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, 1997
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.
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(Exact name of registrant as specified in its charter)
Delaware 16-1435160
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 27,
1998, was $7,689,068 (750,153 shares at $10.25 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, 1997 were
$5,573,983.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Parts I and II)
2. Portions of Proxy Statement for the 1998 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, 1997, the Company had total
assets of $71.7 million, total deposits of $54.9 million and shareholders'
equity of $6.2 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, 1997, the Association's loans
totaled $53.3 million, or 74.3% of total assets, including $43.0 million, or
80.3%, of gross loans secured by one-to-four family properties, $2.2 million,
or 4.1% of gross loans secured by other real estate properties and $7.9
million of consumer loans, or 14.8% of gross loans. Of the Association's
residential mortgage loans secured by one-to-four family and other real estate
properties, $29.6 million, or 68.4%, are fixed-rate loans and $13.7 million,
or 31.6%, 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 required the Association to develop policies and procedures
primarily relating to its internal operations. In connection with the
agreement, the Association took the necessary steps to develop and implement
the policies and procedures required by the Supervisory Agreement. Effective
August 25, 1997, the Supervisory Agreement was terminated by the OTS.
Selected Consolidated Financial Information
This information is incorporated by reference from page 2 of the
1997 Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
This information is incorporated by reference from page 11 of the
Annual Report.
1
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<TABLE>
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).
1997 Compared to 1996 1996 Compared to 1995 1995 Compared to 1994
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans . . . $ 46 $ 69 $ 1 $116 $ 44 $135 $ 2 $181 $ 73 $146 $ 4 $223
Consumer loans. . . . . 5 155 1 161 (14) 13 (1) (2) 4 80 1 85
---- ---- --- ---- ---- ---- --- ---- ---- ---- ---- ----
Total loans. . . . . . 51 224 2 277 30 148 1 179 77 226 5 308
Mortgage-backed
securities . . . . . . 19 303 33 355 10 12 1 23 82 2 1 85
Investment securities . (3) (35) 1 (37) (8) (26) 1 (33) 234 (43) (43) 148
Daily interest-earning
deposits . . . . . . . -- -- -- -- -- -- -- -- -- -- -- --
Other interest-earning
assets . . . . . . . . (6) 162 (13) 143 (10) (116) 5 (121) (5) 12 (2) 5
---- ---- --- ---- ---- ---- --- ---- ---- ---- ---- ----
Total net change in
income on interest-
earning assets. . . . . 61 654 23 738 22 18 8 48 388 197 (39) 546
---- ---- --- ---- ---- ---- --- ---- ---- ---- ---- ----
Interest-bearing liabilities:
Interest-bearing
deposits . . . . . . . (27) 197 (2) 168 (73) 161 (6) 82 441 192 63 696
FHLB advances and
other borrowings . . . 24 284 27 335 9 (192) (4) (187) 136 (114) (34) (12)
---- ---- --- ---- ---- ---- --- ---- ---- ---- ---- ----
Total net change in
expense on interest-
bearing liabilities . . (3) 481 25 503 (64) (31) (10) (105) 577 78 29 684
---- ---- --- ---- ---- ---- --- ---- ---- ---- ---- ----
Net change in net
interest income . . . . $ 64 $173 $(2) $235 $ 86 $ 49 $18 $153 $(189)$119 $(68) $(138)
==== ==== === ==== ==== ==== === ==== ===== ==== ==== =====
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, 1997.
Interest Rate Sensitivity of Net Portfolio Value ("NPV")
NPV as % of
Portfolio Value of Assets
Net Portfolio Value -------------------------
Change --------------------------------- NPV
in Rates $ Amount $ Change(1) % Change Ratio(2) Change(3)
- -------- -------- ----------- -------- -------- ---------
(Dollars in thousands)
+400 bp $3,357 $(4,093) (54)% 5.23% (517) bp
+300 bp 4,744 (2,906) (38) 6.82 (358) bp
+200 bp 5,896 (1,754) (23) 8.30 (210) bp
+100 bp 6,923 (727) (10) 9.55 (85) bp
0 bp 7,650 10.40
- -100 bp 7,979 329 4 10.73 33 bp
- -200 bp 8,103 453 6 10.82 42 bp
- -300 bp 8,334 684 9 11.02 62 bp
- -400 bp 8,783 1,133 15 11.47 107 bp
- ------------
(1) Represents the increase (decrease) of the estimated NPV at the
indicated change in interest rates compared to the NPV assuming no
change in interest rates.
(2) Calculated as the estimated NPV divided by the portfolio value of
total assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
The above table illustrates, for example, that at December 31, 1997
an instantaneous 200 basis point increase in market interest rates would
reduce the Association's NPV by approximately $1,754,000, or 23%, and an
instantaneous 200 basis point (bp) decrease in market interest rates would
increase the Association's NPV by approximately $453,000, or 6%.
Certain assumptions utilized by the OTS in assessing the interest
rate risk of a savings association within its region were utilized in
preparing the preceding table. These assumptions relate to interest rates,
loan prepayment rates, deposit decay rates, and the market values of certain
assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
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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 $53.0 million at December 31, 1997, representing approximately
73.9% of its total assets.
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,
-------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real Estate Loans:
One-to-four family
residential . . . . . . $43,024 80.3% $39,393 81.4% $36,122 80.7%
Commercial(1) . . . . . 2,204 4.1 2,234 4.6 2,594 5.8
Construction(2) . . . . 413 0.8 578 1.2 652 1.4
------- ---- ------- ---- ------- ----
Total real estate
loans . . . . . . . . 45,641 85.2 42,205 87.2 39,368 87.9
Other Loans:
Automobile. . . . . . . 100 0.2 129 0.3 229 0.5
Home improvement and second
mortgage loans . . . . 7,152 13.3 4,960 10.2 3,997 8.9
Other. . . . . . . . . 688 1.3 1,106 2.3 1,187 2.7
------- ---- ------- ---- ------- ----
Total other loans . . 7,941 14.8 6,195 12.8 5,413 12.1
------- ---- ------- ---- ------- ----
Gross loans . . . . . 53,582 100.0% 48,400 100.0% 44,781 100.0%
===== ===== =====
Less:
Undisbursed loans in
process. . . . . . . . (327) (279) (487)
Net deferred loan origination
costs (fees) . . . . . 39 23 (1)
Allowance for loan
losses . . . . . . . . (276) (306) (244)
------- ------- -------
Total loans, net. . . . $53,017 $47,838 $44,049
======= ======= =======
- ---------------
(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, 1997, approximately $43.0 million, or 80.3% 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.
4
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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 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 year 1997, the demand for ARM's decreased in connection
with a flattening of the yield curve and the decline in long-term interest
rates. Therefore, the Association experienced a decrease in its origination
of residential ARM's and the portfolio decreased to $13.6 million at December
31, 1997 from $15.5 million at December 31, 1996.
During the year ended December 31, 1997the Association's total
single-family mortgage loan originations were $8.1 million of which $172,000,
or 2.1% were subject to periodic interest rate adjustments and $7.9 million or
97.9% 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, 1997, the Association had $43.0
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, 1997, the Association had $413,200 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, 1997, the Association
had six loans secured by multi-family dwelling units which it originated and
retained the entire interest, that totalled $522,081, or 1.0%, of the
Association's gross loan portfolio. 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."
5
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At December 31, 1997, the Association's largest multi-family
residential loan was a $141,166 loan secured by a 8-unit apartment complex in
the Association's primary market area. At December 31, 1997, 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."
Commercial Real Estate Loans. Federal regulations permit 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, 1997, this would limit the Association's aggregate
non-residential real estate loans to approximately $22.4 million. At such
time, the Association had commercial real estate loans outstanding of $1.7
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, 1997, the Association's consumer
loan portfolio was $7.9 million, or 14.8%, of the gross loan portfolio. Of
this amount, $7.2 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 $20,670.
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.
6
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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 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."
Loan Maturity and Repricing
The following table sets forth certain information at December 31,
1997 regarding the dollar amount of loans and mortgage-backed securities
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.
