SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22038
ALBION BANC CORP.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-143516
- -------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
48 North Main Street, Albion, New York 14411-0396
- -------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 589-5501
--------------
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 $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES x NO
---- ----
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, based on the closing sales price of the registrant's Common
Stock as quoted on the Nasdaq Smallcap Market under the symbol "ALBC" on March
26, 1997, was $4,625,944 (250,051 shares at $18.50 per share). It is assumed
for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.
The registrant's revenues for the fiscal year ended December 31, 1996
were $4,706,264.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
---- ----
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PART I
Item 1. Description of Business
- --------------------------------
Albion Banc Corp. (the "Company"), a Delaware corporation, was
incorporated on March 23, 1993 for the purpose of becoming the holding company
for Albion Federal Savings and Loan Association ("Albion Federal" or the
"Association") (the Company and Albion Federal shall at times be referred to
as the "Company") upon Albion Federal's conversion from a federal mutual to a
federal stock savings and loan association ("Conversion"). The Conversion was
completed on July 23, 1993. At December 31, 1996, the Company had total
assets of $64.6 million, total deposits of $48.5 million and shareholders'
equity of $5.9 million. The Company has not engaged in any significant
activity other than holding the stock of Albion Federal. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to Albion Federal.
Albion Federal was organized in 1934 as a federally chartered mutual
savings and loan association and has been a member of the Federal Home Loan
Bank ("FHLB") System since 1935. Albion Federal is regulated by the Office of
Thrift Supervision ("OTS") and its deposits are insured up to applicable
limits under the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC").
The Association provides its customers with a full array of community
banking services. The Association is primarily engaged in the business of
attracting deposits from the general public and using such deposits, together
with other funding sources, to invest in one-to-four family residential
mortgage loans and, to a lesser extent, multi-family residential, consumer,
and commercial mortgage loans, including home equity loans, for its loan
portfolio, as well as for mortgage-backed and U.S. Government and agency
securities and other assets. At December 31, 1996, the Association's loans
totaled $48.4 million, or 74.9% of total assets, including $39.4 million, or
81.4%, of total loans secured by one-to-four family properties, $2.2 million,
or 4.7% of total loans secured by other real estate properties and $6.2
million of consumer loans, or 12.8% of total loans. Of the Association's
residential mortgage loans secured by one-to-four family and other real estate
properties, $24.4 million, or 58.7%, are fixed-rate loans and $17.2 million,
or 41.3%, are adjustable rate residential mortgage loans (collectively
referred to as ARMs).
On July 19, 1995, the Association entered into a Supervisory Agreement
with the OTS in connection with the Association's OTS examination. The
agreement requires the Association to develop policies and procedures
primarily relating to its internal operations. The Association has taken
steps to develop and implement the policies and procedures required by the
Supervisory Agreement and now believes that it is in substantial compliance
with the terms of the Supervisory Agreement. The Supervisory Agreement will
remain in effect until it is terminated by the OTS.
Selected Consolidated Financial Information
This information is incorporated by reference from page 2 of the 1996
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
This information is incorporated by reference from page 8 of the Annual
Report.
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<TABLE>
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Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income of the
Association. Information is provided with respect to (i) effects on interest income attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in
rate multiplied by change in volume).
1996 Compared to 1995 1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------- ------------------------- -----------------------
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ --- ---- ------ ------ ---
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans...... $24 $135 $ 1 $160 $ 73 $146 $ 4 $223 $(92) $629 $(23) $514
Consumer loans......... (14) 13 (1) (2) 4 80 1 85 (8) 177 (6) 163
--- ---- --- ---- ----- ---- ---- ---- ---- ---- ---- ----
Total loans........... 10 148 -- 158 77 226 5 308 (100) 806 (29) 677
Mortgage-backed
securities........... 10 11 1 22 82 2 1 85 (7) 13 (1) 5
Investment securities.. (8) (26) 1 (33) 234 (43) (43) 148 (69) (130) 22 (177)
Daily interest-earning
deposits............. -- -- -- -- -- -- -- -- (9) (9) 9 (9)
Other interest-earning
assets............... (10) (117) 5 (122) (5) 12 (2) 5 48 (14) (26) 8
--- ---- --- ---- ----- ---- ---- ---- ---- ---- ---- ----
Total net change in
income on interest-
earning assets......... 2 16 7 25 388 197 (39) 546 (137) 666 (25) 504
--- ---- --- ---- ----- ---- ---- ---- ---- ---- ---- ----
Interest-bearing
liabilities:
Interest-bearing
deposits............ (73) 162 (6) 83 441 192 63 696 (131) 107 (10) (34)
FHLB advances and
other borrowings.... 9 (192) (4) (187) 136 (114) (34) (12) (4) 132 (2) 126
--- ---- --- ---- ----- ---- ---- ---- ---- ---- ---- ----
Total net change in
expense on interest-
bearing liabilities.... (64) (30) (10) (104) 577 78 29 684 (135) 239 (12) 92
--- ---- --- ---- ----- ---- ---- ---- ---- ---- ---- ----
Net change in net
interest income........ $66 $46 $17 $129 $(189) $119 $(68) $(138) $ (2) $427 $(13) $412
=== ==== === ==== ===== ==== ==== ===== ==== ==== ==== ====
2
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Interest Rate Risk Exposure
The following table sets forth the interest rate risk exposure of the
Association's portfolio based on OTS data at December 31, 1996.
Interest Rate Sensitivity of Net Portfolio Value ("NPV")
NPV as % of
PV of Assets
Net Portfolio Value ----------------------
Change ----------------------------------- NPV
in Rates $ Amount $ Change % Change Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+400 $3,893 $(3,268) (46)% 6.32% -448 bp
+300 4,897 (2,263) (32) 7.78 -302 bp
+200 5,835 (1,325) (19) 9.09 -171 bp
+100 6,626 (534) (7) 10.13 -66 bp
0 7,160 -- -- 10.80 --
-100 7,360 200 3 11.00 +20 bp
-200 7,272 111 2 10.82 +2 bp
-300 7,249 89 1 10.72 -8 bp
-400 7,476 316 4 10.95 +15 bp
OTS Interest Rate Risk Measures: 200 BP Rate Shock
At December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
Pre-Shock NPV Ratio:
NPV as a percent of
PV of assets................ 10.80% 11.33% 11.98%
Exposure measure:
Post-shock NPV ratio........ 9.09% 10.51% 10.42%
Sensitivity measure:
Change in NPV ratio......... -171bp -83bp -156bp
Change in NPV as a percent
of PV of assets............. -2.00% -1.02% -1.87%
Interest Rate Risk Capital
Component ($000)............ 0 0 0
Lending Activities
General. The principal lending activity of the Association is the
origination of first mortgage loans secured by residential properties, and, to
a lesser extent, commercial real estate loans. In addition, the Association
currently offers a variety of consumer loans such as home equity loans, home
equity lines of credit and auto loans. The Association's net loans totaled
approximately $47.8 million at December 31, 1996, representing approximately
74.0% of its total assets.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Association's loan portfolio by type of loan as of the dates indicated.
At December 31,
-------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loan:
Real Estate Loans:
One-to-four family
residential........ $39,393 81.4% $36,122 80.7% $37,799 78.1%
Commercial(1)....... 2,234 4.6 2,594 5.8 2,040 4.2
Construction(2)..... 578 1.2 652 1.4 2,943 6.1
------- ---- ------- ---- ------- ----
Total real estate
loans............. 42,205 87.2 39,368 87.9 42,782 88.4
Other Loans:
Automobile.......... 129 0.3 229 0.5 358 0.8
Home improvement
and second
mortgage loans..... 4,960 10.2 3,997 8.9 3,911 8.1
Other.............. 1,106 2.3 1,187 2.7 1,319 2.7
------- ---- ------- ---- ------- ----
Total other
loans........... 6,195 12.8 5,413 12.1 5,588 11.6
------- ---- ------- ---- ------- ----
Gross loans....... 48,400 100.0% 44,781 100.0% 48,370 100.0%
===== ===== =====
Less:
Undisbursed loans
in process......... (279) (487) (1,159)
Net deferred loan
origination
costs (fees)....... 23 (1) 23
Allowance for
loan losses........ (306) (244) (224)
------- ------- -------
Total loans, net.... $47,838 $44,049 $47,010
======= ======= =======
_______________
(1) Commercial mortgage loans include mortgages on multi-family residential
real estate and other commercial properties.
(2) All construction loans originated by Albion Federal represent permanent
financings.
One-to-Four Family Residential Loans. The primary lending activity of the
Association has been the origination of mortgage loans to enable borrowers to
purchase/refinance existing homes or to construct new single-family homes.
Management believes that this policy of focusing on single-family residential
mortgage loans has been successful in contributing to interest income while
keeping delinquencies and losses to a minimum. At December 31, 1996,
approximately $39.4 million, or 81.4% of the Association's gross loan
portfolio consisted of loans secured by one-to-four family residential real
estate. The Association offers long-term, fixed rate mortgage loans and
adjustable-rate mortgage loans.
The Association presently originates both fixed rate mortgage loans and
ARMs secured by one-to-four family properties with loan terms of 10 to 30
years. ARMs originated since 1991 have interest rates that adjust at regular
intervals of one or three years based upon changes in the Treasury Bill for a
period matching the repricing period of the loan. These loans provide that
the amount of any increase or decrease in the interest rate is limited to two
percentage points per adjustment period and are limited to six percentage
points by which the rate can increase or decrease over the life of the loan.
Borrower demand for ARMs versus fixed rate mortgage loans is a function of the
level of interest rates, the expectations of changes in the level of interest
rates and the difference between the
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interest rates and loan fees offered for fixed rate mortgage loans and the
first year rate and loan fees for ARMs. The relative amount of fixed rate and
ARMs that can be originated at any time is largely determined by the demand
for each in a competitive environment.
During fiscal 1995, national demand for ARMs increased in connection with
increases in long term interest rates. However, with subsequent declines in
long term interest rates during the latter part of fiscal 1995 and during
fiscal 1996, national demand for ARMs was significantly reduced. Accordingly,
the Association experienced a decrease in its origination of residential ARMs
and the portfolio remained at $15.5 million at December 31, 1996.
During the year ended December 31, 1996 the Association's total
single-family mortgage loan originations were $9.3 million of which $500,000,
or 5.4% were subject to periodic interest rate adjustments and $8.8 million or
94.6% were long-term, fixed rate loans.
The Association underwrites ARMs based on the borrower's ability to repay
the loan assuming the fully indexed accrual rate on the ARM remained constant
during the loan term. As a result, the potential for a substantial increase
in interest payments on ARMs is lessened, as is the likelihood of
delinquencies and defaults.
Since October 1990, the Association has originated long-term, fixed-rate
loans under guidelines established by the Federal National Mortgage
Association ("FNMA"), which facilitates the sale of such loans in the
secondary market with servicing retained by the Association. The
Association's long-term, fixed-rate loans typically are originated with terms
of 15 to 30 years, amortized on a monthly basis with principal and interest
due each month. A determination is made at the time of origination whether
the loan is held for sale. At December 31, 1996, the Association had $24.4
million of one-to-four family residential fixed rate loans outstanding.
The Association's lending policies generally limit the maximum
loan-to-value ratio on fixed-rate and adjustable rate residential mortgage
loans to 80% of the lesser of the appraised value or purchase price of the
underlying residential property unless private mortgage insurance to cover the
excess over 80% is obtained in which case the mortgage is limited to 95% of
the lesser of appraised value or purchase price. The Association does have
limited funding from FNMA for its Community Homebuyer's program in which case
the loan-to-value ratio increases to 97% of the lesser of the appraised value
or purchase price. Also, the Association offers Federal Housing
Administration ("FHA") and Veteran Administration ("VA") financing. These
loans typically have a loan-to-value ratio of 100% and are partially insured
by the government should losses occur as a result of foreclosure.
At December 31, 1996, the Association had $578,000 in interim
construction loans in its portfolio. All of these loans are residential
construction loans for single family dwelling units and all automatically
convert into permanent residential real estate loans.
Multi-Family Residential Loans. At December 31, 1996, approximately
$600,000, or 1.2%, of the Association's gross loan portfolio consisted of
loans secured by multi-family residential real estate. Multi-family real
estate loans are generally originated at 80% of the appraised value of the
property or selling price, whichever is less, and carry adjustable rate
mortgages with the principal amortized over 10 to 30 years. Loans secured by
multi-family real estate are generally larger and involve a greater degree of
risk than one-to-four family residential loans, and are similar to the risks
associated with commercial real estate lending. See " -- Commercial Real
Estate Loans."
At December 31, 1996, the Association had six loans secured by
multi-family dwelling units which it originated and retained the entire
interest, that totalled $600,000, or 1.2%, of the Association's gross loan
portfolio. At December 31, 1996, the Association's largest multi-family
residential loan was a $156,000 loan secured by a 8-unit apartment complex in
the Association's primary market area. At December 31, 1996, the Association
did not have any multi-family residential loans which the Association
originated and retained the entire interest, and which were delinquent 120
days or more. See "-- Nonperforming Assets and Delinquencies."
5
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Commercial Real Estate Loans. The Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") permits federal savings and
loan associations and savings banks to invest in non-residential real estate
loans up to 400% of their capital as computed under generally accepted
accounting principles ("GAAP") plus general loan loss reserves. At December
31, 1996, this would limit the Association's aggregate non-residential real
estate loans to approximately $20.7 million. At such time, the Association
had commercial real estate loans outstanding of $2.2 million. The commercial
real estate loans originated by the Association are primarily secured by
retail outlets, churches, hospitals, warehouses and office buildings.
The Association does not actively solicit or originate commercial real
estate loans. Of primary concern in commercial real estate lending is the
borrower's creditworthiness and the feasibility and cash flow potential of the
project. Loans secured by income properties are generally larger and involve
greater risks than residential mortgage loans because payments on loans
secured by income properties are often dependent on successful operation or
management of the properties. As a result, repayment of such loans may be
subject, to a greater extent than residential real estate loans, to supply and
demand in the market in the type of property securing the loan and therefore,
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrowers ability to repay
the loan may be impaired. Although the thrift industry has generally
experienced material losses in commercial real estate lending, Albion Federal
has sustained no material losses on such loans.
Consumer Loans. At December 31, 1996, the Association's consumer loan
portfolio was $6.2 million, or 13.1%, of the gross loan portfolio. Of this
amount, $5.0 million were home improvement and home equity loans secured by
first or second liens on residential real estate that the Association
originates using similar underwriting standards as utilized with residential
first mortgage loans.
Albion Federal currently offers a variety of consumer loans, including
loans secured by mortgages on real estate for home improvement, debt
consolidation and other purposes, and savings account loans. The majority of
such loans are secured by a first or second mortgage on residential property.
The Association actively solicits these types of loans by contacting their
borrowing customers directly. The Association offers fixed and adjustable
rate home equity loans which are made for a maximum of $150,000 and are
secured by a first or second lien on one-to-four family properties. The
maximum term for fixed rate home equity loans is 15 years and 20 years for
variable rate loans. For the adjustable rate loans, during the initial five
years, the borrower may take draws against the line of credit up to their
credit limit. After the initial five year period, the pay-back period
commences over the remaining 15 years of the loan. One additional five year
draw period may be made available to the borrower at the Association's
discretion. Home equity lines of credit programs have interest rates varying
from the prime rate to the prime rate plus a margin of 1.20% or 1.45%,
depending upon the amount of the loan. The Association's lending policies
generally limit the maximum loan-to-value on home equity loans to 80% of the
appraised value of the underlying residential property. The Association's
average home equity loan is approximately $19,600.
Consumer loans have been offered under a variety of terms and conditions.
Secured consumer loans are limited to a maximum of 90% of the retail value of
the consumer collateral offered or real estate, including any other mortgages
or liens offered to secure the loan, except in the case of guaranteed student
loans, the amount which is established by the program. In recent years,
management has expanded its consumer lending to include automobile loans.
The Association's underwriting standards for consumer loans include an
assessment of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loans. Although the
applicant's creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral securing the
loan, if any, to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by assets that depreciate rapidly, such as automobiles. In the latter
case, repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the
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outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by the borrower against
the Association as the holder of the loan, and a borrower may be able to
assert claims and defenses which it has against the seller of the underlying
collateral. The Association adds a general provision to its consumer loan
loss allowance, based on general economic conditions and prior loss
experience. The Association historically has had a low level of delinquencies
on its consumer loans. See "-- Nonperforming Assets and Delinquencies."
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Loan Maturity and Repricing
The following table sets forth certain information at December 31, 1996 regarding the dollar amount of
loans maturing in the Association's portfolio based on their contractual terms to maturity, but does not
include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one year or less. Mortgage loans
which have adjustable rates are shown as maturing at their next repricing date. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and nonperforming loans.
Within One to Three to Five to Beyond
One Year Three Years Five Years Ten Years Ten Years Totals
-------- ----------- ---------- --------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages..... $14,733 $177 $1,064 $3,498 $20,472 $39,944
Commercial real estate.... 993 163 -- 148 216 1,520
Construction.............. 89 -- 182 -- 175 446
Other..................... 1,814 475 489 829 2,375 5,982
------- ---- ------ ------ ------- -------
Total loans.......... $17,629 $815 $1,735 $4,475 $23,238 $47,892
======= ==== ====== ====== ======= =======
</TABLE>
The following table sets forth all loans due one year after December 31,
1996 which have fixed interest rates and have floating or adjustable interest
rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Real estate mortgages................... $23,883 $1,328
Commercial real estate.................. 388 139
Construction............................ 285 72
Other................................... 3,297 871
------- ------
Total loans........................ $27,853 $2,410
======= ======
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The following table sets forth scheduled contractual amortization of loans and mortgage-backed
securities at December 31, 1996 and 1995, and the dollar amount of such securities and loans at the date
which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans,
loans having no stated schedule of repayments and no stated maturity and overdraft loans are reported as due
in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned
income and nonperforming loans.
