vary based upon their contribution to the
overall performance of the Bank. However, the total of the actual individual
awards will not exceed the fund generated by the performance of the Bank.
Payment of Incentives
When payable, incentives will be awarded as near to the close of the Company's
fiscal year as may be feasible. Participants in the Plan must be employed at
the end of the incentive (fiscal) year in order to be eligible to receive
bonus payments, except as provided in other Sections of the Plan.
If Participant Retires or Becomes Disabled
An eligible participant who retires or becomes disabled during the year will
receive payment from the plan, as follows. If the participant retires or
becomes disabled:
After the close of the plan year, but prior to the actual
distribution of awards for such year, a full allotment for the
plan year will be paid;
After the beginning, but prior to the end of the plan year, the
allotment will be prorated based on the actual period of their
employment with the Company within the year.
If a Participant Dies
If a participant dies during the year, payment will be made to a beneficiary as
follows. If the participant dies:
After the close of the plan year, but prior to the actual
distribution of awards for such year, a full allotment for the
plan year will be paid to the beneficiary;
After the beginning, but prior to the end of the plan year,
the allotment will be prorated based on the actual period of
their employment with the Company within the year. Payment
will be made to the beneficiary. No awards will be paid for
any period less than six months participation in the plan
year.
Beneficiary Designation
Each Participant will file with the Committee a written designation of one or
more people who will be entitled to receive the amount, if any, payable under
the Plan upon the Participant's death. The Participant may revoke or change a
beneficiary designation without the knowledge or consent of any prior
beneficiary by filing a new designation with the Committee. The last such
designation actually received by the Committee will be controlling; provided,
however, that it is received prior to the Participant's death. Absent a valid
designation, or if the original beneficiary has predeceased the Participant,
then the Participant's estate will receive any benefit payable under the Plan.
SECTION 5
ADMINISTRATION
(a) The Committee will determine who will participate in the Plan. The
Committee will also determine whether a given participant will earn
awards based on ALBANK'S performance objectives, or specified
divisional performance objectives.
(b) The Committee will have full power and authority to construe,
interpret, and administer the Plan. All decisions, actions or
interpretations of the Committee will be final, conclusive, and
binding upon all Participants.
(c) The Committee may employ attorneys, consultants, accountants, or other
persons to render services in connection with the Plan, and the
Company, the Board, the Committee and members of the Board and the
Committee will be entitled to rely upon the advice, opinions, or
valuations of such persons.
(d) Neither the Company, the Board, the Committee, nor any member of the
Board or the Committee will be personally liable for any actions,
determinations, or interpretations taken or made in good faith. The
Company will indemnify and hold harmless, to the fullest extent
permitted by the Company's bylaws or governing law, each member of the
Committee and each director of the Company to whom any duty or power
relating to the administration or interpretation of the Plan may be
delegated, against any cost, expense or liability arising out of an act
or failure to act in connection with the Plan.
(e) Nothing contained in the Plan will give any Participant the right to
be retained in the employment of the Company or affect the right of
the Company to dismiss any Participant.
(f) This Plan will not constitute a contract between the Company and any
Participant and may be revoked at any time by the affirmative vote of
the majority of the Board of Directors, except that rights accrued
prior to such termination will be enforceable by the Participants.
(g) If the Committee will find that any person to whom any amount is
payable under the Plan is unable to care for his affairs because of
illness or accidents, or is a minor, or has died, then any payment due
him or his estate (unless a prior claim for payment has been made by
a duly appointed legal representative of such person) may, if the
Committee so directs the Company, be paid to his spouse, a child, a
relative, an institution maintaining or having custody of such person,
or any other person deemed by the Committee to be a proper recipient
on behalf of such person otherwise entitled to payment. Any such
payment will be a complete discharge of the
liability of the Plan, the Board,
the Committee, and the Company.
(h) Except insofar as may otherwise be required by law, no amount payable
at any time under the Plan will be subject in any manner to alienation
by anticipation, sale, transfer, assignment, bankruptcy, pledge,
attachment, charge, or encumbrance of any kind, nor in any manner be
subject to the debts or liabilities of any person and any attempt to so
alienate or subject any such amount, whether presently or thereafter
payable, will be void. If any person will attempt to, or will,
alienate,sell, transfer, assign, pledge, attach, charge, or otherwise
encumber any amount payable under the Plan, or any part thereof, or if
by reason of this bankruptcy or other event happening at any such time
such amount would be made subject to his debts or liabilities or would
otherwise not be enjoyed by him, then the Committee, if it so elects,
may direct that such amount be withheld and that the same or any part
thereof be paid or applied to or for the benefit of such person, his
spouse, children or other dependents, or any of them in such manner
and proportion as the Committee may deem proper, subject, however,
to such limitations as may be imposed by law, or by a court of
competent jurisdiction.
(i) Nothing contained in the Plan, and no action taken pursuant to its
provisions, will create or be construed to create a trust of any kind,
or a fiduciary relationship between the Company and any eligible
Participant or any other to receive payments from the Company under
this Plan. Such right will be no greater than the right of an
unsecured general creditor of the Company. All payments to be paid
hereunder will be paid from the general funds of the Company and no
special or separate fund will be established and no segregaton of
assets will be made to assure payment of such amounts except as
expressly set forth in the Plan.
SECTION 6
RIGHTS AND INTEREST UNDER THE PLAN
(a) The establishment of the Plan will not give any Participant or
beneficiary any right, title or interest in and to any specific assets
of the Company.
(b) The Board reserves the right at any time and for any reason to amend,
suspend, or terminate the Plan in whole or in part without the consent
of any Participant or beneficiary.
EXHIBIT I
<TABLE>
1997 PLAN GOALS
<CAPTION>
THRESHOLD BUDGET TARGET SUPERIOR OUTSTANDING
Performance Rating 1 2 2.5 2.75 3 4 5
<S> <C> <C> <C> <C> <C> <C> <C>
% of Budget EPS (89%) (90%) (95%) (100%) (105%) (115%) (132%)
% of 1996 EPS (110%) (110%) (117%) (123%) (129%) (136%) (144%)
% of Target Bonus (0%) (25%) (50%) (75%) (100%) (150%) (200%)
ROAE<F1> 10.66 10.67 11.26 11.85 12.44 13.51 14.58
NPA/AA 1.31 1.30 1.19 1.08 0.97 0.86 0.75
OpExp/AA 2.34 2.33 2.23 2.12 2.01 1.95 1.88
Growth EPS $2.51 $2.52 $2.66 $2.80 $2.94 3.11 $3.28
Expected Earnings 33,862,499 33,862,500 35,743,750 37,625,000 39,506,250 43,326,645 47,147,040
Bonus Pool 167,346 350,200 533,054 715,908 898,762 1,264,470 1,630.178
After Tax Bonus/
Earnings .3% .6% .9% 1.1% 1.4% 1.8% 2.1%
(Aggregate Sharing
Percentage)
Marginal After
Tax Bonus/ -- -- 5.8% 5.8% 5.8% 5.7% 5.7%
(Marginal Sharing Percentage)
<FN>
<F1>EPS based on estimated fully diluted shares outstanding at 12/31/97 of
13,449,426.
<F2>Calculation excludes amortization of goodwill, ORE expense,
losses-fixed assets, and ORE losses and writedowns.
<F3>Includes unrealized
gain(loss) on securities available for sale, net of tax.
<F4>With regard to NPA/AA, performance ratings 1,2,2.5,2.75 and 3 equal 79%,
80%, 90%, 100% and 110% of budget performance respectively
</FN>
</TABLE>
EXHIBIT II
<TABLE>
1997 TARGET INCENTIVE TABLE
<CAPTION>
Corporate Individual
Performance Performance
Level Incentive
(Percent of (Percent of
Position Grade Level Salary) Salary)
<S> <C> <C> <C> <C>
CEO N/A I 50% 0%
EVP 20 II 32 8
SVP(Top
Mgmt Group) 19 III 28 7
SVP/VP 18/19 IV 24 6
VP 16/17 V 16 4
Divisional
President 18 VI 15 15
</TABLE>
EXHIBIT III
MODIFICATION FACTOR
<TABLE>
PERFORMANCE VS. PAYOUT
<CAPTION>
Goal Achievement Percent of Target Payout
<S> <C>
0-1.99 0
2 25<F1>
2.5 50
2.75 75
3 100
4 150
5 200
<FN>
<F1>Theshold
</FN>
</TABLE>
<PAGE>
19
====================================
SERIES B CAPITAL SECURITIES GUARANTEE AGREEMENT
ALBANK FINANCIAL CORPORATION
Dated as of December 29, 1997
====================================
<PAGE>
iii
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1 Definitions and Interpretation....................................2
ARTICLE II
TRUST INDENTURE ACT
SECTION 2.1 Trust Indenture Act; Application..................................6
SECTION 2.2 Lists of Holders of Securities....................................6
SECTION 2.3 Reports by the Capital Securities Guarantee Trustee...............6
SECTION 2.4 Periodic Reports to Capital Securities Guarantee Trustee..........6
SECTION 2.5 Evidence of Compliance with Conditions Precedent..................7
SECTION 2.6 Events of Default; Waiver.........................................7
SECTION 2.7 Event of Default; Notice..........................................7
SECTION 2.8 Conflicting Interests.............................................8
ARTICLE III
POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE
SECTION 3.1 Powers and Duties of the Capital Securities Guarantee Trustee.....8
SECTION 3.2 Certain Rights of Capital Securities Guarantee Trustee...........10
SECTION 3.3 Not Responsible for Recitals or Issuance of Series B Capital
Securities Guarantee.............................................12
ARTICLE IV
CAPITAL SECURITIES GUARANTEE TRUSTEE
SECTION 4.1 Capital Securities Guarantee Trustee; Eligibility................12
SECTION 4.2 Appointment, Removal and Resignation of Capital Securities
Guarantee Trustee.................................................13
ARTICLE V
GUARANTEE
SECTION 5.1 Guarantee........................................................14
SECTION 5.2 Waiver of Notice and Demand......................................14
SECTION 5.3 Obligations Not Affected.........................................14
SECTION 5.4 Rights of Holders................................................15
SECTION 5.5 Guarantee of Payment.............................................15
SECTION 5.6 Subrogation......................................................16
SECTION 5.7 Independent Obligations..........................................16
ARTICLE VI
LIMITATION OF TRANSACTIONS; SUBORDINATION
SECTION 6.1 Limitation of Transactions.......................................16
SECTION 6.2 Ranking..........................................................17
ARTICLE VII
TERMINATION
SECTION 7.1 Termination......................................................17
ARTICLE VIII
COMPENSATION AND EXPENSES OF CAPITAL SECURITIES GUARANTEE TRUSTEE
SECTION 8.1 Compensation and Expenses of Capital Securities Guarantee
Trustee..........................................................18
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 Exculpation......................................................18
SECTION 9.2 Indemnification..................................................19
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Successors and Assigns...........................................19
SECTION 10.2 Amendments.......................................................19
SECTION 10.3 Notices..........................................................19
SECTION 10.4 Benefit..........................................................21
SECTION 10.5 Governing Law....................................................21
<PAGE>
SERIES B CAPITAL SECURITIES GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT (the "Series B Capital Securities
Guarantee"), dated as of December 29, 1997, is executed and delivered by ALBANK
Financial Corporation, a Delaware corporation (the "Guarantor"), and The Chase
Manhattan Bank, a New York banking corporation, as indenture trustee (the
"Capital Securities Guarantee Trustee"), for the benefit of the Holders (as
defined herein) from time to time of the Series B Capital Securities (as defined
herein) of ALBANK Capital Trust I, a Delaware statutory business trust (the
"Issuer").
WHEREAS, pursuant to an Amended and Restated Declaration of
Trust (the "Declaration," which expression includes Annex I and Exhibits A-1,
A-2, B and C thereto), dated as of June 6, 1997 among the trustees of the
Issuer, the Administrators, the Guarantor, as sponsor, and the holders from time
to time of undivided beneficial interests in the assets of the Issuer, the
Issuer issued on June 6, 1997, 50,000 capital securities, having an aggregate
liquidation amount of $50,000,000, such capital securities being designated the
9.27% Series A Capital Securities (collectively the "Series A Capital
Securities").
WHEREAS, as incentive for the holders of the Series A Capital
Securities to purchase the Series A Capital Securities, the Guarantor
irrevocably and unconditionally agreed, to the extent set forth in the Series A
Capital Securities Guarantee, dated as of June 6, 1997 (the "Series A Capital
Securities Guarantee"), to pay to the holders of the Series A Capital Securities
the Guarantee Payments (as defined in the Series A Capital Securities Guarantee)
and to make certain other payments on the terms and conditions set forth
therein.
WHEREAS, the Guarantor also executed and delivered a guarantee
agreement (the "Common Securities Guarantee"), with substantially identical
terms to the Series A Capital Securities Guarantee, for the benefit of the
holders of the Common Securities (as defined herein), except that if an Event of
Default (as defined in the Declaration) has occurred and is continuing, the
rights of holders of the Common Securities to receive Guarantee Payments under
the Common Securities Guarantee are subordinated, to the extent and in the
manner set forth in the Common Securities Guarantee, to the rights of holders of
Series A Capital Securities to receive Guarantee Payments (as defined in the
Series A Capital Securities Guarantee) and the rights of holders of Series B
Capital Securities to receive Guarantee Payments under this Series B Capital
Securities Guarantee.
WHEREAS, pursuant to the Registration Rights Agreement (as
defined in the Declaration), the Trust has offered to exchange up to $50,000,000
aggregate liquidation amount of its 9.27% Series B Capital Securities (the
"Series B Capital Securities" and, together with the Series A Capital
Securities, the "Capital Securities"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act") for a like liquidation
amount of its outstanding Series A Capital Securities (the "Exchange Offer").
WHEREAS, pursuant to the Exchange Offer, the Guarantor and the
Capital Securities Guarantee Trustee wish to exchange the Series A Capital
Securities Guarantee with respect to any and all Series A Capital Securities
validly tendered to the Issuer pursuant to the Exchange Offer for this Series B
Capital Securities Guarantee, which is substantially the same as the Series A
Capital Securities Guarantee, except that it has been registered under the
Securities Act and qualified under the Trust Indenture Act, and which is for the
benefit of the Holders of the Series B Capital Securities.
WHEREAS, as incentive for the holders of Series A Capital
Securities to participate in the Exchange Offer (which exchange the Guarantor
acknowledges shall benefit the Guarantor), the Guarantor desires irrevocably and
unconditionally to agree, to the extent set forth in this Series B Capital
Securities Guarantee, to pay to the holders of the Series B Capital Securities
the Guarantee Payments (as defined below) and to make certain other payments on
the terms and conditions set forth therein.
NOW, THEREFORE, in consideration of the premises, the
Guarantor executes and delivers this Series B Capital Securities Guarantee for
the benefit of the Holders.
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1 Definitions and Interpretation
In this Series B Capital Securities Guarantee, unless the
context otherwise requires:
(a) capitalized terms used in this Series B Capital Securities
Guarantee but not defined in the preamble above have the respective meanings
assigned to them in this Section 1.1;
(b) terms defined in the Declaration as at the date of
execution of this Series B Capital Securities Guarantee have the same meaning
when used in this Series B Capital Securities Guarantee unless otherwise defined
in this Series B Capital Securities Guarantee;
(c) a term defined anywhere in this Series B Capital
Securities Guarantee has the same meaning throughout;
(d) all references to "the Series B Capital Securities
Guarantee" or "this Series B Capital Securities Guarantee" are to this Series B
Capital Securities Guarantee as modified, supplemented or amended from time to
time;
(e) all references in this Series B Capital Securities
Guarantee to Articles and Sections are to Articles and Sections of this Series B
Capital Securities Guarantee, unless otherwise specified;
(f) a term defined in the Trust Indenture Act has the same
meaning when used in this Series B Capital Securities Guarantee, unless
otherwise defined in this Series B Capital Securities Guarantee or unless the
context otherwise requires; and
(g) a reference to the singular includes the plural and vice
versa.
"Affiliate" has the same meaning as given to that term in Rule
405 under the Securities Act of 1933, as amended, or any successor rule
thereunder.
"Business Day" means any day other than a Saturday or a
Sunday, or a day on which banking institutions in The City of New York or
Wilmington, Delaware are authorized or required by law or executive order to
close.
"Capital Securities Guarantee Trustee" means The Chase
Manhattan Bank, a New York banking corporation, until a Successor Capital
Securities Guarantee Trustee has been appointed and has accepted such
appointment pursuant to the terms of this Series B Capital Securities Guarantee
and thereafter means each such Successor Capital Securities Guarantee Trustee.
"Common Securities" means the securities representing common
undivided beneficial interests in the assets of the Issuer.
"Corporate Trust Office" means the office of the Capital
Securities Guarantee Trustee at which the corporate trust business of the
Capital Securities Guarantee Trustee shall, at any particular time, be
principally administered, which office at the date of execution of this
Agreement is located at 450 West 33rd Street, New York, New York 10001.
"Covered Person" means any Holder of Series B Capital
Securities.
"Debentures" means the series of subordinated debt securities
of the Guarantor designated the 9.27% Series B Junior Subordinated Deferrable
Interest Debentures due June 6, 2027 held by the Property Trustee.
"Event of Default" means a default by the Guarantor on any of
its payment or other obligations under this Series B Capital Securities
Guarantee.
"Guarantee Payments" means the following payments or
distributions, without duplication, with respect to the Series B Capital
Securities, to the extent not paid or made by the Issuer: (i) any accumulated
and unpaid Distributions required to be paid on such Series B Capital
Securities, to the extent that the Issuer has funds on hand legally available
therefor, (ii) the applicable redemption price, including all accumulated and
unpaid Distributions to the date of redemption (the "Redemption Price") with
respect to any Series B Capital Securities called for redemption by the Issuer,
to the extent that the Issuer has funds on hand legally available therefor, and
(iii) upon a voluntary or involuntary termination and liquidation of the Issuer
(other than in connection with the distribution of Debentures to the Holders in
exchange for Series B Capital Securities as provided in the Declaration), the
lesser of (a) the aggregate of the Liquidation Amount and all accumulated and
unpaid Distributions on the Series B Capital Securities to the date of payment,
to the extent the Issuer has funds on hand legally available therefor, and (b)
the amount of assets of the Issuer remaining available for distribution to
Holders in liquidation of the Issuer (in either case, the "Liquidation
Distribution"). If an Event of Default has occurred and is continuing, no
Guarantee Payments under the Common Securities Guarantee with respect to the
Common Securities or any guarantee payment under any Other Common Securities
Guarantees shall be made until the Holders shall be paid in full the Guarantee
Payments to which they are entitled under this Series B Capital Securities
Guarantee.
"Holder" shall mean any holder, as registered on the books and
records of the Issuer, of any Series B Capital Securities; provided, however,
that, in determining whether the holders of the requisite percentage of Series B
Capital Securities have given any request, notice, consent or waiver hereunder,
"Holder" shall not include the Guarantor or any Affiliate of the Guarantor.
"Indemnified Person" means the Capital Securities Guarantee
Trustee, any Affiliate of the Capital Securities Guarantee Trustee, or any
officers, directors, shareholders, members, partners, employees,
representatives, nominees, custodians or agents of the Capital Securities
Guarantee Trustee.
"Indenture" means the Indenture dated as of June 6, 1997,
among the Guarantor (the "Debenture Issuer") and The Chase Manhattan Bank, as
trustee, pursuant to which the Debentures are to be issued to the Property
Trustee of the Issuer.
"Majority in Liquidation Amount of the Series B Capital
Securities" means, except as provided by the Trust Indenture Act, a vote by
Holder(s) of Series B Capital Securities, voting separately as a class, of more
than 50% of the aggregate Liquidation Amount (including the stated amount that
would be paid on redemption, liquidation or otherwise, plus accumulated and
unpaid Distributions to the date upon which the voting percentages are
determined) of all Series B Capital Securities.
"Officers' Certificate" means, with respect to any person, a
certificate signed by two of the following: the Chairman, a Vice Chairman, the
Chief Executive Officer, the President, a Vice President (whether or not
designated by a number or a word or words added before or after such title), the
Comptroller, the Secretary or an Assistant Secretary of the Guarantor. Any
Officers' Certificate delivered with respect to compliance with a condition or
covenant provided for in this Series B Capital Securities Guarantee (other than
pursuant to Section 314(a)(4) of the Trust Indenture Act) shall include:
(a) a statement that each officer signing the Officers'
Certificate has read the covenant or condition and the definitions relating
thereto;
(b) a statement that each such officer has made such
examination or investigation as, in such officer's opinion, is necessary to
enable such officer to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(c) a statement as to whether, in the opinion of each such
officer, such condition or covenant has been complied with.
"Other Common Securities Guarantees" shall have the same
meaning as "Other Guarantees" in the Common Securities Guarantee.
"Other Debentures" means all junior subordinated debentures
issued by the Guarantor from time to time and sold to trusts to be established
by the Guarantor (if any), in each case similar to the Issuer.
"Other Guarantees" means all guarantees issued by the
Guarantor with respect to capital securities (if any) similar to the Series B
Capital Securities issued by other trusts to be established by the Guarantor (if
any), in each case similar to the Issuer.
"Person" means a legal person, including any individual,
corporation, estate, partnership, joint venture, association, joint stock
company, limited liability company, trust, unincorporated association, or
government or any agency or political subdivision thereof, or any other entity
of whatever nature.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of June 6, 1997, by and among the Guarantor, the Issuer and
the Initial Purchaser named therein as such agreement may be amended, modified
or supplemented from time to time.
"Responsible Officer" means, with respect to the Capital
Securities Guarantee Trustee, any officer within the Corporate Trust Office of
the Capital Securities Guarantee Trustee, including any vice president, any
assistant vice president, any secretary, any assistant secretary, the treasurer,
any assistant treasurer, any trust officer, any senior trust officer or other
officer in the Corporate Trust Office of the Capital Securities Guarantee
Trustee customarily performing functions similar to those performed by any of
the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of that officer's knowledge of and familiarity with the particular
subject.
"Successor Capital Securities Guarantee Trustee" means a
successor Capital Securities Guarantee Trustee possessing the qualifications to
act as Capital Securities Guarantee Trustee under Section 4.1.
"Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended.
"Trust Securities" means the Common Securities and the
Capital Securities, collectively.
ARTICLE II
TRUST INDENTURE ACT
SECTION 2.1 Trust Indenture Act; Application
--------------------------------
(a) This Series B Capital Securities Guarantee is subject to
the provisions of the Trust Indenture Act that are required to be part of this
Series B Capital Securities Guarantee in order for this Series B Capital
Securities Guarantee to be a qualified indenture under the Trust Indenture Act
and shall, to the extent applicable, be governed by such provisions;
(b) this Series B Capital Securities Guarantee has been
qualified under the Trust Indenture Act; and
(c) if and to the extent that any provision of this Series B
Capital Securities Guarantee limits, qualifies or conflicts with the duties
imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such
imposed duties shall control.
SECTION 2.2 Lists of Holders of Securities
------------------------------
(a) The Guarantor shall provide the Capital Securities
Guarantee Trustee (unless the Capital Securities Guarantee Trustee is otherwise
the registrar of the Capital Securities) (i) on a semi-annual basis within 14
days of each regular record date for the Capital Securities, a list, in such
form as the Capital Securities Guarantee Trustee may reasonably require, of the
names and addresses of the Holders of the Series B Capital Securities as of such
record date; and (ii) at such other times as the Capital Securities Guarantee
Trustee may request in writing, within 30 days after the receipt by the
Guarantor of any such request, a list of similar form and content as of a date
not more than 15 days prior to the time such list is furnished, provided, that
the Guarantor shall not be obligated to provide such List of Holders at any time
the List of Holders does not differ from the most recent List of Holders given
to the Capital Securities Guarantee Trustee by the Guarantor. The Capital
Securities Guarantee Trustee may destroy any List of Holders previously given to
it on receipt of a new List of Holders.
(b) The Capital Securities Guarantee Trustee shall comply with
its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture
Act.
SECTION 2.3 Reports by the Capital Securities Guarantee Trustee
---------------------------------------------------
Within 60 days after May 15 of each year, commencing May 15,
1998, the Capital Securities Guarantee Trustee shall provide to the Holders such
reports as are required by Section 313 of the Trust Indenture Act, if any, in
the form and in the manner provided by Section 313 of the Trust Indenture Act.
The Capital Securities Guarantee Trustee shall also comply with the other
requirements of Section 313 of the Trust Indenture Act.
SECTION 2.4 Periodic Reports to Capital Securities Guarantee Trustee
--------------------------------------------------------
The Guarantor shall provide to the Capital Securities
Guarantee Trustee such documents, reports and information as required by Section
314 of the Trust Indenture Act (if any) and the compliance certificate required
by Section 314 of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act, provided that such
compliance certificate shall be delivered on or before 120 days after the end of
each fiscal year of the Guarantor. Delivery of such reports, information and
documents to the Capital Securities Guarantee Trustee is for informational
purposes only and the Capital Securities Guarantee Trustee's receipt of such
shall not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Guarantor's
compliance with any of its covenants hereunder (as to which the Capital
Securities Guarantee Trustee is entitled to rely exclusively on Officers'
Certificates).
SECTION 2.5 Evidence of Compliance with Conditions Precedent
------------------------------------------------
The Guarantor shall provide to the Capital Securities
Guarantee Trustee such evidence of compliance with any conditions precedent, if
any, provided for in this Series B Capital Securities Guarantee that relate to
any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any
certificate or opinion required to be given by an officer pursuant to Section
314(c)(1) of the Trust Indenture Act may be given in the form of an Officers'
Certificate.
SECTION 2.6 Events of Default; Waiver
-------------------------
The Holders of a Majority in Liquidation Amount of Series B
Capital Securities may, by vote, on behalf of all of the Holders, waive any past
Event of Default and its consequences. Upon such waiver, any such Event of
Default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured, for every purpose of this Series B Capital
Securities Guarantee, but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right consequent thereon.