One Three Five
Within to to to Beyond
One Three Five Ten Ten
Year Years Years Years Years Totals
---- ----- ----- ----- ----- ------
Real estate mortgages. . . . $15,057 $265 $ 854 $3,365 $23,758 $43,299
Commercial real estate . . . 317 160 -- 245 966 1,688
Construction . . . . . . . . 413 -- -- -- -- 413
Consumer . . . . . . . . . . 3,582 272 424 1,094 2,521 7,893
Mortgage-backed securities . -- -- -- 64 9,803 9,867
------- ---- ------ ------ ------- -------
Total. . . . . . . . . . . $19,369 $697 $1,278 $4,768 $37,048 $63,160
======= ==== ====== ====== ======= =======
The following table sets forth all loans and mortgage-backed
securities due one year after December 31, 1998 which have fixed interest
rates and have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
------- ----------------
(In thousands)
Real estate mortgages. . . . . . $28,043 $ 199
Commercial real estate . . . . . 1,105 266
Construction . . . . . . . . . . -- --
Consumer . . . . . . . . . . . . 3,754 557
Mortgage-backed securities . . . 5,912 3,955
------- ------
Total. . . . . . . . . . . . . $38,814 $4,977
======= ======
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
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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, 1997, the Association had
$591,740 in whole loans which were purchased by the Association and which are
serviced by the Association, and $135,694 in mortgage pool securities which
are serviced by others.
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The following table shows the dollar amount of loans originated,
purchased, sold and repaid during the periods indicated.
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Total loans at beginning of period . . . . $48,400 $44,781 $48,370
------- ------- -------
Real estate loans originated:
One-to-four family residential. . . . . . 6,300 7,076 1,473
Multi-family residential and
commercial real estate . . . . . . . . . 767 185 150
Construction loans(1) . . . . . . . . . . 1,892 2,242 842
Other loans originated:
Consumer. . . . . . . . . . . . . . . . . 4,548 2,586 1,553
Other loans . . . . . . . . . . . . . . . -- -- --
------- ------- -------
Total loans originated . . . . . . . . . 13,507 12,089 4,018
Real estate loans purchased. . . . . . . . -- -- --
Loans sold:
Total one-to-four family residential
mortgages. . . . . . . . . . . . . . . . (507) (459) (2,101)
------- ------- -------
Total loans sold. . . . . . . . . . . . (507) (459) (2,101)
------- ------- -------
Loan principal repayments. . . . . . . . . (8,145) (7,718) (5,506)
Transfers to foreclosed real estate(2) . . -- (293) --
------- ------- -------
Net loan activity. . . . . . . . . . . . . 4,855 3,619 (3,589)
------- ------- -------
Total loans at end of period . . . . . . . $53,255 $48,400 $44,781
======= ======= =======
- ---------------------
(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 $1.5 million at December 31, 1997. See Note 13
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 $38,935 of net deferred loan
costs at December 31, 1997.
9
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<PAGE>
The Association also receives loan servicing fees on the loans it
sells and on which it retains the servicing responsibilities.
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.
10
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<PAGE>
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, 1997, uncollected
cumulative interest totaled $10,254. The Association would have recorded
interest income of $10,970, $14,470, and $8,926 on non-accrual loans during
the years ended December 31, 1995, 1996, 1997, 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, 1995, 1996 and 1997, respectively. Foreclosed assets include
assets acquired in settlement of loans. During the periods shown, the
Association had no troubled debt restructured loans within the meaning of
Statement of Financial Accounting Standards ('SFAS'), No. 15., 'Accounting By
Debtors and Creditors for Troubled Debt Restructurings.'
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
One-to-four family residential. . . . . . $276 $252 $252
Commercial. . . . . . . . . . . . . . . . -- -- 70
---- ---- ----
TOTAL . . . . . . . . . . . . . . . . . 276 252 322
---- ---- ----
Accruing loans which are contractually
past due 90 days or more . . . . . . . . . -- -- --
Total of nonaccrual and 90 days past
due loans. . . . . . . . . . . . . . . . . 276 252 322
Foreclosed real estate . . . . . . . . . . . -- 211 20
---- ---- ----
Total nonperforming assets . . . . . . . . $276 $463 $342
---- ---- ----
Total loans delinquent 90 days or more
to net loans . . . . . . . . . . . . . . . 0.5% 0.5% 0.5%
Total loans delinquent 90 days or more
to total assets. . . . . . . . . . . . . . 0.4% 0.4% 0.4%
Total nonperforming assets to total
assets(1). . . . . . . . . . . . . . . . . 0.4% 0.7% 0.5%
- ------------------
(1) Total nonperforming assets include total nonaccrual and 90 days past
due loans and real estate owned.
The decrease in total nonperforming assets from $463,000 at December
31, 1996 to $276,000 at December 31, 1997 can be attributed to the liquidation
of all real estate owned and the write off of a portion of three participation
mortgage loan pools.
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
11
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<PAGE>
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. If an asset or portion thereof is
classified loss, the insured institution establishes specific allowances for
loan losses for the full amount of the portion of the asset classified loss.
A portion of general loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At December 31, 1997, there were no unclassified assets which should
have been classified 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, 1997, 1996 and 1995 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,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Classified assets:
Doubtful . . . . . . . . . . . $ 26 $ -- $ --
Substandard assets . . . . . . 250 372 401
Special mention. . . . . . . . 541 510 1,150
Loan loss allowance:
General loss allowances. . . . 276 306 244
Specific loss allowances . . . -- -- --
Net charge-offs. . . . . . . . . 65 78 16
The following is a discussion of the Association's major substandard
loans at December 31, 1997:
The Association's largest nonperforming asset(s) consists of three
participation mortgage loan pool securities that totalled $135,695 at December
31, 1997. 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 resumed in April 1997. The
Association charged-off $44,429, representing the payments collected during
that period and retained by the FDIC for expenses incurred in foreclosure
actions and previous payments advanced in error. The Association's loan loss
allowance includes $36,957 based on the classification of the remaining TASCO
pool balances.
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 and estimated
costs to sell 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, 1997, the Association did not have any 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, 1995, 1996 and 1997, of approximately $36,000, $140,239 and
$35,414, respectively. The fluctuation in the annual provision for loan
losses is the result of management's assessment
12
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<PAGE>
of economic conditions and such provisions are computed based on management's
established loan review process. In 1996, the provision for loan losses
totalled $140,239, an increase of $104,239 from 1995. This increase in the
provision between the periods was principally driven by deterioration in the
credit quality of three participation mortgage loan pools with an outstanding
balance of $212,000. In fiscal 1997, the provision for loan losses totalled
$35,414, a decrease of $104,825 from 1996. The Association's ratio of
nonperforming assets to total assets remained low at .39%, while the ratio of
allowance for loan losses to total loans decreased to .52% 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, 1997 the Association had an allowance for loan losses
of $276,300 which represented .52% of total loans. Management believes that
loan loss reserves were adequate at December 31, 1997. 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,
----------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period . . $306 $244 $224
Provision for loan losses. . . . . . 35 140 36
Net charge offs:
Residential real estate. . . . . . (54) (58) --
Commercial real estate . . . . . . -- (4) --
Consumer loans . . . . . . . . . . (11) (16) (16)
---- ---- ----
Net charge offs . . . . . (65) (78) (16)
---- ---- ----
Allowance at end of period . . . $276 $306 $244
==== ==== ====
Ratio of allowance to total loans
outstanding at the end of the
period . . . . . . . . . . . . . . 0.5% 0.6% 0.6%
Ratio of net charge offs to average
loans outstanding during the
period . . . . . . . . . . . . . . 0.1% 0.2% --
13
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Allowance for Loan Losses by Category
The following table sets forth the breakdown of the allowance for
loan losses by loan category for the dates indicated.
At December 31,
------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
Loan Loan Loan
Category Category Category
as a % of as a % of as a % of
Out- Out- Out-
stand- stand- stand-
ing ing ing
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Real estate loans:
One-to-four family
residential . . . $196 80.8% $218 81.4% $120 80.2%
Commercial . . . . . 26 4.1 34 4.6 25 5.8
Construction . . . . 3 0.2 8 1.2 6 1.9
Consumer . . . . . . . 51 14.9 46 12.8 93 12.1
---- ----- ---- ----- ---- -----
Total allowance for
loan losses . . . . $276 100.0% $306 100.0% $244 100.0%
==== ===== ==== ===== ==== =====
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 -- Liquidity
Requirements." 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, 1997, the Association's regulatory liquidity was 9.9%
which is in excess of the required 4%. 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, 1997, ranging from 7.3%
to 10.3% with a weighted average yield of 7.6% for the year ended
December 31, 1997. At December 31, 1997, the amortized cost of the
Association's mortgage-backed securities portfolio totaled $9.8
million. The market value of such mortgage-backed securities totaled
$9.9 million at December 31, 1997. Mortgage-backed securities
14
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<PAGE>
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, $4.0 million are carried at fixed rates and $5.8 million are
carried at adjustable rates as of December 31, 1997.