At December 31, 1996 At December 31, 1995
---------------------------------------- ----------------------------------------
Mortgage- Mortgage-
Real Estate Consumer Total Backed Real Estate Consumer Total Backed
Loans Loans Loans Securities Loans Loans Loans Securities
----------- -------- ----- ---------- ----------- -------- ----- ----------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year.......... $15,815 $1,814 $17,629 $ -- $15,924 $1,418 $17,072 $ --
After one year
through three years..... 340 475 815 -- 620 526 1,146 --
After three years
through five years...... 1,246 489 1,735 -- 1,184 534 1,718 --
After five years......... 24,509 3,204 27,713 8,075 21,056 2,979 24,035 4,138
------- ------ ------- ------ ------- ------ ------- ------
Total................ $41,910 $5,982 $47,892 $8,075 $38,784 $5,187 $43,971 $4,138
======= ====== ======= ====== ======= ====== ======= ======
Interest rate terms
on amounts due after
one year:
Fixed.................. $24,556 $3,297 $27,853 $4,129 $18,538 $3,565 $22,203 $ --
------- ------ ------- ------ ------- ------ ------- ------
Adjustable............. $ 1,539 $ 871 $ 2,410 $3,946 $ 4,322 $ 474 $ 4,796 $ 4,138
------- ------ ------- ------ ------- ------ ------- ------
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Mortgage Loan Solicitation and Processing. Prior to 1992, the
Association's main source of loans was walk-ins and to a lesser degree broker
related. Subsequent to 1992, loan originations have been derived through the
Association's sales representative as well as walk-ins. Advertising in local
newspapers promotes loan products to the public in general. The present
customer base and walk-in traffic are solicited through stuffers, brochures,
lobby signs, and, occasionally through direct mail. Telephone inquiries are
also used.
Once a mortgage loan application is received, a credit and property
analysis is completed including obtaining a credit report from local reporting
agencies, verification of income and deposits through mail or direct contact,
asset and liability verification as required and an appraisal of the property
offered as collateral. Real estate appraisals are completed by board approved
and licensed independent, fee appraisers. The application is then submitted
to the Association's loan officer for underwriting and approval. All loans
require the approval of two officers of the Association. The loans are
reported to the loan committee at the next monthly meeting. In an effort to
ensure non-discrimination in lending decisions, two officers must also review
loan applications that are declined. Any application that is declined is also
reported to the loan committee at the next monthly meeting.
Loan Originations, Purchases and Sales. Loans are originated to meet or
exceed the applicable underwriting requirements of the FNMA. The Association
maintains mortgage documentation on single-family loans it originates as
required to sell such loans to FNMA in the secondary market. Single-family
loan sales over the past five years have been limited to long-term fixed-rate
whole loans to FNMA without recourse and servicing retained. Loans sold have
had a fixed rate monthly payment.
In addition to selling one-to-four family loans, Albion Federal has
occasionally purchased loans originated by other financial institutions,
secured by one-to-four family residential properties located outside of its
primary market area. The Association's purchases in the secondary market are
dependent upon the demand for mortgage credit in the local market area and the
inflow of funds from traditional sources. The Association has not purchased
any whole loans since 1986. At December 31, 1996, the Association had
$610,255 in whole loans which were purchased by the Association and which are
serviced by the Association, and $212,000 in mortgage pool securities which
are serviced by others.
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The following table shows the dollar amount of loans originated, sold and
repaid during the periods indicated.
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Total loans at beginning
of period......................... $44,781 $48,370 $39,986
------- ------- -------
Real estate loans originated:
One-to-four family residential..... 7,076 1,473 7,873
Multi-family residential and
commercial real estate............ 185 150 736
Construction loans(1).............. 2,242 842 3,689
Other loans originated:
Consumer........................... 2,586 1,553 3,587
Other loans........................ -- -- --
------- ------- -------
Total loans originated........... $12,089 $ 4,018 $15,885
======= ======= =======
Loans sold:
Total one-to-four family
residential mortgages............. $ (459) $(2,101) $(1,704)
------- ------- -------
Total loans sold................ $ (459) $(2,101) $(1,704)
======= ======= =======
Loan principal repayments........... $(7,718) $(5,506) $(5,797)
Transfers to foreclosed real
estate(2).......................... (293) -- --
------- ------- -------
Net loan activity................... 3,619 (3,589) 8,384
------- ------- -------
Total loans at end of period........ $48,400 $44,781 $48,370
======= ======= =======
___________________
(1) All construction loans originated by Albion Federal represent permanent
financings.
(2) Activity represents transfers from loans receivable to real estate owned.
Loan Commitments. The Association issues commitments for fixed and
adjustable rate one-to-four family residential mortgage loans conditioned upon
the occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 60 days from
approval, subject to interest rate change if the loan does not close within
the specified expiration date. The Association had outstanding net loan
commitments of approximately $.4 million at December 31, 1996. See Note 12 of
Notes to Consolidated Financial Statements.
Loan Origination and Other Fees. The Association, in some instances,
receives loan origination fees and discount "points." Loan fees and points
are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for funding the loan. The Association usually charges
discount points of 0% to 2% on one-to-four family residential real estate
loans and on long-term multi-family residential loans and a 1% origination fee
on residential construction loans. Current accounting standards require fees
received (net of certain loan origination costs) for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees associated with loans that are sold are recognized as
income at the time of sale. The Association had $22,905 of net deferred loan
costs at December 31, 1996.
The Association also receives loan servicing fees on the loans it sells
and on which it retains the servicing responsibilities.
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Nonperforming Assets and Delinquencies. When a mortgage loan borrower
fails to make a required payment by the end of the month in which the payment
is due, the Association generally institutes collection procedures. The
Association's collection procedures provide for a two-to-five percent late
charge if a monthly installment is more than 15 days past due. The first
notice is generally mailed to the borrower within 15 days of the payment due
date and, if necessary, a second written notice follows at the end of the
month or shortly thereafter, in which that payment was due. A "demand" letter
is mailed to the borrower after the 60th day of delinquency. Attempts are
made to contact the borrower again during the 90-120th day of delinquency.
When contact is made with the borrower, the Association will attempt to obtain
full payment and if that is not possible, work out a repayment schedule with
the borrower to avoid foreclosure.
In most cases, delinquencies are cured promptly; however, if by the 120th
day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of inducing the borrower to pay on time have been
exhausted, the Association initiates foreclosure, deed-in-lieu of foreclosure,
or, in the case of a second mortgage, liquidation according to the terms of
the security instrument and applicable law.
The Association institutes the same collection procedures for
non-mortgage loans.
The Board of Directors is informed on a monthly basis as to the status of
all mortgage and non-mortgage loans that are delinquent 60 days or more, as
well as the status on all loans currently in foreclosure or owned by the
Association through foreclosure.
The table below sets forth the amounts and categories of nonperforming
assets in the Association's loan portfolio at the dates indicated. Loans are
placed on non-accrual status through the establishment of a reserve for
uncollected interest when the loan becomes more than 90 days delinquent and
collection of interest becomes doubtful. The Association does not recognize
income on non-accrual loans. At December 31, 1996, uncollected cumulative
interest totaled $14,470. The Association would have recorded interest income
of $7,572, $10,970 and $14,470 on non-accrual loans during the years ended
December 31, 1994, 1995 and 1996, respectively, if such loans had been
performing during such periods. The Association did not recognize interest
income on loans placed on a non-accrual basis during the years ended December
31, 1994, 1995 and 1996, respectively. Foreclosed assets include assets
acquired in settlement of loans.
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The following table sets forth dollar amounts of the Association's
nonperforming assets for the periods indicated. During the periods shown, the
Association had no troubled debt restructured loans within the meaning of SFAS
15.
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
One-to-four family residential......... $252 $252 $222
Commercial............................. -- 70 --
---- ---- ----
TOTAL................................ 252 322 222
---- ---- ----
Accruing loans which are contractually
past due 90 days or more:
Real estate:
One-to-four family residential......... -- -- --
Commercial............................. -- -- --
Consumer................................ -- -- --
---- ---- ----
TOTAL.............................. -- -- --
---- ---- ----
Total of nonaccrual and 90 days
past due loans........................... 252 322 222
Foreclosed real estate.................... 211 20 35
---- ---- ----
Total nonperforming assets............. $463 $342 $257
==== ==== ====
Total loans delinquent 90 days or
more to net loans........................ 0.5% 0.5% 0.9%
Total loans delinquent 90 days or
more to total assets..................... 0.4% 0.4% 0.7%
Total nonperforming assets to
total assets(1).......................... 0.7% 0.5% 0.8%
__________________
(1) Total nonperforming assets include total nonaccrual and 90 days past due
loans and real estate owned.
The increase in total nonperforming assets from $342,000 at December 31,
1995 to $463,000 at December 31, 1996 can be attributed largely to the
deterioration of three participation mortgage loan pools and increased real
estate owned. See "-- Asset Classification" for a discussion of the
Association's largest nonperforming loans at December 31, 1996.
Asset Classification. Federal regulations require that each insured
institution review and classify its assets on a regular basis. In addition,
in connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations also provide for a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention that, if left uncorrected, may result in deterioration of the
repayment prospects for the assets or in the institution's credit position at
a future date. Assets classified as substandard, doubtful or special mention
require the
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institution to establish general allowances for loan losses. If an asset or
portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100.0% of the
portion of the asset classified loss or charge off such amount. A portion of
general loss allowances established to cover possible losses related to assets
classified substandard, doubtful and special mention may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At December 31, 1996, there were no assets not classified which
necessitated classification because management knew about possible credit
problems of borrowers which caused management to have serious doubts as to the
ability of such borrowers to comply with existing repayment terms.
At December 31, 1996, 1995 and 1994 the aggregate amounts of the
Association's classified assets, and of the Association's general and specific
allowances and charge-offs for the period then ended were as follows:
At December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Doubtful.................... $ -- $ -- $ --
Substandard assets.......... 372 401 281
Special mention............. 510 1,150 1,067
General loss allowances..... 306 244 224
Specific loss allowances.... -- -- --
Net charge-offs............. 78 16 12
The following is a discussion of the Association's major substandard
loans at December 31, 1996:
The Association's largest nonperforming asset(s) consists of three
participation mortgage loan pool securities that totalled $212,000 at December
31, 1996. The securities were purchased in 1987 from Thrift Association
Service Corporation (TASCO) and are secured by one-to-four family properties.
Payments from TASCO ceased during May 1996 and TASCO and the Federal Deposit
Insurance Corporation (FDIC) are currently in a dispute over the servicing
of these loan pools. The Association has set up a reserve of $97,000 to cover
possible losses associated with these assets.
Real Estate Owned. Real estate acquired by the Association as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired, the unpaid principal
balance of the related loan plus foreclosure costs are compared to the
property's appraised value. The property is then directly written down to the
lower of cost or fair value. Subsequently, the property is carried at the
lower of cost or net realizable value with any adjustments made through the
establishment of a specific reserve. At December 31, 1996, the Association
had $211,498 of real estate owned.
Allowance for Loan Losses. The Association's management, at least
quarterly, evaluates the need to establish reserves against losses on loans
based on estimated losses on specific loans when a finding is made that a
significant and permanent decline in value has occurred. Such evaluation
includes a review of all loans for which full collectibility may not be
reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. These provisions for
losses are charged against earnings in the year they are established. The
Association established provisions for loan losses for the years ended
December 31, 1994, 1995 and 1996, of approximately $132,038, $36,000 and
$140,239, respectively. The fluctuation in the annual provision for loan
losses is the result of management's assessment of economic conditions and
such provisions are computed based on management's established loan review
process. In 1994, the provision for loan losses totaled $132,038, which was
determined primarily from the Association's increased loan portfolio and
higher risk-based loan levels. The Association
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conducted an internal review of its lending policies and practices during the
year and identified concerns in such policies and procedures. In connection
with an OTS examination in November 1994, the examiners expressed concerns
regarding the Association's underwriting policies and weaknesses in the
Association's internal lending policies and procedures. In response to
weaknesses noted during its internal review and the OTS examination, the
Association increased the ratio of its allowance for loan losses to total
loans from .3% to .5% at December 31, 1994. In 1995, the provision for loan
losses totaled $36,000, which decreased between the periods primarily as a
result of improved lending policies and practices and a decrease in size of
the loan portfolio. In 1996, the provision for loan losses totalled $140,239,
an increase of $104,239 from 1995. This increase was primarily the result of
management's quarterly analysis of the Association's loan portfolio,
principally driven by deterioration in the credit quality of three
participation mortgage pools. The Association's ratio of nonperforming assets
to total assets remained low at 0.7%, while the ratio of allowance for loan
losses to total loans remained the same at 0.6% during the period. Although
the Association believes its provision for loan losses is at a level which it
considers to be adequate to provide for losses, there can be no assurances
such losses will not exceed the estimated amounts.
At December 31, 1996 the Association had an allowance for loan losses of
$305,900 which represented .6% of total loans. Management believes that loan
loss reserves were adequate at December 31, 1996. However, if the underlying
facts and circumstances of the loan portfolio change in the future, the
adequacy of the allowance for loan losses will be addressed and, if need be,
adjusted accordingly.
Loan Loss Allowance Analysis
The following table sets forth an analysis of the Association's gross
allowance for loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and
the amount of loss realized has been charged or credited to current income.
Year Ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Allowance at beginning of
period......................... $244 $224 $104
Provision for loan losses........ 140 36 132
Charge offs:
Residential real estate........ (58) -- --
Commercial real estate......... (4) -- --
Consumer loans................. (16) (16) (12)
---- ---- ----
Total charge offs..... (78) (16) (12)
---- ---- ----
Allowance at end of period... $306 $244 $224
==== ==== ====
Ratio of allowance to total
loans outstanding at the
end of the period............... 0.6% 0.6% 0.5%
Ratio of net charge offs to
average loans outstanding
during the period............... 0.2% -- --
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Allowance for Loan Losses by Category
At December 31,
------------------ ------------------ ------------------
1996 1995 1994
------------------ ------------------ ------------------
Loan Loan Loan
Category Category Category
as a % of as a % of as a % of
Out- Out- Out-
standing standing standing
Amount Loans Amount Loans Amount Loans
------ --------- ------ --------- ------ ---------
(Dollars in thousands)
Real estate loans:
One-to-four family
residential...... $218 81.4% $120 80.2% $109 78.1%
Commercial.......... 34 4.6 25 5.8 3 4.2
Construction........ 8 1.2 6 1.9 24 6.1
Consumer............. 46 12.8 93 12.1 88 11.6
---- ----- ---- ----- ---- -----
Total allowance
for loan losses... $306 100.0% $244 100.0% $224 100.0%
==== ===== ==== ===== ==== =====
Investment Activities
Savings and loan associations have authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various Federal agencies and of state and municipal governments, deposits at
the FHLB-New York, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, such savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. Savings institutions
are also required to maintain minimum levels of liquid assets by regulation.
See "Regulation of Albion Federal -- Federal Home Loan Bank System." The
Association may decide to increase its liquidity above the required levels
depending upon the availability of funds and comparative yields on investments
in relation to return on loans.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "Regulation of Albion Federal". The balance of
the Association's investments in short-term securities in excess of regulatory
requirements reflects management's response to the significantly increasing
percentage of deposits with short maturities. At December 31, 1996, the
Association's regulatory liquidity was 9.2% which is in excess of the required
5%. It is the intention of management to hold securities with short
maturities in the Association's investment portfolio in order to enable the
Association to match more closely the interest-rate sensitivities of its
assets and liabilities.
The Association periodically invests in mortgage-backed securities,
insured or guaranteed by either the Government National Mortgage Association
("GNMA"), FNMA or the Federal Home Loan Mortgage Corporation ("FHLMC"). All
of the mortgage-backed securities in the portfolio have coupon rates as of
December 31, 1996, ranging from 6.96 to 9.25% with a weighted average yield of
7.9% for the year ended December 31, 1996. At December 31, 1996, the
amortized cost of the Association's mortgage-backed securities portfolio
totaled $8.0 million. The market value of such mortgage-backed securities
totalled $8.1 million at December 31, 1996. Mortgage-backed securities
generally increase the quality of the Association's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowing or other obligations of the
Association. Of the Association's mortgage-backed securities portfolio, $3.9
million are carried at fixed rates and $4.1 million are carried at adjustable
rates as of December 31, 1996.
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Investment decisions are reviewed by the Asset/Liability Committee
("ALCO"), which meets quarterly and consists of the Association's Chairman of
the Board, Vice Chairman, Chief Executive Officer and two Vice Presidents.
The ALCO Committee acts within policies established by the Board of Directors.
At December 31, 1996, the Association's investment and mortgage-backed
securities portfolio totaled $11.2 million and consisted primarily of U.S.