SECTION 2.7 Event of Default; Notice
------------------------
(a) The Capital Securities Guarantee Trustee shall, within 90
days after the occurrence of a default with respect to this Capital Securities
Guarantee, mail by first class postage prepaid, to all Holders, notices of all
defaults actually known to a Responsible Officer of the Capital Securities
Guarantee Trustee, unless such defaults have been cured before the giving of
such notice, provided, that, except in the case of default in the payment of any
Guarantee Payment, the Capital Securities Guarantee Trustee shall be protected
in withholding such notice if and so long as the board of directors, the
executive committee, or a trust committee of directors and/or Responsible
Officer in good faith determines that the withholding of such notice is in the
interests of the Holders.
(b) The Capital Securities Guarantee Trustee shall not be
deemed to have knowledge of any Event of Default unless the Capital Securities
Guarantee Trustee shall have received written notice from the Guarantor or a
Holder, or a Responsible Officer charged with the administration of the
Declaration shall have obtained actual knowledge, of such Event of Default.
SECTION 2.8 Conflicting Interests
---------------------
The Declaration shall be deemed to be specifically described
in this Series B Capital Securities Guarantee for the purposes of clause (i) of
the first proviso contained in Section 310(b) of the Trust Indenture Act.
ARTICLE III
POWERS, DUTIES AND RIGHTS OF
CAPITAL SECURITIES GUARANTEE TRUSTEE
SECTION 3.1 Powers and Duties of the Capital Securities Guarantee Trustee
-------------------------------------------------------------
(a) This Series B Capital Securities Guarantee shall be held
by the Capital Securities Guarantee Trustee for the benefit of the Holders, and
the Capital Securities Guarantee Trustee shall not transfer this Series B
Capital Securities Guarantee to any Person except a Holder exercising his or her
rights pursuant to Section 5.4(b) or to a Successor Capital Securities Guarantee
Trustee on acceptance by such Successor Capital Securities Guarantee Trustee of
its appointment to act as Successor Capital Securities Guarantee Trustee. The
right, title and interest of the Capital Securities Guarantee Trustee shall
automatically vest in any Successor Capital Securities Guarantee Trustee, and
such vesting and succession of title shall be effective whether or not
conveyancing documents have been executed and delivered pursuant to the
appointment of such Successor Capital Securities Guarantee Trustee.
(b) If an Event of Default actually known to a Responsible
Officer of the Capital Securities Guarantee Trustee has occurred and is
continuing, the Capital Securities Guarantee Trustee shall enforce this Series B
Capital Securities Guarantee for the benefit of the Holders.
(c) The Capital Securities Guarantee Trustee, before the
occurrence of any Event of Default and after the curing of all Events of Default
that may have occurred, shall undertake to perform only such duties as are
specifically set forth in this Series B Capital Securities Guarantee, and no
implied covenants shall be read into this Series B Capital Securities Guarantee
against the Capital Securities Guarantee Trustee. In case an Event of Default
has occurred (that has not been cured or waived pursuant to Section 2.6) and is
actually known to a Responsible Officer of the Capital Securities Guarantee
Trustee, the Capital Securities Guarantee Trustee shall exercise such of the
rights and powers vested in it by this Series B Capital Securities Guarantee,
and use the same degree of care and skill in its exercise thereof, as a prudent
person would exercise or use under the circumstances in the conduct of his or
her own affairs.
(d) No provision of this Series B Capital Securities Guarantee
shall be construed to relieve the Capital Securities Guarantee Trustee from
liability for its own negligent action, its own negligent failure to act, or its
own willful misconduct, except that:
(i) prior to the occurrence of any Event of Default and after
the curing or waiving of all such Events of Default that may have
occurred:
(A) the duties and obligations of the Capital
Securities Guarantee Trustee shall be determined solely by the
express provisions of this Series B Capital Securities
Guarantee, and the Capital Securities Guarantee Trustee shall
not be liable except for the performance of such duties and
obligations as are specifically set forth in this Series B
Capital Securities Guarantee, and no implied covenants or
obligations shall be read into this Series B Capital
Securities Guarantee against the Capital Securities Guarantee
Trustee; and
(B) in the absence of bad faith on the part of the
Capital Securities Guarantee Trustee, the Capital Securities
Guarantee Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the
Capital Securities Guarantee Trustee and conforming to the
requirements of this Series B Capital Securities Guarantee;
but in the case of any such certificates or opinions that by
any provision hereof are specifically required to be furnished
to the Capital Securities Guarantee Trustee, the Capital
Securities Guarantee Trustee shall be under a duty to examine
the same to determine whether or not they conform to the
requirements of this Series B Capital Securities Guarantee;
(ii) the Capital Securities Guarantee Trustee shall not be
liable for any error of judgment made in good faith by a Responsible
Officer thereof, unless it shall be proved that the Capital Securities
Guarantee Trustee was negligent in ascertaining the pertinent facts
upon which such judgment was made;
(iii) the Capital Securities Guarantee Trustee shall not be
liable with respect to any action taken or omitted to be taken by it in
good faith in accordance with the direction of the Holders of a
Majority in Liquidation Amount of the Series B Capital Securities
relating to the time, method and place of conducting any proceeding for
any remedy available to the Capital Securities Guarantee Trustee, or
exercising any trust or power conferred upon the Capital Securities
Guarantee Trustee under this Series B Capital Securities Guarantee; and
(iv) no provision of this Series B Capital Securities
Guarantee shall require the Capital Securities Guarantee Trustee to
expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of
any of its rights or powers, if the Capital Securities Guarantee
Trustee shall have reasonable grounds for believing that the repayment
of such funds or liability is not reasonably assured to it under the
terms of this Series B Capital Securities Guarantee or indemnity,
reasonably satisfactory to the Capital Securities Guarantee Trustee,
against such risk or liability is not reasonably assured to it.
SECTION 3.2 Certain Rights of Capital Securities Guarantee Trustee
------------------------------------------------------
(a) Subject to the provisions of Section 3.1:
(i) The Capital Securities Guarantee Trustee may conclusively
rely, and shall be fully protected in acting or refraining from acting,
upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed, sent or presented
by the proper party or parties.
(ii) Any direction or act of the Guarantor contemplated by
this Series B Capital Securities Guarantee may be sufficiently
evidenced by an Officers' Certificate.
(iii) Whenever, in the administration of this Series B Capital
Securities Guarantee, the Capital Securities Guarantee Trustee shall
deem it desirable that a matter be proved or established before taking,
suffering or omitting any action hereunder, the Capital Securities
Guarantee Trustee (unless other evidence is herein specifically
prescribed) may, in the absence of bad faith on its part, request and
conclusively rely upon an Officers' Certificate which, upon receipt of
such request, shall be delivered by the Guarantor as soon as
practicable.
(iv) The Capital Securities Guarantee Trustee shall have no
duty to see to any recording, filing or registration of any instrument
(or any rerecording, refiling or registration thereof).
(v) The Capital Securities Guarantee Trustee may consult with
counsel of its selection, and the advice or opinion of such counsel
with respect to legal matters shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with such advice or
opinion. Such counsel may be counsel to the Guarantor or any of its
Affiliates and may include any of its employees. The Capital Securities
Guarantee Trustee shall have the right at any time to seek instructions
concerning the administration of this Series B Capital Securities
Guarantee from any court of competent jurisdiction.
(vi) The Capital Securities Guarantee Trustee shall be under
no obligation to exercise any of the rights or powers vested in it by
this Series B Capital Securities Guarantee at the request or direction
of any Holder, unless such Holder shall have provided to the Capital
Securities Guarantee Trustee such security and indemnity, reasonably
satisfactory to the Capital Securities Guarantee Trustee, against the
costs, expenses (including attorneys' fees and expenses and the
expenses of the Capital Securities Guarantee Trustee's agents, nominees
or custodians) and liabilities that might be incurred by it in
complying with such request or direction, including such reasonable
advances as may be requested by the Capital Securities Guarantee
Trustee; provided that, nothing contained in this Section 3.2(a)(vi)
shall be taken to relieve the Capital Securities Guarantee Trustee,
upon the occurrence of an Event of Default, of its obligation to
exercise the rights and powers vested in it by this Series B Capital
Securities Guarantee.
(vii) The Capital Securities Guarantee Trustee shall not be
bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note,
other evidence of indebtedness or other paper or document, but the
Capital Securities Guarantee Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may
see fit.
(viii) The Capital Securities Guarantee Trustee may execute
any of the trusts or powers hereunder or perform any duties hereunder
either directly or by or through agents, nominees, custodians or
attorneys, and the Capital Securities Guarantee Trustee shall not be
responsible for any misconduct or negligence on the part of any agent
or attorney appointed with due care by it hereunder.
(ix) Any action taken by the Capital Securities Guarantee
Trustee or its agents hereunder shall bind the Holders, and the
signature of the Capital Securities Guarantee Trustee or its agents
alone shall be sufficient and effective to perform any such action. No
third party shall be required to inquire as to the authority of the
Capital Securities Guarantee Trustee to so act or as to its compliance
with any of the terms and provisions of this Series B Capital
Securities Guarantee, both of which shall be conclusively evidenced by
the Capital Securities Guarantee Trustee's or its agent's taking such
action.
(x) Whenever in the administration of this Series B Capital
Securities Guarantee the Capital Securities Guarantee Trustee shall
deem it desirable to receive instructions with respect to enforcing any
remedy or right or taking any other action hereunder, the Capital
Securities Guarantee Trustee (i) may request instructions from the
Holders of a Majority in Liquidation Amount of the Series B Capital
Securities, (ii) may refrain from enforcing such remedy or right or
taking such other action until such instructions are received, and
(iii) shall be protected in conclusively relying on or acting in
accordance with such instructions.
(xi) The Capital Securities Guarantee Trustee shall not be
liable for any action taken, suffered, or omitted to be taken by it in
good faith, without negligence, and reasonably believed by it to be
authorized or within the discretion or rights or powers conferred upon
it by this Series B Capital Securities Guarantee.
(b) No provision of this Series B Capital Securities Guarantee
shall be deemed to impose any duty or obligation on the Capital Securities
Guarantee Trustee to perform any act or acts or exercise any right, power, duty
or obligation conferred or imposed on it in any jurisdiction in which it shall
be illegal, or in which the Capital Securities Guarantee Trustee shall be
unqualified or incompetent in accordance with applicable law, to perform any
such act or acts or to exercise any such right, power, duty or obligation. No
permissive power or authority available to the Capital Securities Guarantee
Trustee shall be construed to be a duty.
SECTION 3.3 Not Responsible for Recitals or Issuance of Series B Capital
Securities Guarantee
------------------------------------------------------------
The recitals contained in this Series B Capital Securities
Guarantee shall be taken as the statements of the Guarantor, and the Capital
Securities Guarantee Trustee does not assume any responsibility for their
correctness. The Capital Securities Guarantee Trustee makes no representation as
to the validity or sufficiency of this Series B Capital Securities Guarantee.
ARTICLE IV
CAPITAL SECURITIES GUARANTEE TRUSTEE
SECTION 4.1 Capital Securities Guarantee Trustee; Eligibility
-------------------------------------------------
(a) There shall at all times be a Capital Securities Guarantee
Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a corporation organized and doing business under the
laws of the United States of America or any State or Territory thereof
or of the District of Columbia, or a corporation or Person permitted by
the Securities and Exchange Commission to act as an institutional
trustee under the Trust Indenture Act, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus
of at least 50 million U.S. dollars ($50,000,000), and subject to
supervision or examination by Federal, State, Territorial or District
of Columbia authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of
the supervising or examining authority referred to above, then, for the
purposes of this Section 4.1(a)(ii), the combined capital and surplus
of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so
published.
(b) If at any time the Capital Securities Guarantee Trustee
shall cease to be eligible to so act under Section 4.1(a), the Capital
Securities Guarantee Trustee shall immediately resign in the manner and with the
effect set out in Section 4.2(c).
(c) If the Capital Securities Guarantee Trustee has or shall
acquire any "conflicting interest" within the meaning of Section 310(b) of the
Trust Indenture Act, the Capital Securities Guarantee Trustee and Guarantor
shall in all respects comply with the provisions of Section 310(b) of the Trust
Indenture Act, subject to the penultimate paragraph thereof.
SECTION 4.2 Appointment, Removal and Resignation of Capital Securities
Guarantee Trustee
----------------------------------------------------------
(a) Subject to Section 4.2(b), the Capital Securities
Guarantee Trustee may be appointed or removed without cause at any time by the
Guarantor except during an Event of Default.
(b) The Capital Securities Guarantee Trustee shall not be
removed in accordance with Section 4.2(a) until a Successor Capital Securities
Guarantee Trustee has been appointed and has accepted such appointment by
written instrument executed by such Successor Capital Securities Guarantee
Trustee and delivered to the Guarantor.
(c) The Capital Securities Guarantee Trustee shall hold office
until a Successor Capital Securities Guarantee Trustee shall have been appointed
or until its removal or resignation. The Capital Securities Guarantee Trustee
may resign from office (without need for prior or subsequent accounting) by an
instrument in writing executed by the Capital Securities Guarantee Trustee and
delivered to the Guarantor, which resignation shall not take effect until a
Successor Capital Securities Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Capital Securities Guarantee Trustee and delivered to the Guarantor and the
resigning Capital Securities Guarantee Trustee.
(d) If no Successor Capital Securities Guarantee Trustee shall
have been appointed and accepted appointment as provided in this Section 4.2
within 60 days after delivery of an instrument of removal or resignation, the
Capital Securities Guarantee Trustee resigning or being removed may petition any
court of competent jurisdiction for appointment of a Successor Capital
Securities Guarantee Trustee. Such court may thereupon, after prescribing such
notice, if any, as it may deem proper, appoint a Successor Capital Securities
Guarantee Trustee.
(e) No Capital Securities Guarantee Trustee shall be liable
for the acts or omissions to act of any Successor Capital Securities Guarantee
Trustee.
(f) Upon termination of this Series B Capital Securities
Guarantee or removal or resignation of the Capital Securities Guarantee Trustee
pursuant to this Section 4.2, the Guarantor shall pay to the Capital Securities
Guarantee Trustee all amounts due to the Capital Securities Guarantee Trustee
accrued to the date of such termination, removal or resignation.
ARTICLE V
GUARANTEE
SECTION 5.1 Guarantee
---------
The Guarantor irrevocably and unconditionally agrees to pay in
full to the Holders the Guarantee Payments (without duplication of amounts
theretofore paid by the Issuer), as and when due, regardless of any defense,
right of set-off or counterclaim that the Issuer may have or assert. The
Guarantor's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by causing
the Issuer to pay such amounts to the Holders.
SECTION 5.2 Waiver of Notice and Demand
---------------------------
The Guarantor hereby waives notice of acceptance of this
Series B Capital Securities Guarantee and of any liability to which it applies
or may apply, presentment, demand for payment, any right to require a proceeding
first against the Issuer or any other Person before proceeding against the
Guarantor, protest, notice of nonpayment, notice of dishonor, notice of
redemption and all other notices and demands.
SECTION 5.3 Obligations Not Affected
------------------------
The obligations, covenants, agreements and duties of the
Guarantor under this Series B Capital Securities Guarantee shall in no way be
affected or impaired by reason of the happening from time to time of any of the
following:
(a) the release or waiver, by operation of law or otherwise,
of the performance or observance by the Issuer of any express or implied
agreement, covenant, term or condition relating to the Series B Capital
Securities to be performed or observed by the Issuer;
(b) the extension of time for the payment by the Issuer of all
or any portion of the Distributions, Redemption Price, Liquidation Distribution
or any other sums payable under the terms of the Series B Capital Securities or
the extension of time for the performance of any other obligation under, arising
out of, or in connection with, the Series B Capital Securities (other than an
extension of time for payment of Distributions, Redemption Price, Liquidation
Distribution or other sum payable that results from the extension of any
interest payment period on the Debentures permitted by the Indenture);
(c) any failure, omission, delay or lack of diligence on the
part of the Holders to enforce, assert or exercise any right, privilege, power
or remedy conferred on the Holders pursuant to the terms of the Series B Capital
Securities, or any action on the part of the Issuer granting indulgence or
extension of any kind;
(d) voluntary or involuntary liquidation, dissolution, sale of
any collateral, receivership, insolvency, bankruptcy, assignment for the benefit
of creditors, reorganization, arrangement, composition or readjustment of debt
of, or other similar proceedings affecting, the Issuer or any of the assets of
the Issuer;
(e) any invalidity of, or defect or deficiency in, the
Series B Capital Securities;
(f) the settlement or compromise of any obligation
guaranteed hereby or hereby incurred; or
(g) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a guarantor, it being
the intent of this Section 5.3 that the obligations of the Guarantor with
respect to the Guarantee Payments shall be absolute and unconditional under any
and all circumstances.
There shall be no obligation of the Holders to give notice to,
or obtain consent of, the Guarantor with respect to the happening of any of the
foregoing.
SECTION 5.4 Rights of Holders
-----------------
(a) The Holders of a Majority in Liquidation Amount of the
Series B Capital Securities have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Capital Securities
Guarantee Trustee in respect of this Series B Capital Securities Guarantee or
exercising any trust or power conferred upon the Capital Securities Guarantee
Trustee under this Series B Capital Securities Guarantee, provided that, subject
to Section 3.1, the Capital Securities Guarantee Trustee shall have the right to
decline to follow any such direction if the Capital Securities Guarantee Trustee
shall determine that the action so directed would be unjustly prejudicial to the
holders not taking part in such direction or if the Capital Securities Guarantee
Trustee being advised by counsel determines that the action or proceeding so
directed may not lawfully be taken or if the Capital Securities Guarantee
Trustee in good faith by its board of directors or trustees, executive
committee, or a trust committee of directors or trustees and/or Responsible
Officers shall determine that the action or proceeding so directed would involve
the Capital Securities Guarantee Trustee in personal liability.
(b) If the Capital Securities Guarantee Trustee fails to
enforce such Series B Capital Securities Guarantee, any Holder may institute a
legal proceeding directly against the Guarantor to enforce the Capital
Securities Guarantee Trustee's rights under this Series B Capital Securities
Guarantee, without first instituting a legal proceeding against the Issuer, the
Capital Securities Guarantee Trustee or any other person or entity. The
Guarantor waives any right or remedy to require that any action be brought first
against the Issuer or any other person or entity before proceeding directly
against the Guarantor.
SECTION 5.5 Guarantee of Payment
--------------------
This Series B Capital Securities Guarantee creates a guarantee
of payment and not of collection.
SECTION 5.6 Subrogation
-----------
The Guarantor shall be subrogated to all (if any) rights of
the Holders against the Issuer in respect of any amounts paid to such Holders by
the Guarantor under this Series B Capital Securities Guarantee; provided,
however, that the Guarantor shall not (except to the extent required by
mandatory provisions of law) be entitled to enforce or exercise any right that
it may acquire by way of subrogation or any indemnity, reimbursement or other
agreement, in all cases as a result of payment under this Series B Capital
Securities Guarantee, if, at the time of any such payment, any amounts are due
and unpaid under this Series B Capital Securities Guarantee. If any amount shall
be paid to the Guarantor in violation of the preceding sentence, the Guarantor
agrees to hold such amount in trust for the Holders and to pay over such amount
to the Holders.
SECTION 5.7 Independent Obligations
-----------------------
The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Issuer with respect to the Series B
Capital Securities, and that the Guarantor shall be liable as principal and as
debtor hereunder to make Guarantee Payments pursuant to the terms of this Series
B Capital Securities Guarantee notwithstanding the occurrence of any event
referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof.
ARTICLE VI
LIMITATION OF TRANSACTIONS; SUBORDINATION
SECTION 6.1 Limitation of Transactions
--------------------------
So long as any Capital Securities remain outstanding, the
Guarantor shall not (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
the Guarantor's capital stock (which includes common and preferred stock), (ii)
make any payment of principal, interest or premium, if any, with respect to or
repay, repurchase or redeem any debt securities of the Guarantor (including any
Other Debentures) that rank pari passu with or junior in right of payment to the
Debentures or (iii) make any guarantee payments with respect to any guarantee by
the Guarantor of the debt securities of any subsidiary of the Guarantor
(including Other Guarantees) if such guarantee ranks pari passu with or junior
in right of payment to the Debentures (other than (a) dividends or distributions
in shares of or options, warrants or rights to subscribe for or purchase shares
of, common stock of the Guarantor, (b) any declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Capital
Securities Guarantee, (d) as a result of a reclassification of the Guarantor's
capital stock or the exchange or the conversion of one class or series of the
Guarantor's capital stock for another class or series of the Guarantor's capital
stock, (e) the purchase of fractional interests in shares of the Guarantor's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, and (f) purchases of common
stock related to the issuance of common stock or rights under any of the
Guarantor's benefit plans for its directors, officers or employees or any of the
Guarantor's dividend reinvestment plans) if at such time (i) there shall have
occurred any event of which the Guarantor has actual knowledge that (a) is, or
with the giving of notice or the lapse of time, or both, would be an Event of
Default and (b) in respect of which the Guarantor shall not have taken
reasonable steps to cure, (ii) if such Debentures are held by the Property
Trustee, the Guarantor shall be in default with respect to its payment of any
obligations under this Series B Capital Securities Guarantee or (iii) the
Guarantor shall have given notice of its election of the exercise of its right
to extend the interest payment period pursuant to Section 16.01 of the Indenture
and any such extension shall be continuing.
SECTION 6.2 Ranking
-------
This Series B Capital Securities Guarantee will constitute an
unsecured obligation of the Guarantor and will rank (i) subordinate and junior
in right of payment to all Senior Indebtedness (as defined in the Indenture) in
the same manner that the Debentures are subordinated to all Senior Indebtedness
pursuant to the Indenture (except as indicated below), it being understood that
the terms of Article XV of the Indenture shall apply to the obligations of the
Guarantor under this Series B Capital Securities Guarantee as if (x) such
Article XV were set forth herein in full and (y) such obligations were
substituted for the term "Securities" appearing in such Article XV, except that
with respect to Section 15.03 of the Indenture only, the term "Senior
Indebtedness" shall mean all liabilities of the Guarantor, whether or not for
money borrowed (other than obligations in respect of Other Guarantees), (ii)
pari passu with the most senior preferred or preference stock now or hereafter
issued by the Guarantor and with any Other Guarantee (as defined herein) and any
Other Common Securities Guarantee and any guarantee now or hereafter entered
into by the Guarantor in respect of any preferred or preference stock of any
Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination
-----------
This Series B Capital Securities Guarantee shall terminate (i)
upon full payment of the Redemption Price (as defined in the Declaration) of all
Series B Capital Securities, or (ii) upon liquidation of the Issuer, the full
payment of the amounts payable in accordance with the Declaration or the
distribution of the Debentures to all of the Holders. Notwithstanding the
foregoing, this Series B Capital Securities Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any Holder
must restore payment of any sums paid under the Series B Capital Securities or
under this Series B Capital Securities Guarantee.
ARTICLE VIII
COMPENSATION AND EXPENSES OF
CAPITAL SECURITIES GUARANTEE TRUSTEE
SECTION 8.1 Compensation and Expenses of Capital Securities Guarantee
Trustee
---------------------------------------------------------
The Guarantor covenants and agrees to pay to the Capital
Securities Guarantee Trustee from time to time, and the Capital Securities
Guarantee Trustee shall be entitled to, such compensation as shall be agreed to
in writing between the Guarantor and the Capital Securities Guarantee Trustee
(which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust), and the Guarantor will pay or
reimburse the Capital Securities Guarantee Trustee upon its request for all
reasonable expenses, disbursements and advances incurred by or made by the
Capital Securities Guarantee Trustee in accordance with any of the provisions of
this Capital Securities Guarantee (including the reasonable compensation and the
expenses and disbursements of its counsel and of all persons not regularly in
its employ) except any such expense, disbursement or advance as may arise from
its negligence or bad faith. The Guarantor also covenants to indemnify each of
the Capital Securities Guarantee Trustee (and its officers, agents, directors
and employees) for, and to hold it harmless against, any and all loss, damage,
claim, liability or expense including taxes (other than taxes based on the
income of the Capital Securities Guarantee Trustee) incurred without negligence
or bad faith on the part of the Capital Securities Guarantee Trustee and arising
out of or in connection with the acceptance or administration of this guarantee,
including the costs and expenses of defending itself against any claim or
liability in the premises. The obligations of the Guarantor under this Article
VIII to compensate and indemnify the Capital Securities Guarantee Trustee and to
pay or reimburse the Capital Securities Guarantee Trustee for expenses,
disbursements and advances shall be secured by a lien prior to that of the
Series B Capital Securities upon all property and funds held or collected by the
Capital Securities Guarantee Trustee as such, except funds held in trust for the
benefit of the holders of particular Series B Capital Securities.
The provisions of this Article shall survive the termination
of this Capital Securities Guarantee.
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 Exculpation
-----------
(a) No Indemnified Person shall be liable, responsible or
accountable in damages or otherwise to the Guarantor or any Covered Person for
any loss, damage or claim incurred by reason of any act or omission performed or
omitted by such Indemnified Person in good faith in accordance with this Series
B Capital Securities Guarantee and in a manner that such Indemnified Person
reasonably believed to be within the scope of the authority conferred on such
Indemnified Person by this Series B Capital Securities Guarantee or by law,
except that an Indemnified Person shall be liable for any such loss, damage or
claim incurred by reason of such Indemnified Person's negligence or willful
misconduct with respect to such acts or omissions.
(b) An Indemnified Person shall be fully protected in relying
in good faith upon the records of the Guarantor and upon such information,
opinions, reports or statements presented to the Guarantor by any Person as to
matters the Indemnified Person reasonably believes are within such other
Person's professional or expert competence including information, opinions,
reports or statements as to the value and amount of the assets, liabilities,
profits, losses, or any other facts pertinent to the existence and amount of
assets from which Distributions to Holders of Series B Capital Securities might
properly be paid.
SECTION 9.2 Indemnification
---------------
The Guarantor agrees to indemnify each Indemnified Person for,
and to hold each Indemnified Person harmless against, any and all loss,
liability, damage, claim or expense incurred without negligence or bad faith on
its part, arising out of or in connection with the acceptance or administration
of the trust or trusts hereunder, including the costs and expenses (including
reasonable legal fees and expenses) of defending itself against, or
investigating, any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The obligation to
indemnify as set forth in this Section 9.2 shall survive the termination of this
Series B Capital Securities Guarantee.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Successors and Assigns
----------------------
All guarantees and agreements contained in this Series B
Capital Securities Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Guarantor and shall inure to the benefit of
the Holders of the Series B Capital Securities then outstanding.