Investment decisions are reviewed by the Asset/Liability
Committee ("ALCO"), which meets monthly and consists of the
Association's Chairman of the Board, Vice Chairman, Chief Executive
Officer and three Vice Presidents. The ALCO Committee acts within
policies established by the Board of Directors. At December 31, 1997,
the Association's investment and mortgage-backed securities portfolio
totaled $10.8 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 1997 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,
--------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Percent Percent Percent
Book of Book of Book of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
-------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Available-for-sale:
U.S. government
treasury and
obligations of
U.S. government
agencies. . . . . $ 4,035 37.1% $ 3,946 35.1% $4,138 55.8%
State and
political
subdivision . . . -- -- -- -- -- --
Corporate
obligations . . . -- -- -- -- -- --
------- ------- ------
Total available-
for-sale. . . . . $ 4,035 $ 3,946 $4,138
======= ======= ======
Held-to-Maturity:
U.S. government
treasury and
obligations of U.S.
government
agencies. . . . . $ 6,834 62.9 $ 7,002 62.2 $2,287 30.8
State and political
subdivision -- -- 200 1.8 392 5.3
Corporate
obligations . . . -- -- 100 0.9 601 8.1
------- ------- ------
Total held-to-
maturity. . . . . 6,834 7,302 3,280
------- ----- ------- ----- ------ -----
Total. . . . . . . $10,869 100.0% $11,248 100.0% $7,417 100.0%
======= ===== ======= ===== ====== =====
- ---------------
(1) The market value of the Association's investment securities
portfolio, including mortgage-backed securities, amounted to $10.9
million, $11.2 million and $7.4 million, at December 31, 1997, 1996
and 1995, respectively.
15
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<PAGE>
The following table sets forth the contractual maturities and
weighted average yields of the debt securities including mortgage-backed
securities in the Association's investment securities portfolio at December
31, 1997.
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)
Available-for-sale:
U.S. government
treasury and
obligations
of U.S.
government
agencies. . . $ -- --% $ -- --% $64 8.51% $3,971 7.56%
State and
political
subdivision -- -- -- -- -- -- -- --
Corporate
obligations. . -- -- -- -- -- -- -- --
Held-to-Maturity:
U.S. government
treasury and
obligations
of U.S.
government
agencies $ -- --% $1,001 6.15% -- -- $5,833 7.87%
State and
political
subdivision -- -- -- -- -- -- -- --
Corporate
obligations -- -- -- -- -- -- -- --
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.
16
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<PAGE>
Deposit Balances
The following table sets forth information concerning the
Association's time deposits and other interest-bearing deposits at December
31, 1997.
Percentage
Weighted of Total
Average Interest-
Interest Minimum Bearing
Yield Term Category Amount Balance Deposits
- ----- ---- -------- ------ ------- --------
(Dollars in thousands)
Certificates of Deposit
-----------------------
5.28% 18 Month IRA $1,000 $ 536 1.0%
6.41 42 Month IRA 1,000 545 1.0
3.09 None Passbook 50 13,974 26.7
N/A 32 - 44 days Fixed term and fixed rate 1,000 -- --
4.08 45 - 181 days Fixed term and fixed rate 1,000 71 0.1
5.09 182 - 365 days Fixed term and fixed rate 1,000 2,802 5.3
5.61 1 year Fixed term and fixed rate 1,000 20,118 38.4
5.63 2 years Fixed term and fixed rate 1,000 6,635 12.6
5.88 3 years Fixed term and fixed rate 1,000 1,434 2.7
6.49 4 years Fixed term and fixed rate 1,000 45 0.1
6.16 5 years Fixed term and fixed rate 1,000 637 1.2
1.79 None NOW Accounts 1,000 3,498 6.7
3.09 None MMDA 2,500 2,220 4.2
------- -----
Total $52,515 100.0%
======= =====
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<TABLE>
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.
December 31,
-------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing. . . . . $ 2,395 4.4% $ 810 $ 1,585 3.3% $ 499 $ 1,086 2.3%
NOW checking . . . . . . . . 3,498 6.4 882 2,616 5.4 608 2,008 4.3
Regular savings accounts . . 13,974 25.4 1,085 12,889 26.6 1,666 11,223 24.1
Money market deposit . . . . 2,220 4.0 (1,324) 3,544 7.3 1,295 2,249 4.8
Fixed-rate certificates
which mature in the
year ending
Within 1 year. . . . . . 22,991 41.9 4,702 18,289 37.7 (4,085) 22,374 48.1
Within 1-3 years . . . . 8,605 15.7 791 7,814 16.1 1,261 6,553 14.1
Certificates maturing
thereafter . . . . . . . . 1,227 2.2 (528) 1,755 3.6 689 1,066 2.3
------- ----- ------ ------- ----- ------ ------- -----
Total. . . . . . . . . . $54,910 100.0% $6,418 $48,492 100.0% $1,933 $46,559 100.0%
======= ===== ====== ======= ===== ====== ======= =====
NOTE: IRA accounts are included in certificate balances: Amounts are $1.1 million,$1.1 million and $1.0
million at December 31, 1997, 1996 and 1995, respectively.
</TABLE> 18
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<PAGE>
Time Deposits by Rates and Maturities
The following table sets forth the time deposits in the Association
classified by rates as of the dates included.
At December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Below 4.00%. . . . . . . . $ 11 $ 472 $ 270
4.01% - 6.00%. . . . . . . 29,446 22,852 16,644
6.01% - 8.00%. . . . . . . 3,354 4,518 13,065
8.01% - 10.00% . . . . . . 11 15 14
Over 10.00%. . . . . . . . -- -- --
The following table sets forth the amount and maturities of time
deposits at December 31, 1997.
Amount Due
----------------------------------------
Percentage
of Total
Certi-
Less Than 1-2 2-3 3-4 After ficate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- --------
(Dollars in thousands)
Below 4.00%. . . . . $ 11 $ -- $ -- $ -- $ -- $ 11 0.03%
4.01% - 6.00%. . . . 22,390 5,181 1,017 573 285 29,446 89.72
6.01% - 8.00%. . . . 580 1,988 416 17 353 3,354 10.22
8.01% - 10.00% . . . 9 2 -- -- -- 11 0.03
------- ------ ------ ----- ---- ------- ------
Total . . . . . $22,990 $7,171 $1,433 $ 590 $638 $32,822 100.00%
======= ====== ====== ===== ==== ======= ======
The following table sets forth the savings activities of the
Association for the periods indicated.
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Net increase (decrease)
before interest credited. . $ 4,121 $ (196) $ 6,730
Interest credited . . . . . . 2,297 2,129 2,047
------- ------- -------
Net increase in savings
deposits . . . . . . . . . . 6,418 1,933 8,777
------- ------- -------
Ending balance. . . . . . . . $54,910 $48,492 $46,559
======= ======= =======
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
19
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<PAGE>
secured by the Association's first mortgage loans. At December 31, 1997, the
Association had $9.0 million of fixed rate borrowings from the FHLB-New York
at a weighted average rate of 6.19%. Required principal repayments are as
follows: $5.0 million in 1998, $1.0 million in 1999 and $2.0 million in 2002.
The Association did not have any overnight borrowings from the FHLB-New York
at December 31, 1997.
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, 1995, 1996 and 1997, 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, 1997, 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.
20
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<PAGE>
The HOLA provides that, among other things, no multiple savings and loan
holding company 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
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to the classification of assets and the establishment of 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 $500,000 at December 31, 1997.
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 established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Association Insurance Fund ("BIF") and the SAIF. As insurer of the
Association's deposits, the FDIC has examination, supervisory and enforcement
authority over all savings associations.
The Association's deposit accounts are insured by the FDIC under the
SAIF 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" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIA as discussed below. 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 expensed for the year ended December
31, 1997 equaled $46,632.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the
Association, paying 0%. This assessment schedule is the same as that for the
BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for
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the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980's 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 .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 Act 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,
mortgage-backed securities and certain other investments) equal to a monthly
average of not less than a specified percentage (currently 4.0%) of its net
withdrawable accounts plus short-term borrowings. Monetary penalties may be
imposed for failure to meet liquidity requirements.