Treasury securities, corporate bonds, municipal bonds and mortgage-backed
securities. The Association's variable rate mortgage-backed securities are
held as available for sale, while the fixed rate mortgage-backed securities,
U.S. Treasuries, corporate bonds and municipals, are held until maturity. For
further information concerning the Association's investment and
mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements contained in the 1996 Annual Report to Stockholders.
Investment Securities Analysis
The following table sets forth the Association's investment and
mortgage-backed securities portfolio at carrying value at the dates indicated.
At December 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Percent Percent Percent
of of of
Book Port- Book Port- Book Port-
Value(1) folio Value(1) folio Value(1) folio
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
U.S. government
treasury and
obligations
of U.S.
government
agencies......... $10,948 97.3% $6,425 86.6% $4,085 72.1%
State and
political
subdivision...... 200 1.8 391 5.3 701 12.4
Corporate
obligations...... 100 .9 601 8.1 878 15.5
------- ----- ------ ----- ------ -----
Total............. $11,248 100.0% $7,417 100.0% $5,664 100.0%
======= ===== ====== ===== ====== =====
- -------------
(1) The market value of the Association's investment securities
portfolio, including mortgage-backed securities amounted to $11.2
million, $7.4 million and $5.7 million, at December 31, 1996, 1995 and
1994, respectively. At December 31, 1996, the market value of the
principal components of the Association's investment securities portfolio
was as follows: U.S. Government and agency securities $10.9 million,
state and political subdivision securities $201,400, and corporate
obligations $100,700.
The following table sets forth the contractual maturities and weighted
average yields of the debt securities in the Association's investment
securities portfolio at December 31, 1996.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. government
treasury
and obliga-
tions of U.S.
government
agencies....... $2,873 5.53% $ -- --% $88 8.48% $7,987 7.13%
State and
political
subdivision.... 200 6.06 -- -- -- -- -- --
Corporate
obligations.... 100 6.61 -- -- -- -- -- --
17
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Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and FHLB advances are the major
source of the Association's funds for lending and other investment purposes.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are significantly influenced by general
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds
from other sources. They may also be used on a longer term basis for general
business purposes.
Deposit Accounts. Deposits are attracted from within the Association's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market accounts, regular savings accounts, checking accounts, certificates of
deposit and retirement savings plans. Deposit account terms vary according to
the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. The Association has
emphasized checking accounts, passbooks and certificates of deposits. In
determining the terms of its deposit accounts, the Association considers the
rates offered by its competition, profitability to the Association, matching
deposit and loan products and its customer preferences and concerns. The
Association generally reviews its deposit mix and pricing weekly, and adjusts
it as necessitated by liquidity needs and competition. Management believes
deposits remained relatively stable, net of interest credited, between the
periods despite withdrawals as depositors sought increased yields on
alternative investments in the marketplace.
Deposit Balances
The following table sets forth information concerning the Association's
time deposits and other interest-bearing deposits at December 31, 1996.
Percentage
Weighted of Total
Average Interest-
Interest Minimum Bearing
Yield Term Category Amount Balance Deposits
- -------- ---- -------- ------ -------- ---------
(Dollars in
thousands)
Certificates of Deposit
5.50% 18 Month IRA $1,000 $642 1.4%
6.32 42 Month IRA 1,000 454 1.0
3.09 None Passbook 50 12,889 27.5
4.10 32 - Fixed term 1,000 62 0.1
44 days and fixed rate
4.27 45 - Fixed term 1,000 509 1.1
181 days and fixed rate
5.09 182- Fixed term 1,000 4,022 8.6
365 days and fixed rate
5.38 1 year Fixed term 1,000 11,753 25.1
and fixed rate
6.11 2 years Fixed term 1,000 4,240 9.0
and fixed rate
6.13 3 years Fixed term 1,000 1,226 2.6
and fixed rate
6.39 4 years Fixed term 1,000 895 1.9
and fixed rate
6.44 5 years Fixed term 1,000 4,055 8.6
and fixed rate
1.79 None NOW Accounts 1,000 2,616 5.6
3.08 None MMDA 2,500 3,544 7.5
------- -----
Total $46,907 100.0%
======= =====
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Deposit Flow
The following table sets forth the balances of savings deposits in the various types of savings
accounts offered by the Association at the dates indicated.
At December 31,
-------------------------------------------------------------------------------------
1996 1995 1994
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing.....$ 1,585 3.3% $ 499 $ 1,086 2.3% $ 538 $ 548 1.5% $ 124
NOW checking............ 2,616 5.4 608 2,008 4.3 (42) 2,050 5.4 (184)
Regular savings
accounts............... 12,889 26.6 1,666 11,223 24.1 (3,193) 14,416 38.1 (1,085)
Money market deposit.... 3,544 7.3 1,295 2,249 4.8 (753) 3,002 7.9 (273)
Fixed-rate certificates
which mature in the
year ending
Within 1 year....... 18,289 37.7 (4,085) 22,374 48.1 12,867 9,507 25.2 1,588
Within 1-3 years.... 7,814 16.1 1,261 6,553 14.1 (286) 6,839 18.1 1,599
Certificates maturing
thereafter........... 1,755 3.6 689 1,066 2.3 (369) 1,435 3.8 411
------- ----- ------ ------- ----- ------ ------- ----- ------
Total..............$48,492 100.0% $1,933 $46,559 100.0% $8,762 $37,797 100.0% $2,180
======= ===== ====== ======= ===== ====== ======= ===== ======
NOTE: IRA accounts are included in certificate balances: Amounts are $1.1 million, $1.0 million and
$433,000 at December 31, 1996, 1995 and 1994, respectively.
19
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Time Deposits by Rates
The following table sets forth the time deposits in the Association
classified by rates as of the dates included.
At December 31,
-----------------------------------------
1996 1995 1994
-------- ------- --------
(In thousands)
Below 4.00%................. $ 472 $ 270 $ 3,526
4.01% - 6.00%............... 22,852 16,644 10,861
6.01% - 8.00%............... 4,518 13,065 3,277
8.01% - 10.00%.............. 15 14 101
Over 10.00%................. -- -- 16
The following table sets forth the amount and maturities of time deposits
at December 31, 1996.
Amount Due
------------------------------------------
Less Percentage
Than After of Total
One 1-2 2-3 3-4 4 Certificate
Year Years Years Years Years Total Accounts
---- ----- ----- ----- ----- ----- ---------
(Dollars in thousands)
Below 4.00%....... $ 472 $ -- $ -- $ -- $ -- $ 472 1.7%
4.01% - 6.00%..... 16,315 3,477 1,874 594 592 22,852 82.0
6.01% - 8.00%..... 1,502 553 1,894 298 271 4,518 16.2
8.01% - 10.00%.... -- 9 7 -- -- 16 0.1
------- ------ ------ ---- ---- ------- -----
Total........ $18,289 $4,039 $3,775 $892 $863 $27,858 100.0%
======= ====== ====== ==== ==== ======= =====
The following table sets forth the savings activities of the Association
for the periods indicated.
Year Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Net increase before
interest credited.......... $ (196) $ 6,730 $ 829
Interest credited............ 2,129 2,047 1,351
------- ------- -------
Net increase in savings
deposits................... 1,933 8,777 2,180
------- ------- -------
Ending balance............... $48,492 $46,559 $37,797
======= ======= =======
Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association may rely upon advances from the FHLB-New York to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-New York has served as one of the Association's
primary borrowing sources. Advances from the FHLB-New York are typically
secured by the Association's first mortgage loans. At December 31, 1996, the
Association had $9.0 million of fixed rate borrowings from the FHLB-New York
at a weighted average rate of 5.93%. Required principal repayments are
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as follows: $6.0 million in 1997, and $1.0 million in 1998, 1999 and 2000.
The Association did not have any overnight borrowings from the FHLB-New York
at December 31, 1996.
The FHLB-New York functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Association is required to own capital stock
in the FHLB-New York and is authorized to apply for advances on the security
of such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage
of an institution's retained earnings or on the FHLB's assessment of the
institution's creditworthiness. The FHLB-New York determines specific lines
of credit for each member institution.
At December 31, 1994, 1995 and 1996, the Association had no short-term
borrowings or securities sold under agreements to repurchase.
Subsidiary Activities
In January 1994, the Company formed a subsidiary, New Frontier of Albion
("New Frontier"), to sell fixed rate annuities. In October 1994, New Frontier
was sold to Albion Federal to help facilitate the sale of fixed rate and
variable rate products. At December 31, 1996, Albion Federal had an equity
investment of $100 in New Frontier. The operations of New Frontier, which are
not material, are included in the Company's consolidated financial statements
appearing in the Annual Report.
REGULATION OF ALBION BANC CORP.
General
The Company is a savings and loan holding company within the meaning of
the Home Owners' Loan Act of 1933 ("HOLA"). As such, the Company is
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. The Company is also subject to the
information, proxy solicitation, insider trading restrictions, and other
requirements of the Securities Exchange Act of 1934, as amended.
Company Acquisitions
The HOLA and OTS regulations issued thereunder generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring
more than 5% of the voting stock of any other savings association or savings
and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25 percent
of the voting shares of such holding company, from acquiring control of any
savings association not a subsidiary of such savings and loan holding company,
unless the acquisition is approved by the OTS.
Company Activities
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than a unitary savings and loan holding company. Specifically, if either
federally insured subsidiary savings association fails to meet the QTL test,
the activities of the Company and any of its subsidiaries (other than the
Company or other federally insured subsidiary savings associations) would
thereafter be subject to further restrictions. The HOLA provides that, among
other things, no multiple savings and loan holding company
21
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or subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary
insured institution, (ii) conducting an insurance agency or escrow business,
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple holding company.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the
Federal Reserve Act apply to all federally insured savings associations and
any such "affiliate." A savings and loan holding company, its subsidiaries
and any other company under common control are considered affiliates of the
subsidiary savings association under the HOLA. Generally, Sections 23A and
23B: (i) limit the extent to which the insured association or its
subsidiaries may engage in certain covered transactions with an affiliate to
an amount equal to 10% of such institution's capital and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to
the institution or subsidiary, as those provided to a non-affiliate. The term
"Covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar other types of transactions. Also, a
savings association may not make any loan to an affiliate unless the affiliate
is engaged only in activities permissible for bank holding companies. Only
the Federal Reserve Board may grant exemptions from the restrictions of
Sections 23A and 23B. The OTS, however, may impose more stringent
restrictions on savings associations for reasons of safety and soundness.
Qualified Thrift Lender Test
The HOLA requires that any savings and loan holding company that
controls a savings association that fails the qualified thrift lender test, as
explained under "Regulation of Albion Federal -- Qualified Thrift Lender
Test," must, within one year after the date on which the association ceases to
be a qualified thrift lender, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
REGULATION OF ALBION FEDERAL
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDIA"), and the regulations issued by the
OTS and the FDIC to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. In addition, the
Association's relationship with its depositors and borrowers is also regulated
to a great extent, especially in such matters as the ownership of deposit
accounts and the form and content of the Association's mortgage documents.
The Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to review the Association's compliance
with various regulatory requirements. 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
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adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on the Company, the Association and their operations. The
Company, as a savings and loan holding company, will also be required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-New York, is required to acquire
and hold shares of capital stock in the FHLB-New York in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-New York. The Association is in compliance with this requirement with an
investment in FHLB-New York stock of $450,000 at December 31, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-New York.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. The FDIC currently maintains two separate
insurance funds: the BIF and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Association's accounts are insured by the SAIF up to the maximum
extent permitted by law. The Association pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for
all SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of
an institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
matrix so created results in nine assessment risk classifications, with rates
that until September 30, 1996 ranged from 0.23% for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken. The Association's assessments
for the year ended December 31, 1996 were $391,541, which includes a special
assessment of $274,921.
Until the second half of 1995, the same matrix applied to BIF-member
institutions. As a result of the BIF having reached its designated reserve
ratio, effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000.
Pursuant to the Deposit Insurance Fund
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Act ("DIF Act"), which was enacted on September 30, 1996, the FDIC imposed a
special one-time assessment on each depository institution with
SAIF-assessable deposits so that the SAIF may achieve its designated reserve
ratio. Beginning January 1, 1997, the assessment schedule for SAIF members
will be the same as that for BIF members. In addition, beginning January 1,
1997, SAIF members will be charged an assessment of 0.064% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately 0.013% until the earlier
of December 31, 1999 or the date upon which the last savings association
ceases to exist, after which time the assessment will be the same for all
insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide that
a federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions
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as if it were in the next lower category if the institution is in an unsafe or
unsound condition or has received in its most recent examination, and has not
corrected, a less than satisfactory rating for asset quality, management,
earnings or liquidity. The OTS may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1996, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies have
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness
standards required by the FDIA. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The agencies also proposed asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. Under the final
regulations, if the OTS determines that the Association fails to meet any
standard prescribed by the Guidelines, the agency may require the Association
to submit to the agency an acceptable plan to achieve compliance with the
standard, as required by the FDIA. The final regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in the HOLA and
regulations of the OTS thereunder to avoid operating certain restrictions. A
savings institution that fails to become or remain a QTL shall either become a
national bank or be subject to the following restrictions on its operations:
(i) the association may not make any new investment or engage in activities
that would not be permissible for national banks; (ii) the association may not
establish any new branch office where a national bank located in the savings
institution's home state would not be able to establish a branch office; (iii)
the association shall be ineligible to obtain new advances from any FHLB; and
(iv) the payment of dividends by the association shall be subject to the rules
regarding the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the
savings institution ceases to be a QTL, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any outstanding
advances to any FHLB. In addition, within one year of the date on which a
savings association controlled by a company ceases to be a QTL, the company
must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution quality as a
domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loan to small
businesses and loan made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an
overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within
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90 days of origination; 100% of consumer loans; and stock issued by the FHLMC
or the FNMA. Portfolio assets consist of total assets minus the sum of (i)
goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of the
institution's total assets. At December 31, 1996, the Association's qualified
thrift investments significantly exceeded 65% of its portfolio assets as
required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS' prompt corrective action regulation
provides the a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, and (iii) general valuation loan and lease loss allowances up to 1.25%
of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
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construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in
lieu of the OTS-calculated amount. The OTS has postponed the date that the
component will first be deducted from an institution's total capital until
savings associations become familiar with the process for requesting an
adjustment to its interest rate risk component.
At December 31, 1996, Albion Federal's core capital of approximately $4.9
million, or 7.8% of adjusted total assets, was $3.0 million in excess of the
OTS requirement of $1.9 million, or 3% of adjusted total assets. As of such
date, the Association's tangible capital of approximately $4.9 million, or
7.8% of adjusted total assets, was $3.9 million in excess of the OTS
requirement of $1.0 million, or 1.5% of adjusted total assets. Finally, at
December 31, 1996, the Association had risk-based capital of approximately
$5.2 million or 16.0% of total risk-weighted assets, which was $2.6 million in
excess of the OTS risk-based capital requirement of $2.6 million or 8% of
risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without
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application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier
3 associations may not make any capital distributions without prior approval
from the OTS.
The Association is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At December 31, 1996, the
Association's limit on loans to one borrower was $746,400. At December 31,
1996, the Association's largest single loan to one borrower was $484,234,
which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guaranty and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case
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with respect to all FDIC-insured banks. The Association has not been
significantly affected by the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may
make to such persons based, in part, on the Association's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), a federal statute, all federally-insured financial institutions have
a continuing and affirmative obligation consistent with safe and sound
operations to help meet all the credit needs of its delineated community. The
CRA does not establish specific lending requirements or programs nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to meet all the credit needs of its
delineated community. The CRA requires the federal banking agencies, in
connection with regulatory examinations, to assess an institution's record of
meeting the credit needs of its delineated community and to take such record
into account in evaluating certain regulatory applications filed by an
institution. The CRA requires public disclosure of an institution's CRA
rating. The Association received a "satisfactory" rating as a result of its
latest evaluation.
Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal
of officers or directors, receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or $1.0 million per day in especially egregious
cases. Under the FDIA, the FDIC has the authority to recommend to the
Director of the OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
TAXATION
Federal Taxation
General. The Company and the Association report their income on a
calendar year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Association or the Company.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have
been computed using an amount based on the Association's actual loss
experience, or a percentage equal to 8% of the Association's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve. The Association's deduction with
respect to nonqualifying loans was computed under the experience method, which
essentially allows a deduction based on the
29
<PAGE>
<PAGE>
Association's actual loss experience over a period of several years. Each
year the Association selected the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserve.
Recently enacted federal legislation repeals the reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As a result, savings associations are no longer able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations are required to compute their deduction based on
specific charge-offs during the taxable year or, if the savings association or
its controlled group had assets of less than $500 million, based on actual
loss experience over a period of years. This legislation also requires
savings associations to recapture into income over a six-year period their
post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At December 31, 1996, the Association's post-1987
reserves were a negligible amount of approximately $20,000. The recapture may
be suspended for up to two years if, during those years, the institution
satisfies a residential loan requirement. The Association met the residential
loan requirement for the taxable year ending December 31, 1996.
Under prior law, if the Association failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Association would be required
to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions ratably over a multi-year period.