SECTION 10.2 Amendments
----------
Except with respect to any changes that do not materially
adversely affect the rights of Holders (in which case no consent of Holders will
be required), this Series B Capital Securities Guarantee may only be amended
with the prior approval of the Holders of a Majority in Liquidation Amount of
the Series B Capital Securities (including the stated amount that would be paid
on redemption, liquidation or otherwise, plus accrued and unpaid Distributions
to the date upon which the voting percentages are determined). The provisions of
the Declaration with respect to consents to amendments (whether at a meeting or
otherwise) shall apply to the giving of such approval.
SECTION 10.3 Notices
-------
All notices provided for in this Series B Capital Securities
Guarantee shall be in writing, duly signed by the party giving such notice, and
shall be delivered, telecopied or mailed by first class mail, as follows:
(a) If given to the Issuer, in care of the Administrators at
the Issuer's mailing address set forth below (or such other address as the
Issuer may give notice of to the Holders and the Capital Securities Guarantee
Trustee):
ALBANK Capital Trust I
c/o ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207
Attention: Freling H. Smith
Telecopy: (518) 445-2140
(b) If given to the Capital Securities Guarantee Trustee, at
the Capital Securities Guarantee Trustee's mailing address set forth below (or
such other address as the Capital Securities Guarantee Trustee may give notice
of to the Holders):
The Chase Manhattan Bank
450 West 33rd Street
New York, NY 10001
Attention: Corporate Trustee
Administration Department
Telecopy: (212) 946-8159/8160
(c) If given to the Guarantor, at the Guarantor's mailing
address set forth below (or such other address as the Guarantor may give notice
of to the Holders and the Capital Securities Guarantee Trustee):
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207
Attention: Freling H. Smith
Telecopy: (518) 445-2140
(d) If given to any Holder, at the address set forth
on the books and records of the Issuer.
All such notices shall be deemed to have been given when
received in person, telecopied with receipt confirmed, or mailed by first class
mail, postage prepaid except that if a notice or other document is refused
delivery or cannot be delivered because of a changed address of which no notice
was given, such notice or other document shall be deemed to have been delivered
on the date of such refusal or inability to deliver.
SECTION 10.4 Benefit
This Series B Capital Securities Guarantee is solely for the
benefit of the Holders and, subject to Section 3.1(a), is not separately
transferable from the Series B Capital Securities.
SECTION 10.5 Governing Law
THIS SERIES B CAPITAL SECURITIES GUARANTEE SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
<PAGE>
THIS SERIES B CAPITAL SECURITIES GUARANTEE is executed as of the day and year
first above written.
ALBANK FINANCIAL CORPORATION,
as Guarantor
By: /s/ Richard J. Heller
Name: Richard J. Heller
Title: Executive Vice President
and Chief Financial Officer
The Chase Manhattan Bank, as Capital
Securities Guarantee Trustee
By: /s/ Anne G. Brenner
Name: Anne G. Brenner
Title: Vice President
81022
<PAGE>
ALBANK
Financial Corporation
LOGO
Summary Annual Report 1997
This year, in an attempt to make our Annual Report easier to read, we are
presenting it in two segments. This "Summary Annual Report" contains what we
believe is a concise overview of 1997 results and our five-year history. My
message to shareholders is also included. More detailed financial information is
included in the "Annual Report Supplement", including full consolidated
financial statements and footnotes as well as management's discussion and
analysis. Any comments you may have on this year's Annual Report format are
welcome.
/s/ Herbert G. Chorbajian
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
ALBANK Financial Corporation is the holding company for ALBANK, FSB, a federally
chartered savings bank founded in 1820, and ALBANK Commercial, a New York State
chartered commercial bank formed in 1997. With headquarters in Albany, New
York's capital city, the Banks and a brokerage and insurance subsidiary, Alvest
Financial Services, Inc., offer a wide range of financial products and services
through a branch network of 109 offices in upstate New York, western
Massachusetts and Vermont.
Contents
1 Financial Highlights
2 Five-Year Selected Financial Data
4 Letter to Shareholders
10 Statement of Management's Responsibility
11 Independent Auditors' Report
12 Consolidated Statements of Earnings
13 Consolidated Statements of Financial Condition
14 Consolidated Statements of Changes in Stockholders' Equity
15 Consolidated Statements of Cash Flows
16 Directors and Officers
IBC Corporate Information
<TABLE>
Financial Highlights
<CAPTION>
(Dollars in thousands, except per share data)
December 31, 1997 1996
<S> <C> <C>
For the Year Ended Net income $ 43,424 26,207
Net interest income 136,746 125,641
Basic earnings per share 3.41 1.99
Diluted earnings per share 3.17 1.87
Core net income <F1> 37,139 32,584
Basic earnings per share
based on core net income <F1> 2.91 2.48
Diluted earnings per share
based on core net income <F1> 2.71 2.32
At Year End Total assets $4,083,097 3,506,136
Loans receivable 2,856,049 2,559,649
Deposits 3,483,791 3,013,129
Stockholders' equity 359,613 319,125
Book value per share 27.86 24.72
Tangible book value per share 21.64 21.35
Significant
Ratios Return on average stockholders' equity ("ROE") 13.03% 8.20%
for the Year Return on average assets ("ROA") 1.19 0.77
ROE based on core net income <F1> 11.14 10.20
ROA based on core net income <F1> 1.02 0.96
Net interest spread 3.51 3.52
Net interest margin 3.96 3.91
Stockholders' equity to total assets (at year end) 8.81 9.10
Efficiency ratio <F2> 50.78 54.32
Asset Quality
Ratios Nonperforming loans to loans receivable 1.11% 1.16%
at Year End Nonperforming assets to total assets 0.88 0.96
Allowance for loan losses to:
Loans receivable 1.02 0.94
Nonperforming loans 91.52 80.88
<FN>
<F1> Core net income for 1997 excludes a tax benefit that resulted from a
corporate realignment and the after-tax effect of a partial recovery of a
1995 investment write-off. Core net income for 1996 excludes the after-tax
effect of a special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF").
<F2> The efficiency ratio is calculated by dividing core noninterest expense by
net interest income plus core noninterest income. In addition to noncore
items, noninterest expense excludes capital securities expense, goodwill
amortization and foreclosure related costs, while noninterest income
excludes securities gains/losses and foreclosure related income.
</FN>
</TABLE>
<TABLE>
Five-Year Selected Financial Data
<CAPTION>
(Dollars in thousands, except per share data)
December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data at Year End
Total assets $4,083,097 3,506,136 2,970,170 2,963,843 2,773,223
Loans receivable 2,856,049 2,559,649 1,939,384 1,783,797 1,540,464
Securities available for sale 768,517 617,943 656,784 167,024 51,256
Investment securities 94,971 116,322 160,957 805,850 962,204
Deposits 3,483,791 3,013,129 2,558,288 2,541,962 2,381,714
Borrowed funds 88,808 72,407 1,290 15,300 4,200
Total stockholders' equity 359,613 319,125 323,182 316,789 313,283
Selected Operating Data for the Year
Interest income $ 269,176 248,526 212,502 186,804 183,986
Interest expense 132,430 122,885 104,015 82,092 86,416
Net interest income 136,746 125,641 108,487 104,712 97,570
Provision for loan losses 7,200 5,775 4,500 4,500 4,200
Net interest income after provision for loan losses 129,546 119,866 103,987 100,212 93,370
Net security transactions 476 8 (1,198) 14 130
Other noninterest income 13,790 12,146 10,646 10,077 9,905
Noninterest expense 84,390 90,303 65,804 61,833 59,718
Income before income taxes and cumulative
net effect of changes in accounting principles 59,422 41,717 47,631 48,470 43,687
Income tax expense 15,998 15,510 18,348 19,898 18,289
Income before cumulative net effect
of changes in accounting principles 43,424 26,207 29,283 28,572 25,398
Cumulative net effect of
changes in accounting principles -- -- -- -- 37
Net income $ 43,424 26,207 29,283 28,572 25,435
Earnings per share:
Basic 3.41 1.99 2.08 1.90 1.55
Diluted 3.17 1.87 1.96 1.79 1.47
Other Selected Financial Data
Book value per share $ 27.86 24.72 23.37 21.27 19.48
Tangible book value per share 21.64 21.35 22.05 19.98 19.15
Loan originations 682,208 638,423 459,198 556,785 407,125
Return on average stockholders' equity ("ROE") 13.03% 8.20% 9.09% 9.11% 8.23%
Return on average assets ("ROA") 1.19 0.77 0.99 1.02 0.92
Stockholders' equity to total assets 8.81 9.10 10.88 10.69 11.30
Net interest spread 3.51 3.52 3.40 3.49 3.28
Net interest margin 3.96 3.91 3.84 3.87 3.69
Efficiency ratio 50.78 54.32 52.91 51.99 53.97
Nonperforming loans to loans receivable 1.11 1.16 1.19 1.14 1.49
Nonperforming assets to total assets 0.88 0.96 0.91 0.81 0.99
Allowance for loan losses to:
Loans receivable 1.02 0.94 0.82 0.87 0.84
Nonperforming loans 91.52 80.88 68.88 76.39 56.67
Core net income <F1> $ 37,139 32,584 30,013 28,572 25,435
Earnings per share based on core net income: <F1>
Basic 2.91 2.48 2.14 1.90 1.55
Diluted 2.71 2.32 2.01 1.79 1.47
ROE based on core net income <F1> 11.14% 10.20% 9.32% 9.11% 8.23%
ROA based on core net income <F1> 1.02 0.96 1.01 1.02 0.92
Noninterest expense to average assets <F2> 2.24 2.36 2.22 2.20 2.17
Noninterest expense less other noninterest
income to average assets <F2> 1.86 2.00 1.86 1.84 1.81
<FN>
<F1> Core net income excludes for 1997, a $6.0 million tax benefit that resulted
from a corporate realignment and the after-tax recovery of $0.3 million
related to the 1995 Nationar write-off; for 1996, the after-tax effect of
the $6.4 million special assessment to recapitalize the SAIF; and, for
1995, the after-tax effect of a $0.7 million write-off of the capital
investment in Nationar.
<F2> Noninterest expense excludes the 1997 capital securities expense of $2.7
million and the 1996 pretax SAIF special assessment of $10.4 million.
</FN>
</TABLE>
An investment in ALBANK stock at inception on April 1, 1992, has grown 517%.
/line graph of ALBANK prices vs. S&P 500/
ALBANK
April 1, 1992 $8.33
December 31, 1997 $51.44
S&P 500 Composite Index (excluding reinvestment of dividends)
Results
To Our Shareholders
Last year was the fifth consecutive year in which ALBANK Financial achieved
record core earnings. It was a busy and rewarding year on nearly all fronts. We
turned in an outstanding financial performance while maintaining asset quality.
At the same time, we completed the purchase of 35 branch offices from KeyBank
which brought our assets over the $4 billion mark; we opened 3 new branches and
improved the location of another office through a short distance relocation; we
provided our customers with a new debit card and new cash management services;
and we continued to build and strengthen our human and technical resources. The
market appears to have recognized our accomplishments. As the chart on the
preceding page shows, ALBANK's share price has risen steadily since April 1992,
reaching a closing high of $51.44 at the end of 1997 -- that is an increase of
517% or almost 3.7x the increase in the S&P 500 Index over the same time period.
Looking at the price rise from another perspective, an initial investment in the
shares of ALBANK, including the reinvestment of dividends, has provided an
annualized total return of 39% compared with 19% for the S&P 500 Index through
year-end 1997.
Core Net Income
(In millions)
1993 $25.4
1994 $28.6
1995 $30.0
1996 $32.6
1997 $37.1
Financial Summary
Our Company's 1997 diluted earnings per share based on
core net income rose 17% to an all-time high of $2.71 compared with $2.32 that
we earned in 1996. Basic earnings per share from core net income were $2.91 and
$2.48 for 1997 and 1996, respectively. Core net income for 1997 was $37.1
million, up 14% from the $32.6 million earned in 1996. Core net income for 1997
excludes a tax benefit of approximately $6.0 million, or $0.44 per diluted
share, that resulted from a corporate realignment completed in the fourth
quarter and the after-tax recovery of $0.3 million, or $0.02 per diluted share,
related to our 1995 Nationar investment write-off. Core net income in 1996
excludes ALBANK's share of the one-time Savings Association Insurance Fund
("SAIF") special assessment that the Federal Deposit Insurance Corporation
levied against all SAIF-insured institutions. The 1996 SAIF charge amounted to
$6.4 million after tax, or $0.45 per diluted share ($10.4 million pretax).
Diluted earnings per share and net income including these items were $3.17 and
$43.4 million, respectively, in 1997, and $1.87 and $26.2 million, respectively,
in 1996. Basic earnings per share were $3.41 in 1997 compared with $1.99 in
1996.
The earnings per share stated in the preceding paragraph, as well as through out
this Annual Report, conform to a new Financial Accounting Standard which became
effective last December. The calculation of diluted earnings per share takes
into account the weighted-average number of common shares outstanding plus the
increase in shares that would result from the exercise of all in-the-money
common stock options. The calculation of basic earnings per share takes into
account only the actual weighted-average number of common shares outstanding.
Return on average shareholders' equity in 1997 based on core net income was
11.14% compared with 10.20% in 1996; core return on average assets for the year
was 1.02% compared with 0.96% in 1996. Book value per share at December 31,
1997, was $27.86, up from $24.72 a year ago, an increase of 13%. Shareholders'
equity was $359.6 million at year end versus $319.1 million at year-end 1996.
Equity as a percentage of total assets at year end was 8.81% compared with 9.10%
at December 31, 1996.
In 1996, we introduced a new measure of financial
performance when we began reporting cash earnings. This concept is receiving
increasing attention from financial analysts and institutional investors. Cash
net income, which in our case is core net income plus amortization of goodwill
and costs associated with certain stock-related employee benefit plans, also
reached a new high last year. Earnings per diluted share based on cash net
income in 1997 rose 15% to a record $3.10, up from the $2.69 that we earned in
1996; cash net income rose 12% to $42.5 million from $37.9 million in 1996. The
return on tangible equity based on cash net income was 14.87%, up from 13.49% in
1996; cash return on average tangible assets in 1997 was 1.18% compared with
1.13% the prior year.
At December 31, 1997, nonperforming assets totaled $35.8 million, or 0.88% of
total assets; comparable figures for 1996 were $33.8 million and 0.96%.
Nonperforming loans amounted to $31.8 million, or 1.11% of loans receivable; the
1996 figure was $29.8 million, or 1.16% of loans receivable. At year end, loan
loss reserves were equal to 92% of nonperforming loans, up from 81% at December
31, 1996.
Diluted Core Earnings Per Share
1993 $1.47
1994 $1.79
1995 $2.01
1996 $2.32
1997 $2.71
Return on Equity
Based on Core Net Income
1993 8.23%
1994 9.11%
1995 9.32%
1996 10.20%
1997 11.14%
Expansion
Growth -- Internal and External
/picture of New York, Massachusetts, and Vermont with counties in which
ALBANK has branches/
The ALBANK market: in upstate New York, 27 counties from Rockland in the south
to the Canadian border and west from the Capital District to Syracuse and
Binghamton; in western Massachusetts, 2 counties encompassing the greater
Springfield area; in Vermont, 5 counties stretching from Rutland to Burlington
and east to the New Hampshire border.
During the past year, the number of ALBANK branch offices increased from 71 to
109. All of this growth was in New York State with the largest share coming from
the KeyBank purchase, which we completed in November. In order to retain the
public funds that were on deposit in the KeyBank offices, we formed a
state-chartered commercial bank, ALBANK Commercial, which purchased and now
operates these offices. With the formation of ALBANK Commercial, we took an
important step toward becoming more bank-like. The 35 offices with $541 million
in deposits bolstered ALBANK's presence in the northern part of the State as
well as the greater Hudson Valley, and gave us a new four-county market
presence centered in Binghamton. In January of this year, we further
strengthened our Hudson Valley franchise when we purchased two branch offices
from First Union National Bank. We expect to acquire a third office from First
Union later this year. Together, the three offices have approximately $33
million in deposits.
We believe that there is a good likelihood that there will be additional
opportunities within our market for acquisitions of other financial institutions
as well as for branch purchases. The KeyBank branch purchase was our sixth and
largest acquisition since 1992. Such external growth in or adjacent to our
existing markets remains an essential element in our longer-term strategy. We do
have, however, one concern: competition in the acquisition arena is fierce, and
prices could be driven to what we would consider prohibitively high levels.
Internally during the past year, we opened
corporate headquarters for ALBANK Commercial in downtown Albany, while
ALBANK,FSB opened a new full-service supermarket branch and a new traditional
freestanding branch, both in the Capital District. While we continue to believe
acquisitions offer us the best avenue for growth, we will continue to
selectively consider de novo branching opportunities.
We also had good
internal growth on the asset side of the balance sheet. Despite keen competition
for quality credits from banks and nonbanks, loan originations and purchases in
1997 rose to $682 million, up 7% from $638 million in 1996. The record level of
new bookings propelled the total loan portfolio to nearly $2.9 billion at year
end, up 12% from year-end 1996. We are committed to becoming more bank-like, to
move beyond the traditional thrift balance sheet with its reliance on
residential mortgage loans to an improved mix of assets and liabilities -- a
balance sheet that includes public funds, more lower-cost core deposits and
heavier asset concentrations in consumer and commercial credits. Consumer loans,
including home equity loans, and commercial loans at year end totaled $695
million and made up 24% of total loans.
While reporting on our lending activity,
it is appropriate to mention the status of our consent decree which we entered
into last August with the U.S. Justice Department. The Justice Department had
alleged that ALBANK's out-of-market mortgage loan purchasing policies violated
fair lending laws. We maintained, and still do, that the policies did not
violate any law, but we decided to avoid what certainly would have been a
distracting and expensive legal confrontation. In the consent decree, ALBANK
agreed to make $55 million in discounted mortgage loans and to provide financial
support for homebuyer education programs in designated neighborhoods located in
seven Connecticut cities and southern Westchester County in New York. We are
pleased with the progress we have made so far in implementing the provisions of
the decree and will continue to discharge our obligations thereunder. ALBANK has
always recognized the challenges and demands of assuring fair lending and
Community Reinvestment Act compliance. We expect to devote substantive
attention to maintaining high standards in this regard and to addressing related
regulatory concerns.
Under the heading of internal growth, it is also
appropriate to comment on new and enhanced product offerings. Last year we
introduced a new debit card which enables our bank customers direct access at
the point of sale to their checking accounts. Our commercial customers now enjoy
improved cash management services. Using their office PC, they can track and
transfer funds easier and faster, and take advantage of features like a zero
balance account, access to ACH facilities and on-line account reconciliation.
New product-support development has given us upgraded loan origination and
tracking software, which, among other features, generates loan documentation at
the branch office level, greatly improving our loan turnaround time. Finally,
speaking of technology driven product development, I would like to invite you to
visit ALBANK's new website which is currently under development at
www.albank.com.
In 1992, its first year as a publicly owned company, ALBANK had a branch network
of 38 offices in upstate New York. Today, after five transactions involving the
purchase of banking offices from other financial institutions, one bank
acquisition and de novo branching, the ALBANK network includes 109 offices in
three states.
/picture of two banks/
38 offices in 1992.
109 offices in 1997
Capital Management
We have continued to employ three principal capital management tools: stock
repurchases, regular quarterly dividends and leveraged acquisitions. Since 1992,
we have invested $113.8 million in acquiring 5.3 million shares of ALBANK common
stock. While we were not as active repurchasing our stock last year as in
previous years, repurchases remain a viable option which we will continue to
consider on a regular basis going forward. We did increase the quarterly
dividend last October, our fourth increase of 20% or more in the regular cash
distribution since we began paying a dividend in 1994. All of the acquisitions
we have completed since 1992 were fully leveraged. That is, we paid cash for
them and did not issue any new equity to finance the transactions.
Outlook
The Directors' Table
Henry M. Elliot, Jr., who retired from our Board of
Directors in January 1998, was an ALBANK Director for 21 years. He was a former
District and Agency Manager for the Equitable Life Assurance Society where he
had achieved outstanding success in building and managing agencies that were
consistently top producers. His background and experience were a great help to
the Bank as it began to offer new financial products and services.
The Board also elected a new Director in 1997. John J. Nigro is the President of
Nigro Companies, an Albany-based real estate development and management concern.
Nigro Companies is a specialist in commercial real estate development, primarily
in upstate New York. Mr. Nigro brings to our Board a wealth of business insight
and a strong community presence.
Stockholders' Equity (In millions, at year end)
1993 $313
1994 $317
1995 $323
1996 $319
1997 $360
/picture of Herbert G. Chorbajian/
Future Outlook
Sometime ago we
started reviewing our computer information
systems in anticipation of the arrival of the year 2000. Much has been written
about the potential chaos that could occur if a computer program failed to
process properly a date that included the year "00". Obviously, data processing
in the financial industry is heavily dependent on dates, and the regulatory
authorities have mandated procedures to insure that banks thoroughly examine all
their critical software. Our 1996-97 information systems and technology
investment, which included the purchase of new hardware and software, has put us
in a good position to meet these requirements. The review and analysis, however,
will still take a substantial amount of time and effort from our staff and
information managers. In addition, we have designated a special senior
management team with the responsibility to monitor our progress. We will
complete this task well in advance of the year 2000.
Nineteen ninety-eight will
no doubt confront us with new and different challenges as we pursue our efforts
to build our company and bring added value to your investment in ALBANK
Financial. Even before the year began, we were confronted with two
interconnected issues, albeit ones we have encountered before. During the fourth
quarter of 1997, the relatively stable interest rate environment that we had
enjoyed for the past two and a half years began to change. Rates, led by
long-term rates, began to decline. The 30-year Treasury bond eventually reached
a historic low in January of this year. This has led to a flattened yield curve
reflecting a much narrower spread between short- and long-term rates. The
combined effect of lower rates and a flatter yield curve could result in
increased refinancing in the Bank's mortgage loan portfolio. If this does
happen, our interest margin will come under some pressure. Lower rates and a
leveling yield curve could also make internal asset growth more difficult. These
are, however, challenges that we have successfully met in the past, and I am
confident we will do so again. Improving our asset/liability mix by continuing
to become more bank-like, successfully managing our interest spreads by reducing
pricing on the liability side of the balance sheet to counterbalance potentially
lower asset yields, building noninterest income and continued noninterest
expense control are the keys to achieving another winning year.
/s/ Herbert G. Chorbajian
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
February 11, 1998
Net Interest Margin
1993 3.69%
1994 3.87%
1995 3.84%
1996 3.91%
1997 3.96%
Return on Assets
Based on Core Net Income
1993 0.92%
1994 1.02%
1995 1.01%
1996 0.96%
1997 1.02%
Statement of Management's Responsibility
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
To Our Stockholders:
The consolidated financial statements and the related financial information in
this 1997 Summary Annual Report and the 1997 Annual Report Supplement were
prepared by the management of ALBANK Financial Corporation in accordance with
generally accepted accounting principles and, where appropriate, reflect
management's best estimates and judgment. Management is responsible for the
integrity, objectivity, consistency and fair presentation of such consolidated
financial statements and financial information.
In order to fulfill its
responsibility, management relies in part on a system of internal accounting
control which has been designed to safeguard the Company's assets from material
loss or misuse and to ensure that transactions are properly authorized and
recorded in its financial records. An internal auditing program monitors
compliance with established procedures and controls to provide assurance that
the system of internal accounting control is functioning in a proper manner.
There are limits inherent in all systems of internal control based on the
recognition that the cost of such systems should not exceed the benefits to be
derived. Management believes the Company's system of internal accounting control
provides reasonable assurance that its assets are safeguarded and that its
financial records are reliable.
The consolidated financial statements have been
audited by KPMG Peat Marwick LLP, independent public accountants. Their
appointment was ratified by the stockholders of ALBANK Financial Corporation.
Their examination provides an objective assessment of the degree to which the
Company's management has met its responsibility for financial reporting. The
opinion of the independent public accountants on the consolidated financial
statements is based on auditing procedures which include reviewing the internal
control structure to determine the timing and scope of audit procedures and
performing selected tests of transactions and records as they deem appropriate.
Their auditing procedures are designed to provide a reasonable level of
assurance that the consolidated financial statements are fairly presented in all
material respects.
The Company's internal auditor and independent auditors have direct access to
the Audit Committee of the Board of Directors. This Committee, which is composed
entirely of outside directors, meets periodically with management, the internal
auditor and the independent auditors to gain assurance that the financial
accounting and audit process are properly conducted.
/s/ Herbert G. Chorbajian
Herbert G. Chorbajian
Chairman of the Board, President and Chief Executive Officer
/s/ Richard J. Heller
Richard J. Heller
Executive Vice President and Chief Financial Officer
Independent Auditors' Report
KPMG Peat Marwick LLP
Certified Public Accountants
515 Broadway
Albany, NY 12207
To the Board of Directors and Stockholders
ALBANK Financial Corporation and Subsidiaries:
We have audited, in accordance with generally
accepted auditing standards, the consolidated statements of financial condition
of ALBANK Financial Corporation and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 (not presented herein), and in our report dated
January 30, 1998, we expressed an unqualified opinion on those consolidated
financial statements.