Prompt Corrective Action. Under 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%.
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 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,
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significantly undercapitalized or critically undercapitalized. Immediately
upon becoming undercapitalized, an institution shall become subject to various
mandatory and discretionary restrictions on its operations.
At December 31, 1997, 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 recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines"). 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. 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. OTS 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 to avoid certain restrictions
on their operations. 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 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 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, 1997, 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
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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 that 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, subject to an amortization schedule, 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 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 totaled 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
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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. A savings association with assets of
less than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. 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.
At December 31, 1997, Albion Federal's core capital of approximately
$5.3 million, or 7.5% of adjusted total assets, was $3.2 million in excess of
the OTS requirement of $2.1 million, or 3% of adjusted total assets. As of
such date, the Association's tangible capital of approximately $5.3 million,
or 7.8% of adjusted total assets, was $4.3 million in excess of the OTS
requirement of $1.1 million, or 1.5% of adjusted total assets. Finally, at
December 31, 1997, the Association had risk-based capital of approximately
$5.6 million or 15.7% of total risk-weighted assets, which was $2.7 million in
excess of the OTS risk-based capital requirement of $2.9 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 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. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Association currently meets 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.
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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, 1997, the
Association's limit on loans to one borrower was $810,000. At December 31,
1997, the Association's largest single loan to one borrower was $512,000,
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. Any loan or extension of credit by the
Association to an affiliate must be secured by collateral in accordance with
Section 23A.
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 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 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.
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Community Reinvestment Act. Under the federal Community Reinvestment
Act ("CRA"), 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 regulatory applications to establish a new branch office that
will accept deposits, relocate an existing office, or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution, among others. 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. 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 $27,500 per
day, or $1.1 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
fiscal 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.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted
to establish a reserve for bad debts and to make annual additions thereto,
which may have been deducted in arriving at their taxable income. The
Association's deductions with respect to "qualifying real property loans,"
which are generally loans secured by certain interest in real property, were
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 non-qualifying reserve. Due to the Association's loss experience, the
Association generally recognized a bad debt deduction equal to 8% of taxable
income.
The provisions repealing the current thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). The Association
has previously recorded a deferred tax liability equal to the bad debt
recapture and as such the new rules will have no effect on the net income or
federal income tax expense. For taxable years beginning after December 31,
1995, the Association's bad debt deduction will be determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if the Association is a "large" association (assets in
excess of $500 million) on the basis of net charge-offs during the taxable
year. The new rules allow an institution to suspend bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's
28
<PAGE>
<PAGE>
lending activity for those years is equal to or greater than the institutions
average mortgage lending activity for the six taxable years preceding 1996
adjusted for inflation. For this purpose, only home purchase or home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions 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. The amount of
additional taxable income created from 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, after the Conversion, the Association
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation of Albion Federal" 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 0.12% 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 is paid.
Dividends-Received Deduction. 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.
Audits. The Association's federal income tax returns have not been
audited within 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.
29
<PAGE>
<PAGE>
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 11 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 $71.7
million at December 31, 1997. Based on data at June 30, 1997, the Marine
Midland branch and the Fleet Bank branch had approximately $54.9 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, 1997, the Association had 24 full-time employees
and six part-time employees. The employees are not represented by a
collective bargaining unit. The Association believes its relationship with
its employees to be satisfactory.
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 49 President and Chief Executive Officer
John S. Kettle 51 Senior Vice President and Treasurer
Mark F. Reed 39 Vice President and Chief Financial Officer
- --------------
(1) As of December 31, 1997.
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.
30
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<PAGE>
JEFFREY S. RHEINWALD has been employed in various capacities at
Albion Federal for over 24 years and currently holds the position of President
and Chief Executive Officer of the Association and the Company.
JOHN S. KETTLE is Senior Vice President and Treasurer of the Company
and the Association. He has been employed by Albion Federal since 1995.
Prior to joining the Association, Mr. Kettle was employed as an examiner with
the FHLB-New York from 1972-1975, from 1975-1993 he was employed by Anchor
Savings Bank and from 1993-1994 he was employed by First Federal Savings and
Loan Association of Rochester.
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.
Item 2. Description of Property
- --------------------------------
The following table sets forth information concerning the
Association's offices at December 31, 1997.
Net Book
Value at
Year Square Owned/ Total December
Name of Office Opened Footage Leased Cost 31, 1997
- -------------- ------ ------- ------ ---- --------
Main Office 1976 8,522 Owned $1,606,092 $727,057
48 North Main Street
Albion, NY 14411
Loan Department 1993 3,314 Owned 270,511 223,613
34 North Main Street
Albion, NY 14411
Branch Office 1994 3,276 Owned 1,568,661 1,400,293
Brockport, NY
The net book value of the Association's investment in all office
properties and equipment less accumulated depreciation totaled $2.3 million at
December 31, 1997. See Note _ 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, 1997.
31
<PAGE>
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, 1997,
1996 and 1995*
Consolidated Statement of Operations For the Years Ended December 31,
1997, 1996 and 1995*
Consolidated Statements of Changes in Shareholders' Equity For the
Years Ended December 31, 1997, 1996 and 1995*
Consolidated Statements of Cash Flows For the Years Ended December
31, 1997, 1996 and 1995*
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.
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.<PAGE>
32
<PAGE>
<PAGE>
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 and 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)
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,
1997.
- ------------------
(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.
33
<PAGE>
<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 30, 1998 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 30, 1998
-------------------------------------
Jeffrey S. Rheinwald
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark F. Reed March 30, 1998
-------------------------------------
Mark F. Reed
(Principal Financial and Accounting Officer)
By: /s/ James H. Keeler March 30, 1998
-------------------------------------
James H. Keeler
Chairman of the Board
By: /s/ Richard A. Pilon March 30, 1998
-------------------------------------
Richard A. Pilon
Director
By: /s/ Dolores L. Giarrizzo March 30, 1998
-------------------------------------
Dolores L. Giarrizzo
Director
By: /s/ Robert R. Brown II March 30, 1998
-------------------------------------
Robert R. Brown II
Director
By: March , 1998
-------------------------------------
Harold P. Kludt --
Director
By: /s/Chriss M. Andrews March 30, 1998
-------------------------------------
Chriss M. Andrews
Director
By: March , 1998
------------------------------------- --
Greg Spear
Director
<PAGE>
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
<PAGE>
[Logo] ALBION
BANC
CORPORATION
1997
----
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, 1997, the
Corporation had total assets of $71.7 million, total deposits of $54.9 million
and stockholders' equity of $6.2 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 . . . . . . . . 16
Consolidated Financial Statements . . . . . . . . 17
Notes to Consolidated Financial Statements . . . . . 21
Common Stock Information . . . . . . . . . . . 39
Directors and Officers. . . . . . . . . . . . 40
Corporate Information/Offices. . . . . . . . . . 41
<PAGE>
<PAGE>
Dear Shareholders:
It is my pleasure as President and CEO of Albion Banc Corp. to present the
Annual Report of your Company's affairs for the year 1997. 1997 was a year
when the Holding Company and its subsidiaries, Albion Federal Savings and Loan
Association and New Frontier of Albion Corp., were able to leverage into
profitability their investment in delivery systems, services and people.
I think it would be fitting, therefore, to begin by stating that the Company
reported a $351,201 after tax profit for the year 1997, compared to a net loss
of $4,352 for the year 1996. This translates into earnings per share of $.46
on a diluted basis. Highlighting the earnings was the $25,471 after tax profit
earned by New Frontier of Albion Corp., our subsidiary that engages in the
sale of mutual funds and annuity products. This marks the first year of
profitability for the subsidiary and reflects the yearly improvement it has
shown since 1994.
Another essential factor in our earnings improvement was the growth in our
Brockport branch. During 1997, deposits at the branch grew by $7.4 million to
a total of $18.9 million. This represents a 65% increase, at the branch, from
the end of 1996. This provided the liquidity to support operations and fund
our lending activities. The added significance to this growth is that it was
achieved through the acquisition of lower cost transaction accounts.
Transaction accounts now comprise 42% of the branch's total deposits. As an
institution, deposits grew $6.4 million, or 13.24%, to a total of $54.9
million.
Assets grew as a result of lending activity funded by our deposit growth.
During the year 1997, Albion Federal Savings and Loan Association originated
$9.0 million in first mortgage loans and $4.5 million in consumer loans. The
result was an increase in loans of $5.1 million, or a 10.7% increase from
December 31, 1996. The effect of the lending activity and investment purchases
was an increase of 11.1% in our total assets from year-end 1996 to $71.7
million at December 31, 1997.