At December 31, 1996, the Association's total bad debt reserve for tax
purposes was approximately $828,000. Among other things, the qualifying
thrift definitional tests required the Association to hold at least 60% of its
assets as "qualifying assets." Qualifying assets generally include cash,
obligations of the United States or any agency or instrumentality thereof,
certain obligations of a state or political subdivision thereof, loans secured
by interests in improved residential real property or by savings accounts,
student loans and property used by the Association in the conduct of its
banking business. Under current law, a savings association will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Association's taxable income. Nondividend
distributions include distributions in excess of the Association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out
of the Association's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Association's bad debt reserve. Thus, any
dividends to the Company that would reduce amounts appropriated to the
Association's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Association. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Association makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"Regulation of Albion Federal -- Federal Regulation of Savings Associations
- -- Limitations on Capital Distributions" for limits on the payment of
dividends by the Association. The Association does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Association,
whether or not an Alternative Minimum Tax ("AMT") is paid.
30
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<PAGE>
Dividends-Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted.
There have not been any IRS audits of the Association's federal income
tax returns during the past five years.
State Taxation
New York has adopted the Code, with certain modifications, as it relates
to savings and loan associations, effective for taxable years beginning after
December 31, 1984. The Association is subject to New York income tax at the
rate of 9%. This rate of tax is imposed on savings and loan associations in
lieu of the general state business corporation income tax.
The Company's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 10 of the Notes to Consolidated Financial
Statements.
Competition
The Association has been, and continues to be, a community-oriented
savings institution offering a variety of financial resources to meet the
needs in the communities it serves. The Association's deposit gathering area
is concentrated in Orleans County and Western Monroe counties, New York. The
Association's lending base primarily covers the same area; however, the
Association periodically originates or purchases multi-family residential
loans in other parts of New York. The Association's office is located in
Albion.
The Association was the largest of the eight bank and thrift offices
located in Orleans County, New York, based on its total assets of $64.6
million at December 31, 1996. Based on data at December 31, 1996, the Marine
Midland branch and the Fleet Bank branch had approximately $54.0 million and
$26.0 million in deposits, respectively. The Association faces strong
competition in the attraction of savings deposits and in the origination of
loans. Its most direct competition for savings deposits and loans has
historically come from other thrift institutions and from commercial banks
located in its primary market area, some with a state-wide or regional
presence. Additionally, the Association faces significant competition from
mortgage bankers, mortgage brokers, finance companies, insurance companies and
other financial entities in lending. The Association also competes with
securities firms, credit unions, money market funds and mutual funds in
raising deposits.
Management considers the Association's reputation for financial strength
and customer service as its major competitive advantage in attracting and
retaining customers in its market area. The Association also believes it
benefits from its community bank orientation as well as its relatively high
core deposit base.
Personnel
As of December 31, 1996, the Association had 22 full-time employees and
five part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees
to be satisfactory.
31
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<PAGE>
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company, each of whom holds the same positions with
the Company and each of whom holds the same positions with the Association.
Name Age(1) Position
- ----- ------ ------------
Jeffrey S. Rheinwald 48 President and Chief Executive Officer
Mark F. Reed 38 Vice President/Treasurer and Chief
Financial Officer
Marie A. Rice 48 Vice President/Secretary
_________________
(1) As of December 31, 1996.
The principal occupation of each executive officer of the Association is
set forth below. Unless otherwise noted, all officers have held the position
described below for at least the past five years and reside in Albion, New
York.
JEFFREY S. RHEINWALD has been employed in various capacities at Albion
Federal for over 23 years and currently holds the position of President and
Chief Executive Officer of the Association and the Company.
MARK F. REED is Vice President and Treasurer of the Association and the
Company, a position he has held with the Association since 1990. Prior to
joining Albion Federal, Mr. Reed was employed as an examiner for the OTS from
1989 through 1990; from 1988 through 1989 he was employed by the FHLB-New York
and from 1987 through 1988 was an examiner for the Office of the Comptroller
of the Currency.
MARIE A. RICE is Vice President and Secretary of the Company and the
Association, a position she has held with the Association since 1991. Ms.
Rice has been employed and has served the Association in various capacities
since 1973.
Item 2. Description of Property
- --------------------------------
The following table sets forth information concerning the Association's
offices at December 31, 1996.
Net Book
Value at
Year Square Owned/ Total December
Name of Office Opened Footage Leased Cost 31, 1996
- -------------- ------- -------- ------- ------- ----------
Main Office 1976 8,522 Owned $592,977 $192,842
48 North Main Street
Albion, NY 14411
Loan Department 1993 3,314 Owned 196,708 175,972
34 North Main Street
Albion, NY 14411
Branch Office 1994 3,276 Owned 938,075 900,105
Brockport, NY
32
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<PAGE>
The net book value of the Association's investment in all office
properties and equipment less accumulated depreciation totaled $2.1 million at
December 31, 1996. See Note 6 of the Notes to the Consolidated Financial
Statements for further information on office properties and equipment.
Item 3. Legal Proceedings
- --------------------------
From time to time, the Association is a party to legal proceedings in the
ordinary course of business wherein it enforces its security interest in
mortgage loans it has made. Other than such proceedings, the Association is
not involved in any legal proceedings of a material nature at this time.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained in the section captioned "Market for Albion
Banc Corp.'s Common Stock and Related Stockholder Matters" in the Annual
Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
Independent Auditors Report*
Consolidated Statements of Financial Condition, December 31, 1996,
1995 and 1994*
Consolidated Statements of Income For the Year Ended December 31,
1996, 1995 and 1994*
Consolidated Statements of Changes in Shareholders' Equity For the
Year Ended December 31, 1996, 1995 and 1994*
Consolidated Statements of Cash Flows For the Year Ended December
31, 1996, 1995 and 1994*
Notes to Consolidated Financial Statements*
* Contained in the Annual Report to Stockholders filed as an exhibit
hereto and incorporated herein by reference. All schedules have
been omitted as the required information is either inapplicable or
contained in the Consolidated Financial Statements or related Notes
contained in the Annual Report to Stockholders.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------
No disagreement with the Company's independent accountants on accounting
and financial disclosure has occurred during the past 24 months.
33
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ---------------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference. For information concerning the executive officers of the
Association, see "Item I -- Business -- Executive Officers." The information
contained under the section captioned "Compliance With Section 16(a) of the
Exchange Act" in the Proxy Statement is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein
by reference to the section captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein
by reference to the sections captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and
Management" and "Proposal I - Election of Directors" of
the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a
change in control of the Company.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Certain
Transactions."
Item 13. Exhibits, List Reports on Form 8-K
- --------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Albion Banc Corp.(1)
3.2 Bylaws of Albion Banc Corp.(1)
10.1 Employment Agreement with Jeffrey S. Rheinwald(2)
10.2 Severance Agreement for Mark F. Reed(2)
10.3 Severance Agreement for Marie A. Rice(2)
(continued on following page)
34
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<PAGE>
(a) Exhibits (continued)
10.4 Employee Stock Ownership Plan(1)
10.5 The Albion Banc Corp. 1993 Stock Option and Incentive
Plan(3)
10.6 The Albion Federal Savings and Loan Association Management
Recognition Plans(3)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended December
31, 1996.
________________
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 File No. 33-60230.
(2) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(3) Incorporated by reference to the Company's 1994 Annual Meeting Proxy
Statement dated March 25, 1994.
35
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<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ALBION BANC CORP.
Date: March 28, 1997 By: /s/ Jeffrey S. Rheinwald
--------------------------------
Jeffrey S. Rheinwald
President and Chief
Executive Officer (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Jeffrey S. Rheinwald March 28, 1997
--------------------------------------
Jeffrey S. Rheinwald
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark F. Reed March 28, 1997
--------------------------------------
Mark F. Reed
(Principal Financial and Accounting Officer)
By: /s/ James H. Keeler March 28, 1997
--------------------------------------
James H. Keeler
Chairman of the Board
By: /s/ Richard A. Pilon March 28, 1997
--------------------------------------
Richard A. Pilon
Director
By: /s/ Dolores L. Giarrizzo March 28, 1997
--------------------------------------
Dolores L. Giarrizzo
Director
By: /s/ Robert R. Brown II March 28, 1997
--------------------------------------
Robert R. Brown II
Director
By: , 1997
-------------------------------------- --------
Harold P. Kludt
Director
By: /s/Chriss M. Andrews March 28, 1997
--------------------------------------
Chriss M. Andrews
Director
<PAGE>
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
<PAGE>
ALBION
[Logo] BANC
[Logo] CORPORATION
1996
------
ANNUAL
REPORT
<PAGE>
<PAGE>
Business of the Corporation
Albion Banc Corp. ("Corporation"), a Delaware corporation, was
incorporated on March 23, 1993 for the purpose of becoming the holding company
for Albion Federal Savings and Loan Association ("Albion Federal" or the
"Association") upon Albion Federal's conversion from a federal mutual to a
federal stock savings and loan association ("Conversion"). The Corporation
and Albion Federal shall be referred to collectively as the "Company". The
Conversion was completed on July 23, 1993. At December 31, 1996, the
Corporation had total assets of $64.6 million, total deposits of $48.5 million
and stockholders' equity of $5.9 million. The Corporation has not engaged in
any significant activity other than holding the stock of Albion Federal.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to Albion Federal.
Albion Federal was organized in 1934 as a federally chartered mutual
savings and loan association and has been a member of the Federal Home Loan
Bank ("FHLB") System since 1935. The Association is regulated by the Office
of Thrift Supervision ("OTS") and its deposits are insured up to applicable
limits under the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC").
TABLE OF CONTENTS
Page
----
Letter to Shareholders ......................... 1
Selected Consolidated Financial Data............ 2
Management's Discussion and Analysis............ 4
Independent Accountant's Report................. 14
Consolidated Financial Statements............... 15
Notes to Consolidated Financial Statements...... 19
Common Stock Information........................ 37
Directors and Officers.......................... 38
Corporate Information/Offices................... 39
<PAGE>
<PAGE>
Dear Shareholders:
As President of Albion Banc Corp. I am pleased to present the Annual Report to
the Shareholders. During the fiscal year 1996, the Holding Company and its
subsidiaries, were actively promoting the growth of the company and creating
franchise value for the shareholders.
1996 was the first full year of operation in our new branch facility located
in the Town of Clarkson. We are pleased that it is in line with projections
for growth and deposit mix. As of December 31, 1996, the branch had $11.4
million in total deposits, an increase of $2.7 million from December 31, 1995.
More importantly, 40.7% of the branch's total deposits were in low cost
transaction accounts as compared to 20.1% at year end 1995. This favorable
mix has decreased Albion Federal's overall cost of funds by approximately 20
basis points and has increased our spread with respect to our earning assets.
Although it is difficult to specifically measure the increase in loan
generation due to the presence of the branch, in 1996 we generated $5.6
million in mortgage and consumer loans in the branch service area as compared
to $1.4 million in 1995. It would appear with these significant increases
that the opening of the branch has had a favorable impact on our ability to
originate loans.
The Company's total assets increased 13.1%, or $7.6 million from $57.0 million
at December 31, 1995, to $64.6 million at December 31, 1996. During the same
period, total deposits increased to $48.5 million from $46.6 million, an
increase of 4.2%, or $1.9 million.
As many of you are aware, insured thrift institutions were assessed a one-time
premium to recapitalize the Savings Association Insurance Fund (SAIF), the
insurer of our deposits. The cost of this assessment totaled $274,921 which
was accounted for as a direct expense and consequently had a significant
negative impact on earnings for 1996. The impact of the SAIF assessment is
not all negative, as our SAIF insurance premium will decrease going forward.
Additionally, management and the Board of Directors elected to substantially
increase its reserve for loan losses. This further eroded profits, however it
is intended to mitigate the effects of any future loan losses or write-downs.
In spite of a net loss of $4,352, the Board of Directors declared an annual
dividend of $.31 per share, to shareholders of record on December 31, 1996.
The Directors felt that the dividend is reflective of core earnings, excluding
the one-time events which effected earnings in 1996. Also, in August of 1996,
the Company completed it's stock repurchase program which began in November of
1995. A total of 13,035 shares were repurchased in an effort to increase the
future book value and earnings per share. All shares were purchased at a
price of $17.00 per share, or approximately a 26% discount to the book value.
Another meaningful event that occurred in 1996 was the announcement of Marine
Midland Bank's intent to acquire First Federal Savings and Loan Association of
Rochester. The significance of this announcement is that Marine Midland and
First Federal each have a branch office in Brockport, NY and compete directly
with our Clarkson branch. We believe that as a result of the apparent
consolidation, there will be opportunity to capture additional customers who
want to remain with a thrift institution.
From the time of our conversion in 1993, the Board of Directors and management
have aspired to build a company that rewards its shareholders through
franchise value, earnings and stock appreciation. We believe that we have the
products, delivery system and personnel to accomplish those goals in 1997. We
acknowledge your support over the past three years while we have been
positioning our Company toward the future.
Yours Very Truly,
/s/Jeffrey S. Rheinwald
- -----------------------
Jeffrey S. Rheinwald
President
1
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA
On July 23, 1993, Albion Banc Corp. (the "Company"), a Delaware
corporation, became the holding company for Albion Federal Savings and Loan
Association (the "Association") which is headquartered in Albion, New York.
The Company is engaged primarily in the business of directing, planning and
coordinating the business activities of the Association. Since the Company
had not commenced operations prior to the mutual to stock conversion of the
Association on July 23, 1993, the financial information presented for periods
prior to 1993 is that of the Association. This information is qualified in
its entirety by reference to the detailed information and Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Report.
At
At December 31, September 30,
----------------------------------------- -------------
1996 1995 1994 1993 1992 1992
---- ---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (In thousands)
Total assets........$64,585 $56,992 $55,334 $50,288 $41,134 $35,775
Loans, net.......... 47,839 44,049 47,010 39,007 27,630 26,672
Mortgage-backed
securities........ 8,075 4,138 3,085 4,035 2,676 838
Cash and due from
banks, interest-
bearing deposits
and investment
securities........ 5,299 5,677 3,240 5,103 7,288 6,974
Deposits............ 48,492 46,559 37,782 35,617 32,212 30,165
Federal Home Loan
Bank advances..... 9,000 3,000 10,295 7,950 5,000 2,000
Shareholders'
equity............ 5,864 6,089 5,898 5,556 3,078 2,978
Three
Months Ended Year Ended
Year Ended December 31, December 31, September 30,
---------------------------- ------------ -------------
1996 1995 1994 1993 1992 1992
---- ---- ---- ---- ---- ----
OPERATING DATA: (In thousands)
Interest income.....$4,446 $4,398 $3,852 $3,348 $810 $3,178
Interest expense.... 2,377 2,482 1,799 1,707 405 1,678
------ ------ ------ ------ ---- ------
Net interest income. 2,069 1,916 2,053 1,641 405 1,500
Provision (benefit)
for loan losses.... 140 36 132 (27) 3 82
------ ------ ------ ------ ---- ------
Net interest income
after provision
for loan losses.... 1,929 1,880 1,921 1,668 402 1,418
Noninterest income.. 260 197 146 205 39 86
Noninterest expense. 2,231 1,817 1,550 1,366 277 970
------ ------ ------ ------ ---- ------
Income(loss) before
income taxes, and
accounting change.. (42) 260 517 507 164 534
(Benefit) provision
for income taxes... (38) 79 165 157 64 213
------ ------ ------ ------ ---- ------
Income before
accounting change.. (4) 181 352 350 100 321
Accounting change... -- -- -- 23 -- --
------ ------ ------ ------ ---- ------
Net (loss) income...$ (4) $ 181 $ 352 $ 373 $100 $ 321
====== ====== ====== ====== ==== ======
2
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<PAGE>
At December 31,
------------------------------------------
1996 1995 1994 1993 1992
OTHER DATA:
Number of:
Real estate loans
serviced............... 998 931 1,015 916 821
Deposit accounts......... 7,320 6,509 4,938 4,502 4,002
Offices.................. 2 2 2 1 1
Per share:
Book value............... $23.45 $23.36 $22.62 $21.31 --
Dividends paid........... .31 .31 .30 -- --
Net (loss) income........ (.02) .71 1.40 -- --
Three
Months Year
Ended Ended
December September
Year Ended December 31, 31, 30,
---------------------------- -------- ---------
1996 1995 1994 1993 1993 1992
---- ---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets
(net income divided by
average assets)....... .0% .3% .7% .8% 1.0% .9%
Return on average equity
(net income divided by
average equity)....... (.1)% 3.0% 6.1% 8.6% 13.2% 11.4%
Average equity to
average assets........ 9.8% 10.2% 10.8% 9.4% 7.9% 8.2%
Interest rate spread
(difference between
average yield on
interest-earning assets
and average cost of
interest- bearing
liabilities).......... 3.2% 2.9% 3.6% 3.3% 4.0% 4.3%
Net interest margin
(net interest income
as a percentage of
average interest-
earning assets)....... 3.7% 3.4% 4.0% 3.7% 4.4% 4.6%
Noninterest expense
to average assets..... 3.7% 3.3% 2.9% 3.0% 2.9% 2.8%
Average interest-
earning assets to
average interest-
bearing liabilities..110.6% 111.1% 112.5% 110.8% 107.5% 105.5%
Allowance for loan
losses to total
loans at end of
period................ .6% .6% .5% .3% .5% .5%
Ratio of nonperforming
assets to total
assets................ .6% .6% .4% .8% 1.3% 1.1%
3
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition
of the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements, the accompanying Notes
to Consolidated Financial Statements and the other sections contained in this
Report.