In our opinion, the information set forth in the
accompanying consolidated condensed financial statements in the Summary Annual
Report is fairly stated, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
/s/ KPMG Peat Marwick LLP
February 11, 1998
<TABLE>
Consolidated Statements of Earnings
<CAPTION>
(In thousands, except per share data)
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Interest Income
Mortgage loans $173,296 155,914 125,228
Other loans 45,051 38,194 28,571
Securities available for sale 41,943 41,676 11,098
Investment securities 6,767 8,959 43,520
Federal funds sold 137 508 918
Securities purchased under agreement to resell 656 2,225 1,888
Stock in Federal Home Loan Bank 1,326 1,050 1,279
Total interest income 269,176 248,526 212,502
Interest Expense
Deposits and escrow accounts 125,526 120,006 103,810
Short-term borrowed funds and repurchase agreements 5,771 1,338 125
Long-term debt 1,133 1,541 80
Total interest expense 132,430 122,885 104,015
Net interest income 136,746 125,641 108,487
Provision for loan losses 7,200 5,775 4,500
Net interest income after provision for loan losses 129,546 119,866 103,987
Noninterest Income
Service charges on deposit accounts 7,130 5,556 5,046
Net security transactions 476 8 (1,198)
Brokerage and insurance commissions 2,108 2,049 1,621
Other 4,552 4,541 3,979
Total noninterest income 14,266 12,154 9,448
Noninterest Expense
Compensation and employee benefits 41,368 38,455 31,817
Occupancy, net 10,055 9,186 8,260
Furniture, fixtures and equipment 6,651 5,270 4,036
Federal deposit insurance premiums 1,412 4,331 5,152
Federal deposit insurance special SAIF assessment -- 10,397 --
Professional, legal and other fees 2,976 3,242 2,512
Telephone, postage and printing 4,694 4,393 4,062
Goodwill amortization 3,872 3,078 1,570
Capital securities expense 2,666 -- --
Other 10,696 11,951 8,395
Total noninterest expense 84,390 90,303 65,804
Income before income taxes 59,422 41,717 47,631
Income tax expense 15,998 15,510 18,348
Net income $ 43,424 26,207 29,283
Earnings per share:
Basic $ 3.41 1.99 2.08
Diluted 3.17 1.87 1.96
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
</TABLE>
<TABLE>
Consolidated Statements of Financial Condition
<CAPTION>
(Dollars in thousands, except per share data) December 31, 1997 1996
Assets
<S> <C> <C>
Cash and due from banks $ 97,389 68,883
Securities purchased under agreement to resell 75,000 --
Total cash and cash equivalents 172,389 68,883
Securities available for sale 768,517 617,943
Investment securities 94,971 116,322
Loans receivable 2,856,049 2,559,649
Less: allowance for loan losses 29,117 24,114
Loans receivable, net 2,826,932 2,535,535
Accrued interest receivable 27,837 27,092
Office premises and equipment, net 57,435 48,554
Stock in Federal Home Loan Bank, at cost 21,408 16,913
Real estate owned 3,966 4,012
Goodwill 80,281 43,482
Other assets 29,361 27,400
$4,083,097 3,506,136
Liabilities
Deposits $3,483,791 3,013,129
Escrow accounts 21,172 26,603
Accrued income taxes payable 8,289 3,938
Short-term borrowed funds and repurchase agreements 68,747 42,346
Long-term debt 20,061 30,061
Obligation under capital lease 4,542 4,646
Other liabilities 66,882 66,288
Total liabilities 3,673,484 3,187,011
Corporation-obligated manditorily redeemable capital securities of subsidiary trust 50,000 --
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock, $.01 par value. Authorized 25,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; 15,697,500 shares issued;
12,906,845 shares outstanding at December 31, 1997 and 12,910,763 at December 31, 1996 157 157
Additional paid-in capital 182,704 180,670
Retained earnings, substantially restricted 248,402 214,283
Treasury stock, at cost (2,790,655 shares at December 31, 1997 and 2,786,737
at December 31, 1996) (73,200) (71,235)
Net Unrealized gain on securities available for sale, net of tax 6,578 1,781
Common stock acquired by:
Employee stock ownership plan ("ESOP") (5,023) (6,279)
Bank recognition plan ("BRP") (5) (252)
Total stockholders' equity 359,613 319,125
$4,083,097 3,506,136
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
</TABLE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Net
Unrealized
Gain (Loss) Common Common
Additional on Securities Stock Stock
Common Paid-in Retained Treasury Available Acquired Acquired
(Dollars in thousands) Stock Capital Earnings Stock for Sale by ESOP by BRP Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $157 151,433 235,065 (58,218) (735) (8,791) (2,122) 316,789
Net income -- -- 29,283 -- -- -- -- 29,283
Purchase of treasury stock (898,053 shares) -- -- -- (24,233) -- -- -- (24,233)
Exercise of stock options -- -- (10) 70 -- -- -- 60
Tax benefits related to vested BRP stock
and stock options exercised -- 536 -- -- -- -- -- 536
Adjustment of securities
available for sale to market, net of tax -- -- -- -- 4,263 -- -- 4,263
Cash dividends declared -- -- (5,707) -- -- -- -- (5,707)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1995 157 151,969 258,631 (82,381) 3,528 (7,535) (1,187) 323,182
Net income -- -- 26,207 -- -- -- -- 26,207
Purchase of treasury stock (926,517 shares) -- -- -- (25,847) -- -- -- (25,847)
Exercise of stock options -- -- 275 745 -- -- -- 1,020
Tax benefits related to vested BRP stock
and stock options exercised -- 898 -- -- -- -- -- 898
Adjustment of securities available for sale
to market, net of tax -- -- -- -- (1,747) -- -- (1,747)
Cash dividends declared -- -- (6,779) -- -- -- -- (6,779)
Stock dividend declared -- 27,803 (64,051) 36,248 -- -- -- --
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1996 157 180,670 214,283 (71,235) 1,781 (6,279) (252) 319,125
Net income -- -- 43,424 -- -- -- -- 43,424
Purchase of treasury stock (154,468 shares) -- -- -- (5,057) -- -- -- (5,057)
Exercise of stock options -- -- (821) 3,092 -- -- -- 2,271
Tax benefits related to vested BRP stock
and stock options exercised -- 2,034 -- -- -- -- -- 2,034
Adjustment of securities available for sale
to market, net of tax -- -- -- -- 4,797 -- -- 4,797
Cash dividends declared -- -- (8,484) -- -- -- -- (8,484)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 247 247
Balance at December 31, 1997 $157 182,704 248,402 (73,200) 6,578 (5,023) (5) 359,613
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $ 43,424 26,207 29,283
Reconciliation of net income to net cash provided by operating activities:
Depreciation and lease amortization 6,799 5,385 3,962
Goodwill amortization 3,872 3,078 1,570
Amortization of capitalized costs related to the issuance of capital securities 27 -- --
Net amortization of premiums and accretion of discounts on securities 897 1,229 1,322
ESOP and BRP amortization 1,503 2,191 2,191
Net loss (gain) on security transactions (476) (8) 1,198
Net gain on sale of real estate owned (289) (383) (328)
Origination of loans receivable for sale (6,366) (22,631) (15,401)
Proceeds from sale of loans receivable 11,353 34,024 31,379
Provision for loan losses 7,200 5,775 4,500
Writedown of real estate owned 279 603 312
Net increase in accrued income taxes payable 6,385 277 2,632
Net decrease (increase) in accrued interest receivable (412) 2,814 (1,682)
Net increase in other assets (8,130) (619) (3,291)
Net increase (decrease) in other liabilities and obligation under capital lease (28) 18,692 (6,272)
Net cash provided by operating activities 66,038 76,634 51,375
Cash Flows from Investing Activities
Net cash provided (used) by acquisition activity 446,784 (61,439) 17,488
Proceeds from the sale of securities available for sale 15,019 22,985 --
Proceeds from the maturity or call of securities available for sale 237,738 154,445 90,008
Proceeds from the maturity or call of investment securities 71,691 70,538 173,465
Proceeds from the partial recovery of Nationar investment 453 -- --
Purchase of securities available for sale (396,110) (45,105) (79,902)
Purchase of investment securities (50,327) (25,678) (23,313)
Purchase of loans receivable (312,095) (229,342) (125,894)
Net decrease (increase) in loans receivable 53,444 (30,659) (55,387)
Redemption (purchase) of Federal Home Loan Bank stock (4,495) 2,912 (1,621)
Proceeds from the sale of real estate owned 4,944 6,950 5,648
Capital expenditures (9,558) (6,740) (9,882)
Net cash provided (used) by investing activities 57,488 (141,133) (9,390)
Cash Flows from Financing Activities
Net increase (decrease) in deposits (60,652) 20,530 (1,868)
Net increase (decrease) in escrow accounts (5,431) (8,465) 1,441
Net increase (decrease) in short-term borrowed funds and repurchase agreements 17,803 17,907 (12,010)
Proceeds from long-term debt -- 30,061 --
Repayment of long-term debt (10,000) -- (2,000)
Proceeds from issuance of capital securities 50,000 -- --
Purchase of treasury stock (5,057) (25,847) (24,233)
Dividends paid (8,117) (6,210) (5,565)
Cash proceeds from the exercise of stock options 1,434 404 60
Net cash provided (used) by financing activities (20,020) 28,380 (44,175)
Net increase (decrease) in cash and cash equivalents 103,506 (36,119) (2,190)
Cash and cash equivalents at beginning of year 68,883 105,002 107,192
Cash and cash equivalents at end of year $172,389 68,883 105,002
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest on deposits, escrows, short-term borrowed funds,
repurchase agreements and long-term debt $132,879 122,662 104,022
Income taxes 9,633 12,804 16,118
Supplemental schedule of noncash investing and financing activities:
Net reduction in loans resulting from transfers to real estate owned 4,908 5,941 5,710
Net unrealized gain (loss) on securities available for sale 8,110 (3,098) 7,251
Transfer of investment securities to securities available for sale -- -- 492,246
Tax benefits related to vested BRP stock and stock options exercised 2,034 898 536
Acquisition activity:
Fair value of noncash assets acquired 94,116 523,406 712
Fair value of liabilities assumed 540,900 461,967 18,200
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
</TABLE>
Directors and Officers
Board of Directors
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
William J. Barr
Retired Senior Vice President and Controller ALBANK,FSB
Henry M. Elliot, Jr.
Retired Agency Manager
Equitable Life Assurance Society of the United States Inc.
Karen R. Hitchcock, Ph.D.
President State University of New York at Albany
John E. Maloy, Sr.
President J.H. Maloy, Inc.
Francis L. McKone
President and Chief Executive Officer
Albany International Corp.
John J. Nigro
President Nigro Companies
Susan J. Stabile, Esq.
Professor of Law St. John's University School of Law
Anthony P. Tartaglia, M.D.
Professor of Medicine Albany Medical College
/picture of Board of Directors Nigro, Hitchcock, McKone, Tartaglia,
Elliot, Chorbajian, Stabile, Barr, Maloy/
Officers
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
Clifford M. Apgar
Executive Vice President Senior Credit Officer
Barry G. Blenis
Executive Vice President Operations and Strategic Planning
Richard J. Heller
Executive Vice President and Chief Financial Officer
Freling H. Smith, Esq.
Senior Vice President, Secretary and General Counsel
Frank J. Vaselewski
Senior Vice President Retail Banking
John J. Donnelly
Senior Vice President Chief Information Officer
Margaret F. Ludington
Senior Vice President Human Resources
Robert L. Meyer
Senior Vice President Retail Lending
Joseph P. Richardson
Senior Vice President Commercial Lending
Patrick J. Rielly
Senior Vice President Operations
Margaret J. Welch
Senior Vice President Branch Administration
Mary Jean Laraway
Vice President Corporate Services
James F. McDonald
Vice President Investment Officer
Edward C. Tremblay
Vice President and Auditor
Michael C. Walajtys
Vice President and Controller
Edward J. Grover
President ALBANK Commercial
Thomas C. Nachod
Senior Vice President ALBANK Commercial
Corporate Information
Stock Transfer Agent/Dividend Reinvestment Plan
Inquiries regarding stock transfer, lost certificates, changes in name/address
and/or Dividend Reinvestment Plan the should be directed to the stock transfer
agent by writing to:
ChaseMellon Shareholders Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 851-9677
Certain information requests and address changes may also be made through
ChaseMellon's website at www.chasemellon.com.
Investor Information
Shareholders, investors and analysts interested in
additional information may contact:
Richard J. Heller
Executive Vice President and Chief Financial Officer
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
Stock Listing
The Company's common stock trades on The Nasdaq Stock Market under the symbol
ALBK.
Stock Price
The table below shows the reported closing prices
of ALBANK common stock during the periods indicated in calendar 1997 and 1996.
<TABLE>
<CAPTION>
1997 Quarterly Stock Prices 1996 Quarterly Stock Prices
High Low Qtr. End High Low Qtr. End
<S> <C> <C> <C> <C> <C> <C>
First $37.50 $30.50 $36.38 $28.88 $22.92 $28.88
Second 41.00 34.00 39.50 30.63 26.38 26.38
Third 45.88 37.13 42.25 29.56 25.13 28.75
Fourth 51.44 42.25 51.44 32.81 27.38 31.38
</TABLE>
Annual Meeting of Shareholders
The Annual Meeting of the shareholders of ALBANK Financial Corporation will be
held on May 19,1998 at 10:00 AM at:
ALBANK Operations Center
833 Broadway Albany, NY 12207-2415
All shareholders are welcome to attend.
Annual Report on Form 10-K
A copy of ALBANK Financial Corporation's Annual Report on Form 10-K filed with
the Securities and Exchange Commission is available without charge by writing
to:
Freling H. Smith, Esq.
Senior Vice President, Secretary and General Counsel
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
LOGO ALBANK
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
(518) 445-2100
ALBANK
Financial
Corporation
LOGO
Annual
Report
Supplement
1997
The 1997 Annual Report is presented in two sections. Among other information,
the "Summary Annual Report" segment includes financial highlights, five-year
selected financial data, the letter to shareholders, the statement of
management's responsibility and quarterly stock price data. This "Annual Report
Supplement" segment contains management's discussion and analysis, the
independent auditors' report and consolidated financial statements including
footnotes.
Contents
1 Management's Discussion and Analysis
14 Independent Auditors' Report
15 Consolidated Statements of Earnings
16 Consolidated Statements of Financial Condition
17 Consolidated Statements of Changes in Stockholders' Equity
18 Consolidated Statements of Cash Flows
19 Notes to Consolidated Financial Statements
The 1997 Annual Report contains certain forward-looking statements
that by their nature involve inherent risks and uncertainties. Actual
results may differ materially from the results indicated by such statements.
For more information regarding inherent risks and uncertainties, see Item I of
the 1997 Annual Report on Form 10-K.
Management's Discussion and Analysis
General
ALBANK Financial Corporation ("ALBANK" or the "Company") was formed in 1991 as a
savings and loan holding company under Delaware law. On April 1, 1992, ALBANK
completed its public offering of 15,697,500 shares of common stock at $10.00 per
share, realizing net proceeds of $150.8 million after expenses and concurrently
acquired ALBANK, FSB as part of its conversion from a mutual to a stock form
savings bank. On October 10, 1997, the Company became a bank holding company
when it formed ALBANK Commercial, a newly chartered New York State commercial
bank.
ALBANK's business currently consists primarily of the business of its
constituent banks. As such, the Company's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations and borrowings, in various loan products
and investment securities. The Company's results of operations are dependent on
net interest income, provisions for loan losses, the levels of noninterest
income earned and noninterest expense incurred and the effect of income taxes.
The Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and principal and interest
payments on loans and investment securities. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
ALBANK, FSB is required to maintain minimum levels of liquid assets as
promulgated by its primary regulator, the Office of Thrift Supervision ("OTS").
This requirement, which may vary at the direction of the OTS depending on
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio of liquid assets to deposits and
short-term borrowings is currently 4%. At December 31, 1997 and 1996, ALBANK,
FSB's liquidity ratios were 25.2% and 23.7%, respectively.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. At December 31, 1997 and 1996, cash and cash
equivalents totaled $172.4 million and $68.9 million, respectively.
At the time of its conversion to stock form, ALBANK, FSB was required to
establish a liquidation account in an amount equal to its regulatory net worth
as of December 31, 1991. The amount of this liquidation account reduces to the
extent that eligible depositors' accounts are reduced. In the unlikely event of
a complete liquidation (and only in such an event), each eligible depositor
would be entitled to receive a distribution from the liquidation account before
any liquidation distribution could be made to common stockholders of the
Company.
Stockholders' equity of $359.6 million at December 31, 1997, represented a
capital-to-assets ratio of 8.81%. At year-end 1997, book value and tangible book
value per common share were $27.86 and $21.64, respectively. At December 31,
1997, ALBANK, FSB and ALBANK Commercial exceeded all of the capital requirements
of their respective regulators. ALBANK, FSB's ratios at December 31, 1997, were
as follows: tangible capital, 6.67%; core capital, 6.67%; Tier 1 risk-based
capital, 10.81%; and total risk-based capital, 11.91%. ALBANK Commercial's
ratios at year-end 1997 were: leverage capital, 7.91%; Tier 1 risk-based
capital, 14.95%; and total risked-based capital, 16.01%, respectively.
Among other things, OTS regulations provide that an institution, such as ALBANK,
FSB, that exceeds all capital requirements before and after a proposed capital
distribution could, after prior notice to but without the approval of the OTS,
make capital distributions during the calendar year in an amount that would
reduce by one half its "excess capital ratio" plus its net income for the
current calendar year. Under such limitation, ALBANK, FSB could declare
dividends to the holding company in 1998 of approximately $46 million plus an
amount equal to 1998 earnings. ALBANK Commercial is subject to dividend
limitations under New York Banking Law, including a requirement that prior
regulatory approval be obtained for dividends paid in any year that would exceed
ALBANK Commercial's net profits for such year combined with retained net profits
for the prior two years.
As one method of enhancing shareholder value, the Company instituted a stock
repurchase program in June 1992. In May 1996, the Board authorized a seventh
repurchase of the Company's outstanding shares of common stock under this
program. Through December 31, 1997, the Company had repurchased 5,298,715 shares
of stock and had remaining authorization to repurchase another 187,227 shares.
On February 27, 1996, the Board of Directors of the Company declared a 6-for-5
stock split effected as a 20% stock dividend. This stock dividend was paid April
1, 1996, to shareholders of record on March 15, 1996. By maintaining the
quarterly per share cash dividend at $0.12 following the stock dividend, the
Board effectively increased the dividend by 20%, the second such increase in as
many years. On November 25, 1996, the Company announced that its Board increased
the Company's quarterly cash dividend an additional 25% by initiating payment at
a quarterly rate of $0.15 per share commencing with the dividend paid on January
2, 1997. The Company further increased its quarterly dividend 20% on August 26,
1997, when its Board declared an $0.18 per share cash dividend, which was paid
on October 1, 1997.
The analyses of net interest income that are shown in the following two tables
are an integral part of the discussion of the results of operations for 1997,
1996 and 1995 that follows:
<TABLE>
Average Balance Sheets, Interest Rates and Interest Differential
<CAPTION>
Years Ended December 31,
1997 1996 1995
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans, net<F1> $2,159,981 173,296 8.02% $1,923,787 155,914 8.10% $1,586,878 125,228 7.89%
Other loans, net<F1> 487,462 45,051 9.24 411,602 38,194 9.28 296,479 28,571 9.64
Securities available
for sale 667,820 41,943 6.28 670,111 41,676 6.22 164,970 11,098 6.73
Investment securities 101,894 6,767 6.64 140,841 8,959 6.36 718,611 43,520 6.06
Federal funds sold 2,497 137 5.49 9,529 508 5.33 15,680 918 5.85
Securities purchased
under agreement to resell 11,140 656 5.89 38,115 2,225 5.84 30,247 1,888 6.24
Stock in Federal
Home Loan Bank 20,718 1,326 6.40 16,754 1,050 6.27 15,554 1,279 8.22
Total interest-earning
assets 3,451,512 269,176 7.80 3,210,739 248,526 7.74 2,828,419 212,502 7.51
Noninterest-earning assets 191,571 174,784 132,663
$3,643,083 $3,385,523 $2,961,082
Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
Deposits:
Savings accounts<F2> $ 822,727 23,691 2.88% $ 872,348 25,373 2.91% $ 909,019 26,544 2.92%
Transaction accounts<F3> 519,616 13,549 2.61 463,864 11,898 2.56 336,647 6,925 2.06
Certificate accounts 1,618,711 88,286 5.45 1,521,036 82,735 5.44 1,280,662 70,341 5.49
Short-term borrowed
funds and repurchase
agreements 103,306 5,771 5.59 25,337 1,338 5.28 1,898 125 6.59
Long-term debt 20,636 1,133 5.49 28,305 1,541 5.44 1,463 80 5.47
Total interest-bearing
liabilities 3,084,996 132,430 4.29 2,910,890 122,885 4.22 2,529,689 104,015 4.11
Demand deposits 115,814 83,634 53,935
Noninterest-bearing
liabilities 80,386 71,405 55,478
Total liabilities 3,281,196 3,065,929 2,639,102
Corporation-obligated
manditorily redeemable
capital securities of
subsidiary trust 28,630 -- --
Stockholders' equity 333,257 319,594 321,980
$3,643,083 $3,385,523 $2,961,082
Net interest income
and net interest spread $136,746 3.51% $125,641 3.52% $108,487 3.40%
Net interest-earning
assets and net interest
margin $ 366,516 3.96% $ 299,849 3.91%$ $ 298,730 3.84%
Interest-earning assets
to interest-bearing
liabilities 1.12x 1.10x 1.12x
Average balances are derived principally from average daily balances and include
nonaccruing loans. Tax-exempt securities income has not been calculated on a tax
equivalent basis. Interest on securities available for sale includes dividends
received on equity securities.
<FN>
<F1> Net of unearned discounts, premiums and related deferred loan fees and costs, where applicable.
<F2> Includes passbook, statement and interest-bearing escrow accounts.
<F3> Includes NOW, Super NOW, money market and interest-bearing demand deposit accounts.
</FN>
</TABLE>
<TABLE>
Analysis of Changes in Net Interest Income
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
Compared with Compared with
Year Ended December 31, 1996 Year Ended December 31, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
(In thousands) Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgage loans, net $18,965 (1,583) 17,382 27,224 3,462 30,686
Other loans, net 7,012 (155) 6,857 10,719 (1,096) 9,623
Securities available for sale (143) 410 267 31,478 (900) 30,578
Investment securities (2,572) 380 (2,192) (36,648) 2,087 (34,561)
Federal funds sold (386) 15 (371) (334) (76) (410)
Securities purchased under
agreement to resell (1,588) 19 (1,569) 465 (128) 337
Stock in Federal Home Loan Bank 254 22 276 93 (322) (229)
Total 21,542 (892) 20,650 32,997 3,027 36,024
Interest Expense
Savings accounts (1,431) (251) (1,682) (1,067) (104) (1,171)
Transaction accounts 1,451 200 1,651 3,008 1,965 4,973
Certificate accounts 5,326 225 5,551 13,081 (687) 12,394
Short-term borrowed funds and
repurchase agreements 4,352 81 4,433 1,243 (30) 1,213
Long-term debt (421) 13 (408) 1,461 -- 1,461
Total 9,277 268 9,545 17,726 1,144 18,870
Change in net interest income $12,265 (1,160) 11,105 15,271 1,883 17,154
Information in the above table is provided in each category with respect to (i)
changes attributable to changes in volume (change in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (change in rate multiplied
by prior volume) and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
</TABLE>
Results of Operations--1997 Compared With 1996
General
Net income for the year ended December 31, 1997, totaled $43.4 million, an
increase of $17.2 million (66%) from the $26.2 million recorded in 1996. Basic
earnings per share for 1997 were $3.41, up 71% from 1996's $1.99; 1997 diluted
earnings per share of $3.17 were 70% greater than the $1.87 recorded in 1996.
Return on average equity for 1997 was 13.03% compared with 8.20% in 1996. Return
on average assets totaled 1.19% in 1997 and 0.77% for 1996. Net income for 1997
included an approximate $6.0 million tax benefit that resulted from a corporate
realignment and a $0.3 million ($0.5 million pretax) recovery of a 1995
investment write-off. Net income for 1996 included a one-time Savings
Association Insurance Fund ("SAIF") special assessment of $6.4 million ($10.4
million before tax). Excluding these respective items, core net income for 1997
was $37.1 million, an increase of $4.5 million (14%) over the $32.6 million
recorded in 1996. Basic and diluted earnings per share based on 1997 core net
income were $2.91 and $2.71, respectively, each a 17% improvement over
comparable respective amounts of $2.48 and $2.32 recorded in 1996. Return on
average equity based on core net income was 11.14% in 1997 compared with 10.20%
in 1996. Core return on average assets for 1997 of 1.02% compared with 1996's
0.96%.
Cash net income, which is defined as core net income plus the amortization of
goodwill and costs associated with certain stock-related employee benefit plans,
are continuing to receive increased scrutiny from stock analysts as well as
institutional investors. Cash net income for 1997 amounted to $42.5 million, up
$4.6 million (12%) from the $37.9 million reported in 1996. Diluted earnings per
share based on cash earnings equaled $3.10, an increase of 15% from the $2.69
recorded for 1996. Cash return on average tangible equity (that is, average
stockholders' equity less unamortized goodwill) was 14.87% compared with 13.49%
in 1996. Return on average tangible assets (that is, average assets less
unamortized goodwill) amounted to 1.18% for 1997 compared with 1.13% for 1996.
On November 10, 1997, the Company purchased 35 New York State branch offices
from KeyBank. The offices, which are located in northern New York, the greater
Hudson Valley and the Binghamton area, had $540.9 million in deposits and $52.2
million in loans as of the closing date. The Company paid a 7% deposit premium
based on average deposits for a period prior to closing. This deposit premium
and certain other direct costs of the acquisition created accounting goodwill of
$40.6 million. Primarily in order to retain public deposits (which thrifts in
New York State are unable to accept), the Company merged the branches into a
newly formed subsidiary, ALBANK Commercial, a New York State chartered
commercial bank.
On January 3, 1996, ALBANK, FSB acquired all of the outstanding common stock of
Marble Financial Corporation of Rutland, Vermont for $18.00 per share in cash or
approximately $61 million in total consideration. On the date of closing, Marble
had consolidated assets and deposits of $396.2 million and $326.6 million,
respectively. An additional Vermont acquisition was completed on September 27,
1996, when the Company assumed the deposit liabilities and purchased loans owned
and serviced by six banking offices operated by the Green Mountain Bank of
Rutland, Vermont. This transaction included approximately $108 million in loans
and deposits. Both transactions were accounted for under the purchase method of
accounting and generated accounting goodwill of $20.1 million with respect to
the Marble acquisition and $8.2 million with respect to Green Mountain. The
banking offices from these Vermont acquisitions are currently operated as
ALBANK, FSB's Marble Division.