I want to mention that we were also successful in reducing nonperforming
assets in 1997. At the end of 1996, we had $463,000 in nonperforming assets. I
am happy to report that at the end of 1997, we had reduced that amount to
$276,300 or .52% of total loans.
In June of 1997, we successfully completed a data processing conversion to an
in-house system. This new system will provide us the independence to be more
efficient and service our customer base more effectively. Further, it will
allow us better access to data, improve decision-making and make our marketing
programs more successful, while controlling costs and increasing productivity.
There were also some very notable events relating to our stock. 1997 marked
the first year that we paid a semi-annual cash dividend. Plans for 1998
include paying the dividend on a quarterly basis. In December 1997, the
Company announced a three for one split of its common stock in order to
maintain the Company's' listing on the NASDAQ Small Cap Market. The split was
effective February 5, 1998.
The effect of the announcements of the stock split, the cash dividend and our
positive earnings, pushed the Company's stock as high as $13.58 per share. Our
stock closed at $13.33 in 1997, appreciating 139% from the 1996 year end
market price, which was $5.58 per share.
Although we are pleased with our 1997 results, as stewards of your investment,
we are continually striving to maximize your confidence in the Company through
enhancement of profits and franchise value. On behalf of the Directors,
Officers and employees of Albion Banc Corp., I would like to express our
gratitude for your continuing support of our endeavors.
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. 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 December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (In thousands)
Total assets.................. $71,719 $64,585 $56,992 $55,334 $50,288
Loans, net ................... 53,017 47,839 44,049 47,010 39,007
Mortgage-backed securities ... 9,867 8,075 4,138 3,085 4,035
Cash and due from banks,
interest-bearing deposits
and investment securities .. 5,391 5,299 5,677 3,240 5,103
Deposits ..................... 54,910 48,492 46,559 37,782 35,617
Federal Home Loan Bank
advances ................... 9,000 9,000 3,000 10,295 7,950
Shareholders' equity ......... 6,155 5,864 6,089 5,898 5,556
Year Ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
OPERATING DATA: (In thousands)
Interest income .............. $5,184 $4,446 $4,398 $3,852 $3,348
Interest expense ............. 2,880 2,377 2,482 1,799 1,707
------ ------ ------ ------ ------
Net interest income .......... 2,304 2,069 1,916 2,053 1,641
Provision (benefit) for loan
losses ..................... 35 140 36 132 (27)
------ ------ ------ ------ ------
Net interest income after
provision for loan losses .. 2,269 1,929 1,880 1,921 1,668
Noninterest income ........... 390 260 197 146 205
Noninterest expense .......... 2,081 2,231 1,817 1,550 1,366
------ ------ ------ ------ ------
Income(loss) before income taxes,
and accounting change....... 578 (42) 260 517 507
Provision (benefit) for
income taxes................ 227 (38) 79 165 157
------ ------ ------ ------ ------
Income before accounting
change ..................... 351 (4) 181 352 350
Accounting change ............ -- -- -- -- 23
------ ------ ------ ------ ------
Net income (loss)............. $ 351 $ (4) $ 181 $ 352 $ 373
====== ====== ====== ======= ======
2
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<PAGE>
At December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans serviced... 1,019 998 931 1,015 916
Deposit accounts ............ 9,315 7,320 6,509 4,938 4,502
Offices ..................... 2 2 2 2 1
Per share:
Book value................... $8.20 $7.82 $7.79 $7.54 $7.10
Dividends paid .............. .16 .10 .10 .10 --
Basic earnings (loss)........ .48 (.01) .24 .47 --
Diluted earnings (loss)...... .46 (.01) .24 .47
Year Ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets (net
income divided by average
assets)...................... .5% .0% .3% .7% .8%
Return on average equity (net
income divided by average
equity )..................... 5.8% (.1)% 3.0% 6.1% 8.6%
Average equity to average
assets ...................... 8.7% 10.1% 10.2% 10.8% 9.4%
Interest rate spread (dif-
ference between average yield
on interest-earning assets
and average cost of interest-
bearing liabilities) ........ 3.2% 3.2% 2.9% 3.6% 3.3%
Net interest margin (net interest
income as a percentage of
average interest-earning
assets) ..................... 3.6% 3.7% 3.4% 4.0% 3.7%
Noninterest expense to average
assets ...................... 3.0% 3.7% 3.3% 2.9% 3.0%
Average interest-earning assets
to average interest-bearing
liabilities .................108.7% 110.6% 111.1% 112.5% 110.8%
Allowance for loan losses to
total loans at end of
period ...................... .5% .6% .6% .5% .3%
Ratio of nonperforming assets to
total assets ................ .4% .6% .6% .4% .8%
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 $7.1 million, or 11.0%, from $64.6
million at December 31, 1996 to $71.7 million at December 31, 1997. This
increase was due primarily to increases of $5.2 million in net loans and $1.8
million in Federal funds sold. The increase in loans and Federal funds sold
was funded primarily by a $6.4 million increase in deposits.
Cash and Cash Equivalents. Cash and cash equivalents increased by
$514,037, or 50.1%, from $1,025,929 at December 31, 1996 to $1,539,966 at
December 31, 1997. Federal funds sold increased from $1,100,000 at December
31, 1996 to $2,850,000 at December 31, 1997.
Investment Securities Available for Sale. The Association's investment
securities available for sale increased $89,200, or 2.3%, from $3.9 million at
December 31, 1996 to $4.0 million at December 31, 1997. This increase was the
result a $1.0 million purchase of a government agency security and the normal
amortization and paydowns of other securities in the portfolio.
Investment Securities Held to Maturity. Investment securities held to
maturity decreased by $468,811, or 6.4%, from $7.3 million at December 31,
1996 to $6.8 million at December 31, 1997. This decrease was the result of
normal maturities and calls of securities in the held to maturity portfolio
which totaled $5.1 million, offset by the purchase of $4.6 million in
securities to be held to maturity.
4
<PAGE>
<PAGE>
Net Loans. The balance of net loans increased $5.2 million, or 10.8%,
from $47.8 million at December 31, 1996 to $53.0 million at December 31, 1997.
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 market and a
strong emphasis on promoting home equity products.
Premises and Equipment. Premises and equipment increased $255,436, or
12.2%, from $2.1 million at December 31, 1996 to $2.35 million at December 31,
1997. This increase is attributable to the purchase of equipment and software
for the Company's in-house data processing system.
Deposits and Borrowings. Deposits increased $6.4 million, or 13.2%, from
$48.5 million at December 31, 1996 to $54.9 million at December 31, 1997. This
was attributable primarily to growth at the Association's branch in Brockport,
NY. This increase in deposits was used primarily to fund loan demand and
purchase mortgage-backed securities. Advances from the Federal Home Loan Bank
of New York (FHLB-NY) and other borrowings decreased $.1 million to $9.2
million as of December 31, 1997.
Shareholders' Equity. Shareholders' equity increased $291,245, or 5.0%,
from $5.9 million at December 31, 1996 to $6.2 million at December 31, 1997.
This increase is due primarily to earnings for the year and the resulting
increase in equity, offset by cash dividends on common stock of $113,925. The
Company's equity as a percentage of total assets at December 31, 1997 was 8.6%
and exceeds all regulatory requirements.
Results of Operations
Fiscal Year Ended December 31, 1997 Compared to December 31, 1996
Net Income. The Company reported net income of $351,201 for the year
ended December 31, 1997 as compared to a net loss of $4,352 for the year ended
December 31, 1996. This increase was primarily the result of increased net
interest income and noninterest income, and decreased noninterest expenses.
Net Interest Income. Net interest income increased by $235,543, or
11.4%, from $2.1 million for the year ended December 31, 1996 to $2.3 million
for the year ended December 31, 1997. Total interest income increased
$738,258, or 16.6%, during the period. Interest and dividends on investments
increased $461,768, or 84.7%, from $544,863 during the year ended December 31,
1996 to $1,006,631 during the year ended December 31, 1997. 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 $276,490, or
7.1%, during this period due to a higher average outstanding balance and
higher yields.
Total interest expense increased $502,715, or 21.1%, primarily due to an
increase in the average balance outstanding of deposits and FHLB-NY advances.