Operating Strategy
The primary goal of management is to increase the Company's
profitability and enhance its capital, while minimizing risk. The operating
results of the Company depend primarily on its net interest income, which is
the difference between interest income on interest-earning assets, primarily
loans, investments, and mortgage-backed securities, and interest expense on
interest-bearing liabilities, primarily deposits and borrowings. The
Company's net income also is affected by the establishment of provisions for
loan losses and the level of its other income, including fees on loans sold,
deposit service charges, the results of foreclosed real estate activities,
gains or losses from the sale of loans, as well as its other expenses and
income tax provisions. The Company's results of operations are also
significantly affected by local economic and competitive conditions, primarily
in the Company's market area of Orleans, western Monroe and Genesee counties
of New York state. Changes in market interest rates, government legislation
and policies concerning monetary and fiscal affairs, housing and financial
institutions and the attendant actions of the regulatory authorities all have
an impact on the Company's operations. It is management's strategy to
strengthen the Company's presence within its primary market area.
Financial Condition
General. Total assets increased by $7.6 million, or 13.1%, from $57.0
million at December 31, 1995 to $64.6 million at December 31, 1996. This
increase was due primarily to increases of $3.8 million in net loans and $3.8
million in investment securities. The increase in loans and investment
securities were funded by a $1.9 million increase in deposits and $6.0
million in borrowings from the Federal Home Loan Bank of New York.
Cash and Cash Equivalents. Cash and cash equivalents decreased by
$21,089, or 2.0%, from $1,047,018 at December 31, 1995 to $1,025,929 at
December 31, 1996. Federal Funds sold decreased from $1,350,000 at December
31, 1995 to $1,100,000 at December 31, 1996.
Investment Securities Available For Sale. The Association's investment
securities available for sale decreased $192,100 or 4.6%, from $4.1 million at
December 31, 1995 to $3.9 million at December 31, 1996. This decrease was
primarily the result of normal amortization in the portfolio.
Investment Securities Held to Maturity. Investment securities held to
maturity increased by $4.0 million, or 122.7%, from $3.3 million at December
31, 1995 to $7.3 million at December 31, 1996. This increase was the result
of the purchase of $4.0 in mortgage-backed securities. This increase was
primarily the result of management's strategy of leveraged growth.
4
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<PAGE>
Net Loans. The balance of net loans increased $3.8 million, or 8.6%,
from $44.0 million at December 31, 1995 to $47.8 million at December 31, 1996.
The increase in net loans was the result of increased one-to-four family
mortgage loan originations and consumer loan originations, primarily home
equity loans. This resulted from an increase in demand for this type of
lending, due to favorable interest rates, the active refinance and
construction loan market and a strong emphasis on promoting home equity
products.
Premises and Equipment. Premises and equipment decreased $.1 million or
4.4%, from $2.2 million at December 31, 1995 to $2.1 million at December 31,
1996. This decrease is attributable to the normal depreciation of the
Company's facility and related equipment.
Deposits and Borrowings. Deposits increased $1.9 million, or 4.2%, from
$46.6 million at December 31, 1995 to $48.5 million at December 31, 1996.
This was attributable primarily to growth at the Association's branch
facility in Brockport, NY. Advances from the FHLB-NY (Federal Home Loan
Bank of New York) and other borrowings increased to $9.3 million as of
December 31, 1996. The proceeds were used primarily to fund loan demand and
purchase mortgage-backed securities.
Shareholders' Equity. Shareholders' equity decreased $220,533 or 3.6%,
from $6.1 million at December 31, 1995 to $5.9 million at December 31, 1996.
This was primarily the result of the common stock repurchase program which
reduced equity by $221,595, payment of cash dividends in the amount of $80,000
and the Company's loss of $4,352.
Results of Operations
The operating results of the Company depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets (primarily loans ,mortgage-backed securities
and investment securities) and interest expense on interest-bearing
liabilities ( primarily deposits accounts and borrowings). The Company's net
income is also affected by the establishment of provisions for loan losses and
the level of its other income, including deposit service charges, as well as
its other expenses and income tax provisions.
Fiscal Year Ended December 31, 1996 Compared to December 31, 1995
Net Income (Loss). The Company reported a net loss of $4,352 for the
year ended December 31, 1996 as compared to net income of $180,733 for the
year ended December 31, 1995. This loss was primarily the result of the
one-time special assessment imposed by the Federal Deposit Insurance
Corporation (FDIC) on SAIF-assessable deposits of $274,921 and an increase in
the provision for loan losses of $104,239, partially offset by an increase in
net interest income of $152,898 and increased noninterest income of $63,213.
Net Interest Income. Net interest income increased by 152,898, or 8.0%,
from $1.9 million for the year ended December 31, 1995 to $2.1 million for the
year ended December 31, 1996. Total interest income increased $48,104 during
the same period. Interest and dividends on investments decreased $130,744, or
19.4%, from $675,607 during the year ended December 31, 1995 to $544,863
during the year ended December 31, 1996. This decrease can be attributed to a
decline in the average outstanding balance in the portfolio and lower yields.
Interest and fees on loans increased $178,848, or 4.8%, during this period
primarily from increases in the average outstanding balance of the loan
portfolio.
Total interest expense decreased $104,794 or 4.2%, primarily due to a
lower weighted-average rate paid on deposits and a decrease in the average
balance outstanding of FHLB-NY advances. The weighted-average rate paid on
deposits decreased from 4.80% for 1995 to 4.63% for 1996 as a result of
increases in transaction account balances. Interest on advances from the
FHLB-NY decreased $186,823 or 43.0%, primarily due to a decrease in the
average balance outstanding from $7.8 million in 1995 to $4.4 million in 1996.
5
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Provision for Loan Losses. The Association's provision for loan losses
for the year ended December 31, 1996 was $140,239, a $104,239 increase
compared to the same period in 1995. Management charges earnings for an
amount necessary to maintain the allowance for possible loan losses at a level
considered adequate to absorb potential losses in the loan portfolio. The
level of the allowance is based on management's evaluation of individual
loans, past loan loss experience, the assessment of prevailing conditions and
anticipated economic conditions and other relevant factors. The allowance for
possible loan losses of the Association at December 31, 1996 was $305,900 or
.64% of total loans, compared to $244,100 or .55% of total loans at December
31, 1995. The increase in the provision between the periods was due primarily
to management's quarterly analysis of the Association's loan portfolio,
principally driven by deterioration in the credit quality of three
participation mortgage loan pools with an outstanding balance of $212,000.
Noninterest Income. Noninterest income for the year ended December 31,
1996 was $260,131 compared with $196,918 for the year ended December 31, 1995.
This increase was attributable primarily to increased fee income from
depository transaction accounts, fee income from New Frontier of Albion Corp.
and the sale of real estate owned, which resulted in a net gain of $32,100.
Noninterest Expense. Noninterest expense increased $413,806, or 22.8%,
to $2.2 million for the year ended December 31, 1996, from $1.8 million for
the year ended December 31, 1995. This increase in noninterest expense
resulted primarily from the one-time special assessment of $274,921 imposed by
the FDIC on SAIF-assessable deposits. Compensation and employee benefits
increased $67,299, or 8.1%, from $831,446 for the year ended 1995 to $898,745
for the year ended 1996 primarily due to inflationary increases in salaries
and benefits and the first full year's expense for the Company's internal
auditor/compliance officer. Occupancy expenses increased $61,460, or 24.9%,
from $246,426 for the year ended December 31, 1995 to $307,886 for the year
ended December 31, 1996 primarily due to the operation of the Association's
Brockport branch. Federal Deposit Insurance Premiums increased $289,365, or
283.2%, from $102,176 for the year ended December 31, 1995 to $391,541 for the
year ended December 31, 1996 primarily due to the special one-time assessment
of $274,921 and higher deposit levels. Data processing fees increased $52,256
or 35.1%, from $148,897 for the year ended December 31, 1995 to $201,153 for
the year ended December 31, 1996 primarily due to increased transaction volume
and other items related to the new branch. Other operating expenses increased
$27,455 or 9.1%, from $302,710 to $330,165 during the year ended December 31,
1996. This increase was primarily the result of increased real estate owned
expenses. These increases were partially offset by a decrease in professional
fees of $84,029 or 45.3%, from $185,457 for the year ended December 31, 1995
to $101,428 for the year ended December 31, 1996. This decrease was primarily
the result of decreased legal and consultant fees.
Income Taxes. The provision (benefit) for income taxes decreased to
$(38,049) for the year ended December 31, 1996 from $78,800 for the year ended
December 31, 1995 primarily as a result of the operating loss for the year.
The (benefit) of $(38,049) represents the reduced future tax liability
resulting from the net operating loss and other deferrals.
Fiscal Year Ended December 31, 1995 Compared to December 31, 1994
Net Income. Net income decreased by $171,364 or 48.7%, to $180,733 for
the year ended December 31, 1995 from $352,097 for the year ended December 31,
1994. This decrease was primarily the result of decreased net interest income
and increased operating expenses associated with the Brockport branch office.
Net Interest Income. Net interest income decreased by $136,815, or
6.7%, from $2.1 million for the year ended December 31, 1994 to $1.9 million
for the year ended December 31, 1995. Total interest income increased
$545,930 during the same period. Interest and dividends on investments
increased $238,183, from $437,424 during the year ended December 31, 1994 to
$675,607 during the year ended December 31, 1995. This increase can be
attributed to an increase in the average outstanding balance in the portfolio
and higher yields. Interest and fees on loans increased $307,747, or 9.0%,
during this period primarily from increased yields on adjustable rate loans.
6
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<PAGE>
Total interest expense increased $682,745, or 37.9%, primarily due to a
higher weighted-average rate paid on deposits and a significant increase in
the average balance of deposits outstanding. The weighted-average rate paid
on deposits increased from 3.73% for 1994 to 4.80% for 1995 as a result of an
increase in market interest rates and a larger average outstanding balance,
primarily certificates of deposit. The balance of deposits outstanding
increased to $46.6 million at December 31, 1995 from $37.8 million at December
31, 1994. Interest on advances from the FHLB-NY decreased $39,297, or 8.8%,
primarily due to a decrease in the average balance outstanding. The balance
of FHLB-NY borrowings decreased to $3.0 million at December 31, 1995 from
$9.98 million at December 31, 1994.
The Association's net interest margin decreased from 4.0% for the year
ended December 31, 1994 to 3.4% for the year ended December 31, 1995.
Provision for Loan Losses. The Association's provision for loan losses
for the year ended December 31, 1995 was $36,000, a $96,038 decrease compared
to the same period in 1994. The allowance for loan losses is based on
management's quarterly analysis of the loan portfolio including delinquency
levels, charge-offs, the estimated value of underlying collateral and an
assessment of prevailing and economic conditions. The Association's provision
for loan losses decreased between the periods primarily as a result of
improved lending policies and practices and a decrease in size of the loan
portfolio. Also, the Association's ratio of nonperforming assets to total
assets remained low at .56%. The Association's ratio of allowance for loan
losses to total loans increased from .5% to .6% during the period.
Noninterest Income. Noninterest income for the year ended December 31,
1995 was $196,918 compared with $146,461 for the year ended December 31, 1994.
This increase was attributable to a greater number of loans sold and therefore
an increase in gains on sales of mortgage loans, increased fee income from
depository transaction accounts and fee income from the Association's
subsidiary company, New Frontier of Albion Corp.
Noninterest Expense. Noninterest expense increased $267,044, or 17.2%,
to $1.8 million for the year ended December 31, 1995 from $1.55 million for
the year ended December 31, 1994. Compensation and employee benefits
increased $133,062, or 19.1%, from $698,384 for the year ended 1994 to
$831,446 for the year ended 1995. This increase resulted from a full twelve
(12) month period of employees necessary to staff the Brockport branch of the
Association which opened in December 1994, the hiring of an experienced
internal auditor/compliance officer as well as inflationary increases in
employee salaries and benefits. Occupancy expenses increased $17,248, or
7.5%, from $229,178 for the year ended December 31, 1994 to $246,426 for the
year ended December 31, 1995 primarily due to the operation of the
Association's Brockport branch. Federal deposit insurance premiums increased
$16,540, or 19.3%, from $85,636 for the year ended December 31, 1994 to
$102,176 for the year ended December 31, 1995 primarily due to an increase in
the deposit insurance premium rate from 23 basis points to 26 basis points and
higher deposit levels. Professional fees increased $29,994, or 19.3%, from
$155,463 for the year ended December 31, 1994 to $185,457 for the year ended
December 31, 1995 primarily due to increased audit and legal fees. Data
processing fees increased $38,228, or 34.5%, from $110,669 for the year ended
December 31, 1994 to $148,897 for the year ended December 31, 1995 due to
increased transaction volume related to growth at the new branch. Other
operating expenses increased $31,972, or 11.8%, from $270,738 to $302,710
during the year ended December 31, 1995. This increase was primarily the
result of increased advertising expense associated with the Brockport branch
office and increased real estate owned expenses.
Income Taxes. The provision for income taxes decreased to $78,800 for
the year ended December 31, 1995 from $164,800 for the year ended December 31,
1994 primarily as a result of decreased taxable income.
7
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<PAGE>
Yields Earned and Rates Paid
The earnings of the Association depend largely on the spread between the
yield on interest-earning assets (primarily loans, mortgage-backed securities
and investments) and the cost of interest-bearing liabilities (primarily
deposit accounts and borrowings), as well as the relative size of the
Association's interest-earning assets and interest-bearing liability
portfolios.
The following tables set forth, for the periods indicated, information
relating to average balances of consolidated assets and liabilities. These
tables reflect the average yields on assets and the average costs of
liabilities for the periods indicated (derived by dividing income or expense
by the average balance of assets or liabilities, respectively), as well as the
"net interest margin" (which reflects the effect of the net earning balance)
for the periods shown.
(Tables begin on next page)
8
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<PAGE>
Year Ended December 31,
---------------------------------------------------
1996 1995
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Real estate loans.....$41,867 $3,394 8.11% $40,184 $3,235 8.05%
Consumer loans........ 5,276 485 9.20 5,140 487 9.47
------- ------ ---- ------- ------ ----
Total loans......... 47,143 3,879 8.23 45,324 3,722 8.21
Mortgage-backed
securities........... 4,137 281 6.79 3,962 259 6.54
Investment securities. 3,089 183 5.92 3,520 216 6.14
Daily interest-
bearing deposits..... -- -- -- -- -- --
Other interest-
earning assets....... 1,339 80 5.97 3,194 201 6.29
------ ----- ---- ------ ----- ----
Total interest-
earning assets..... 55,708 4,423 7.94 56,000 4,398 7.85
------ ----- ---- ------ ----- ----
Noninterest-earning assets:
Office properties and
equipment, net....... 2,170 1,263
Foreclosed real
estate, net.......... 129 44
Other noninterest-
earning assets....... 1,328 1,380
------- -------
Total assets........$59,335 $58,687
======= =======
Interest-bearing
liabilities:
Passbook accounts.....$12,512 $ 383 3.06% $11,950 $ 364 3.05%
NOW accounts.......... 2,667 471 .76 1,978 35 1.77
Money market accounts. 2,349 72 3.07 2,458 75 3.05
Certificates of
deposit.............. 28,484 1,628 5.72 26,220 1,573 6.00
------- ------ ---- ------- ------ ----
Total deposits...... 46,012 2,130 4.63 42,606 2,047 4.80
Other interest-
bearing liabilities.. 4,362 248 5.69 7,807 435 5.57
------- ------ ---- ------- ------ ----
Total interest-
bearing
liabilities........ 50,374 2,378 4.72 50,413 2,482 4.92
------- ------ ---- ------- ------ ----
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits............. 796 754
Other liabilities..... 2,189 1,543
------- -------
Total liabilities... 53,359 52,710
Shareholders' equity.. 5,976 5,977
------- -------
Total liabilities
and shareholders'
equity.............$59,335 $58,687
======= =======
Net interest income.... $2,045 $1,916
====== ======
Interest rate spread... 3.22% 2.93%
Contribution of
interest-free funds... .45% .49%
---- ----
Net interest margin
on interest-
earning assets........ 3.67% 3.42%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities... 110.59% 111.08%
_________________
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---------------------------------------
Year Ended December 31,
1994
--------------------------------------
Interest Annualized
Average and Yield/
Balance(1) Dividends Cost
---------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Real estate loans................ $38,416 $3,012 7.84%
Consumer loans................... 4,593 403 8.77
------- ------ ----
Total loans.................... 43,009 3,415 7.94
Mortgage-backed securities....... 3,560 173 4.86
Investment securities............ 3,592 231 6.43
Daily interest-bearing deposits.. -- -- --
Other interest-earning deposits.. 862 33 3.83
------ ----- ----
Total interest-earning assets.. 51,023 3,852 7.55
------ ----- -----
Noninterest-earning assets:
Office properties and equipment,
net............................ 779
Foreclosed real estate, net...... 35
Other noninterest-earning assets. 974
-------
Total assets................... $52,811
=======
Interest-bearing liabilities:
Passbook accounts................ $14,958 $ 468 3.13%
NOW accounts..................... 2,142 45 2.09
Money market accounts............ 3,139 97 3.09
Certificates of deposit.......... 15,982 741 4.64
------- ------ ----
Total deposits................. 36,221 1,351 3.73
Other interest-bearing
liabilities.................... 9,122 448 4.91
------- ------ ----
Total interest-bearing
liabilities................... 45,343 1,799 3.97
------- ----- ----
Noninterest-bearing liabilities:
Noninterest-bearing deposits..... 479
Other liabilities................ 1,262
-------
Total liabilities.............. 47,084
Shareholders' equity............. 5,727
-------
Total liabilities and
shareholders' equity......... $52,811
=======
Net interest income............... $2,053
======
Interest rate spread.............. 3.58%
Contribution of interest-free
funds........................... .44%
------
Net interest margin on interest-
earning assets................... 4.02%
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 112.53%
- ------------
(1) Balances represent simple average and are representative of the
Association's operations.