Interest Income
Total interest income of $269.2 million for the year ended December 31, 1997,
was up $20.7 million (8%) from 1996 as earning assets advanced $240.8 million
(7%) and the average yield earned rose 6 basis points (1%) to 7.80%. The
increase in average earning assets primarily reflected the growth in loans that
resulted from record 1997 loan originations and, secondarily, by the full year
impact of the Green Mountain branch acquisition and the Key branch acquisition
in November 1997.
Interest income on mortgage loans moved ahead $17.4 million (11%) to $173.3
million for 1997. The increase in average mortgage loans of $236.2 million (12%)
more than overcame an 8 basis point (1%) decline in the average rate earned to
8.02%. The increased average balance of mortgage loans was primarily
attributable to new loan originations. Over 70% of the 1997 loan originations
were comprised of residential mortgages, more than four-fifths of which were
adjustable-rate loans. Approximately one-sixth of the overall increase in the
average balance of mortgage loans was due to the aforementioned acquisitions.
Interest income from other loans rose $6.9 million (18%) above 1996 levels to
$45.1 million as increased average loan balances of $75.9 million (18%) were
slightly offset by a 4 basis point decline in portfolio yield to 9.24%. The
growth in average loans was driven mainly by an increase in average commercial
loans of $67.7 million (37%), about two-thirds of which came as a result of the
Green Mountain acquisition, and an $8.2 million increase in average consumer
loans that was generated primarily from acquisitions.
Interest income on securities available for sale for 1997 rose $0.3 million (1%)
to $41.9 million as a slight decrease in the average amount invested was more
than offset by a 6 basis point (1%) rise in the average rate earned. The average
balance of this investment category would have been approximately $120 million
lower for 1997 had it not been for the Key branch acquisition including the
Company's effort to prefund security purchases in anticipation of the closing
date.
Interest income on investment securities was $6.8 million for 1997, a decrease
of $2.2 million (24%) from 1996. The decrease was the net result of a $38.9
million (28%) decline in the average amount invested and a 28 basis point (4%)
increase in the average rate earned.
Declines in the average balances of federal funds sold and securities purchased
under agreement to resell of $7.0 million (74%) and $27.0 million (71%),
respectively, resulted in respective reductions in interest income of $0.4
million (73%) and $1.6 million (71%).
Earnings on stock in the Federal Home Loan Bank increased $0.3 million (26%) as
the cumulative result of a $4.0 million (24%) increase in the average amount
invested and a 13 basis point (2%) increase in the average rate earned.
Interest Expense
Total interest expense of $132.4 million for the year ended December 31, 1997,
was $9.5 million (8%) greater than the $122.9 million recorded for 1996 as a
$174.1 million (6%) increase in average interest-bearing liabilities combined
with a 7 basis point (2%) rise in the average rate paid to 4.29%. The increase
in average deposits of $103.8 million (4%) was the end product of acquired
balances in about equal proportion between the Green Mountain and Key branch
acquisitions, reduced by net deposit outflows. The net increase in average
borrowed funds of $70.3 million (131%) coupled with an increase in rate of 20
basis points (4%) resulted in increased interest expense of $4.0 million (140%).
Interest expense on savings accounts declined $1.7 million (7%) to $23.7 million
as decreases in average savings deposits of $49.6 million (6%) combined with a
decrease in the average rate paid of 3 basis points (1%). The decline in average
savings deposits occurred despite the addition of average balances of $13.5
million and $7.6 million from the Green Mountain and Key branch acquisitions,
respectively.
Growth in the average balance of transaction accounts of $55.8 million (12%) and
a rise in the average rate paid of 5 basis points (2%) resulted in an increase
in interest expense of $1.7 million (14%) to $13.5 million. The Green Mountain
and Key branch acquisitions increased average balances by $68.5 million, split
about equally from each acquisition.
Interest expense on certificate accounts rose $5.6 million (7%) to $88.3 million
while the average rate paid of 5.45% represented an increase of 1 basis point
over 1996. Balances acquired in the Green Mountain and Key branch acquisitions
accounted for about two-thirds of the $97.7 million (6%) increase in average
certificates outstanding.
Interest expense on short-term borrowed funds and repurchase agreements
increased $4.4 million (331%) to $5.8 million primarily as the result of an
approximate four-fold increase in average balances to $103.3 million. The
increase in average short-term borrowings of $78.0 million was split evenly
between repurchase agreements and other short-term borrowings and was incurred
primarily to finance the purchase of securities available for sale in
anticipation of the closing of the Key branch purchase. The average rate paid of
5.59% was 31 basis points (6%) higher than that of the previous year.
Interest expense on long-term debt fell $0.4 million (26%) to $1.1 million as
repayments reduced the average debt outstanding by $7.7 million (27%).
Net Interest Income
Net interest income for 1997 of $136.7 million represented an $11.1 million (9%)
increase over the previous year; this was a net result of a $20.7 million (8%)
rise in interest income and a $9.5 million (8%) increase in interest expense.
The increase in the total return on earning assets of 6 basis points was 1 basis
point less than the increase in the total average cost of interest-bearing
liabilities of 7 basis points. As a result, the net interest spread for 1997 of
3.51% was 1 basis point less than the prior year. Net interest-earning assets,
however, exceeded the previous year by $66.7 million (22%). Accordingly, the net
interest margin climbed 5 basis points (1%) over 1996 to finish the year at
3.96%.
Provision for Loan Losses
The provision for loan losses for the year ended December 31, 1997, was $7.2
million, an increase of $1.4 million (25%) over 1996. The increase reflected a
conscious effort to raise the level of the allowance for loan losses. At
year-end 1997, the allowance for loan losses totaled $29.1 million, a growth of
$5.0 million (21%) over year-end 1996. In addition to the provision for loan
losses, the allowance benefited from a $2.0 million addition that was made in
connection with the Key branch acquisition. Net chargeoffs for 1997 equaled $4.2
million compared with $8.9 million for 1996. It should be noted, however, that
1996 chargeoffs included a $4.1 million loss that was related to the sale of a
package of nonperforming one- to four-family loans that had a book value of
$10.3 million.
The provision for loan losses is utilized to maintain an allowance for loan
losses that is deemed appropriate to provide for known and inherent risks in the
loan portfolio. In determining the adequacy of the allowance for loan losses,
management takes into account the current status of the loan portfolio and
changes in appraised values of collateral as well as general economic
conditions. Although the allowance for loan losses is considered by management
to be adequate to provide for potential losses, there can be no absolute
assurance that such losses will not exceed the current estimated amounts. The
allowance for loan losses as a percentage of loans receivable at December 31,
1997, was 1.02% compared with 0.94% a year ago. At year end, the allowance as a
percentage of nonperforming loans was 92%, up from 81% at year-end 1996.
Nonperforming loans comprised 1.11% of loans receivable at December 31, 1997,
compared with 1.16% a year earlier. At year-end 1997, almost two-thirds of
nonperforming loans outstanding were secured by one- to four-family residences.
Nonperforming assets measured 0.88% and 0.96% of total assets at December 31,
1997 and 1996, respectively.
Noninterest Income
Total noninterest income increased $2.1 million (17%) to $14.3 million for the
year ended December 31, 1997, from the $12.2 million generated in the previous
year. The increase includes $0.5 million earned by ALBANK Commercial in its
first 52 days of operation and a $0.5 million recovery of the 1995 Nationar
investment write-off. The introduction of a debit card and charges for foreign
transactions on our ATM terminals netted additional fee income of approximately
$0.3 million. The remaining increase in noninterest income is primarily
attributable to increased charges for deposit services such as handling returned
checks coupled with the full year impact of the Green Mountain branches.
Noninterest Expense
Total noninterest expense for the year ended December 31, 1997, was $84.4
million, a decrease of $5.9 million (7%) from the previous year. Included in
noninterest expense for 1996 was a one-time Federal Deposit Insurance
Corporation ("FDIC") SAIF assessment of $10.4 million. Excluding the SAIF
assessment from 1996 results, noninterest expense would have increased $4.5
million (6%). Capital securities expense which totaled $2.7 million for 1997 was
a new category of noninterest expense. The expense represents the tax-deductible
carrying cost of $50 million in securities issued in June 1997 which are treated
as capital for regulatory purposes.
Compensation and employee benefits increased $2.9 million (8%) to $41.4 million
for the year ended December 31, 1997. An increase in salaries and benefits of
$3.8 million (12%) was primarily due to the expansion of the branch network from
the Green Mountain and Key branch acquisitions, additions to staff necessary to
support the formation of ALBANK Commercial and the effect of annual merit
increases. Offsetting the increase in salaries and benefits expense were
reductions in expense related to amortization of the cost of shares awarded
under the conversion related Bank Retention Plan of $0.6 million (30%) and a
reduction in temporary help expense of $0.3 million (58%).
Increases of $0.5 million (12%) in branch building depreciation and rental
expense, $0.1 million (8%) in maintenance and repairs and $0.3 million (22%) in
property taxes comprised the primary components of an increase of $0.9 million
(9%) in occupancy expense. These increases were brought about mainly by the
expansion of the branch network from the Green Mountain and Key branch
acquisitions.
Furniture, fixtures and equipment expense rose $1.4 million (26%) as
depreciation on equipment increased $1.2 million (34%) primarily as a result of
additional data processing hardware and software costs necessary to support
products and services for an expanded branch network.
As a direct result of the 1996 premium paid to the FDIC to recapitalize the
SAIF, insurance premiums paid to the FDIC decreased $2.9 million (67%) to $1.4
million for the year ended December 31, 1997.
The decrease in professional, legal and other fees of $0.3 million (8%) was
spread about evenly over reductions in legal, consulting and bank service
charges.
Telephone, postage and printing expense for 1997 was $4.7 million, an increase
of $0.3 million (7%) over the previous year. The increase is due primarily to
higher telephone expenses of $0.2 million (16%) for the year as a result of the
expanded branch network.
Goodwill amortization increased $0.8 million (26%) to $3.9 million as a direct
result of amortization of goodwill related to the Green Mountain and Key branch
acquisitions.
Other noninterest expense decreased $1.3 million (11%) to $10.7 million for the
year ended December 31, 1997. Sharing primary responsibility about equally for
the decrease were reductions in other real estate expense and an increase in
costs deferred in conjunction with new loan originations. Excluding capital
securities expense in 1997 and the FDIC special SAIF assessment in 1996, the
ratios of noninterest expense to average assets were 2.24% and 2.36% for 1997
and 1996, respectively. The efficiency ratio, calculated as noninterest expense
(excluding capital securities expense, the FDIC special SAIF assessment,
foreclosure related costs and goodwill amortization) as a percentage of net
interest income plus noninterest income (exclusive of net security transactions
and foreclosure related income), was 50.78% for 1997, down from the 54.32%
reported for 1996.
Income Tax Expense
Income tax expense for the year ended December 31, 1997, was up only $0.5
million (3%) from 1996 despite an increase of $17.7 million (42%) in pretax
income. The lower income tax expense for 1997 is due to a $6.0 million tax
benefit that resulted from a corporate restructuring that involved the
liquidation of an ALBANK, FSB subsidiary. Excluding this benefit, income tax
expense would have increased $6.5 million (42%) which corresponds to the
increase in pretax income. Excluding the restructuring benefit, the effective
income tax rate for 1997 would have been 36.9% compared with 37.2% in 1996.
Results of Operations--1996 Compared With 1995
General
Net income for 1996 decreased $3.1 million (11%) from 1995 to $26.2 million.
Basic and diluted per share earnings were a respective $1.99 and $1.87 for 1996
compared with $2.08 and $1.96 for 1995, down 4% and 5%, respectively. Return on
average equity was 8.20% compared with 9.09% in 1995, while return on average
assets was 0.77% and 0.99% for the respective years. Core net income for 1996
excluded the one-time SAIF special assessment of $6.4 million after tax while
1995 core net income excluded a $0.7 million after tax write-off of ALBANK,
FSB's investment in Nationar. Core net income equalled $32.6 million in 1996, an
increase of $2.6 million (9%) over 1995. Basic and diluted earnings per share
based on core net income were $2.48 and $2.32, respectively, for 1996 which
compared with $2.14 and $2.01 per share, respectively, earned in 1995. Return on
average equity based on core net income was 10.20% in 1996 and 9.32% in 1995;
core return on average assets totaled 0.96% and 1.01% for 1996 and 1995,
respectively. Cash earnings were $37.9 million in 1996, an increase of $4.1
million (12%) over 1995. Diluted earnings per share on a cash basis were $2.69
compared with $2.26 in 1995. Return on average tangible equity for 1996 amounted
to 13.49% compared with 11.14% the prior year, while return on tangible assets
of 1.13% compared with 1.15% in 1995.
Interest Income
Interest income of $248.5 million for 1996 was $36.0 million (17%) higher than
the prior year, as a $382.3 million (14%) increase in average interest-earning
assets that was primarily the result of the two 1996 Vermont acquisitions
combined with a 23 basis point (3%) rise in average rate earned to 7.74%.
Interest income on mortgage loans totaled $155.9 million for the year, a $30.7
million (25%) improvement from the prior year that was the result of increased
average balances of $336.9 million (21%), and an increase in the average rate
earned of 21 basis points (3%). The Vermont acquisitions accounted for
approximately two-thirds of the average balance growth.
Interest income on other loans increased $9.6 million (34%) to $38.2 million as
an increase in the average amount invested of $115.1 million (39%) was only
partially offset by a decrease of 36 basis points (4%) in the average rate
earned. Commercial loans accounted for over three-quarters of the increase in
the average balance. Again, about two-thirds of the higher average volume was
due to the Vermont acquisitions.
Interest income on securities available for sale amounted to $41.7 million, an
advance of $30.6 million (276%) over 1995 that was the net result of an increase
in average balance of $505.1 million (306%) and a 51 basis point (8%) reduction
in the average rate earned.
Earnings on investment securities declined $34.6 million (79%) from 1995 as a
net result of a $577.8 million (80%) reduction in the average amount invested
and an increase of 30 basis points (5%) in the average rate earned. A December
1995 reclassification of investment securities to securities available for sale
was largely responsible for the change in balances between these two earning
asset categories.
Interest on federal funds sold fell $0.4 million (45%) as the average amount
invested and the average rate earned dropped $6.2 million (39%) and 52 basis
points (9%), respectively. Interest income from securities purchased under
agreement to resell rose $0.3 million (18%) to $2.2 million as an increase in
the average amount invested of $7.9 million (26%) was partially offset by a
decline in the average rate earned of 40 basis points (6%).
Interest Expense
Interest expense for the year ended December 31, 1996, was $122.9 million, an
increase of $18.9 million (18%) over 1995. The higher level of expense resulted
from a $381.2 million (15%) increase in average interest-bearing liabilities and
a rise in the average rate paid of 11 basis points (3%) to 4.22%. Almost 90% of
the rise in average interest-bearing liabilities was the result of deposits
acquired in the Vermont acquisitions.
Interest paid on savings accounts declined $1.2 million (4%) and totaled $25.4
million for 1996 as average balances declined $36.7 million (4%), despite the
addition of $30.8 million in average balances that resulted from the Vermont
acquisitions, while the average rate paid declined 1 basis point.
Interest paid on transaction accounts increased by $5.0 million (72%) as the
average balance increased $127.2 million (38%) while the average rate paid rose
50 basis points (24%). About four-fifths of the average volume rise was the
result of the Vermont acquisitions.
Interest paid on certificate accounts for the year amounted to $82.7 million, an
advance of $12.4 million (18%) over 1995 as the average balance for 1996
increased $240.4 million (19%) over the prior year, while the average rate paid
declined 5 basis points (1%) compared with 1995. Again the Vermont acquisition
led to approximately four-fifths of the volume growth.
Interest paid on short-term borrowed funds and repurchase agreements increased
$1.2 million as the net effect of a $23.4 million increase in the average
balance and a 131 basis point (20%) decrease in the average rate paid.
Interest paid on long-term debt increased $1.5 million as a $26.8 million
increase in the average balance more than offset a 3 basis point (1%) decrease
in the average rate paid.
Net Interest Income
Net interest income totaled $125.6 million in 1996, an increase $17.2 million
(16%) from the prior year as interest income advanced $36.0 million (17%) while
interest expense rose $18.9 million (18%). The net interest spread increased 12
basis points (4%) to equal 3.52% for 1996, while the net interest margin
advanced 7 basis points (2%) to total 3.91%.
Provision for Loan Losses
The provision for loan losses increased to $5.8 million for 1996, up $1.3
million (28%) from the $4.5 million recorded in 1995. The allowance as a
percentage of loans receivable at year-end 1996 was 0.94% compared with 0.82% at
the end of 1995. The allowance as a percentage of nonperforming loans at
December 31, 1996, was 81% compared with 69% a year earlier. Nonperforming loans
at December 31, 1996, were 1.16% of loans receivable while nonperforming assets
to total assets were 0.96%; comparable 1995 percentages were 1.19% and 0.91%,
respectively.
Noninterest Income
Noninterest income totaled $12.2 million for 1996, an increase of $2.7 million
(29%) compared with 1995. Excluding the 1995 write-off of $1.2 million for
Nationar, the increase in noninterest income of $1.5 million (14%) was primarily
the result of service charges on deposits which rose $0.5 million (10%),
brokerage and insurance commissions which were up $0.4 million (26%) and
increased servicing income on mortgage loans of $0.3 million (19%). These
improvements in noninterest income were all positively impacted by the Company's
1996 acquisition activity and the resultant expansion of its branch network.
Noninterest Expense
Noninterest expense of $90.3 million for the year ended December 31, 1996,
included a one-time FDIC special SAIF assessment. Excluding this $10.4 million
special assessment, noninterest expense would have risen $14.1 million (21%)
over the $65.8 million recorded in 1995 primarily due to costs associated with
operating branches acquired in the Vermont acquisitions.
Compensation and employee benefits increased $6.7 million (21%) to equal $38.5
million for 1996, about two-thirds of which was directly related to the Vermont
acquisitions. The remaining increase was due to salary merit increases and
increases in employee benefit costs in nearly equal proportion.
Increases of $0.3 million (35%) in building depreciation, $0.3 million (16%) in
maintenance and repair expenses and $0.2 million (13%) in property taxes
contributed to the overall increase in occupancy expense of $0.9 million (11%)
which totaled $9.2 million for 1996. The increase was principally the result of
the Vermont acquisitions. Furniture, fixtures and equipment expense rose $1.2
million (31%) to $5.3 million in 1996, about three-fifths of which was the
result of a full year's depreciation of the Bank's 1995 data processing
upgrades.
Despite increased levels of total deposits, FDIC insurance expense declined $0.8
million (16%) below 1995 to equal $4.3 million for 1996. The reduction reflects
a change in the Bank's deposit mix as the percentage of Bank Insurance Fund
insured deposits increased as a result of deposits acquired in the two Vermont
acquisitions and a 25% reduction in the SAIF insurance rate that was effective
for the last quarter of 1996. The FDIC special SAIF assessment in 1996 of $10.4
million was a one-time charge to the Bank to recapitalize the SAIF insurance
fund; this change reduced deposit insurance premiums on SAIF insured deposits
beginning in 1997.
Professional, legal and other fees increased $0.7 million (29%) to $3.2 million
for 1996 with higher legal fees being the most significant component of the
rise. Telephone, postage and printing expense of $4.4 million for 1996 increased
$0.3 million (8%) above 1995 levels.
Goodwill amortization increased $1.5 million (96%) over 1995 levels as a direct
result of goodwill generated by the two Vermont acquisitions. Other noninterest
expense of $12.0 million represented a $3.6 million (42%) increase over 1995 due
primarily to the operation of the Bank's expanded branch network.
Excluding the FDIC special SAIF assessment in 1996, the ratios of noninterest
expense to average assets were 2.36% and 2.22% for 1996 and 1995, respectively.
The efficiency ratio of 54.32% for 1996 compared with 52.91% in 1995.
Income Tax Expense
Income tax expense for the year ended December 31, 1996, was $15.5 million, a
decrease of $2.8 million (15%) from the previous year. The decrease was the
combined result of a lower amount of income before income taxes combined with a
lower overall effective income tax rate for 1996 of 37.2% compared with 38.5% in
1995. The reduction in the effective income tax rate for 1996 resulted from a
continuing trend of tax rate reductions in New York State coupled with an
expansion of operations into the State of Vermont.
Impact of Year 2000
Much has been written about the general concern that computer systems in all
walks of life are currently incapable of adequately dealing with any date beyond
1999. As with any financial services company, computer systems play a vital role
in the daily operations of ALBANK. As such, the Board of Directors and senior
management of the Company are keenly aware of the oversight responsibilities
they have to see that an appropriate plan to deal with the "Year 2000" issue is
developed and implemented. The Company commenced work on a formal Year 2000 plan
in the Spring of 1997. That plan identifies each of the Company's systems that
need to be addressed; specifies a target date of no later than December 31,
1998, that each system is to be certified as Year 2000 compliant; and sets a
time frame during which compliant programs are to be extensively tested that
runs through June 30, 1999. The Company's plan also takes into account
third-party "vendors" on whom the Company relies, setting parameters similar to
those outlined above. Additionally, there is a separate section of the plan that
establishes standards whereby significant commercial loan and commercial real
estate customers will be surveyed to ascertain their preparedness for Year 2000
issues; such customer inquiries will provide loan officers a basis to determine
if there is undue risk that will potentially adversely affect an outstanding
credit commitment of the Company.
As a result of the Company's relatively recent conversion to a new IBM system,
approximately one-half of the systems and application software currently
installed in production are stated by the vendor to be Year 2000 compliant.
Based on this factor and the fact that there is not a significant amount of
customized programming, the Company does not currently believe that the
expenditures related to Year 2000 compliance will be material to the Company's
results of operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes 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 the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of Changes in Accounting Standards
Earnings per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which establishes standards for computing and presenting earnings per
share ("EPS"). This Statement simplifies the standards for computing EPS and
supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings per
Share" and related interpretations. SFAS No. 128 replaces the presentation of
primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the diluted EPS computation.
Basic EPS exclude dilution and are computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS are calculated by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period plus the share effect of dilutive common stock equivalents.
Stock options are regarded as common stock equivalents and are therefore
considered in the diluted earnings per share calculation if dilutive. All EPS
disclosures in this 1997 Annual Report Supplement comply with SFAS No. 128.
Capital Structure
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which establishes standards for disclosure about a company's
capital structure. In accordance with SFAS No. 129, companies are required to
provide in the financial statements a complete description of all aspects of
their capital structure, including call and put features, redemption
requirements and conversion options. The disclosures required by SFAS No. 129
are for financial statements issued for periods ending after December 15, 1997.
Management has provided the required information in this Annual Report
Supplement.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income.
SFAS No. 130 states that comprehensive income includes the reported net income
of a company adjusted for items that are currently accounted for as direct
entries to equity, such as the mark-to-market adjustment on securities available
for sale, foreign currency items and minimum pension liability adjustments. This
Statement is effective for fiscal years beginning after December 15, 1997.
Management anticipates developing the required information in the 1998
consolidated financial statements.
Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for reporting
by public companies about operating segments of their business. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for periods
beginning after December 15, 1997. Management will report the required
information in the 1998 consolidated financial statements.
Asset/Liability Management
The Company employs many strategies to manage interest rate risk, the general
goal of which has been to minimize fluctuations in net interest income from
changes in interest rates. This goal has been pursued actively in the management
of the mortgage loan and investment portfolios. Since the early 1980's, the
Company has generally emphasized the origination of one- to four-family
adjustable-rate mortgages ("ARMs") for portfolio retention. As a result, ARMs
represented 75% of total mortgage loans outstanding at December 31, 1997.
Additions to the investment securities and securities available for sale
portfolios in 1997 of $446.4 million generally had maturities or expected
average lives of three to five years; applying current prepayment assumptions to
the securities backed by certain tangible assets, the entire investment
portfolio at year-end 1997 had an expected average life of between three and
four years.
The interest rate risk analysis table that follows sets forth at December 31,
1997, the approximate amounts of interest-earning assets and interest-bearing
liabilities outstanding which are expected to reprice or mature within each of
the time periods indicated. Loans that have an adjustable interest rate are
shown as being due in the period during which the interest rate is next subject
to change.
Principal amortization of loans is shown in accordance with contractual terms
(scheduled amortization) and by using assumptions on the rate at which the loan
will repay in excess of scheduled amortization (prepayments). Monthly prepayment
factors were developed taking into account current economic forecasts as well as
historic prepayment activity. The monthly prepayment factors utilized were as
follows: ARMs, 0.57% to 0.99%; convertible ARMs, 3.94%; residential fixed-rate
mortgage loans, 0.11% to 1.29%; fixed-rate home equity loans, 0.97% to 1.26%;
adjustable-rate home equity loans, 1.06%; nonresidential fixed-rate mortgage
loans, 0.19% to 0.80%; consumer loans, 0.92% to 3.84%; and student loans, 1.00%.
With regard to deposit accounts, the following withdrawal/repricing rates have
been assumed: savings accounts, 20% per year; NOW and super NOW accounts, 10%
per year, in years one through four with the remainder repricing in year five;
regular money market accounts, 25% per year; premium money market accounts, 100%
repricing in less than one year. The 20% sensitivity of savings accounts
represents the portion of total savings that management believes to be interest
rate sensitive. In arriving at this judgment, management considered a number of
factors including the trend and level of overall interest rates and the review
of historic, current and projected future deposit flows. The perceived
sensitivity of premium money market accounts to interest rate shifts is
reflected in their 100% classification in the less than one year category. The
lower relative interest rate sensitivity of regular money market accounts is
reflected in their 25% per year classification. The classification of 10% of the
NOW and super NOW accounts in the less than one year category illustrates their
lesser degree of interest rate sensitivity.
Interest rate "gap" analysis is a common, though imperfect, measure of interest
rate risk. It measures the relative dollar amounts of interest-earning assets
and interest-bearing liabilities which reprice within a specific time period,
either through maturity or by rate adjustment.