The average outstanding balance of deposits increased $4.2 million, or 9.2%,
from $46.0 million for the year ended December 31, 1996 to $50.2 million for
the year ended December 31, 1997. This increase in the average outstanding
balance was offset by a decrease in the weighted average rate paid on
deposits. The weighted average rate paid on deposits decreased from 4.63% for
the year ended December 31, 1996 to 4.57% for the year ended December 31,
1997, as a result of lower interest rates being offered on certificates of
deposit. Interest on advances from the FHLB-NY increased $334,664 or 134.7%,
primarily due to an increase in the average balance outstanding from $4.4
million in 1996 to $9.4 million in 1997 and an increase in the weighted
average rate paid from 5.69% in 1996 to 6.23% in 1997.
5
<PAGE>
<PAGE>
Provision for Loan Losses. The Association's provision for loan losses
for the year ended December 31, 1997 was $35,414, a $104,825 decrease compared
to the same period in 1996. 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, 1997 was $276,300, or
.52% of total loans, compared to $305,900, or .64% of total loans at December
31, 1996. The decrease in the provision between the periods was due primarily
to improvement in the overall credit quality of Association's loan portfolio
and the resumed payments on three participation mortgage loan pools that had
been delinquent.
Noninterest Income. Noninterest income for the year ended December 31,
1997 was $389,589 compared with $260,131 for the year ended December 31, 1996.
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 $59,203.
Noninterest Expense. Noninterest expense decreased $150,041, or 6.7%,
from $2.2 million for the year ended December 31, 1996, to $2.1 million for
the year ended December 31, 1997. This decrease in noninterest expense
resulted primarily from a reduction in Federal Deposit Insurance Corporation
(FDIC) premiums of $69,988, or 60.0%, due to reduced premiums being charged as
a result of the prior year recapitalization of the Savings Association
Insurance Fund (SAIF) and the one-time charge of $274,921 associated with that
recapitalization in the prior year. Data processing fees decreased $12,803, or
6.4%, as a result of the conversion from a service bureau to our in-house data
processing system. These decreases were partially offset by an increase in
compensation and employee benefits of $86,843, or 9.7%, from $898,745 for the
year ended 1996 to $985,588 for the year ended 1997, primarily due to
inflationary increases in salaries and benefits. Occupancy expenses increased
$82,250, or 26.7%, from $307,886 for the year ended December 31, 1996 to
$390,136 for the year ended December 31, 1997 primarily due to the operation
of the Association's in-house data processing system and related supplies.
Other operating expenses increased $37,222, or 11.3%, from $330,165 to
$367,387 during the year ended December 31, 1997. This increase was primarily
the result of a one-time charge of $41,642 related to the Company's data
processing conversion.
Income Taxes. The provision (benefit) for income taxes increased to
$226,265 for the year ended December 31, 1997 from $(38,049) for the year
ended December 31, 1996 primarily as a result of the increase in income for
the year as compared to the loss for 1996. The effective tax rate for 1997 was
39.2%.
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
6
<PAGE>
<PAGE>
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.
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 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, which caused total FDIC premiums to
increase $289,365, or 283.2%, to $391,541 for the year ended December 31,
1996. 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. 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
consulting 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.
7
<PAGE>
<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
<PAGE>
<PAGE>
<TABLE>
Year Ended December 31,
-----------------------------------------------------------
1997 1996
--------------------------- ---------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans . . . . . . . . . . $42,717 $3,532 8.27% $41,867 $3,416 8.16%
Consumer loans . . . . . . . . . . . 6,956 646 9.29 5,276 485 9.20
------- ------ ---- ------- ------ ----
Total loans . . . . . . . . . . . . 49,673 4,178 8.41 47,143 3,901 8.27
Mortgage-backed securities. . . . . . 8,614 637 7.39 4,137 282 6.82
Investment securities . . . . . . . . 2,502 146 5.84 3,089 183 5.92
Other interest-earning assets . . . . 4,009 223 5.56 1,339 80 5.97
------- ------ ---- ------- ------ ----
Total interest-earning assets . . . 64,798 5,184 8.00 55,708 4,446 7.98
------- ------ ---- ------- ------ ----
Noninterest-earning assets:
Office properties and equipment,
net . . . . . . . . . . . . . . . . 2,223 2,170
Foreclosed real estate, net . . . . . -- 129
Other noninterest-earning assets . . 1,990 1,328
------- -------
Total assets. . . . . . . . . . . . $69,011 $59,335
======= =======
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . $13,724 $ 421 3.07% $12,512 $ 383 3.06%
NOW accounts . . . . . . . . . . . . 3,258 57 1.75 2,667 47 1.76
Money market accounts . . . . . . . . 2,622 80 3.05 2,349 72 3.07
Certificates of deposit . . . . . . . 30,632 1,739 5.68 28,484 1,627 5.71
------- ------ ---- ------- ------ ----
Total deposits . . . . . . . . . . 50,236 2,297 4.57 46,012 2,129 4.63
Other interest-bearing liabilities . 9,358 583 6.23 4,362 248 5.69
------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities . . . . . . . . . . . 59,594 2,880 4.83 50,374 2,377 4.72
------- ------ ---- ------- ------ ----
Noninterest-bearing liabilities:
Noninterest-bearing deposits . . . . . 767 796
Other liabilities . . . . . . . . . . 2,641 2,189
------- -------
Total liabilities . . . . . . . . . 62,659 53,359
Shareholders' equity . . . . . . . . . 6,009 5,976
------- -------
Total liabilities and
shareholders' equity . . . . . . . $69,011 $59,335
======= =======
Net interest income . . . . . . . . . . $2,304 $2,069
====== ======
Interest rate spread . . . . . . . . . 3.17% 3.26%
Contribution of interest-free funds . . .39% .45%
---- ----
Net interest margin on interest-
earning assets. . . . . . . . . . . . 3.56% 3.71%
Ratio of average interest-earning
assets to average interest-bearing
liabilities . . . . . . . . . . . . . 108.73% 110.59%
9
</TABLE>
<PAGE>
<PAGE>
Year Ended December 31,
--------------------------------
1995
--------------------------------
Interest
Average and Yield/
Balance Dividends Cost
------- --------- -----
(Dollars in thousands)
Interest-earning assets:
Real estate loans . . . . . . . . . . $40,184 $3,235 8.05%
Consumer loans . . . . . . . . . . . 5,140 487 9.47
------- ------ ----
Total loans . . . . . . . . . . . . 45,324 3,722 8.21
Mortgage-backed securities . . . . . 3,962 259 6.54
Investment securities . . . . . . . 3,520 216 6.14
Other interest-earning deposits . . . 3,194 201 6.29
------- ------ ----
Total interest-earning assets . . . 56,000 4,398 7.85
------- ------ ----
Noninterest-earning assets:
Office properties and equipment, net. 1,263
Foreclosed real estate, net . . . . . 44
Other noninterest-earning assets . . 1,380
-------
Total assets . . . . . . . . . . . $58,687
=======
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . $11,950 $ 364 3.05%
NOW accounts . . . . . . . . . . . . 1,978 35 1.77
Money market accounts . . . . . . . . 2,458 75 3.05
Certificates of deposit . . . . . . . 26,220 1,573 6.00
------- ------ ----
Total deposits . . . . . . . . . . 42,606 2,047 4.80
Other interest-bearing liabilities. . 7,807 435 5.57
------- ------ ----
Total interest-bearing liabilities . 50,413 2,482 4.92
------- ------ ----
Noninterest-bearing liabilities:
Noninterest-bearing deposits . . . . . 754
Other liabilities . . . . . . . . . . 1,543
-------
Total liabilities. . . . . . . . . . 52,710
Shareholders' equity . . . . . . . . . 5,977
-------
Total liabilities and
shareholders' equity . . . . . . . $58,687
=======
Net interest income . . . . . . . . . . $1,916
======
Interest rate spread . . . . . . . . . 2.93%
Contribution of interest-free funds. . . .49%
----
Net interest margin on interest-
earning assets. . . . . . . . . . . . . . 3.42%
Ratio of average interest-earning assets
to average interest-bearing liabilities . 111.08%
- ---------
10
<PAGE>
<PAGE>
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates
indicated, the average yields earned 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,
--------------------------------
1997 1996 1995
---- ---- ----
Average yield on loan
portfolio ...................... 8.4% 8.3% 8.2%
Average yield on mortgage-backed
securities ..................... 7.4% 6.8% 6.5%
Average yield on investment
portfolio ...................... 5.8% 5.9% 6.1%
Average yield on all
interest-earning assets ........ 8.0% 8.0% 7.9%
Average cost of
deposits ....................... 4.6% 4.6% 4.8%
Average cost of Federal Home
Loan Bank advances and
other borrowings ............... 6.2% 5.7% 5.6%
Average cost of all
interest-bearing liabilities ... 4.8% 4.7% 4.9%
Interest rate spread (spread
between average yield on all
interest-earning assets and
average cost of all interest-
bearing liabilities) ........... 3.2% 3.3% 2.9%
Net interest margin (net interest
income as a percentage of
average interest-earning
assets) ........................ 3.6% 3.7% 3.4%
11
<PAGE>
<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, 1997, 1996 and 1995,
the Association's origination of mortgage loans were $9.0 million, $9.5
million and $2.5 million, respectively. The volume in mortgage loan
originations during 1997 and 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 $3.0
million, $5.0 million and $2.9 million for the years ending December 31, 1997,
1996 and 1995, respectively. Other investing activities included the purchase
of investment securities, which totaled $2.6 million during the year ended
December 31, 1997, $2.1 million during the year ended December 31, 1996 and
$5.2 million for the year ended December 31, 1995. These activities were
funded primarily by deposits, principal repayments on loans and
mortgage-backed securities and maturities of investment securities.