10
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<PAGE>
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates
indicated, the average yields earned (based on simple averages) on the
Company's assets, the average interest rates paid on the Company's
liabilities, together with the net yield on interest-earning assets.
Years Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Average yield on loan
portfolio....................... 8.2% 8.2% 7.9%
Average yield on mortgage-backed
securities...................... 6.8% 6.5% 4.9%
Average yield on investment
portfolio....................... 5.9% 6.1% 6.4%
Average yield on all
interest-earning assets......... 7.9% 7.9% 7.6%
Average cost of
savings deposits................ 4.6% 4.8% 3.7%
Average cost of Federal Home
Loan Bank advances and
other borrowings................ 5.7% 5.6% 4.9%
Average cost of all
interest-bearing liabilities.... 4.7% 4.9% 4.0%
Interest rate spread (spread
between average yield on all
interest-earning assets and
average cost of all interest-
bearing liabilities)............ 3.2% 2.9% 3.6%
Net interest margin (net
interest income as a
percentage of average
interest-earning assets)........ 3.7% 3.4% 4.0%
__________________________
(1) Rates are annualized.
11
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<PAGE>
Liquidity and Capital Resources
The Association's primary sources of funds are deposits and proceeds
from principal and interest payments on loans, mortgage-backed securities and
investment securities, sale of fixed rate mortgage loans and FHLB-NY advances.
While maturities and scheduled amortization of loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary investing activity of the Association is the origination of
mortgage loans. During the three years ended December 31, 1994, 1995 and
1996, the Association's origination of mortgage loans were $12.7 million, $2.5
million and $9.5 million, respectively. The increase in mortgage loan
originations during 1996 was primarily the result of an increase in the demand
for this type of lending, due to favorable interest rates and the active
refinance market. Purchases of mortgage-backed securities totaled $0 million,
$2.9 million and $5.0 million for the years ending December 31, 1994, 1995 and
1996, respectively. Other investing activities include the purchase of
investment securities which totaled $0 during the year ended December 31,
1994, $5.2 million during the year ended December 31, 1995 and $2.1 million
for the year ended December 31, 1996. These activities were funded primarily
by deposits, principal repayments on loans and mortgage-backed securities,
maturities of investment securities and FHLB-NY advances.
The net cash provided by financing activities for the year ended
December 31, 1996 totaled $7.5 million. This resulted from a net increase in
time and demand deposits of $1.9 million and net proceeds from FHLB-NY
borrowings of $6.0 million.
The Association must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, satisfy financial commitments and take advantage of investment
opportunities. The Association's sources of funds include deposits, principal
and interest payments from loans and mortgage-backed securities, sale of fixed
rate loans, earnings on investments and FHLB-NY borrowings. During fiscal
1994, the Association used its sources of funds primarily to fund loan
commitments and pay maturing savings certificates and deposit withdrawals.
During 1995, the Association used its sources of funds primarily to reduce
FHLB-NY borrowings and fund loan commitments. During 1996, the Association
used its sources of funds primarily to fund loan commitments, purchase
mortgage-backed securities, pay maturing savings certificates and deposit
withdrawals. At December 31, 1996, the Association had approved loan
commitments totaling $.7 million, including $.3 million of undisbursed loans
in process.
At December 31, 1996, certificates of deposit amounted to $27.9 million,
or 57.5%, of the Association's total deposits, including $18.3 million which
are scheduled to mature by December 31, 1997. Historically, the Association
has been able to retain a significant share of its deposits as they mature.
Also, the opening of Albion Federal's branch facility has enhanced the
Company's ability to attract deposits. Deposits at that location totaled
$11.4 million at December 31, 1996. Management of the Association believes it
has adequate resources to meet all liquidity needs, fund all loan commitments
by savings deposits, FHLB-NY advances and sale of mortgage loans and that it
can adjust the offering rates of savings certificates to retain deposits in
changing interest rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
5.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings. In addition, short-term liquid assets must constitute
1.0% of the sum of net withdrawable deposit accounts plus short-term
borrowings. The Association's average liquidity ratios were 11%, 13% and 9%
during the years ended December 31, 1994, 1995 and 1996, respectively. The
Association's average short-term liquidity ratios for the same periods were
8%, 8% and 7% respectively. The Association's actual liquidity ratio at
December 31, 1996 was 9.2%. The Association consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an
appropriate strategy for proper asset and liability management. The Company
does not utilize any off-balance sheet derivative instruments.
12
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<PAGE>
The Association is required to maintain specific amounts of capital
pursuant to the OTS regulations. As of December 31, 1996, the Association was
in compliance with all the regulatory capital requirements which were
effective as of such date, with tangible, core and risk-based capital ratios
of 7.8%, 7.8% and 16.0%, respectively. These ratios exceed the minimum
capital ratios as required by federal regulations.
Impact of New Accounting Pronouncements and Regulatory Policies
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." In
accordance with SFAS 125, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. As
originally issued, SFAS 125 is effective for all transfers and servicing of
financial assets and extinguishment of liabilities occurring after December
31, 1996. SFAS 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125," was issued in December 1996 and defers for one year
the effective date for certain provisions of SFAS 125 specifically relating to
repurchase agreement, dollar roll, securities lending and similar
transactions. All provisions of SFAS 125, as amended by SFAS 127, are to be
applied prospectively and earlier or retroactive application is not permitted.
Management does not anticipate that adoption of this Statement will have a
significant impact on the Company's financial position or results of
operations.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the changes in relative purchasing power of money
over time due to inflation. The primary impact of inflation on operations
of the Association is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. During the current interest rate environment, management
believes that the liquidity and the maturity structure of the Association's
assets and liabilities are critical to the maintenance of acceptable
profitability.
13
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<PAGE>
3600 Marine Midland Center Telephone 716 856 4650
Buffalo, NY 14203
Price Waterhouse LLP [Logo]
Report of Independent Accountants
To the Board of Directors and Shareholders of
Albion Banc Corp.
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of income, changes in shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Albion Banc Corp. and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Buffalo, New York
February 21, 1997
14
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<PAGE>
ALBION BANC CORP.
Consolidated Statement of Financial Condition
- ------------------------------------------------------------------------------
December 31,
1996 1995
Assets
Cash and due from banks, including interest-bearing
accounts of $89,700 and $163,800, respectively $ 1,025,929 $ 1,047,018
Federal funds sold 1,100,000 1,350,000
Investment securities available for sale 3,945,700 4,137,800
Investment securities held to maturity (fair value of
$7,283,800 and $3,307,900, respectively) 7,302,388 3,279,551
Loans held for sale 657,698
Loans receivable, net of allowance for loan losses of
$305,900 and $244,100, respectively 47,181,135 44,048,608
Federal Home Loan Bank stock, at cost 450,000 475,000
Premises and equipment, net 2,095,528 2,191,147
Other assets 826,732 462,378
---------- -----------
Total assets $64,585,110 $56,991,502
=========== ===========
Liabilities and Shareholders' Equity
Deposits $48,492,019 $46,559,429
Advances from Federal Home Loan Bank and other
borrowings 9,275,675 3,298,782
Advances from borrowers for taxes and insurance 823,620 968,711
Other liabilities 130,209 75,460
----------- -----------
Total liabilities 58,721,523 50,902,382
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value - 500,000
shares authorized, none outstanding
Common stock, $.01 par value - 3,000,000 shares
authorized, 263,086 and 260,714 issued,
respectively 2,631 2,607
Capital surplus 2,348,185 2,305,975
Retained earnings, substantially restricted 3,749,459 3,833,811
Unearned employee stock ownership plan (ESOP)
shares (70,708) (97,617)
Unrealized gain on investment securities
available for sale, net 55,615 44,344
Treasury stock, 13,035 shares, at cost (221,595)
----------- -----------
Total shareholders' equity 5,863,587 6,089,120
----------- -----------
Total liabilities and shareholders' equity $64,585,110 $56,991,502
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
15
<PAGE>
<PAGE>
ALBION BANC CORP.
Consolidated Statements of Income
- ------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
Interest income:
Interest and fees on loans $ 3,901,270 $ 3,722,422 $ 3,414,675
Interest and dividends on
investment securities and
federal funds sold 544,863 675,607 437,424
---------- ---------- ----------
Total interest income 4,446,133 4,398,029 3,852,099
---------- ---------- ----------
Interest expense:
Interest on deposits 2,129,106 2,047,077 1,351,442
Interest on borrowed funds 248,402 435,225 448,115
---------- ---------- ----------
Total interest expense 2,377,508 2,482,302 1,799,557
---------- ---------- ----------
Net interest income 2,068,625 1,915,727 2,052,542
Provision for loan losses 140,239 36,000 132,038
---------- ---------- ----------
Net interest income
after provision
for loan losses 1,928,386 1,879,727 1,920,504
---------- ---------- ----------
Noninterest income:
Gain on sale of mortgage loans,
investment securities available
for sale and foreclosed real
estate 38,031 39,070 21,306
Other noninterest income 222,100 157,848 125,155
---------- ---------- ----------
Total noninterest income 260,131 196,918 146,461
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 898,745 831,446 698,384
Occupancy expenses 307,886 246,426 229,178
Deposit insurance premiums 391,541 102,176 85,636
Professional fees 101,428 185,457 155,463
Data processing fees 201,153 148,897 110,669
Other operating expenses 330,165 302,710 270,738
---------- ---------- ----------
Total noninterest expense 2,230,918 1,817,112 1,550,068
---------- ---------- ----------
(Loss) income before income taxes (42,401) 259,533 516,897
(Benefit) provision for income
taxes (38,049) 78,800 164,800
---------- ---------- ----------
Net (loss) income $ (4,352) $ 180,733 $ 352,097
========== ========== ==========
(Loss) earnings per common and
common equivalent share $(.02) $.71 $1.40
===== ==== =====
The accompanying notes are an integral part of
these consolidated financial statements.
16
<PAGE>
<TABLE>
<PAGE>
ALBION BANC CORP.
Consolidated Statements of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------
Unrealized
gain on
investment Common
Unearned securities stock
Common Capital Retained ESOP available acquired Treasury
stock surplus earnings shares for sale by MRP Stock Total
Balance at December
<S> <C> <C> <C> <C> <C> <C>
31, 1993 $2,607 $2,288,573 $3,450,594 $(156,830) $(29,325) $5,555,619
Net income 352,097 352,097
Cash dividends paid
($.30 per share) (73,509) (73,509)
ESOP shares committed
to be released 4,518 30,130 34,648
Amortization of MRP
stock award 29,325 29,325
------ ---------- ---------- --------- ------- ----------
Balance at December
31, 1994 2,607 2,293,091 3,729,182 (126,700) -0- 5,898,180
Net Income 180,733 180,733
Cash dividends paid
($.31 per share) (76,104) (76,104)
ESOP shares committed
to be released 12,884 29,083 41,967
Net unrealized appre-
ciation of invest-
ment securities
available for sale $44,344 44,344
------ ---------- ---------- -------- ------- ------- ----------
Balance at December
31, 1995 2,607 2,305,975 3,833,811 (97,617) 44,344 -0- 6,089,120
Net loss (4,352) (4,352)
Exercise of stock
options 24 23,696 23,720
Cash dividends paid
($.31 per share) (80,000) (80,000)
ESOP shares committed
to be released 18,514 26,909 45,423
Net unrealized appre-
ciation of invest-
ment securities
available for sale 11,271 11,271
Purchase of treasury
stock $(221,595) (221,595)
------ ---------- ---------- -------- ------- ------- --------- ----------
Balance at December
31, 1996 $2,631 $2,348,185 $3,749,459 $(70,708) $55,615 $ -0- $(221,595) $5,863,587
====== ========== ========== ======== ======= ======= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
17
</TABLE>
<PAGE>
<PAGE>
ALBION BANC CORP.
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net (loss) income $ (4,352) $ 180,733 $ 352,097
Depreciation, amortization and
accretion 142,208 60,072 103,733
Provision for loan losses 140,239 36,000 132,038
Provision for losses on foreclosed
real estate 41,000 14,546
Benefit for deferred income taxes (12,800) (11,600) (8,500)
Net gain on sale of mortgage loans,
investment securities and
foreclosed real estate (38,031) (39,070) (21,306)
MRP and ESOP expense 45,423 41,967 63,973
Originations of loans held for
sale (1,116,740) (1,924,374)
Proceeds from sale of loans
held for sale 464,990 2,745,386
Changes in operating assets
and liabilities -
(Increase) decrease in other
assets (168,005) 5,269 (138,402)
Increase (decrease) in other
liabilities 54,749 (39,111) (18,233)
----------- ----------- -----------
Net cash (used in) provided
by operating activities (451,319) 248,806 1,286,412
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of foreclosed
real estate 159,537
Proceeds from sale of investment
securities available for sale 1,936,928
Proceeds from maturities and
calls of investment securities
available for sale 1,203,432 2,010,88 932,516
Proceeds from maturities and
calls of investment securities
held to maturity 2,206,792 2,482,000 2,000,000
Purchases of investment
securities available for sale (1,011,009) (2,873,862)
Purchases of investment securities
held to maturity (6,193,497) (5,187,448)
Net (increase) decrease in loans
receivable (3,632,264) 2,963,578 (8,134,871)
Redemption (purchase) of Federal
Home Loan Bank stock 25,000 47,500 (120,000)
Expenditures for capital assets (64,278) (1,321,292) (449,825)
----------- ----------- -----------
Net cash (used in) provided
by investing activities (7,306,287) 58,292 (5,772,180)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in savings,
NOW, money market and non-
interest-bearing deposits 4,067,121 (3,433,884) (1,433,247)
Net (decrease) increase in time
deposits (2,134,531) 12,211,275 3,598,682
Proceeds from Federal Home Loan
Bank and other borrowings 9,500,000 4,295,000
Payments on advances from Federal
Home Loan Bank and other
borrowings (3,523,107) (6,676,218) (1,950,000)
Proceeds from exercise of
stock options 23,720
Dividends paid (80,000) (76,104) (73,509)
Net (decrease) increase in
advances from borrowers for
taxes and insurance (145,091) (595,410) 210,668
Purchase of treasury stock (221,595)
----------- ----------- -----------
Net cash provided by
financing activities 7,486,517 1,429,659 4,647,594
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (271,089) 1,736,757 161,826
Cash and cash equivalents at
beginning of year 2,397,018 660,261 498,435
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 2,125,929 $ 2,397,018 $ 660,261
=========== =========== ===========
Cash paid during the year for:
Interest $ 2,307,861 $ 2,527,052 $ 1,788,648
Income taxes $ 46,000 $ 97,363 $ 187,500
The accompanying notes are an integral part of
these consolidated financial statements.
18
<PAGE>
<PAGE>
ALBION BANC CORP.
Notes to Consolidated Financial Statements
December 31, 1996
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of operations
On July 23, 1993, Albion Banc Corp. (the "Holding Company" or the "Company")
became the holding company for Albion Federal Savings and Loan Association
(the "Association"), which is headquartered in Albion, New York. Through the
Association, the Company is engaged primarily in the business of retail
banking in Western New York. Additionally, the Association offers
nontraditional deposit products, such as annuities and mutual funds, through a
subsidiary, New Frontier of Albion Corp. ("New Frontier").
Basis of presentation
The consolidated financial statements include the accounts of the Company, the
Association and New Frontier. All significant intercompany accounts and
transactions have been eliminated.
The accounting principles of the Company conform with generally accepted
accounting principles and prevailing practices within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Certain prior year balances have been reclassified to conform with current
year presentation.
Investment securities
Investments in debt securities are classified as held to maturity and stated
at amortized cost when management has the positive intent and ability to hold
such securities to maturity. Investments in other debt securities having
readily determinable fair values are classified as available for sale and
stated at estimated fair value. Unrealized gains or losses related to
securities available for sale are reflected in a separate component of
shareholders' equity, net of applicable income taxes.
During 1995, securities with an amortized cost basis of approximately
$4,061,400 were reclassified from held to maturity to available for sale as
permitted by the Financial Accounting Standards Board (FASB). This transfer
resulted in an unrealized gain of approximately $76,000. Other than this
transaction, no securities have been transferred between the available for
sale and held to maturity categories or sold from the held to maturity
category.
Interest income includes interest earned on the securities and the respective
amortization of premium or accretion of discount. Amortization or accretion
is computed using the straight-line method which approximates the interest
method. Sales of securities and related gains are determined using the
specific identification method.
19
<PAGE>
<PAGE>
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans receivable
Loans receivable are stated at their principal amount outstanding, net of
deferred loan origination and commitment fees and certain direct costs, which
are recognized over the contractual life of the loan as an adjustment of the
loan's yield. Interest income on loans is recognized on an accrual basis,
calculated using the level yield interest method.
The allowance for possible loan losses is maintained at a level which, in the
opinion of management, is considered adequate to absorb potential losses in
the loan portfolio. The level of the allowance is based on management's
evaluation of individual loans, past loan loss experience, the assessment of
prevailing and anticipated economic conditions, the estimated value of
collateral and other relevant factors.