A "positive" gap for a given period means that the amount of interest-earning
assets maturing or otherwise repricing exceeds the amount of interest-bearing
liabilities maturing or otherwise repricing within the same period. Accordingly,
in a rising interest rate environment, an institution with a positive gap would
generally be expected, absent the effects of other factors, to experience a
greater increase in the yield of its assets relative to the cost of its
liabilities. Conversely, the cost of funds for an institution with a positive
gap would generally be expected to decline less quickly than the yield on its
assets in a falling interest rate environment. Changes in interest rates
generally have the opposite effect on an institution with a "negative" gap.
There are some shortcomings inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities have
similar periods to maturity or to repricing, they may react in different degrees
to changes in market rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets such as adjustable-rate mortgage loans have
features which restrict changes in interest rates on a short-term basis and over
the life of the assets. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the table. Another shortcoming of gap
analysis is the fact that it is static with regard to new business volumes.
Finally, the ability of many borrowers to service their debt may decrease in the
event of a significant interest rate increase. Management takes these factors
into account when reviewing the Company's gap position and regularly runs
interest rate risk simulations to assess the effects of interest rate increases
and decreases upon net interest income and market value prior to establishing
asset/liability strategy.
As of December 31, 1997, the following table indicates that total
interest-earning assets maturing or repricing within one year exceeded total
interest-bearing liabilities maturing or repricing in the same time period by
$58.1 million.
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1997 One Year One to Three to Five to Over
or Less Three Years Five Years Ten Years Ten Years Total
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Mortgage loans $1,253,547 534,641 122,793 142,016 247,132 2,300,129<F1>
Other loans 251,545 103,764 63,051 71,098 34,648 524,106<F1>
Securities purchased under
agreement to resell 75,000 -- -- -- -- 75,000
Securities available for sale 218,260 244,785 140,032 153,839 595 757,511<F2>
Investment securities 50,613 24,638 13,123 6,597 -- 94,971
Stock in Federal Home Loan Bank -- -- -- 21,408 -- 21,408
Total interest-earning assets 1,848,965 907,828 338,999 394,958 282,375 3,773,125
Interest-Bearing Liabilities
Deposits:
Savings accounts 161,910 323,818 323,818 -- 21,172 830,718<F3>
Transaction accounts 239,218 152,260 242,866 -- -- 634,344<F4>
Certificate accounts 1,310,987 498,071 34,016 7,166 -- 1,850,240
Short-term borrowed funds
and repurchase agreements 68,747 -- -- -- -- 68,747
Long-term debt 10,000 10,000 -- -- 61 20,061
Total interest-bearing liabilities 1,790,862 984,149 600,700 7,166 21,233 3,404,110
Interest sensitivity gap per period $ 58,103 (76,321) (261,701) 387,792 261,142 369,015
Cumulative $ 58,103 (18,218) (279,919) 107,873 369,015 369,015
Cumulative interest sensitivity gap
as a percentage of total assets 1.42% (0.45)% (6.86)% 2.64% 9.04%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities 103.24% 99.34% 91.71% 103.19% 110.84%
<FN>
<F1> Mortgage and other loans are reduced for nonperforming loans but are not reduced for the allowance for loan losses.
<F2> Does not include SFAS No. 115 unrealized gain of $11,006.
<F3> Includes interest-bearing escrow accounts of $21,172.
<F4> Does not include noninterest-bearing demand deposits of $189,661.
</FN>
</TABLE>
The following table shows the expected maturity of the Company's
interest-earning assets and interest-bearing liabilities along with the
weighted-average yield and estimated fair market value data as of December 31,
1997. Prepayment/maturity assumptions are consistent with those applied in the
interest rate sensitivity table on the immediately preceding page. Actual
prepayments/maturities obviously may differ from those assumed.
<TABLE>
Expected Maturity Dates as of December 31, 1997
<CAPTION>
Estimated
(Dollars in thousands) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Mortgage loans $ 377,318 281,816 227,025 38,332 44,470 1,331,168 2,300,129 2,298,976
8.07% 8.03% 8.04% 8.30% 8.39% 7.91% 7.98%
Other loans $ 251,545 59,788 43,976 34,067 28,984 105,746 524,106 524,878
9.26% 9.12% 8.93% 8.90% 8.89% 9.58% 9.24%
Securities purchased
under agreement to
resell $ 75,000 -- -- -- -- -- 75,000 75,000
6.03% -- -- -- -- -- 6.03%
Securities available
for sale $ 218,260 136,623 108,162 72,310 67,722 154,434 757,511 768,517
6.19% 6.57% 6.91% 6.55% 6.59% 6.32% 6.46%
Investment securities $ 50,613 18,574 6,064 9,488 3,635 6,597 94,971 96,481
6.80% 6.73% 7.46% 7.44% 8.29% 8.22% 7.05%
Stock in Federal
Home Loan Bank $ -- -- -- -- -- 21,408 21,408 21,408
-- -- -- -- -- 7.05% 7.05%
Total interest-earning
assets $ 972,736 496,801 385,227 154,197 144,811 1,619,353 3,773,125 3,785,260
7.73% 7.71% 7.82% 7.56% 7.65% 7.86% 7.78%
Interest-Bearing
Liabilities
Deposits:
Savings accounts $ 161,910 161,909 161,909 161,909 161,909 21,172 830,718 830,718
2.84% 2.84% 2.84% 2.84% 2.84% 1.84% 2.81%
Transaction accounts $ 239,218 76,130 76,130 76,130 166,736 -- 634,344 634,344
3.49% 2.82% 2.82% 2.82% 1.10% -- 2.62%
Certificate accounts $1,310,987 442,592 55,479 24,890 9,126 7,166 1,850,240 1,863,904
5.39% 5.86% 5.77% 5.68% 5.68% 6.07% 5.52%
Short-term borrowed funds
and repurchase agreements $ 68,747 -- -- -- -- -- 68,747 68,747
5.37% -- -- -- -- -- 5.37%
Long-term debt $ 10,000 10,000 -- -- -- 61 20,061 19,998
5.41% 5.52% -- -- -- 7.47% 5.47%
Total interest-bearing
liabilities $1,790,862 690,631 293,518 262,929 337,771 28,399 3,404,110 3,417,711
4.90% 4.81% 3.39% 3.10% 2.06% 2.92% 4.31%
</TABLE>
<TABLE>
Quarterly Results of Operations
<CAPTION>
The Company's quarterly results of operations for the years ended December 31,
1997 and 1996 are as follows:
(In thousands, except per share data) Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Quarterly Operating Data
Interest income $64,430 65,618 67,522 71,606
Interest expense 31,394 32,168 33,005 35,863
Net interest income 33,036 33,450 34,517 35,743
Provision for loan losses 1,800 1,800 1,800 1,800
Noninterest income 3,257 3,509 3,289 4,211
Noninterest expense 19,806 20,206 21,122 23,256
Income before income taxes 14,687 14,953 14,884 14,898
Income tax expense (benefit) 5,370 5,512 5,506 (390)
Net income $ 9,317 9,441 9,378 15,288
Core net income<F1> $ 9,317 9,282 9,378 9,162
Basic earnings per share:
Based on net income $ 0.73 0.74 0.73 1.19
Based on core net income 0.73 0.73 0.73 0.72
Diluted earnings per share:
Based on net income 0.68 0.69 0.68 1.11
Based on core net income 0.68 0.68 0.68 0.67
Dividends declared per share 0.15 0.15 0.18 0.18
(In thousands, except per share data) Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Quarterly Operating Data
Interest income $61,588 61,089 61,660 64,189
Interest expense 30,696 29,847 30,282 32,060
Net interest income 30,892 31,242 31,378 32,129
Provision for loan losses 1,425 1,425 1,425 1,500
Noninterest income 3,010 3,092 2,910 3,142
Noninterest expense 19,648 19,729 30,571 20,355
Income before income taxes 12,829 13,180 2,292 13,416
Income tax expense 5,118 5,345 644 4,403
Net income $ 7,711 7,835 1,648 9,013
Core net income<F2> $ 7,711 7,835 8,025 9,013
Basic earnings per share:
Based on net income $ 0.58 0.59 0.13 0.70
Based on core net income 0.58 0.59 0.62 0.70
Diluted earnings per share:
Based on net income 0.54 0.55 0.12 0.65
Based on core net income 0.54 0.55 0.58 0.65
Dividends declared per share 0.12 0.12 0.12 0.15
<FN>
<F1> Core net income for 1997 excludes a December 1997 tax benefit of $6.0 million
that resulted from a corporate realignment and the after-tax effect of $0.3
million related to a partial recovery of a 1995 investment write-off.
<F2> Core net income for 1996 excludes the after-tax effect of the $6.4 million special
assessment to recapitalize the SAIF.
</FN>
</TABLE>
Independent Auditors' Report
KPMG Peat Marwick LLP
Certified Public Accountants
515 Broadway
Albany, NY 12207
The Board of Directors and Stockholders
ALBANK Financial Corporation and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of ALBANK Financial Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ALBANK Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 30, 1998
<TABLE>
Consolidated Statements of Earnings
<CAPTION>
(In thousands, except per share data) Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Interest Income
Mortgage loans $173,296 155,914 125,228
Other loans 45,051 38,194 28,571
Securities available for sale 41,943 41,676 11,098
Investment securities 6,767 8,959 43,520
Federal funds sold 137 508 918
Securities purchased under agreement to resell 656 2,225 1,888
Stock in Federal Home Loan Bank 1,326 1,050 1,279
Total interest income 269,176 248,526 212,502
Interest Expense
Deposits and escrow accounts 125,526 120,006 103,810
Short-term borrowed funds and repurchase agreements 5,771 1,338 125
Long-term debt 1,133 1,541 80
Total interest expense 132,430 122,885 104,015
Net interest income 136,746 125,641 108,487
Provision for loan losses 7,200 5,775 4,500
Net interest income after provision for loan losses 129,546 119,866 103,987
Noninterest Income
Service charges on deposit accounts 7,130 5,556 5,046
Net security transactions 476 8 (1,198)
Brokerage and insurance commissions 2,108 2,049 1,621
Other 4,552 4,541 3,979
Total noninterest income 14,266 12,154 9,448
Noninterest Expense
Compensation and employee benefits 41,368 38,455 31,817
Occupancy, net 10,055 9,186 8,260
Furniture, fixtures and equipment 6,651 5,270 4,036
Federal deposit insurance premiums 1,412 4,331 5,152
Federal deposit insurance special SAIF assessment -- 10,397 --
Professional, legal and other fees 2,976 3,242 2,512
Telephone, postage and printing 4,694 4,393 4,062
Goodwill amortization 3,872 3,078 1,570
Capital securities expense 2,666 -- --
Other 10,696 11,951 8,395
Total noninterest expense 84,390 90,303 65,804
Income before income taxes 59,422 41,717 47,631
Income tax expense 15,998 15,510 18,348
Net income $ 43,424 26,207 29,283
Earnings per share:
Basic $ 3.41 1.99 2.08
Diluted 3.17 1.87 1.96
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Financial Condition
<CAPTION>
Dollars in thousands, except per share data) December 31, 1997 1996
Assets
<S> <C> <C>
Cash and due from banks $ 97,389 68,883
Securities purchased under agreement to resell 75,000 --
Total cash and cash equivalents 172,389 68,883
Securities available for sale 768,517 617,943
Investment securities 94,971 116,322
Loans receivable 2,856,049 2,559,649
Less: allowance for loan losses 29,117 24,114
Loans receivable, net 2,826,932 2,535,535
Accrued interest receivable 27,837 27,092
Office premises and equipment, net 57,435 48,554
Stock in Federal Home Loan Bank, at cost 21,408 16,913
Real estate owned 3,966 4,012
Goodwill 80,281 43,482
Other assets 29,361 27,400
$4,083,097 3,506,136
Liabilities
Deposits $3,483,791 3,013,129
Escrow accounts 21,172 26,603
Accrued income taxes payable 8,289 3,938
Short-term borrowed funds and repurchase agreements 68,747 42,346
Long-term debt 20,061 30,061
Obligation under capital lease 4,542 4,646
Other liabilities 66,882 66,288
Total liabilities 3,673,484 3,187,011
Corporation-obligated manditorily redeemable capital securities of subsidiary trust 50,000 --
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock, $.01 par value. Authorized 25,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; 15,697,500 shares issued;
12,906,845 shares outstanding at December 31, 1997 and 12,910,763 at December 31, 1996 157 157
Additional paid-in capital 182,704 180,670
Retained earnings, substantially restricted 248,402 214,283
Treasury stock, at cost (2,790,655 shares at December 31, 1997 and 2,786,737
at December 31, 1996) (73,200) (71,235)
Unrealized gain on securities available for sale, net of tax 6,578 1,781
Common stock acquired by:
Employee stock ownership plan ("ESOP") (5,023) (6,279)
Bank recognition plan ("BRP") (5) (252)
Total stockholders' equity 359,613 319,125
$4,083,097 3,506,136
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Net
Unrealized
Gain (Loss) Common Common
Additional on Securities Stock Stock
Common Paid-in Retained Treasury Available Acquired Acquired
(Dollars in thousands) Stock Capital Earnings Stock for Sale by ESOP by BRP Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $157 151,433 235,065 (58,218) (735) (8,791) (2,122) 316,789
Net income -- -- 29,283 -- -- -- -- 29,283
Purchase of treasury stock (898,053 shares) -- -- -- (24,233) -- -- -- (24,233)
Exercise of stock options -- -- (10) 70 -- -- -- 60
Tax benefits related to vested BRP stock
and stock options exercised -- 536 -- -- -- -- -- 536
Adjustment of securities
available for sale to market, net of tax -- -- -- -- 4,263 -- -- 4,263
Cash dividends declared -- -- (5,707) -- -- -- -- (5,707)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1995 157 151,969 258,631 (82,381) 3,528 (7,535) (1,187) 323,182
Net income -- -- 26,207 -- -- -- -- 26,207
Purchase of treasury stock (926,517 shares) -- -- -- (25,847) -- -- -- (25,847)
Exercise of stock options -- -- 275 745 -- -- -- 1,020
Tax benefits related to vested BRP stock
and stock options exercised -- 898 -- -- -- -- -- 898
Adjustment of securities available for sale
to market, net of tax -- -- -- -- (1,747) -- -- (1,747)
Cash dividends declared -- -- (6,779) -- -- -- -- (6,779)
Stock dividend declared -- 27,803 (64,051) 36,248 -- -- -- --
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1996 157 180,670 214,283 (71,235) 1,781 (6,279) (252) 319,125
Net income -- -- 43,424 -- -- -- -- 43,424
Purchase of treasury stock (154,468 shares) -- -- -- (5,057) -- -- -- (5,057)
Exercise of stock options -- -- (821) 3,092 -- -- -- 2,271
Tax benefits related to vested BRP stock
and stock options exercised -- 2,034 -- -- -- -- -- 2,034
Adjustment of securities available for sale
to market, net of tax -- -- -- -- 4,797 -- -- 4,797
Cash dividends declared -- -- (8,484) -- -- -- -- (8,484)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 247 247
Balance at December 31, 1997 $157 182,704 248,402 (73,200) 6,578 (5,023) (5) 359,613
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash EquivalentsCash
Flows from Operating Activities
Net income $ 43,424 26,207 29,283
Reconciliation of net income to net cash provided by operating activities:
Depreciation and lease amortization 6,799 5,385 3,962
Goodwill amortization 3,872 3,078 1,570
Amortization of capitalized costs related to the issuance of capital securities 27 -- --
Net amortization of premiums and accretion of discounts on securities 897 1,229 1,322
ESOP and BRP amortization 1,503 2,191 2,191
Net loss (gain) on security transactions (476) (8) 1,198
Net gain on sale of real estate owned (289) (383) (328)
Origination of loans receivable for sale (6,366) (22,631) (15,401)
Proceeds from sale of loans receivable 11,353 34,024 31,379
Provision for loan losses 7,200 5,775 4,500
Writedown of real estate owned 279 603 312
Net increase in accrued income taxes payable 6,385 277 2,632
Net decrease (increase) in accrued interest receivable (412) 2,814 (1,682)
Net increase in other assets (8,130) (619) (3,291)
Net increase (decrease) in other liabilities and obligation under capital lease (28) 18,692 (6,272)
Net cash provided by operating activities 66,038 76,634 51,375
Cash Flows from Investing Activities
Net cash provided (used) by acquisition activity 446,784 (61,439) 17,488
Proceeds from the sale of securities available for sale 15,019 22,985 --
Proceeds from the maturity or call of securities available for sale 237,738 154,445 90,008
Proceeds from the maturity or call of investment securities 71,691 70,538 173,465
Proceeds from the partial recovery of Nationar investment 453 -- --
Purchase of securities available for sale (396,110) (45,105) (79,902)
Purchase of investment securities (50,327) (25,678) (23,313)
Purchase of loans receivable (312,095) (229,342) (125,894)
Net decrease (increase) in loans receivable 53,444 (30,659) (55,387)
Redemption (purchase) of Federal Home Loan Bank stock (4,495) 2,912 (1,621)
Proceeds from the sale of real estate owned 4,944 6,950 5,648
Capital expenditures (9,558) (6,740) (9,882)
Net cash provided (used) by investing activities 57,488 (141,133) (9,390)
Cash Flows from Financing Activities
Net increase (decrease) in deposits (60,652) 20,530 (1,868)
Net increase (decrease) in escrow accounts (5,431) (8,465) 1,441
Net increase (decrease) in short-term borrowed funds and repurchase agreements 17,803 17,907 (12,010)
Proceeds from long-term debt -- 30,061 --
Repayment of long-term debt (10,000) -- (2,000)
Proceeds from issuance of capital securities 50,000 -- --
Purchase of treasury stock (5,057) (25,847) (24,233)
Dividends paid (8,117) (6,210) (5,565)
Cash proceeds from the exercise of stock options 1,434 404 60
Net cash provided (used) by financing activities (20,020) 28,380 (44,175)
Net increase (decrease) in cash and cash equivalents 103,506 (36,119) (2,190)
Cash and cash equivalents at beginning of year 68,883 105,002 107,192
Cash and cash equivalents at end of year $172,389 68,883 105,002
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest on deposits, escrows, short-term borrowed funds,
repurchase agreements and long-term debt $132,879 122,662 104,022
Income taxes 9,633 12,804 16,118
Supplemental schedule of noncash investing and financing activities:
Net reduction in loans resulting from transfers to real estate owned 4,908 5,941 5,710
Net unrealized gain (loss) on securities available for sale 8,110 (3,098) 7,251
Transfer of investment securities to securities available for sale -- -- 492,246
Tax benefits related to vested BRP stock and stock options exercised 2,034 898 536
Acquisition activity:
Fair value of noncash assets acquired 94,116 523,406 712
Fair value of liabilities assumed 540,900 461,967 18,200
See accompanying notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
ALBANK Financial Corporation (the "Holding Company") completed its initial
public offering on April 1, 1992. Simultaneously, the Holding Company purchased
all of the outstanding stock of ALBANK, FSB. On November 10, 1997, the Holding
Company formed ALBANK Commercial, a newly chartered New York commercial bank. To
date, the principal operations of ALBANK Financial Corporation and subsidiaries
(the "Company") have been those of ALBANK, FSB and ALBANK Commercial, along with
their respective subsidiaries.
The accounting and reporting policies of the Company conform in all material
respects to generally accepted accounting principles and to general practice
within the banking industry. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates. Certain
amounts in prior years have been reclassified to conform to current year
classifications.
The following is a description of the more significant policies which the
Company followed in preparing and presenting its consolidated financial
statements.
A. Basic Presentation
The accompanying consolidated financial statements include the accounts of the
Holding Company; its wholly owned banking subsidiaries, ALBANK, FSB and ALBANK
Commercial, along with their related subsidiaries; and its wholly owned business
trust subsidiary, ALBANK Capital Trust I. Significant intercompany transactions
and balances have been eliminated in consolidation.
B. Cash Equivalents
For purposes of the consolidated statements of financial condition and
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
C. Restriction on Cash Balances
The Company was required to retain cash funds of $19,118,000 at December 31,
1997, and $28,164,000 at December 31, 1996, to satisfy minimum reserve
requirements established by the Federal Reserve Bank of New York.
D. Securities
Securities are classified at the time of purchase as investment securities,
securities available for sale, or trading account securities. Investment
securities are those securities that management has the positive intent and
ability to hold to maturity and are carried at amortized cost. Securities
available for sale are those that management intends to hold for an indefinite
period of time. Such securities may be sold in response to changes in interest
rates, prepayment risk, liquidity needs or other similar factors. Securities
available for sale are reported at fair value, with unrealized gains and losses
reported, net of tax, as a separate component of stockholders' equity. If
securities are purchased for the purpose of selling them in the near term, they
are classified as trading securities and are reported at fair value with
unrealized gains and losses reflected in current earnings. The Company had no
trading account securities during the three-year period ended December 31, 1997.
Any portion of unrealized loss on an individual security deemed to be other than
temporary is recognized as a realized loss in the accounting period in which
such determination is made. Gains and losses on the sale of securities are
determined using the specific identification method. Discounts and premiums on
securities are accreted into or amortized against interest income using a method
which approximates the level-yield method.
E. Loans Receivable/Allowance for Loan Losses
Loans receivable are stated at unpaid principal amounts, net of unearned
discounts, unamortized premiums and deferred loan fees and costs. Discounts,
premiums and deferred loan fees and costs are accreted into or amortized against
interest income using a method that approximates the level-yield method over the
estimated lives of the loans.
When management deems full collection of all principal and interest to be
uncertain, loans are placed on nonaccrual status. Generally, nonperforming one-
to four-family residential mortgage loans continue to accrue interest income
until they become 120 days delinquent, at which time they are placed on
nonaccrual status. Most delinquent consumer loans are not placed on nonaccrual
status as they are charged against the allowance for loan losses prior to 180
days delinquency. Loans, other than consumer and residential mortgage loans,
past due 90 days or more as to principal or interest are placed on nonaccrual
status except for those loans which, in management's judgment, are adequately
secured or are in the process of collection. Generally, previously accrued
income that has not been collected is reversed from current income, and
subsequent cash receipts are applied to reduce the unpaid principal balance.
Amortization of related deferred fees is suspended when a loan is placed on
nonaccrual status.
1. Summary of Significant Accounting Policies (continued)
The Company accounts for impairment of loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosure." These Statements prescribe
recognition criteria for loan impairment, generally related to commercial type
loans. The Statements also prescribe measurement methods for certain impaired
loans as well as all loans whose terms are modified in troubled debt
restructurings. A loan is considered impaired when collection of principal and
interest is doubtful, and there is insufficient collateral or other repayment
resources available to repay the principal balance of the loan along with all
interest that would accrue until the loan is fully satisfied.
The Company generally places impaired loans on nonaccrual status and recognizes
interest income on such loans only upon receipt of interest payments from the
borrower. In some instances, all moneys received from the borrower, or from the
proceeds of collateral, are applied directly to reduce the principal balance of
the loan, and no interest income is recognized until the principal balance of
the impaired loan is paid in full or is no longer considered impaired.
The Company's subsidiary banks maintain valuation allowances for losses on loans
for estimable and probable future losses. The allowances for loan losses are
maintained at levels deemed appropriate by management to adequately provide for
known and inherent risks in the present loan portfolios. The determination of
the amount of the allowances includes estimates that are susceptible to
significant changes due to changes in appraised values of collateral and general
economic conditions. In connection with such deter mination concerning
collateral, management obtains independent appraisals for significant
properties. While management uses available information to recognize losses on
loans, future additions to the allowances may be necessary based on changes in
relevant facts and circumstances including changes in general economic
conditions. In addition, various regulatory agencies as an integral part of
their examination process periodically review the allowance for loan losses of
each subsidiary bank of the Company. Such agencies may require the subsidiary
banks to recognize additions to the allowances based on their judgments of
information available to them at the time of their examinations.
F. Real Estate Owned
It is the Company's policy to include in real estate owned assets received from
loan foreclosures and loans deemed to be in-substance foreclosures. A loan is
considered an in-substance foreclosure when the Company has taken possession of
the collateral regardless of whether formal foreclosure proceedings have taken
place.
Real estate owned is recorded on an individual asset basis at net realizable
value which is the lower of fair value minus estimated costs to sell or "cost"
(defined as the fair value at initial foreclosure). When a property is acquired,
any excess of the loan balance over fair value is charged to an allowance for
loan losses. Subsequent write-downs to carry the property at net realizable
value are included in other noninterest expense.
G. Office Premises and Equipment
Office premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization of premises and equipment are
primarily computed using the straight-line method over the estimated useful life
of the respective asset. Useful lives vary between 20 and 50 years for banking
facilities and between 3 and 15 years for furniture, fixtures and equipment.
Amortization of capital leases and leasehold improvements is computed on the
straight-line method over the lesser of the term of the lease or the useful life
of the property.
H. Goodwill
In acquisitions accounted for as a purchase, goodwill results when the
consideration paid exceeds the fair value of net assets acquired. Goodwill
resulting from acquisition activity by the Company is being amortized using the
straight-line method, generally over 15 years.
I. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes arise from the recognition
of certain items of income and expense for tax purposes in years different from
those in which they are recognized in the consolidated financial statements. The
Company records deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. To the extent that current available
evidence about the future raises doubt about the realization of a deferred tax
asset, a valuation allowance is established.
J. Treasury Stock
Repurchases of common stock are accounted for under the cost method and recorded
in a contra-equity account.
K. Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board("APB")Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense was recorded on the date of grant only if the then
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," with respect to employee stock options granted subsequent to
1994. As such, the Company has adopted the provision of SFAS No. 123 whereby it
will continue to apply the provisions of APB Opinion No. 25 in its financial
statements and supplementally provide in its footnotes to financial statements
proforma net income and proforma earnings per share disclosures as if the fair
value based method of valuing options defined in SFAS No. 123 had been applied.
L. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share," which establishes standards for computing and
presenting earnings per share. The Company adopted the provisions of SFAS No.
128 as of December 31, 1997. All earnings per share data reflect the adoption of
this Statement. Basic earnings per share are calculated by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share are calculated by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding during the period plus the share effect of
dilutive common stock equivalents. Stock options are regarded as common stock
equivalents and, therefore, are considered in the earnings per share calculation
if dilutive. Common stock equivalents are computed using the treasury stock
method.
M. Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a financial components approach that focuses on control. The
Company adopted SFAS No. 125 on January 1, 1997. The adoption of SFAS No. 125
did not have a material impact on the Company's consolidated financial
statements.
2. Restrictions on Stockholders' Equity
As part of its conversion to a stock form savings bank, ALBANK, FSB established
a liquidation account for the benefit of eligible depositors who continue to
maintain their deposit accounts in ALBANK, FSB after conversion. In the unlikely
event of a complete liquidation of ALBANK, FSB, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation account, in
the proportionate amount of the then current adjusted balance, before
distribution may be made with respect to the capital stock of ALBANK, FSB.
ALBANK, FSB may not declare or pay a cash dividend to the Holding Company, or
repurchase any of its capital stock, if the effect thereof would cause the
retained earnings of ALBANK, FSB to be reduced below the amount required for the
liquidation account. Except for such restrictions, the existence of the
liquidation account does not restrict the use or application of retained
earnings.
The capital of ALBANK, FSB exceeds all capital regulatory requirements. The
Office of Thrift Supervision ("OTS") regulations provide that an institution
that exceeds all capital requirements before and after a proposed capital
distribution could, after prior notice to but without the approval of the OTS,
make capital distributions during the calendar year of an amount that would
reduce by one half its "excess capital ratio" plus its net income for the
current calendar year. Under such limitation, ALBANK, FSB could declare
dividends to the Holding Company in 1998 of approximately $46 million plus an
amount equal to 1998 earnings.
ALBANK Commercial is subject to dividend limitations under New York Banking Law,
including a requirement that prior regulatory approval be obtained for dividends
paid in any year that would exceed ALBANK Commercial's net profits for such year
combined with retained net profits for the prior two years.
3. Acquisitions
On November 10, 1997, the Company assumed the deposit liabilities and purchased
loans owned and serviced by 35 New York State branch offices of KeyBank. The
acquisition included $540.9 million in deposits and $52.2 million in loans. This
acquisition, which was accounted for under the purchase method of accounting,
generated accounting goodwill of $40.6 million which is being amortized over 15
years.
On September 27, 1996, the Company assumed the deposit liabilities and purchased
loans owned and serviced by 6 banking offices formerly operated by the Green
Mountain Bank of Rutland, Vermont. The acquisition included $107.7 million in
deposits and loans with a net book value of $108.4 million. This acquisition,
which was accounted for under the purchase method of accounting, generated
accounting goodwill amounting to $8.2 million which is being amortized over a
period of 15 years.
On January 3, 1996, ALBANK, FSB acquired all of the outstanding common stock of
Marble Financial Corporation of Rutland, Vermont for $18.00 per share in cash or
approximately $61 million in total consideration. On the date of closing, Marble
Financial had consolidated assets and deposits of $396.2 million and $326.6
million, respectively. The transaction, which was accounted for under the
purchase method of accounting, generated accounting goodwill of $20.1 million
which is being amortized over 15 years.
4. Securities
The amortized cost and estimated market value of investment securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1997 Amortized Cost Gains Losses Market Value
<S> <C> <C> <C> <C>
U.S. Government obligations $ 1,845 8 (1) 1,852
U.S. Government agency obligations 55,000 221 -- 55,221
Mortgage-backed securities 19,815 1,348 -- 21,163
Corporate bonds 219 -- -- 219
Collateralized mortgage obligation and real estate
mortgage investment
conduit securities 7,472 8 (90) 7,390
Asset-backed securities 3,580 1 (19) 3,562
Other debt securities 7,040 34 -- 7,074
Total $ 94,971 1,620 (110) 96,481
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1996 Amortized Cost Gains Losses Market Value
U.S. Government obligations $ 1,744 9 (6) 1,747
U.S. Government agency obligations 25,140 129 -- 25,269
Mortgage-backed securities 25,082 1,456 (5) 26,533
Corporate bonds 219 -- -- 219
Collateralized mortgage obligation and real estate mortgage
investment conduit securities 34,587 21 (248) 34,360
Asset-backed securities 21,532 141 (48) 21,625
Other debt securities 8,018 35 -- 8,053
Total $116,322 1,791 (307) 117,806
</TABLE>
There were no sales of investment securities in the three-year period ended
December 31, 1997. Gains and losses recorded on investment securities
are as follows:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Recovery on securities previously written off $453 -- --
Gross gains recognized on call of securities -- 3 1
Write-off of securities -- -- (1,199)
Total $453 3 (1,198)
</TABLE>
The contractual maturity schedule of investment securities at amortized cost and
estimated market value is as follows:
<TABLE>
<CAPTION>
Estimated
(In thousands) December 31, 1997 Amortized Cost Market Value
<S> <C> <C>
Within 1 year $ 1,378 1,381
After 1 year through 5 years 68,156 68,413
After 5 years through 10 years 6,488 6,669
After 10 years 18,949 20,018
Total $94,971 96,481
</TABLE>
In the foregoing table and the contractual maturity table of securities
available for sale below, maturities of mortgage-backed securities,
collateralized mortgage obligation securities, real estate mortgage investment
conduit securities and asset-backed securities are based on the maturity of the
final scheduled payment. Such securities, which comprise most of the balances
shown as maturing beyond five years, generally amortize on a regular basis,
predominantly monthly, and are subject to prepayment. Taking into account such
contractual amortization and expected prepayments, a significant amount of
principal reduction on the aforementioned securities will occur within five
years.
The amortized cost and estimated market value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1997 Amortized Cost Gains Losses Market Value
<S> <C> <C> <C> <C>
U.S. Government obligations $ 45,305 761 (9) 46,057
U.S. Government agency obligations 3,028 -- (24) 3,004
Mortgage-backed securities 460,939 3,523 (2,305) 462,157
Corporate bonds 193,333 1,923 (153) 195,103
Collateralized mortgage obligation and
real estate mortgage
investment conduit securities 13,385 -- (253) 13,132
Asset-backed securities 34,689 83 (13) 34,759
Equity securities 6,832 7,477 (4) 14,305
Total $757,511 13,767 (2,761) 768,517
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1996 Amortized Cost Gains Losses Market Value
U.S. Government obligations $ 75,910 604 (252) 76,262
U.S. Government agency obligations 6,032 24 (42) 6,014
Mortgage-backed securities 200,870 1,407 (2,235) 200,042
Corporate bonds 282,867 1,862 (869) 283,860
Collateralized mortgage obligation and
real estate mortgage
investment conduit securities 19,443 -- (392) 19,051
Asset-backed securities 23,093 94 (31) 23,156
Equity securities 6,832 2,732 (6) 9,558
Total $615,047 6,723 (3,827) 617,943
</TABLE>
Proceeds from the sale of securities available for sale in 1997, 1996 and 1995
amounted to $15,019,000, $22,985,000, and $0, respectively. In 1997, gains and
losses amounted to $25,645 and $3,217, respectively. In 1996, gains and losses
amounted to $11,198 and $6,575, respectively. There were no gains or losses in
1995.
The contractual maturity schedule of securities available for sale (exclusive of
equity securities) at amortized cost and estimated market value is as follows:
<TABLE>
<CAPTION>
Estimated
(In thousands) December 31, 1997 Amortized Cost Market Value
<S> <C> <C>
Within 1 year $132,571 132,261
After 1 year through 5 years 215,968 218,245
After 5 years through 10 years 174,224 175,277
After 10 years 227,916 228,429
Total $750,679 754,212
</TABLE>
The book value of securities pledged as required by law and for other purposes
amounted to $214.3 million and $107.2 million at December 31, 1997 and 1996,
respectively. Such securities were primarily used to secure public deposits.
The Company has entered into an agreement to loan certain securities to
investment brokers for which the Company receives a fee. The total book value of
securities loaned to brokers under this agreement was approximately $25.3
million and $67.0 million at December 31, 1997 and 1996, respectively.
5. Office Premises and Equipment
A summary of office premises and equipment follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Banking house, land and land improvements $44,392 37,975
Leasehold improvements 11,038 9,010
Furniture, fixtures and equipment 42,730 35,488
Capitalized lease 5,775 5,775
103,935 88,248
Less: accumulated depreciation and amortization 46,500 39,694
Total $57,435 48,554
</TABLE>
Amounts charged to expense for depreciation and amortization aggregated
$6,799,000, $5,385,000 and $3,962,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
6. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Mortgage Loans
One- to four-family $1,984,783 1,730,059
Home equity 164,991 169,214
Commercial real estate 111,989 135,284
Multi-family 32,968 31,792
Construction 16,393 13,338
Total 2,311,124 2,079,687
Other Loans
Commercial 285,266 241,002
Student 96,884 94,478
Automobile 68,316 64,864
Home improvement 24,737 23,593
Personal, secured and unsecured 23,731 19,444
Credit cards 13,428 14,754
Overdraft and other 21,799 16,222
Total 534,161 474,357
Total mortgage and other loans 2,845,285 2,554,044
Net discounts, premiums and deferred loan fees and costs 10,764 5,605
Loans receivable $2,856,049 2,559,649
</TABLE>
Real estate mortgage loans serviced for other institutions of approximately
$260.8 million and $289.7 million at December 31, 1997 and 1996, respectively,
are not included in loans receivable.
Nonperforming loans are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996 1995
<S> <C> <C> <C>
Mortgage Loans
Nonaccrual $18,477 15,298 12,571
Delinquent more than 90 days and still accruing 2,871 7,367 5,567
Total nonperforming mortgage loans 21,348 22,665 18,138
Other Loans
Nonaccrual 6,074 3,933 372
Delinquent more than 90 days and still accruing 4,392 3,218 4,646
Total nonperforming other loans 10,466 7,151 5,018
Total nonperforming loans $31,814 29,816 23,156
</TABLE>
Assuming all nonaccrual loans had been current, the amounts of interest income
recorded on such loans during the years ended December 31, 1997, 1996 and 1995,
based on such loans' original rates of interest, would have totaled $2.1
million, $1.7 million and $1.0 million, respectively. The amounts included in
interest income recorded in these periods with respect to such loans were
$452,000, $320,000 and $295,000, respectively. The Company has no commitments to
extend further credit on nonaccrual loans.
Certain directors and executive officers of the Company, as well as certain
affiliates of directors, were customers of and had other transactions with the
Company in the ordinary course of the Company's business. Loans to these parties
were made in the ordinary course of business at the Company's normal credit
terms, including interest rate and collateralization. The aggregate of such
loans totaled $1,679,000 and $463,000 at December 31, 1997 and 1996,
respectively. Total advances to these directors and executive officers during
the year ended December 31, 1997, were $1,592,000. Total payments made on these
loans were $376,000.
7. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $24,114 15,949 15,510
Allowance recorded/acquired from acquisition activity 2,000 11,310 --
Provision charged to operations 7,200 5,775 4,500
Loans charged off (5,272) (9,648) (4,421)
Recoveries of loans previously charged off 1,075 728 360
Balance, end of year $29,117 24,114 15,949
</TABLE>
Of the total loans charged off in 1996, $4.1 million was related to a sale of a
group of one- to four-family nonperforming loans.
8. Accrued Interest Receivable
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Loans $18,558 18,193
Securities available for sale 7,405 7,669
Investment securities 1,081 1,019
Other earning assets 793 211
Total $27,837 27,092
</TABLE>
9. Accounting by Creditors for Impairment of a Loan
The allowance for loan losses related to impaired loans is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent loans).
Impaired loans at December 31, 1997 and 1996, were generally collateral
dependent. The Company considers estimated costs to sell, on a discounted basis,
when determining the fair value of collateral in the measurement of impairment
if those costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
At December 31, 1997 and 1996, the recorded investment in loans that were
considered to be impaired under SFAS No. 114 totaled $3,210,000 and $4,358,000,
respectively. Restructured loans included in the foregoing impaired loan
balances amounted to $272,000 and $320,000 at the respective year-end dates. The
allowance for loan losses allocated to impaired loans at December 31, 1997 and
1996, was $1,053,000 and $1,375,000, respectively. The average recorded
investment in impaired loans during the twelve months ended December 31, 1997,
1996 and 1995, was approximately $3,345,000, $3,560,000 and $1,433,000,
respectively.
Impaired loans are included in nonperforming loans generally as nonaccrual
loans. Commercial loans past due greater than 90 days and still accruing are
generally not considered to be impaired as the Company expects to collect all
amounts due, including interest accrued at the contractual interest rate for the
delinquent period. As of December 31, 1997, the balance of loans restructured
prior to the adoption of SFAS No. 114 amounted to $163,000; such loans were not
considered impaired.
The Company did not recognize interest income on any impaired loans during the
three-year period ended December 31, 1997.
10. Real Estate Owned
A summary of real estate acquired through foreclosure follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Residential (1-4 family) $2,251 2,750
Commercial properties 1,715 1,262
Total $3,966 4,012
</TABLE>
11. Deposits
A summary of depositors' balances is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1997 1996
Weighted- Weighted-
Amount Average Rate Amount Average Rate
<S> <C> <C> <C> <C>
Passbook and statement accounts $ 809,546 2.84% $ 824,151 2.94%
Certificate accounts:
2.01% to 3.00% 9,420 9,215
3.01% to 4.00% 9,340 11,908
4.01% to 5.00% 218,927 411,986
5.01% to 6.00% 1,466,338 967,800
6.01% to 7.00% 90,313 110,113
7.01% to 8.00% 53,675 69,572
8.01% to 9.00% 2,227 3,196
9.01% to 10.00% -- --
10.01% to 11.00% -- 135
Total certificate accounts 1,850,240 5.52 1,583,925 5.37
Money market accounts 356,449 3.60 260,521 3.14
Super NOW accounts 22,556 1.81 27,908 1.82
NOW accounts 246,846 1.11 195,479 1.02
Commercial demand deposit accounts
from 0% to 2.25% in 1997 and
0% to 2.47% in 1996 116,706 0.12 74,238 0.29
Demand deposit accounts 81,448 -- 46,907 --
Total $3,483,791 4.05% $3,013,129 3.99%
</TABLE>
At December 31, 1997 and 1996, the aggregate amounts of certificate accounts
with balances equal to or in excess of $100,000 were approximately $232.3
million and $174.5 million, respectively.
The approximate amount of contractual maturities of certificate accounts for the
years subsequent to December 31, 1997, is as follows:
<TABLE>
<CAPTION>
(In thousands) Amount
<S> <C>
1998 $1,310,987
1999 442,592
2000 55,479
2001 24,890
2002 9,126
Thereafter 7,166
Total $1,850,240
</TABLE>
Components of interest expense on deposits and escrow accounts
are detailed as follows:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Passbook and statement accounts $ 23,303 24,773 25,870
Certificate accounts 88,286 82,735 70,341
Money market accounts 10,785 9,320 4,346
Super NOW and NOW accounts 2,570 2,499 2,557
Commercial demand deposit accounts 194 79 22
Escrow accounts 388 600 674
Total $125,526 120,006 103,810
</TABLE>
12. Short-Term Borrowed Funds and Repurchase Agreements
Short-term borrowed funds and repurchase agreements, consisting of advances with
original maturities of less than one year are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, Interest Rate 1997 1996
<S> <C> <C> <C>
Federal Home Loan Bank advances 6.13% to 6.88% $47,000 --
6.88% to 7.38% -- 36,000
Repurchase agreements 3.50% to 5.00% 21,097 --
4.00% -- 4,796
Other short-term borrowings 5.88% 650 --
6.00% -- 1,550
Total $68,747 42,346
</TABLE>
Short-term Federal HomeLoan Bank advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities, and are collateralized by Federal Home Loan Bank stock and real
estate mortgages. The Company enters into sales of securities under short-term,
fixed coupon repurchase agreements. Such agreements are accounted for as
financings and the repurchase agreements are reflected as liabilities on the
Company's consolidated statements of financial condition. During the period of
such agreements, the underlying securities (which may take the form of
mortgage-backed or other qualifying securities) are transferred to a segregated
account held by the Company's custodian.
13. Long-Term Debt
The contractual maturity of long-term debt, consisting of advances from the
Federal Home Loan Bank with original maturities of one year or more, is as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, Interest Rate 1997 1996
<S> <C> <C> <C>
Year of Maturity:
1997 5.40% $ -- 10,000
1998 5.41% 10,000 10,000
1999 5.52% 10,000 10,000
2016 7.47% 61 61
Total $20,061 30,061
</TABLE>
Long-term Federal HomeLoan Bank advances are collateralized by Federal Home Loan
Bank stock and real estate mortgages.
14. Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust
On June 6, 1997, the Holding Company through ALBANK Capital Trust I (the
"Trust"), a 100% owned subsidiary business trust formed for the sole purpose of
issuing capital securities, issued $50 million of 9.27% capital securities due
June 6, 2027 (the "Capital Securities"). The Capital Securities qualify as Tier
I capital under regulatory definitions.
The net proceeds of the Capital Securities, along with the funds provided by the
Holding Company to the Trust as a capital contribution, were lent by the Trust
to the Holding Company as long-term junior subordinated debentures. The
debentures are subordinated to all Holding Company debt, but senior to all
common stock. The Holding Company, in turn, used the proceeds for general
corporate purposes. The Capital Securities, which are callable at a premium, in
whole or in part, on or after June 6, 2007, include provisions that provide for
the temporary deferral of dividend payments for up to five years under certain
conditions.
The long-term junior subordinated debentures are the sole assets of the Trust,
and interest payments on such debentures are the Trust's sole revenue source.
The Holding Company's primary sources of funds to pay interest on the
subordinated debentures are current dividends from its subsidiary banks.
Accordingly, the Holding Company's ability to service the subordinated
debentures is dependent upon the continued ability of its subsidiary banks to
pay dividends.
15. Income Taxes
Income tax expense consists of the following:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Current tax expense:
Federal $12,427 10,860 15,648
State 3,158 2,835 3,626
15,585 13,695 19,274
Deferred tax expense (benefit) 413 1,815 (926)
Total $15,998 15,510 18,348
</TABLE>
The income tax provisions differ from the statutory federal income tax rate. The
reasons for the differences are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
% of % of % of
Pretax Pretax Pretax
(Dollars in thousands) Amount Amount Amount Amount Amount Amount
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at 35% $20,798 35.0% $14,601 35.0% $16,671 35.0%
Federal income tax benefit
of corporate realignment (5,963) (10.0) -- -- -- --
State income taxes, net of
federal tax benefit 2,053 3.4 1,843 4.4 2,357 4.9
Tax-exempt income and dividend
received deduction (345) (0.6) (272) (0.7) (178) (0.4)
Other (545) (0.9) (662) (1.5) (502) (1.0)
Total $15,998 26.9% $15,510 37.2% $18,348 38.5%
Prior to 1996, ALBANK, FSB was allowed to claim a special bad debt deduction in
excess of its actual loss experience; such special deduction was not subject to
deferred tax allocation prior to 1988 in accordance with SFAS No. 109.
Accordingly, no deferred tax liability has been recorded for the tax bad debt
reserve at December 31, 1987 (the "base year reserve"). The pre-1988 tax bad
debt reserve, which was approximately $27.3 million at December 31, 1997, will
not be subject to tax as long as ALBANK, FSB does not redeem stock or distribute
amounts to the Company in excess of historical tax earnings.
As a result of tax legislation passed by Congress in 1996, ALBANK, FSB is no
longer eligible to claim the special bad debt deduction for federal income tax
purposes. The total federal tax bad debt reserve, aggregating approximately
$33.5 million at December 31, 1995, exceeds the base year reserve by
approximately $6.2 million (the "excess reserve"). The excess reserve is to be
recaptured as taxable income over a defined number of years. The Company had
previously established a deferred tax liability for this excess reserve such
that there is no impact on total tax expense for the Company for 1997 or any
future year based on current tax rates.
Significant net temporary differences and carryforwards that give rise to net
deferred tax assets are as follows:
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
S> <C> <C>
Allowance for loan losses $ 8,030 6,279
Net operating loss carryforwards 10 247
Employee benefit plans 6,267 5,589
Net deferred fees on loans (3,086) (1,225)
Prepaid expenses (1,483) (1,907)
Accrued expenses 822 1,246
Unrealized gain on securities available for sale (4,428) (1,115)
Other items (267) (92)
5,865 9,022
Valuation reserve (1,558) (1,689)
Net deferred tax asset--at year end 4,307 7,333
Less: net deferred tax asset--at beginning of year 7,333 4,597
Decrease (increase) in deferred tax asset 3,026 (2,736)
Change in temporary difference for unrealized (gain) loss on securities available for sale (3,313) 1,351
Deferred tax asset recorded/acquired from acquisition activity 700 3,200
Deferred tax expense for the years ended $ 413 1,815
</TABLE>
The Company established valuation reserves at December 31, 1997 and 1996, based
on an evaluation of the Company's historical levels of taxable income in prior
years and the anticipated time period for the reversal of the items giving rise
to the deferred tax asset. Management believes that it is more likely than not
that the results of future operations of the Company will generate sufficient
taxable income to realize the net deferred tax asset as of December 31, 1997.
16. Postretirement Benefits Other Than Pensions
The Company sponsors defined benefit postretirement medical and life insurance
plans that cover full-time employees who have retired and met minimum age and
service requirements. The medical plan currently does not require a contribution
from qualified pre-1993 retirees 65 or older; the Company's frozen contribution
on behalf of all other qualified retirees varies based on years of service. The
Company's postretirement life insurance plan is currently 100% employer paid.
The following table sets forth the plans' funded status and amounts recognized
in the consolidated financial statements:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $(5,902) (5,586)
Active employees (3,418) (2,520)
Unfunded postretirement benefit obligation (9,320) (8,106)
Unrecognized net loss resulting from past experience
different from that assumed and changes in assumptions 1,191 521
Accrued postretirement benefit liability $(8,129) (7,585)
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Service cost--benefits earned during the year $237 169 81
Interest cost 652 580 474
Net amortization and deferral 28 6 (56)
Net periodic postretirement benefit cost $917 755 499
</TABLE>
For measurement purposes, an 8.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal year 1998; the rate was
assumed to decrease gradually down to 5.5% for fiscal year 2003 and remain at
that level thereafter. The healthcare cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997, by $745,000 (8%) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for fiscal year 1997
by $64,000 (7%). The weighted-average discount rates used in determining the
accumulated postretirement benefit obligation were 7.35%, 7.50% and 7.25% as of
December 31, 1997, 1996 and 1995, respectively.
17. Retirement Plans
The Company maintains a noncontributory defined benefit pension plan covering
substantially all employees 21 years of age or older who have completed at least
one year of service. The amounts contributed to the plan are determined annually
on the basis of (a) the maximum amount that can be deducted for federal income
tax purposes or (b) the amount certified by a consulting actuary as necessary to
avoid an accumulated funding deficiency as defined by the Employee Retirement
Income Security Act of 1974. Contributions are intended to provide for benefits
attributed to service to date and for those expected to be earned in the future.
Assets of the plan are primarily invested in pooled equity funds and fixed
income funds.
The following table sets forth the plan's funded status and amounts recognized
in the consolidated financial statements at or for the years ended December 31,
1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Accumulated benefit obligation, including vested benefits
of $22,931 in 1997 and $21,081 in 1996. $(23,805) (23,488)
Projected benefit obligation for service rendered to date $(30,958) (30,379)
Plan assets at fair value 38,331 33,261
Plan assets greater than projected benefit obligation 7,373 2,882
Unrecognized net loss (gain) from past experience different
from that assumed and effects and changes in assumptions (4,598) 359
Unrecognized prior service cost 657 758
Unrecognized net asset at July 1, 1987, being recognized
over a weighted-average period of 13 years (681) (879)
Prepaid pension asset $2,751 3,120
</TABLE>
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 1,102 820 561
Interest cost on projected benefit obligation 2,149 2,119 1,959
Actual return on plan assets (7,241) (4,245) (5,196)
Net amortization and deferral 4,359 1,652 2,994
Net periodic pension cost $ 369 346 318
</TABLE>
Significant assumptions used in the accounting for the plan are as follows:
<TABLE>
<CAPTION>
As of December 31, 1997 1996 1995
<S> <C> <C> <C>
Settlement rate 7.35% 7.50% 7.50%
Expected long-term rate of return on plan assets 9.00 8.50 8.50
Salary increase rate 5.00 5.00 5.00
</TABLE>
The Company also has a directors' retirement plan which was amended to freeze
participation in the plan to directors who were participants in the plan on
January 1, 1992. The directors' retirement plan, which is unfunded, provides a
benefit of $500 for each quarter of service not to exceed 40 quarters or a total
annual maximum pension payment of $20,000. The amount of pension liability
recorded on the books of the Company related to the directors' retirement plan
was $2.7 million and $2.4 million at December 31, 1997 and 1996, respectively.
Net periodic pension costs for this plan for the years ended December 31, 1997,
1996 and 1995, were $240,000, $248,000 and $284,000, respectively. Settlement
rates used in accounting for the plan were 7.35%, 7.50% and 7.50% as of December
31, 1997, 1996 and 1995, respectively.
The Company also has supplemental retirement contracts with certain key
executives. The amount of pension liability recorded on the books of the Company
related to these supplemental retirement contracts was $1.4 million and $1.0
million at December 31, 1997 and 1996, respectively. Net periodic pension costs
in connection with these contracts for the years ended December 31, 1997, 1996
and 1995 were $285,000, $239,000 and $173,000, respectively. Settlement rates
used in accounting for the plan were 7.35%, 7.50% and 7.50% as of December 31,
1997, 1996 and 1995, respectively.
18. Stock Benefit Plans
At December 31, 1997, the Company had several stock-based compensation plans,
which are described below. As allowed by SFAS No. 123, the Company has continued
to apply APB Opinion No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans. Alternatively, had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value based method
outlined in SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share data) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Net income:
As reported $43,424 26,207 29,283
Proforma 42,499 25,822 29,236
Basic earnings per share:
As reported 3.41 1.99 2.08
Proforma 3.33 1.96 2.08
Diluted earnings per share:
As reported 3.17 1.87 1.96
Proforma 3.10 1.84 1.95
</TABLE>
Under the 1992 Incentive Stock Option Plan as amended, the Company may grant up
to 1,674,500 shares to senior officers. Under this plan, the exercise price of
each option equals the market price of the Company stock on the date of grant.