The net cash provided by financing activities for the year ended
December 31, 1997 totaled $6.3 million. This resulted from a net increase in
time and demand deposits of $6.4 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 1997, the
Association used its sources of funds primarily to fund loan commitments,
purchase mortgage-backed securities, pay maturing savings certificates and
deposit withdrawals. 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. During 1995, the
Association used its sources of funds primarily to reduce FHLB-NY borrowings
and fund loan commitments. At December 31, 1997, the Association had approved
loan commitments totaling $1.4 million, including $.3 million of undisbursed
loans in process.
At December 31, 1997, certificates of deposit amounted to $32.8 million,
or 59.7%, of the Association's total deposits, including $23.0 million that
are scheduled to mature by December 31, 1998. Historically, the Association
has been able to retain a significant share of its deposits as they mature.
Also, the opening of Albion Federal's Brockport branch has enhanced the
Company's ability to attract deposits. Deposits at that location totaled $18.9
million at December 31, 1997. 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
4.0% 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 12%, 9% and 13%
during the years ended December 31, 1997, 1996 and 1995, respectively. The
Association's average short-term liquidity ratios for the same periods were
8%, 7% and 8% respectively. The Association's actual liquidity ratio at
December 31, 1997 was 9.9%. The Association consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an
appropriate strategy for proper
12
<PAGE>
<PAGE>
asset and liability management. The Company does not utilize any off-balance
sheet derivative instruments.
The Association is required to maintain specific amounts of capital
pursuant to the OTS regulations. As of December 31, 1997, the Association was
in compliance with all the regulatory capital requirements that were effective
as of such date, with tangible, core and risk-based capital ratios of 7.5%,
7.5% and 15.7%, respectively. These ratios exceed the minimum capital ratios
as required by federal regulations.
Market Risk
One of the Company's principal financial objectives is to achieve
long-term profitability while managing its exposure to fluctuation in interest
rates. The principal element in achieving this objective has been to increase
the interest rate sensitivity of the Company's assets by originating loans
with interest rates subject of periodic repricing to market conditions and
purchasing adjustable rate mortgage-backed securities. Management has also
offered higher yields on deposits with extended maturities and has lengthened
the average life of its FHLB advances to assist in matching the rate
sensitivity of its liabilities.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Company's assets
mature or reprice more quickly or to a greater extent than its liabilities,
the institution's net portfolio value and net interest income would tend to
increase during periods of rising interest rates but decrease during periods
of declining interest rates. If the Company's assets mature or reprice more
slowly or to a lesser extent than its liabilities, the Company's net portfolio
value and net interest income would tend to decrease during periods of rising
interest rates but increase during periods of falling interest rates.
The Company's Board of Directors has formulated an Interest Rate Risk
Management policy designed to promote long-term profitability while managing
interest rate risk. The Board of Directors has established and Asset/Liability
Committee that consists primarily of the management team of the institution.
This Committee meets periodically and reports to the Board of Directors on a
monthly basis concerning asset/liability policies, strategies and the
Company's current interest rate risk position. The Committee's first priority
is to structure and price the institution's assets and liabilities to maintain
an acceptable interest rate spread while reducing the net effects of change in
interest rates.
Management's principal strategy in managing the Company's interest rate risk
has been to manage the Company's portfolio of investment securities and
mortgage-backed securities so that they mature on a basis that approximates as
closely as possible the estimated maturities of the Company's liabilities. In
addition, the Company maintains short and intermediate term assets in the
portfolio while selling longer-term assets in excess of the level needed to
meet growth targets. The Company does not engage in off-balance sheet hedging
activities and has had no trading activity.
In addition to shortening the average repricing of its assets, the Company has
sought to lengthen the average maturity of its liabilities by adopting a
tiered pricing program for its certificates of deposit, which provides higher
rates of interest on its longer term certificates in order to encourage
depositors to invest in certificates with longer maturities and by taking down
longer maturity FHLB advances.
13
<PAGE>
<PAGE>
The Company measures its interest rate risk (IRR) in terms of the
Company's Net Portfolio Value (NPV) sensitivity to changes in interest rates.
NPV is the difference between incoming and outgoing discounted cash flows from
assets, liabilities and off balance sheet contracts. The Company measures the
change to the NPV as a result of a hypothetical 200 basis point (bp) change in
market interest rates.
Management reviews the IRR measurements on a quarterly basis. In
addition to monitoring selected measures on NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This measure is used in conjunction with NPV measures to identify excessive
interest rate risk. The following table presents the Company's NPV at December
31, 1997, as calculated by the Office of Thrift Supervision model.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
At December 31, 1997
- ------------------------------------------------------------------------------------
Net Portfolio Value
Change in -------------------
Interest Rates (Dollars in thousands) NPV as % of PV of Assets
- --------------- ----------------------------------- ------------------------
Basis Points $ Amount $ Change % Change NPV Ratio BP Change
- --------------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
+400 bp 3,557 -4,093 - 54 5.23% -517
+300 bp 4,744 -2,906 - 38 6.82% -358
+200 bp 5,896 -1,754 - 23 8.30% -210
+100 bp 6,923 - 727 - 10 9.55% - 85
0 7,650 10.40%
-100 bp 7,979 329 + 4 10.73% + 33
-200 bp 8,103 453 + 6 10.82% + 42
-300 bp 8,334 684 + 9 11.02% + 62
-400 bp 8,783 1,133 + 15 11.47% +107
</TABLE>
<PAGE>
In the above table, the first column on the left presents the basis
point (BP) increments of yield curve shifts. The second column presents the
overall dollar amount of NPV at each basis point increment. The third and
fourth columns present the Company's actual position in dollar change and
percentage change in NPV at each basis point increment. The remaining columns
present the Company's percentage change and basis point change in its NPV as a
percentage of portfolio value (PV) of assets. The model is a static simulation
assessing cash flows from the Company's current balance sheet position. No
management reaction to rate changes is projected. The model measures the
economic value of assets and liabilities taking into consideration effective
duration, imbedded options of mortgage assets, and annual and lifetime caps on
rate adjustments.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates.
The Company's Board of Directors is responsible for reviewing the
Company's assets and liability policies. The Board meets monthly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. The Company's management is responsible for administering the
policies and determinations of the Board of Directors with respect to the
Company's asset and liability goals and strategies.
14
<PAGE>
<PAGE>
Year 2000
Many computer programs use only a two-digit field to identify the year.
The upcoming change in the century requires a four-digit field. If not
corrected, many computer applications could fail or create erroneous results
by or at the year 2000.
The Company relies heavily on automated systems to service its
customers, primarily deposits and loans. If not addressed by the Company and
its vendors, the year 2000 issue could cause material adverse consequences.
The Company has developed a plan to address the year 2000 issue. The plan
includes the identification of all possible impacted applications, analysis of
any year 2000 issues and steps to correct any problems. The plan includes
contacting all vendors and suppliers to solicit their certification that they
are Year 2000 compliant or if not, their expected remedial action and
timetable for compliance. The Company's plan calls for the completion of the
Year 2000 project by year-end 1998.