The allowance for possible loan losses is established through charges to
earnings in the form of a provision for loan loss. Increases and decreases in
the allowance due to changes in the measurement of the impaired loans are
included in the provision for loan losses. Loans continue to be classified as
impaired unless they are brought fully current and the collection of scheduled
interest and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition." Under these Standards, a loan is considered impaired,
based on current information and events, when it is probable that the Company
will not be able to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement (generally
within 90 days). Accordingly, the Company measures all nonaccrual and
restructured commercial real estate and commercial loans individually, based
on the present value of expected future cash flows discounted at the
historical effective interest rate, except that all collateral dependent loans
are measured for impairment based on the fair value of the collateral. The
Standards do not apply to large groups of small balance, homogeneous loans
such as consumer installment and residential real estate loans, that are
collectively evaluated for impairment based upon historical statistics. The
effect of implementation was not material.
Income recognition on impaired and nonaccrual loans
Loans, including impaired loans, are placed on a nonaccrual status in
accordance with policies established by management. Loans, other than
consumer loans, are generally transferred to nonaccrual status when principal
or interest payments become 90 days past due. Any accrued but uncollected
interest previously recorded on such loans is reversed in the current period.
Past due consumer loans are generally fully reserved or charged-off when they
reach a 120 day delinquency
20
<PAGE>
<PAGE>
status. Loans are returned to accrual status when management determines that
the circumstances have improved to the extent that both principal and interest
are collectible and there has been a sustained period of repayment performance
in accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may
be recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
Premises and equipment
Land is carried at cost. Company premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on the straight-line
basis over the estimated useful lives of the related assets, generally ranging
from three to forty years.
Income taxes
The Company accounts for income taxes using the asset and liability approach
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of such assets and liabilities. This method
utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are
recognized, net of any valuation allowances, for deductible temporary
differences and net operating loss and tax credit carryforwards.
Earnings (loss) per share
Earnings (loss) per share is determined by dividing income (loss) for the year
by the weighted average number of common and common equivalent shares. Stock
options are regarded as common stock equivalents; whereas, ESOP shares not
committed to be released are not considered outstanding for purposes of
calculating earnings (loss) per share. For periods in which such common stock
equivalents would be antidilutive, they are excluded from the computation.
The weighted average number of shares used in the computation of earnings
(loss) per share for 1996, 1995 and 1994 was 250,271, 256,320 and 252,318,
respectively. There is no material difference between primary and fully
diluted earnings (loss) per share.
Statement of cash flows
For purposes of the statement of cash flows, the Company defines cash and cash
equivalents as cash and due from banks and federal funds sold.
21
<PAGE>
<PAGE>
New accounting standards
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." In
accordance with SFAS 125, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. As
originally issued, SFAS 125 is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. SFAS 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125," was issued in December 1996 and defers for one year
the effective date for certain provisions of SFAS 125 specifically relating to
repurchase agreement, dollar roll, securities lending and similar
transactions. All provisions of SFAS 125, as amended by SFAS 127, are to be
applied prospectively, and earlier or retroactive application is not
permitted. Management does not anticipate that adoption of this Standard will
have a significant impact on the Company's financial position or results of
operations.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities available
for sale are as follows:
December 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Mortgage-backed securities $3,850,505 $ 95,874 $ (679) $3,945,700
========== ======== ====== ==========
December 31, 1995
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Mortgage-backed securities $4,061,370 $ 79,386 $(2,956) $4,137,800
========== ======== ====== ==========
The amortized cost and estimated fair value of investment securities held to
maturity are as follows:
December 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
U. S. Treasury securities $2,872,670 $ 2,507 $ (77) $2,875,100
State and political
subdivision securities 200,218 1,182 201,400
Mortgage-backed securities 4,129,590 (22,990) 4,106,600
Corporate obligations 99,910 790 100,700
---------- ------- -------- ----------
Total $7,302,388 $ 4,479 $(23,067) $7,283,800
========== ======= ======== ==========
22
<PAGE>
<PAGE>
December 31, 1995
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
U. S. Treasury securities $2,286,858 $13,442 $ -0- $2,300,300
State and political
subdivision securities 391,443 5,157 396,600
Corporate obligations 601,250 9,750 611,000
---------- ------- -------- ----------
Total $3,279,551 $28,349 $ -0- $3,307,900
========== ======= ======== ==========
The fair values of investment securities are estimated utilizing independent
pricing services and are based on available market data.
The amortized cost and estimated fair value by contractual maturity of
investment securities at December 31, 1996 are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations.
Available for sale Held to maturity
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
Due in one year or less $3,172,798 $3,177,200
Due after five years
through ten years $ 88,478 $ 87,800
Due after ten years 3,762,027 3,857,900 4,129,590 4,106,600
---------- ---------- ---------- ----------
$3,850,505 $3,945,700 $7,302,388 $7,283,800
========== ========== ========== ==========
23
<PAGE>
<PAGE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
December 31,
1996 1995
Real estate loans:
Secured by one to four family residences $38,734,967 $36,122,461
Secured by other properties 2,234,372 2,594,168
Construction loans 578,318 651,649
----------- -----------
41,547,657 39,368,278
----------- -----------
Other loans:
Automobile loans 129,271 228,544
Home improvement loans 4,959,798 3,996,860
Other 1,106,331 1,187,811
----------- -----------
6,195,400 5,413,215
----------- -----------
Undisbursed portion of loans (278,927) (487,913)
Net deferred loan origination costs (fees) 22,905 (872)
Allowance for loan losses (305,900) (244,100)
----------- -----------
(561,922) (732,885)
----------- -----------
$47,181,135 $44,048,608
=========== ===========
The balance of nonaccrual loans at December 31, 1996 and 1995 was $251,500 and
$321,700, respectively. The balance of impaired loans at December 31, 1996
and 1995 was $- 0 - and $69,500, respectively. The allowance recorded against
the balance of impaired loans at December 31, 1996 and 1995 was $- 0 - and
$6,950, respectively. The average balance of impaired loans during 1996 and
1995 was $52,100 and $69,500, respectively. Interest income recognized on
impaired loans and interest income recognized on a cash basis was not
significant.
At December 31, 1996, the carrying value and market value of loans pledged as
collateral for advances from the Federal Home Loan Bank of New York was
$9,817,940, and $9,900,000, respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses is as follows:
December 31,
1996 1995 1994
Balance at beginning of period $ 244,100 $ 224,000 $ 104,100
Provision expense 140,239 36,000 132,038
Net charge-offs (78,439) (15,900) (12,138)
--------- --------- ---------
Balance at end of period $ 305,900 $ 244,100 $ 224,000
========= ========= =========
24
<PAGE>
<PAGE>
NOTE 5 - LOAN SERVICING
Loans serviced for others, amounting to approximately $11,079,500 and
$12,048,300 at December 31, 1996 and 1995, respectively, are not included in
the statement of financial condition. Custodial escrow balances maintained in
connection with loans serviced for others were approximately $196,600 and
$241,800 at December 31, 1996 and 1995, respectively.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment, net of accumulated depreciation and amortization,
consist of the following:
December 31,
1996 1995
Land $ 350,642 $ 350,642
Premises 1,727,760 1,682,514
Furniture, fixtures and equipment 918,380 898,864
---------- ----------
2,996,782 2,932,020
Less - Accumulated depreciation (901,254) (740,873)
---------- ----------
$2,095,528 $2,191,147
========== ==========
Depreciation expense on premises and equipment was: $158,900, $104,300 and
$60,400 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 7 - DEPOSITS
Deposits were comprised of the following:
December 31,
----------------------------------------
1996 1995
Per Per
Amount cent Amount cent
Noninterest bearing deposits $ 1,584,823 3.3% $ 1,086,601 2.3%
Savings deposits 12,889,380 26.6 11,223,541 24.1
Negotiable order of with-
drawal deposits 2,615,737 5.4 2,007,755 4.3
Money market deposits 3,544,009 7.3 2,248,931 4.8
----------- ----- ----------- -----
20,633,949 42.6 16,566,828 35.5
----------- ----- ----------- -----
Certificates of deposit:
4.00% and less 472,108 1.0 269,677 .6
4.01% - 6.00% 22,852,167 47.1 16,643,907 35.8
6.01% - 8.00% 4,518,302 9.3 13,064,645 28.1
8.01% and greater 15,493 0.0 14,372 0.0
----------- ----- ----------- -----
27,858,070 57.4 29,992,601 64.5
----------- ----- ----------- -----
$48,492,019 100.0% $46,559,429 100.0%
=========== ===== =========== =====
The weighted average interest rates paid on total deposits were 4.4% and 4.8%
at December 31, 1996 and 1995, respectively.
25
<PAGE>
<TABLE>
<PAGE>
At December 31, 1996, certificates of deposit have scheduled maturity dates as follows:
There-
1997 1998 1999 2000 2001 after Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.00% or less $ 472,108 $ 472,108
4.01% - 6.00% 16,314,376 $3,476,736 $1,874,431 $594,412 $571,165 $ 21,047 2,852,167
6.01% - 8.00% 1,502,392 553,201 1,894,162 297,778 7,161 263,608 4,518,302
8.01% and
greater 8,712 6,781 15,493
----------- ---------- ---------- -------- -------- -------- -----------
Total $18,288,876 $4,038,649 $3,775,374 $892,190 $578,326 $284,655 $27,858,070
=========== ========== ========== ======== ======== ======== ===========
</TABLE>
<PAGE>
At December 31, 1996, certificates of deposit in amounts of $100,000 or more
have the following scheduled time remaining until maturity:
Three months or less $ 1,468,792
Over three through six months 759,910
Over six through twelve months 108,034
Over twelve months 460,176
-----------
$ 2,796,912
===========
Interest expense on deposits is as follows:
Year ended December 31,
1996 1995 1994
Savings deposits $ 382,701 $ 364,458 $ 467,529
Negotiable order of withdrawal
deposits 47,091 34,748 44,754
Money market deposits 72,388 74,561 96,870
Certificates of deposit 1,626,926 1,573,310 742,289
---------- ---------- ----------
$2,129,106 $2,047,077 $1,351,442
========== ========== ==========
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
At December 31, 1996 and 1995, the Company had advances, secured by
residential real estate loans, from the Federal Home Loan Bank of New York of
$9,000,000 and $3,000,000, respectively. The borrowings outstanding at
December 31, 1996 had fixed and variable rates of interest ranging from 4.85%
to 6.28%, with a weighted average interest rate of 5.93%, and mature at
various dates through 2000. The borrowings outstanding at December 31, 1995
had fixed and variable rates of interest ranging from 4.90% to 5.20%, with a
weighted average interest rate of 5.10%. Required principal repayments at
December 31, 1996 are as follows: $6,000,000 in 1997 and $1,000,000 in 1998,
1999 and 2000. At December 31, 1996, the Company had an available line of
credit with the Federal Home Loan Bank of New York of $5,589,500. There are
no commitment fees associated with this line. There were no outstanding
borrowings against this line at December 31, 1996 and maximum borrowings
outstanding against this line during the year ended December 31, 1996 were
$500,000.
26
<PAGE>
<PAGE>
At December 31, 1996 and 1995, the Company had $275,675 and $298,782,
respectively, outstanding on a loan used for construction of a branch office.
The loan has a fixed rate of interest of 8.5% and requires monthly payments of
principal and interest through 2001. At December 31, 1996, principal payments
of $23,000, $81,200, $88,400, $42,200 and $40,900 are required in 1997, 1998,
1999, 2000 and 2001, respectively.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan covering substantially all
employees which provides for a salary deferral arrangement, pursuant to
Section 401(k) of the Internal Revenue Code, as contributions to a savings
plan. The plan provides for an annual contribution by the Company of 5% of an
employee's base salary. In addition, the Company contributes to the plan
one-half of every dollar contributed by an employee up to an additional 4% of
an employee's base salary. The amounts charged to expense related to this
plan were approximately $33,500, $27,700 and $28,500 for the years ended
December 31, 1996, 1995 and 1994, respectively.
During 1993, the Company established an internally leveraged employee stock
ownership plan that covers all employees who have completed at least 1,000
hours of service in a twelve-month period and have attained the age of 21.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. The ESOP shares initially were
pledged as collateral for its debt. As the debt is repaid, shares are
released from collateral and allocated to active participants in proportion to
their compensation relative to total compensation of all active participants.
The Company accounts for its ESOP in accordance with Statement of Position
93-6, "Employer's Accounting for Employee Stock Ownership Plans."
Accordingly, the debt of the ESOP is eliminated in consolidation and the
shares pledged as collateral are reported as unearned ESOP shares in the
consolidated statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for earnings per
share computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP compensation
expense was approximately $45,400, $42,000 and $34,600 during 1996, 1995 and
1994, respectively.
A summary of ESOP shares is as follows:
December 31,
1996 1995
Shares released for allocation and
allocated 11,178 8,487
Unreleased shares 7,071 9,762
-------- --------
Total ESOP shares 18,249 18,249
======== ========
Fair value of unreleased shares $118,439 $161,073
======== ========
27
<PAGE>
<PAGE>
7,820 shares of the Company's common stock in the conversion, all of which
were awarded. The directors' MRP, which acquired 3,910 shares, became fully
vested on January 1, 1994, while the officers' MRP, which also acquired 3,910
shares, became fully vested on the anniversary date of the conversion. The
value of the common stock contributed to the MRPs was amortized to
compensation expense as the shares became vested. During 1994, $29,300 was
amortized to expense.
NOTE 10 - INCOME TAXES
The Company and the Association file consolidated federal and combined state
and local tax returns on a calendar year basis.
For the tax years prior to 1996 under the Internal Revenue Code, a special bad
debt deduction for additions to the Company's tax bad debt reserves was
allowed. Recently enacted federal legislation eliminated this reserve method.
For tax years beginning after January 1, 1996, the Company is only permitted
to take deductions for bad debts for federal tax purposes on the basis of
actual loan charge-off activity (specific charge-offs). This legislation also
requires that the Company recapture into taxable income the portion of
existing tax bad debt reserves created in the years beginning after December
31, 1987 over a six-year period. The amount of such reserve subject to
recapture at December 31, 1996 is approximately $5,000.
Under prior federal law, tax bad debt reserves created prior to January 1,
1988 were subject to recapture into taxable income should the Company fail to
meet certain qualifying asset and definitional tests. New federal legislation
eliminated these thrift related recapture rules. However, under current law
pre-1988 reserves remain subject to recapture should the Company make certain
non-dividend distributions or cease to maintain a Company charter. Management
has no intention of taking any such actions.
At December 31, 1996, the Company's total pre-1988 tax bad debt reserve was
approximately $828,000. This reserve reflects the cumulative effect of
federal tax deductions by the Company for which no federal income tax
provision has been made.
Provided the Company continues to satisfy certain definitional tests and other
conditions for New York State income tax purposes, the Company is permitted to
continue to take special reserve method bad debt deductions. The deductible
annual addition to the state reserve may be computed using a specific formula
based on the Company's loss history ("Experience Method") or a statutory
percentage equal to 32% of the Company's New York State taxable income. The
Company used the specific charge-off method in 1996 and expects to use the
percentage method in 1997.
The components of the (benefit) provision for income taxes are as follows:
December 31,
1996 1995 1994
Current:
Federal $ (25,499) $ 84,400 $163,600
State 250 6,000 9,700
(25,249) 90,400 173,300
Deferred (12,800) (11,600) (8,500)
--------- -------- --------
$ (38,049) $ 78,800 $164,800
========= ======== ========
28
<PAGE>
<PAGE>
Under the 1993 Stock Option and Incentive Plan (Stock Option Plan) 26,070
shares of common stock were reserved for the benefit of certain officers,
employees and directors. The Stock Option Plan is administered by a committee
of the Board of Directors (the "Committee"). Management intends that options
granted under the Stock Option Plan constitute both incentive and
non-incentive stock options. Options granted to non-employee directors will
constitute non-incentive stock options.
With respect to incentive stock options, the option exercise price may be no
less than the fair market value of the Company's common stock on the date of
grant. All options are immediately exercisable and expire no later than ten
years from the date of grant.
Beginning in 1996, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model and the following
assumptions: a risk-free interest rate of 6.38%; an expected life of six
years; expected volatility of 31.33%; and an expected dividend yield of 1.77%.
The Company did not recognize any compensation cost associated with the
granting of options during 1996. Had the Company recognized compensation cost
associated with these options, net loss and loss per share would have been
$26,729 and $.11, respectively.
A summary of the status of the Company's stock option plan as of December 31,
1996, 1995 and 1994 and changes during the years ended on those dates is as
follows:
1996 1995 1994
----------------- ---------------- ----------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at
beginning of year 15,511 $ 10 17,701 $ 10 18,249 $ 10
Granted 3,535 17
Exercised (2,372) 10
Forfeited (2,190) 10 (548) 10
------ ----- ------ ----- ------ -----
Outstanding and
exercisable at
end of year 16,674 $ 12 15,511 $ 10 17,701 $ 10
====== ===== ====== ===== ====== =====
Fair value of
options granted
during the year $ 6.33
======
At December 31, 1996, there are 8,029 options outstanding with an exercise
price of $10 and a remaining contractual life of seven years, and 3,535
options outstanding with an exercise price of $17 and a remaining contractual
life of ten years. Additionally, at December 31, 1996, there were 7,024
shares available for future grant.