Options granted before December 18, 1995, become exercisable on a cumulative
basis in equal installments at a rate of one-fifth per year commencing one year
from the date of grant; however, all options become 100% exercisable in the
event the employee's employment is terminated due to death, disability or in the
event of a change in control of ALBANK, FSB or the Company. Options granted on
or after December 18, 1995, become exercisable on a cumulative basis in equal
installments at a rate of one-third per year commencing one year from the date
of grant. All options granted under the 1992 Incentive Stock Option Plan as
amended give rise to a "limited right" with respect to the shares covered by the
options. Limited rights granted are subject to certain terms and conditions and
can be exercised only in the event of a change in control of the Company. Upon
exercise of a limited right, the holder shall receive from the Company a cash
payment equal to the difference between the exercise price of the option and the
fair market value of the underlying shares of the Company's common stock. All
options granted under the 1992 Incentive Stock Option Plan as amended, including
limited rights, expire ten years following the date of grant.
Under the 1992 Directors' Option Plan, the Company granted to directors who were
not officers or employees of the Company options to acquire 330,000 shares.
Under this plan, the exercise price of each option equals the market price of
the Company stock on the date of grant with limited rights. Options are
exercisable by a director on a cumulative basis in equal installments at the
rate of one-fifth per year commencing one year from the date of grant; however,
all options become 100% exercisable in the event a director dies or becomes
disabled or in the event of a change in control of ALBANK, FSB or the Company.
All options granted under this Directors' Option Plan, including limited rights
which have characteristics similar to the rights granted under the 1992
Incentive Stock Option Plan as amended, expire upon the earlier of ten years
following the date of grant or one year following the date the optionee's term
as a director or a director emeritus expires.
18. Stock Benefit Plans (continued)
Under the 1995 Directors' Option Plan, which superseded the 1992 Directors'
Option Plan, the Company may grant up to 240,000 options to acquire shares to
directors who are not officers or employees of the Company. Options are
exercisable by a director on a cumulative basis in equal installments at a rate
of one-third per year commencing one year from the date of grant. All other
significant provisions of this plan are identical to those of the 1992
Directors' Option Plan.
In connection with the acquisition of Marble, the Company assumed liability for
the Marble stock option plan (the "Marble Option Plan"). All options granted
under the Marble Option Plan were converted to options to acquire 0.732 shares
of ALBANK stock, based on the market price of the Company's stock and cash
consideration paid for the Marble common stock on the acquisition date. All
options granted under these plans have an original maximum term of ten years
from the date of grant and are fully vested. The Company recorded a liability of
$1,867,000 for the estimated fair value of these options on the assumption date.
In regard to the disclosure required by SFAS No. 123, the fair value of each of
the option grants in the years ended December 31, 1997, 1996 and 1995 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1997, 1996 and
1995, respectively: dividend yields of 1.40%, 1.91% and 1.92%; expected
volatility of 25%, 25% and 25%; risk-free interest rates of 5.74%, 6.50% and
5.60%; and expected lives of 7.5 years for all plan options.
A summary of the status of the Company's fixed-stock option plans as of December
31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,715,973 $12.9633 1,464,960 $10.7550 1,263,960 $ 8.5791
Granted 166,650 48.0000 192,000 31.1146 208,200 23.8809
Assumed in acquisition -- -- 112,362 8.1784 -- --
Exercised (150,550) 9.5248 (53,349) 7.5708 (7,200) 8.3333
Outstanding at end of year 1,732,073 $16.6332 1,715,973 $12.9633 1,464,960 $10.7550
Options exercisable at end of year 1,355,619 1,113,893 722,400
Weighted-average fair value of
options granted during the year $2,876,000 $2,077,000 $1,611,000
</TABLE>
The following table summarizes information about fixed-stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$6.6598 to $9.9999 1,115,959 4.1 years $ 8.3007 1,115,959 $ 8.3007
$10.0000 to $14.9999 31,464 5.2 years 13.3605 25,464 13.3424
$15.0000 to $24.9999 250,000 7.3 years 22.9923 158,200 22.7236
$25.0000 to $34.9999 168,000 8.9 years 32.0179 55,996 32.0179
$35.0000 to $48.0000 166,650 10.0 years 48.0000 -- --
$6.6598 to $48.0000 1,732,073 5.6 years $16.6332 1,355,619 $11.0582
Incentive Savings and Employee Stock Ownership Plans
ALBANK, FSB maintains an Incentive Savings Plan which is a tax-qualified defined
contribution plan. All salaried employees of the Company become eligible to
participate in the plan after completing one year of service. The Incentive
Savings Plan was amended effective April 1, 1992, to discontinue after-tax
contributions and instead provide for pretax contributions pursuant to Section
401(k) of the Internal Revenue Code. The plan as amended requires a minimum age
of 21 for participation.
In connection with the amendment of the Incentive Savings Plan, ALBANK, FSB
established an employee stock ownership plan ("ESOP"). The ESOP borrowed $12.4
million from the Holding Company and, along with $126,000 contributed by ALBANK,
FSB, purchased 8%, or 1,255,800 shares, of common stock issued in ALBANK, FSB's
conversion to stock form. The cost of the purchased shares is being amortized
over a ten-year period. At December 31, 1997, the total unamortized cost of $5.0
million is reflected as a reduction of stockholders' equity. Shares purchased by
the ESOP are held in a suspense account for allocation among participants as the
ESOP loan is repaid. ALBANK, FSB's current intention is to repay the loan in
substantially equal installments over a remaining term of four years. ALBANK,
FSB will make scheduled discretionary cash contributions as approved by the
Board of Directors to the ESOP at least sufficient to fund the scheduled
principal and interest payments on the debt of the ESOP. During 1997 and 1996,
dividends on unallocated ESOP shares amounting to $511,000 and $427,000,
respectively, were used to reduce the Company's compensation expense. The
Company has elected to make payments on the loan obligation equal to the amount
of these dividends; such amounts were used to reduce the regularly scheduled
principal and interest payments due on the ESOP obligation. At December 31, 1997
and 1996, the loan had an outstanding balance of $5.0 million and $6.3 million,
respectively, and respective interest rates of 8.25% and 8.00%, both of which
were based on the prime lending rate less 0.25%. Interest paid by ALBANK, FSB on
the obligation of $499,000 and $596,000 for the years ended December 31, 1997
and 1996, respectively, was eliminated in consolidation. ESOP shares are
allocated to contributing participants in ALBANK, FSB's amended 401(k) plan in
order to satisfy the Company's minimum matching obligation. The shares released
from the ESOP in excess of the amount necessary to satisfy the minimum matching
allocation of the 401(k) plan are allocated to eligible employees on the basis
of compensation subject to Internal Revenue Code limitations. In connection with
these plans, an expense of $731,000, $815,000 and $790,000 was recognized for
the years ended December 31, 1997, 1996 and 1995, respectively.
Bank Recognition Plans and Trusts
In conjunction with ALBANK, FSB's conversion, a BRP was established to acquire,
in the aggregate, 3% of the shares of common stock issued in the conversion to
provide employees, officers, and directors of the Company with a proprietary
interest in the Holding Company in a manner designed to encourage such persons
to remain with the Company. ALBANK, FSB's BRP trustee acquired a total of
470,925 shares of common stock in the conversion and an additional 6,183 shares
during the first quarter of 1993. The BRP vests on the anniversary of the date
of award at a rate of one-fifth per year. The BRP becomes 100% vested in the
event an employee, officer or director's employment is terminated due to death,
disability or in the event of a change in control of ALBANK, FSB or the Company.
The $4.8 million contributed to the BRP is being amortized to compensation
expense as the Company's employees become vested in those shares. Amortized
expense related to the BRP of $224,000, $900,000 and $907,000 was recognized for
the years ended December 31, 1997, 1996 and 1995, respectively. The expense
includes the pro-rata amount of shares earned but not yet vested. The Bank
distributed 91,011, 93,583 and 80,010 shares of common stock pursuant to the BRP
during the years ended December 31, 1997, 1996 and 1995, respectively. The
unamortized cost is reflected as a reduction of stockholders' equity.
19. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
the Company to disclose estimated fair values for its financial instruments.
SFAS No. 107 defines fair value of financial instruments as the amount at which
the instrument could be exchanged in a current transaction between willing
parties other than in a forced or liquidation sale. SFAS No. 107 defines a
financial instrument as cash, evidence of ownership interest in an entity, or a
contract that imposes on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other financial
instruments on potentially unfavorable terms with a second entity and conveys to
that second entity a contractual right to receive cash or another financial
instrument from the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
office premises and equipment. In addition, tax ramifications related to the
realization of the unrealized gains and losses on securities available for sale,
which can have a significant effect on fair value estimates, have not been
considered in the estimates of fair value under SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Bank's branch network and
other items generally referred to as "goodwill".
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments:
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 172,389 172,389 68,883 68,883
Securities available for sale 768,517 768,517 617,943 617,943
Investment securities 94,971 96,481 116,322 117,806
Stock in Federal Home Loan Bank 21,408 21,408 16,913 16,913
Accrued interest receivable 27,837 27,837 27,092 27,092
Loans receivable 2,845,285 2,847,151 2,554,044 2,595,445
Allowance for loan losses (29,117) -- (24,114) --
Net discounts, premiums and deferred loan fees and costs 10,764 -- 5,605 --
Loans receivable, net 2,826,932 2,847,151 2,535,535 2,595,445
Deposits:
Demand deposits 198,154 198,154 121,145 121,145
Passbook, statement, NOW and super NOW accounts 1,078,948 1,078,948 1,047,538 1,047,538
Money market accounts 356,449 356,449 260,521 260,521
Certificates of deposit 1,850,240 1,863,904 1,583,925 1,589,489
Escrow accounts 21,172 21,172 26,603 26,603
Short-term borrowed funds and repurchase agreements 68,747 68,747 42,346 42,346
Long-term debt 20,061 19,998 30,061 29,958
Capital securities 50,000 57,302 -- --
</TABLE>
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks, federal funds sold and
securities purchased under agreement to resell (collectively defined as ("cash
and cash equivalents"), accrued interest receivable and stock in the Federal
Home Loan Bank is considered to be equal to fair value as a result of their
short-term nature or limited marketability.
Securities Available for Sale and Investment Securities
The fair value of securities available for sale and investment securities is
estimated based on bid prices published in financial newspapers and bid
quotations received from either quotation services or securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one- to four-family,
commercial real estate, consumer and commercial loans. Each loan category is
further segmented into fixed- and adjustable-rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the contractual term of the loans to maturity, adjusted for
estimated prepayments.
The fair value estimate for credit card loans is based on the value of existing
loans at December 31, 1997 and 1996. This estimate does not include the value of
estimated cash flows from new loans generated from existing cardholders over the
remaining life of the portfolio.
Fair value for nonperforming loans is based on recent external appraisals and
discounting of cash flows. Estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower information.
Deposits and Escrow Accounts
Under SFAS No. 107, the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, passbook, statement, NOW and super NOW
accounts, money market accounts and escrow accounts, is estimated to be the
amount payable on demand as of December 31, 1997 and 1996. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. As per SFAS No. 107, the fair value
estimates of deposit liabilities in the foregoing table do not include the
benefit that results from the low cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the debt market.
Short-Term Borrowed Funds and Repurchase Agreements, Long-Term Debt and Capital
Securities
The fair value of short-term borrowed funds and repurchase agreements for 1997
and 1996 is considered to be equal to the carrying amount due to their
short-term nature. The fair value of long-term debt for 1997 and 1996 and
capital securities for 1997 is estimated using the present value of the
anticipated cash flows related to the debt considering the remaining maturity
and yield.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. Fees such as these are not a major part of
the Company's business. Based on an analysis of the foregoing factors, the fair
value of these items is deemed insignificant at December 31, 1997 and 1996.
20. Commitments and Contingent Liabilities
A. Financial Instruments with Off-Balance Sheet Risk and Concentrations
of Credit
The Company enters into financial agreements in the normal course of business
that have off-balance sheet risk. These agreements include commitments to extend
credit and standby letters of credit and involve, to varying degrees, elements
of credit risk in excess of the amount recognized on the consolidated statements
of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit and standby letters of credit is
represented by a contractual amount. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments.
Off-balance sheet commitments are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 1996
<S> <C> <C>
Mortgage loans $ 43,671 30,314
Home equity loans 75,742 81,353
Commercial real estate loans 7,833 9,726
Construction loans 5,746 12,247
Credit cards 41,348 42,002
Commercial loans 104,039 98,115
Student loans 4,818 6,322
Overdraft loans 31,109 17,883
314,306 297,962
Standby letters of credit 2,801 1,599
Total $317,107 299,561
</TABLE>
The range of interest rates on fixed-rate commitments was 5.50% to 18.00% at
December 31, 1997, and 7.13% to 18.00% at December 31, 1996. The Company offers
a variety of adjustable-rate mortgage ("ARM") products on one- to four-family
residential dwellings. Generally, the principal one-year ARM offered by the
Company has a 2.00% annual interest rate adjustment cap, and uses the weekly
average from the one-year Treasury Constant Maturity Index, plus a margin of
3.00%, as an index for rate adjustments. The lifetime rate ceilings for one-year
ARM originations generally are 6.00% over the initial first year rate. Another
one-year product offered by the Company is an ARM that is convertible to a fixed
rate loan between the 13th and 60th months. Three- and, five-year ARMs are also
available; such loans have a 3.00% periodic adjustment cap at the first
adjustment date and a 2.00% cap in all subsequent years. Additionally, 3/1, 5/1,
and 7/1 ARMs are offered that are fixed for 3, 5 and 7 years, respectively, then
adjust annually thereafter. The Company does not originate loans which provide
for negative amortization. Loan terms vary from 5 to 30 years.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if any, required
by the Company upon the extension of credit is based on management's credit
evaluation of the customer. Mortgage and construction loan commitments are
secured by a first lien on real estate. Collateral on extensions of credit for
commercial loans varies but may include accounts receivable, inventory,
property, plant and equipment, and income producing commercial property.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support borrowing arrangements. The credit risk involved in
issuing standby letters of credit is essentially the same as that involved in
extending loan facilities to customers.
B. Leases
The Company leases branch office facilities and equipment used in its operations
which are accounted for as operating leases. These leases expire (excluding
renewal options) in periods ranging from 1 to 25 years. The Company also
occupies its main office building under a lease agreement which is accounted for
as a "capital lease" for financial reporting purposes. Minimum rental
commitments under operating and capital leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
(In thousands) Operating Leases Capital Leases
<S> <C> <C>
1998 $ 2,064 415
1999 1,935 415
2000 1,620 415
2001 1,375 415
2002 1,240 415
Thereafter 6,218 6,241
Total minimum lease payments 14,452 8,316
Imputed interest at 6.76% n.a. 3,774
Present value of minimum lease payments $ n.a. 4,542
</TABLE>
Rent expense aggregated $2,859,000, $2,544,000 and $2,082,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
C. Litigation
There are legal proceedings against the Company arising in the ordinary course
of business. Although it is not possible to determine the ultimate outcome of
the Company's legal proceedings, management believes that the outstanding
litigation will not result in material losses to the Company upon resolution.
21. Earnings Per Share
The following table reconciles basic and diluted earnings per share
calculations:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Years Ended December 31, 1997 1996 1995
Net Average Per Share Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $43,424 12,746,012 $3.41 $26,207 13,146,097 $1.99 $29,283 14,046,507 $2.08
Dilutive effect of
stock options and grants 953,770 902,074 910,849
Diluted earnings per share $43,424 13,699,782 $3.17 $26,207 14,048,171 $1.87 $29,283 14,957,356 $1.96
</TABLE>
22. Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition as of December 31,
1997 and 1996, and condensed statements of earnings and cash flows for each of
the years in the three-year period ended December 31, 1997, for ALBANK Financial
Corporation (parent company only) should be read in conjunction with the
consolidated financial statements and accompanying notes.
<TABLE>
Statements of Financial Condition (Parent Company Only)
<CAPTION>
(In thousands) December 31, 1997 1996
Assets
<S> <C> <C>
Cash and cash equivalents $ 26,625 13,813
Securities available for sale 14,152 9,453
Investment securities 6,191 6,715
Loan receivable from ESOP 5,023 6,279
Equity in net assets of subsidiaries 360,384 284,813
Intercompany accounts receivable 3,129 3,037
Other assets 1,424 180
$416,928 324,290
Liabilities
Accrued income taxes payable $2,782 1,031
Junior subordinated debentures 51,547 --
Other liabilities 2,986 4,134
Total liabilities 57,315 5,165
Stockholders' Equity
Preferred stock -- --
Common stock 157 157
Additional paid-in capital 182,704 180,670
Retained earnings 248,402 214,283
Treasury stock (73,200) (71,235)
Unrealized gain on securities available for sale, net of tax 6,578 1,781
Common stock acquired by ESOP (5,023) (6,279)
Common stock acquired by BRP (5) (252)
Total stockholders' equity 359,613 319,125
$416,928 324,290
</TABLE>
<TABLE>
Statements of Earnings (Parent Company Only)
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Interest income $ 3,036 1,984 2,091
Interest expense 2,721 63 215
Net interest income 315 1,921 1,876
Noninterest income -- 2 157
Noninterest expense 818 967 782
Income (loss) before income taxes and equity in earnings of subsidiaries (503) 956 1,251
Income tax expense (benefit) (320) 256 459
Income (loss) before equity in earnings of subsidiaries (183) 700 792
Equity in earnings of subsidiaries 43,607 25,507 28,491
Net income $43,424 26,207 29,283
</TABLE>
<TABLE>
Statements of Cash Flows (Parent Company Only)
<CAPTION>
(In thousands) Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $ 43,424 26,207 29,283
Reconciliation of net income to net cash provided (used) by operating
activities:
Equity in earnings of subsidiary (43,607) (25,507) (28,491)
Net amortization of premiums and accretion of discounts on securities (4) 28 102
Net decrease (increase) in other assets (1,246) (51) 61
Net increase in intercompany accounts receivable (92) (964) (47)
Net increase in accrued income taxes payable 851 103 5
Net increase (decrease) in other liabilities (678) 2,372 (128)
Net cash provided (used) by operating activities (1,352) 2,188 785
Cash Flows from Investing Activities
Net decrease in loan receivable from ESOP 1,256 1,256 1,256
Investment in ALBANK Commercial (67,880) -- --
Investment in ALBANK Capital Trust (1,547) -- --
Proceeds from the maturity of investment securities 528 506 7,852
Proceeds from the maturity of securities available for sale -- 10,000 --
Purchase of investment securities -- -- (2,963)
Purchase of securities available for sale -- (2,065) (3,205)
Net cash provided (used) by investing activities (67,643) 9,697 2,940
Cash Flows from Financing Activities
Net decrease in repurchase agreements -- -- (11,800)
Dividends received 42,000 32,000 28,000
Dividends paid (8,117) (6,210) (5,565)
Proceeds of junior subordinated debentures 51,547 -- --
Purchase of treasury stock (5,057) (25,847) (24,233)
Cash proceeds from the exercise of stock options 1,434 404 60
Net cash provided (used) by financing activities 81,807 347 (13,538)
Net increase (decrease) in cash and cash equivalents 12,812 12,232 (9,813)
Cash and cash equivalents at beginning of year 13,813 1,581 11,394
Cash and cash equivalents at end of year $ 26,625 13,813 1,581
Supplemental Disclosures of Cash Flow Information
Net unrealized gain on securities available for sale $ 4,699 1,282 1,149
Tax benefits related to stock options exercised 1,081 100 40
</TABLE>
23. Regulatory Capital Requirements
ALBANK, ALBANK Commercial and ALBANK, FSB are each subject to federal regulatory
capital requirements, administered respectively by the Federal Reserve Board,
the Federal Deposit Insurance Corporation ("FDIC") and the OTS (collectively,
the "Regulators").
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies, such as ALBANK (on a consolidated basis with their
subsidiaries), and the FDIC has adopted comparable guidelines for state
non-member banks such as ALBANK Commercial. For holding companies and state
non-member banks, the minimum ratio of qualifying total capital to risk-weighted
assets (including certain off-balance sheet items) is 8%, with "Tier 1 capital"
(principally common equity, retained earnings and certain types of preferred
stock) comprising at least half that amount. In addition, the Federal Reserve
Board has established a minimum leverage ratio (Tier 1 capital to average total
assets) to supplement its risk-based ratio, and the FDIC has adopted
substantially similar requirements. The applicable capital guidelines provide
for a minimum leverage ratio of 3% for the bank holding companies and banks that
meet certain specified criteria, including those having the highest regulatory
rating. All other institutions are required to maintain a leverage ratio of at
least 4%. The Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
The OTS requires savings associations such as ALBANK, FSB to comply with each of
three separate capital adequacy standards. They must have "tangible" capital
equal to at least 1.5% of adjusted total assets and "risk-based capital" equal
to at least 8% of risk-weighted assets (including certain off-balance sheet
items), of which 4% must be "core capital." In addition, ALBANK, FSB must
maintain a "leverage ratio" of 3% of core capital (analogous to "Tier 1
capital") to adjusted total assets. The OTS has proposed that the 3% core
capital requirement apply only to the strongest institutions and that all other
institutions maintain core capital of at least 4% or more of adjusted total
assets depending on the circumstances and the respective institution's risk
profile.
Under their prompt corrective action regulations, the Regulators are required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to undercapitalized institutions. Such actions could have a direct
material effect on an institution's financial statements. The regulations
establish a framework for the classification of institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage ratio of at
least 5%; a Tier 1 risk-based capital ratio of at least 6%; and a total
risk-based capital ratio of at least 10%.
As of December 31, 1997, ALBANK's leverage ratio, Tier 1 risk-based ratio and
total risk-based ratio were 8.38%, 12.97% and 14.15%, respectively. ALBANK
Commercial's leverage ratio, Tier 1 risk-based ratio and total risk-based ratio
were 7.91%, 14.95% and 16.01%, respectively. ALBANK, FSB's tangible capital
ratio, core ("leverage") ratio, Tier 1 risk-based ratio and total risk-based
ratio were 6.67%, 6.67%, 10.81% and 11.99%, respectively. At December 31, 1996,
ALBANK, FSB's tangible capital ratio, core ("leverage") ratio, Tier 1
risked-based ratio and total risk-based ratio were 7.00%, 7.00%, 10.80% and
11.88%, respectively.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the Regulators about capital components,
risk weightings and other factors.
Management believes that the Holding Company and Banks met all pertinent
regulatory capital adequacy requirements at December 31, 1997 and 1996.
Furthermore, the most recent OTS notification categorized ALBANK, FSB as a
well-capitalized institution under the prompt corrective action regulations.
There have been no conditions or events since the most recent notification that
management believes have changed the capital classification of ALBANK, FSB. As
of December 31, 1997, ALBANK and ALBANK Commercial had not as of yet received
capital adequacy categorizations from their respective Regulators.
LOGO ALBANK
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
(518) 445-2100
Exhibit 21.01 Subsidiaries of the Registrant
and Related Subsidiaries
as of December 31, 1997
State of
Incorporation or
Parent Organization Subsidiary Ownership
ALBANK Financial Corporation ALBANK, FSB 100% New York
ALBANK Commercial ALVEST Financial 100% New York
Services, Inc.
ALBANK, FSB ASBANY FUNDING CORP. 100% New York
ALBANK, FSB ASBANY CORP. 100% New York
ASBANY CORP. PAGE-ASBANY 100% Nebraska
ASBANY CORP. CDC-ASBANY 100% New York
ASBANY CORP. GABLES CVF, INC. 100% New York
ALBANK Financial Corporation ALBANK Capital Trust I 100% New York
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
ALBANK Financial Corporation:
We consent to the incorporation by reference in the following
Registration Statements:
No. 33-46977 on Form S-8,
No. 33-57674 on Form S-8,
No. 33-57672 on Form S-8,
No. 333-00016 on Form S-8,
No. 333-00082 on Form S-8, and
No. 333-00084 on Form S-8
of our report dated January 30, 1998, relating to the consolidated
statements of financial condition of ALBANK Financial Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of ALBANK Financial
Corporation.
/s/ KPMG Peat Marwick LLP
Albany, New York
March 25, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 68,883 97,389
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 617,943 768,517
<INVESTMENTS-CARRYING> 116,322 94,971
<INVESTMENTS-MARKET> 117,806 96,481
<LOANS> 2,559,649 2,856,049
<ALLOWANCE> 24,114 29,117
<TOTAL-ASSETS> 3,506,136 4,083,097
<DEPOSITS> 3,013,129 3,483,791
<SHORT-TERM> 42,346 68,747
<LIABILITIES-OTHER> 101,475 100,885
<LONG-TERM> 30,061 20,061
0 0
0 0
<COMMON> 157 157
<OTHER-SE> 318,968 359,456
<TOTAL-LIABILITIES-AND-EQUITY> 3,506,136 4,083,097
<INTEREST-LOAN> 194,108 218,347
<INTEREST-INVEST> 50,635 48,710
<INTEREST-OTHER> 3,783 2,119
<INTEREST-TOTAL> 248,526 269,176
<INTEREST-DEPOSIT> 119,405 125,138
<INTEREST-EXPENSE> 122,885 132,430
<INTEREST-INCOME-NET> 125,641 136,746
<LOAN-LOSSES> 5,775 7,200
<SECURITIES-GAINS> 8 476
<EXPENSE-OTHER> 90,303 84,390
<INCOME-PRETAX> 41,717 59,422
<INCOME-PRE-EXTRAORDINARY> 26,207 43,424
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 26,207 43,424
<EPS-PRIMARY> 1.99<F1> 3.41<F1>
<EPS-DILUTED> 1.87 3.17
<YIELD-ACTUAL> 3.91 3.96
<LOANS-NON> 19,231 24,551
<LOANS-PAST> 10,585 7,263
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 15,949 24,114
<CHARGE-OFFS> 9,648 5,272
<RECOVERIES> 728 1,075
<ALLOWANCE-CLOSE> 24,114 29,117
<ALLOWANCE-DOMESTIC> 19,048 21,124
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 5,066 7,993
<FN>
<F1>EPS Primary represents Basic EPS
</FN>
</TABLE>