In conjunction with the conversion from a mutual savings and loan association
to a federally chartered stock savings and loan association during 1993, two
Management Recognition Plans ("MRPs") were adopted to provide officers and
directors with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Company. The MRPs were managed by
trustees comprised of directors of the Company. Collectively, the trustees
acquired
29
<PAGE>
<PAGE>
A summary of deferred income taxes is as follows:
December 31,
1996 1995
Deferred income tax assets:
Allowance for loan losses $ 106,000 $ 68,700
Other 44,500 12,000
--------- ---------
$ 150,500 $ 80,700
========= =========
Deferred income tax liabilities:
Depreciation $ (85,000) $ (45,000)
Unrealized gain on investment securities (38,000) (30,500)
Deferred loan origination fees and costs (9,000)
Other (8,000)
--------- ---------
(140,000) (75,500)
--------- ---------
Net deferred income tax asset $ 10,500 $ 5,200
========= =========
In the Company's opinion, the net deferred income tax asset is fully
realizable. Accordingly, no valuation allowance has been provided.
The provision for income taxes is different from that which would be obtained
by applying the statutory federal income tax rate to income before taxes. The
items causing this difference are as follows:
Year ended December 31,
1996 1995 1994
-------------- -------------- --------------
Per Per Per
cent cent cent
of of of
pretax pretax pretax
Amount income Amount income Amount income
Expected tax at federal
statutory rate $(14,416) (34.0)% $88,200 34.0% $175,700 34.0%
Increases (decreases)
resulting from:
State franchise
taxes, less appli-
cable federal income
tax benefit (18,975) (44.7) 10,200 3.9 14,600 2.8
Tax exempt interest on
investments in state
and political sub-
division securities (4,866) (11.5) (7,900) (3.0) (12,000) (2.3)
Book bad debt deduction
less than tax (17,700) (6.8) (17,700) (3.4)
Other, net 208 .5 6,000 2.3 4,200 .8
-------- ----- ------- ---- ------- ----
(Benefit) provision for
income taxes $(38,049) (89.7)% $78,800 30.4% $164,800 31.9%
======== ===== ======= ==== ======== ====
30
<PAGE>
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain executive officers, directors, principal shareholders and companies in
which such individuals have 10% or more ownership (related parties) are
engaged in transactions with the Company in the ordinary course of business.
It is the Company's policy that all related party transactions are conducted
at "arm's length" and all loans and commitments included in such transactions
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other customers. A summary of the changes in outstanding loans to such
related parties is as follows:
Year ended
December 31,
1996 1995
Balance of loans outstanding at beginning
of year $ 364,601 $ 383,277
New originations and increases in existing
loans 38,046
Principal repayments (30,997) (18,676)
--------- ---------
Balance of loans outstanding at end of year $ 371,650 $ 364,601
========= =========
At December 31, 1996, there were approximately $438,900 in deposits from such
related parties.
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
which involve, to varying degrees, elements of credit, interest rate or
liquidity risk in excess of the amount recognized in the statement of
financial condition. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amounts of those
instruments. The Company has experienced minimal credit losses to date on its
financial instruments with off-balance sheet risk and management does not
anticipate any significant losses on its commitments to extend credit
outstanding at December 31, 1996. The Company does not utilize off-balance
sheet derivative instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The
Company controls the credit risk of off-balance sheet instruments through
credit approvals, limits and monitoring procedures, and management evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained is based on management's credit evaluation of the
customer.
Commitments to extend credit, which generally have a sixty-day expiration date
or other termination clauses, are legally binding agreements to lend to a
customer (as long as there is no violation of any condition established in the
contract). At December 31, 1996, the Company's total commitments to extend
credit approximated $413,100, which included fixed rate commitments of
$341,700. All outstanding loan commitments are scheduled to be disbursed
within sixty days. Since a portion of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements.
31
<PAGE>
<PAGE>
The Company has identified certain credit risk concentrations in relation to
its on- and off-balance sheet financial instruments. Credit risk is defined
as the possibility that a loss may occur from the failure of another party to
perform according to the terms of the contract. A credit risk concentration
results when the Company has a significant credit exposure to an individual or
a group engaged in similar activities or affected similarly by economic
conditions.
The Company's customers are located primarily in Western Monroe County and
Orleans County in New York State. As Note 3 to these financial statements
indicates, the majority of the Company's loan portfolio relates to loans
secured by first mortgages on real estate.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation and investigations of a routine nature
which are being defended and handled in the ordinary course of business.
These matters are not considered significant to the Company's financial
condition or results of operations.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents
For these short-term instruments, the carrying amount represents an estimate
of fair value.
Loan receivables
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit liabilities
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowings
Rates currently available to the bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. The
estimated fair value of financial commitments was not significant.
32
<PAGE>
<PAGE>
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
amount value amount value
Financial assets:
Cash and cash
equivalents $ 2,125,929 $ 2,125,929 $ 2,397,018 $ 2,397,018
Investment
securities 11,248,088 11,229,500 7,417,351 7,446,000
Loans held for
sale and loans
receivable, net
of allowance
for possible
loan losses 47,838,833 48,002,000 44,048,608 44,528,000
Federal Home Loan
Bank stock 450,000 450,000 475,000 475,000
Financial liabilities:
Deposits 48,492,019 48,658,000 46,559,429 46,795,000
Advances from the
Federal Home Loan
Bank 9,000,000 9,020,000 3,000,000 2,998,000
Other borrowings 275,675 258,000 298,782 289,000
NOTE 15 - REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must meet
specific guidelines that involve quantitative measures of the Association's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I and tangible capital (as
defined) to adjusted total assets (as defined). Management believes, as of
December 31, 1996, that the Association meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996 and 1995, the most recent notification from the OTS
categorized the Association as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Association must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
Association's category.
33
<PAGE>
<PAGE>
The Association's actual capital amounts (in thousands) and ratios are also
presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio > Amount > Ratio > Amount > Ratio
- - - -
As of December 31, 1996:
Total capital (to risk-
weighted assets) $5,166 16.0% $2,585 8.0% $3,231 10.0%
Tier I capital (to
risk-weighted assets) 4,957 15.3 1,292 4.0 1,938 6.0
Tier I capital (to ad-
justed total assets) 4,957 7.8 1,919 3.0 3,198 5.0
Tangible capital (to
adjusted total assets) 4,957 7.8 959 1.5 N/A N/A
As of December 31, 1995:
Total capital (to risk-
weighted assets) 5,215 17.4 2,400 8.0 3,000 10.0
Tier I capital (to
risk-weighted assets) 4,971 16.6 1,200 4.0 1,800 6.0
Tier I capital (to ad-
justed total assets) 4,971 8.9 1,684 3.0 2,807 5.0
Tangible capital (to
adjusted total assets) 4,971 8.9 842 1.5 N/A N/A
The Association's capital exceeds all of the fully phased-in capital
requirements imposed by the Financial Institution Reform, Recovery and
Enforcement Act of 1989. OTS regulations provide that an association that
exceeds all fully phased-in capital requirements before and after a proposed
capital distribution can, after prior notice but without the approval by the
OTS, make capital distributions during the calendar year of 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 excess capital
over its fully phased-in capital requirements) at the beginning of the
calendar year, or (ii) 75% of its net income during the most recent
four-quarter period. Any additional capital distributions require prior
regulatory approval.
At the time of conversion from a mutual savings and loan association to a
federally chartered stock savings and loan association during 1993, the
Association established a liquidation account in an amount of $3,077,944 for
the benefit of eligible account holders who continue to maintain their
accounts at the Association subsequent to the conversion. The liquidation
account is reduced annually to the extent the eligible account holders have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. Subsequent to
the conversion, the Association may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
shareholders equity to be reduced below the balance of the liquidation account
or if such declaration and payments would otherwise violate regulatory
requirements.
The Company is subject to the restrictions of Delaware law, which generally
limits dividends to the amount of a corporation's surplus or, in the case
where no such surplus exists, the amount of a corporation's net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year.
On July 19, 1995, the Association entered into a Supervisory Agreement with
the OTS. The agreement requires the Company to develop policies and
procedures primarily relating to its internal operations.
34
<PAGE>
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION
The following condensed statement of financial condition and condensed
statements of operations and of cash flows for Albion Banc Corp. should be
read in conjunction with the consolidated financial statements and notes
thereto.
Condensed Statement of Condition
December 31,
1996 1995
Assets
Cash $ 194,853 $ 113,963
Investment securities held to
maturity (fair value of $585,000
and $779,800, respectively) 584,667 779,818
Investment in subsidiary 4,898,877 4,923,240
Loan to ESOP 78,210 104,280
Other loan receivable 120,182
Other assets 3,115 317
----------- -----------
Total assets $ 5,759,722 $ 6,041,800
=========== ===========
Liabilities and Shareholders' Equity
Accrued liabilities $ 149
Shareholders' equity
Common stock 2,631 $ 2,607
Capital surplus 2,229,078 2,205,382
Retained earnings 3,749,459 3,833,811
Treasury stock, 13,035 shares, at cost (221,595)
----------- -----------
Total liabilities and
shareholders' equity $ 5,759,722 $ 6,041,800
=========== ===========
Condensed Statement of Operations
Year ended December 31,
1996 1995 1994
Equity in undistributed (loss)
earnings of subsidiary $ (24,363) $ 98,788 $283,567
Dividends received - Albion Federal
Savings and Loan Association 76,104 73,509
Interest and fees on loans 8,286 10,564 6,952
Interest and dividends on investment
securities 38,501 11,858
Other operating expenses (26,776) (16,581) (11,931)
--------- -------- --------
Net income $ (4,352) $180,733 $352,097
========= ======== ========
35
<PAGE>
<PAGE>
Condensed Statement of Cash Flows
Year ended December 31,
1996 1995 1994
Cash flows from operating
activities:
Net (loss) income $ (4,352) $ 180,733 $ 352,097
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities -
Accretion of bond discount (38,483)
Equity in loss (income) of
subsidiary 24,363 (174,892) (357,076)
(Increase) decrease in other
assets (2,798) (317) 4,562
Increase (decrease) in accrued
liabilities 149 (18,753) 6,679
--------- ---------- ----------
Net cash (used in)
provided by
operating activities (21,121) (13,229) 6,262
--------- ---------- ----------
Cash flows from investing activities:
Dividends received - Albion Federal
Savings and Loan Association 76,104 73,509
Proceeds from repayment of ESOP loan 34,673 37,476 52,140
Proceeds from maturities of invest-
ment securities held to maturity 1,500,000 900,000
Purchases of investment securities
held to maturity (1,274,969) (1,671,312)
Net decrease (increase) in loans
receivable 120,182 (120,182)
--------- ---------- ----------
Net cash provided by
(used in) investing
activities 379,886 (777,914) 125,649
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock
options 23,720
Dividends paid (80,000) (76,104) (73,509)
Purchase of treasury stock (221,595)
--------- ---------- ----------
Net cash used in
financing activities (277,875) (76,104) (73,509)
--------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 80,890 (867,247) 58,402
Cash and cash equivalents at
beginning of year 113,963 981,210 922,808
--------- ---------- ----------
Cash and cash equivalents at
end of year $ 194,853 $ 113,963 $ 981,210
========= ========== ==========
36
<PAGE>
<PAGE>
COMMON STOCK INFORMATION
The common stock of Albion Banc Corp. is traded on the Nasdaq Small Cap
Market under the symbol "ALBC". As of March 1, 1997, there were 420
stockholders of record. Under Federal regulations, the dollar amount of
dividends a federal savings association may pay is dependent upon the
association's capital surplus position and recent net income. Generally, if
an association satisfies its regulatory capital requirements, it may make
dividend payments up to the limits prescribed in the OTS regulations.
However, institutions that have converted to the stock form of ownership may
not declare or pay a dividend on, or repurchase any of, its common stock if
the effect thereof would cause the regulatory capital of the institution to be
reduced below the amount required for the liquidation account which was
established in accordance with OTS regulations and the Association's Plan of
Conversion. Albion Federal is subject to these requirements and regulations.
There are also certain dividend limitations applicable to the Corporation
under Delaware law. The Company's common stock closed at $17.125 on March 1,
1997.
The following table sets forth market price and dividend information for
the Corporation's Common Stock for the years 1996 and 1995.
Fiscal 1996 High Low Close Dividend
------------- ------ ------ ------ --------
First Quarter $18.00 $16.50 $16.50 $.31
Second Quarter $18.50 $16.625 $16.75 --
Third Quarter $17.50 $16.50 $16.50 --
Fourth Quarter $18.25 $16.75 $16.75 --
Fiscal 1995 High Low Close Dividend
------------- ------- ------ ------- ---------
First Quarter $13.375 $12.25 $13.375 $.31
Second Quarter $15.50 $12.25 $15.50 --
Third Quarter $18.25 $14.75 $16.50 --
Fourth Quarter $18.75 $16.50 $16.50 --
37
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
ALBION BANC CORP. ALBION FEDERAL SAVINGS
AND LOAN ASSOCIATION
DIRECTORS: DIRECTORS:
James H. Keeler James H. Keeler
Chairman of the Board of the Corporation Chairman of the Board of the
and President, Chief Executive Officer Association and President,
and majority shareholder of Keeler Chief Executive Officer and
Construction Co., Inc. majority shareholder of Keeler
Construction Co., Inc.
Richard A. Pilon Richard A. Pilon
Vice Chairman of the Board of the Vice Chairman of the Board of
Corporation, President, Treasurer and the Association, President,
a majority stockholder of Dale's Plaza, Treasurer and a majority
Inc. and Secretary and Treasurer of stockholder of Dale's Plaza,
Dale & Son Supermarket, Inc. (DBA Jubilee Inc. and Secretary and
Foods). Treasurer of Dale & Son
Supermarket, Inc. (DBA Jubilee
Foods).
Dolores L. Giarrizzo Dolores L. Giarrizzo
Retired, Prior to that, associated with Retired, Prior to that,
Agway, Inc. associated with
Agway, Inc.
Robert R. Brown II Robert R. Brown II
Self-employed and Vice President Self-employed and Vice
of Orchard Dale Fruit Farms, Inc. President of Orchard Dale Fruit
Farms, Inc.
Harold M. Kludt Harold M. Kludt
Partner and part owner Kludt Bros., Inc. Partner and part owner Kludt
Bros., Inc.
Chriss M. Andrews Chriss M. Andrews
Owner and President of Barclay & Fowler Owner and President of Barclay
Oil Corp. & Fowler Oil Corp.
OFFICERS: OFFICERS:
Jeffrey S. Rheinwald Jeffrey S. Rheinwald
President and C.E.O. President and C.E.O.
Mark F. Reed Mark F. Reed
Vice President/Treasurer and C.F.O. Vice President/Treasurer and
C.F.O.
Marie A. Rice Marie A. Rice
Vice President and Secretary Vice President and Secretary
38
<PAGE>
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
48 North Main Street American Stock Transfer & Trust Co.
Albion, New York 14411 6201 15th Avenue
Brooklyn, New York 11219
INDEPENDENT ACCOUNTANTS COMMON STOCK
Price Waterhouse LLP Traded Over the Counter
Buffalo, New York Small Cap Market
Nasdaq Symbol: ALBC
GENERAL COUNSEL
Saperston and Day
Rochester, New York
SPECIAL COUNSEL
Breyer and Aguggia
Washington, D.C.
---------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Wednesday, April 16, 1997
at 10:00 a.m., Eastern Time, at Tillman's Village Inn, Corner of Routes 98 and
104, Albion, New York.
39
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Albion Banc Corp.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Albion Federal Savings
and Loan Association 100% United States
New Frontier of Albion (b) 100% New York
- -------------------
(a) The operation of the Company's wholly owned subsidiaries are
included in the Company's Financial Statements contained in the
Annual Report attached hereto as Exhibit 13.
(b) New Frontier of Albion is the wholly owned subsidiary of Albion
Federal Savings and Loan Association.
<PAGE>
<PAGE>
Exhibit 23
Consent of Price Waterhouse LLP
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 77152) of Albion Banc Corp. of our report dated
February 21, 1997 appearing on page 14 of the 1996 Annual Report to
Shareholders of Albion Banc Corp., which is incorporated by reference in
Albion Banc Corp.'s Annual Report on Form 10-KSB for the year ended December
31, 1996.
/s/PRICE WATERHOUSE LLP
- -----------------------
PRICE WATERHOUSE LLP
Buffalo, New York
March 26, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1026
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3946
<INVESTMENTS-CARRYING> 7302
<INVESTMENTS-MARKET> 7284
<LOANS> 48145
<ALLOWANCE> (306)
<TOTAL-ASSETS> 64585
<DEPOSITS> 48492
<SHORT-TERM> 6000
<LIABILITIES-OTHER> 954
<LONG-TERM> 3276
0
0
<COMMON> 3
<OTHER-SE> 5861
<TOTAL-LIABILITIES-AND-EQUITY> 64585
<INTEREST-LOAN> 3901
<INTEREST-INVEST> 545
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4446
<INTEREST-DEPOSIT> 2129
<INTEREST-EXPENSE> 2378
<INTEREST-INCOME-NET> 2069
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2231
<INCOME-PRETAX> (42)
<INCOME-PRE-EXTRAORDINARY> (42)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
<YIELD-ACTUAL> 7.94
<LOANS-NON> 252
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 252
<ALLOWANCE-OPEN> 244
<CHARGE-OFFS> 78
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 306
<ALLOWANCE-DOMESTIC> 306
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