The Company estimates that 60% of its plan has been completed and
expects to meet the target completion date. In June 1997, the Company
converted to an in-house system for servicing deposits and loans. This system
is Year 2000 compliant. At that time, the majority of computer equipment was
also upgraded to meet the new systems requirements and insure Year 2000
compliance. The Company has identified minor required expenditures that will
be cured through normal asset retirement, or expensed as they are incurred.
Impact of New Accounting Pronouncements and Regulatory Policies
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS establishes standards for reporting and displaying comprehensive
income and its components and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
will adopt the provisions of SFAS No. 130 in the first quarter of 1998. When
adopted, SFAS No. 130 is not expected to have a material impact on the
Company.
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.
15
<PAGE>
<PAGE>
[Letterhead of Price Waterhouse LLP]
Report of Independent Accountants
February 19, 1998
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 operations, 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, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, 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
16
<PAGE>
<PAGE>
Albion Banc Corp.
Consolidated Statement of Financial Condition
- ------------------------------------------------------------------------------
December 31,
1997 1996
Assets
Cash and due from banks, including interest-bearing
accounts of $18,600 and $89,700, respectively $ 1,539,966 $ 1,025,929
Federal funds sold 2,850,000 1,100,000
Investment securities available for sale 4,034,900 3,945,700
Investment securities held to maturity (fair value of
$6,883,000 and $7,283,800, respectively) 6,833,577 7,302,388
Loans held for sale 550,340 657,698
Loans receivable, net of allowance for loan losses of
$276,300 and $305,900, respectively 52,467,012 47,181,135
Federal Home Loan Bank stock, at cost 500,000 450,000
Premises and equipment, net 2,350,964 2,095,528
Other assets 592,490 826,732
----------- -----------
Total assets $71,719,249 $64,585,110
=========== ===========
Liabilities and Shareholders' Equity
Deposits $54,910,181 $48,492,019
Advances from Federal Home Loan Bank and other
borrowings 9,200,526 9,275,675
Advances from borrowers for taxes and insurance 891,392 823,620
Other liabilities 562,318 130,209
----------- -----------
Total liabilities 65,564,417 58,721,523
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value - 500,000
shares authorized, none outstanding
Common stock, $.0033 par value - 3,000,000 shares
authorized, 789,258 issued 2,631 2,631
Capital surplus 2,383,434 2,348,185
Retained earnings, substantially restricted 3,986,735 3,749,459
Unearned employee stock ownership plan (ESOP) shares (44,638) (70,708)
Unrealized gain on investment securities
available for sale, net 48,265 55,615
Treasury stock, 39,105 shares, at cost (221,595) (221,595)
----------- -----------
Total shareholders' equity 6,154,832 5,863,587
----------- -----------
Total liabilities and shareholders' equity $71,719,249 $64,585,110
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
<PAGE>
Albion Banc Corp.
Consolidated Statement of Operations
- ------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
Interest income:
Interest and fees on loans $4,177,760 $3,901,270 $3,722,422
Interest and dividends on investment
securities and federal funds sold 1,006,631 544,863 675,607
---------- ---------- ----------
Total interest income 5,184,391 4,446,133 4,398,029
---------- ---------- ----------
Interest expense:
Interest on deposits 2,297,157 2,129,106 2,047,077
Interest on borrowed funds 583,066 248,402 435,225
---------- ---------- ----------
Total interest expense 2,880,223 2,377,508 2,482,302
---------- ---------- ----------
Net interest income 2,304,168 2,068,625 1,915,727
Provision for loan losses 35,414 140,239 36,000
---------- ---------- ----------
Net interest income after provision
for loan losses 2,268,754 1,928,386 1,879,727
---------- ---------- ----------
Noninterest income:
Gain on sale of mortgage loans,
investment securities available for
sale and foreclosed real estate 59,203 38,031 39,070
Other noninterest income 330,386 222,100 157,848
---------- ---------- ----------
Total noninterest income 389,589 260,131 196,918
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 985,588 898,745 831,446
Occupancy expenses 390,136 307,886 246,426
Deposit insurance premiums 46,632 391,541 102,176
Professional fees 102,784 101,428 185,457
Data processing fees 188,350 201,153 148,897
Other operating expenses 367,387 330,165 302,710
---------- ---------- ----------
Total noninterest expense 2,080,877 2,230,918 1,817,112
---------- ---------- ----------
Income (loss) before income taxes 577,466 (42,401) 259,533
Provision (benefit) for income taxes 226,265 (38,049) 78,800
---------- ---------- ----------
Net income (loss) $ 351,201 $ (4,352) $ 180,733
========== ========== ==========
Basic earnings (loss) per common share $ .48 $ (.01) $ .24
========== ========== ==========
Diluted earnings (loss) per common share $ .46 $ (.01) $ .24
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
<PAGE>
<TABLE>
Albion Banc Corp.
Consolidated Statements of Changes in Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------
Unrealized
gain on
investment
Unearned securities
Common Capital Retained ESOP available Treasury
stock surplus earnings shares for sale stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 2,607 $2,293,091 $3,729,182 $(126,700) $5,898,180
Net income 180,733 180,733
Cash dividends paid
($.10 per share) (76,104) (76,104)
ESOP shares committed to be
released 12,884 29,083 41,967
Net unrealized appreciation of
investment 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 6,089,120
Net loss (4,352) (4,352)
Exercise of stock options 24 23,696 23,720
Cash dividends paid ($.10 per
share) (80,000) (80,000)
ESOP shares committed to be
released 18,514 26,909 45,423
Net unrealized appreciation of
investment securities available
for sale 11,271 11,271
Purchase of treasury stock (221,595) (221,595)
------- ---------- ---------- --------- ------- --------- ----------
Balance at December 31, 1996 2,631 2,348,185 3,749,459 (70,708) 55,615 (221,595) 5,863,587
Net income 351,201 351,201
Cash dividends paid ($.16 per
share) (113,925) (113,925)
ESOP shares committed to be
released 35,249 26,070 61,319
Net unrealized depreciation of
investment securities available
for sale (7,350) (7,350)
------- ---------- ---------- --------- ------- --------- ----------
Balance at December 31, 1997 $ 2.631 $2,383,434 $3,986,735 $(44,638) $48,265 $(221,595)$6,154,832
======= ========== ========== ======== ======= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
19
<PAGE>
<PAGE>
Albion Banc Corp.
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities:
Net income (loss) $ 351,201 $ (4,352) $ 180,733
Depreciation, amortization and accretion 183,938 142,208 60,072
Provision for loan losses 35,414 140,239 36,000
Provision for losses on foreclosed real
estate 41,000 14,546
Provision (benefit) for deferred income
taxes 133,700 (12,800) (11,600)
Gain on sale of mortgage loans, investment
securities and foreclosed real estate (59,203) (38,031) (39,070)
ESOP expense 61,319 45,423 41,967
Originations of loans held for sale (392,566)(1,116,740)
Proceeds from sale of loans held for sale 506,641 464,990
Changes in operating assets and liabilities -
Decrease (increase) in other assets 32,142 (168,005) 5,269
Increase (decrease) in other liabilities 305,894 54,749 (39,111)
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,158,480 (451,319) 248,806
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of foreclosed real
estate 254,586 159,537
Proceeds from sale of investment
securities available for sale 1,936,928
Proceeds from maturities and calls of
investment securities available
for sale 881,521 1,203,432 2,010,888
Proceeds from maturities and calls of
investment securities held to maturity 5,116,163 2,206,792 2,482,000
Purchases of investment securities
available for sale (1,001,757)(1,011,009) (2,873,862)
Purchases of investment securities held
to maturity (4,621,649)(6,193,497) (5,187,448)
Net (increase) decrease in loans
receivable (5,321,291)(3,632,264) 2,963,578
(Purchase) redemption of Federal Home
Loan Bank (50,000) 25,000 47,500
Expenditures for capital assets (448,876) (64,278) (1,321,292)
---------- ---------- ----------
Net cash (used in) provided by
investing activities (5,191,303)(7,306,287) 58,292
---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in savings, NOW,
money market and noninterest-bearing
deposits 1,453,774 4,067,121 (3,433,884)
Net increase (decrease) in time deposits 4,964,388 (2,134,531) 12,211,275
Proceeds from Federal Home Loan Bank and
other borrowings 5,000,000 9,500,000
Payments on advances from Federal Home
Loan Bank and other borrowings (5,075,149)(3,523,107) (6,676,218)
Proceeds from exercise of stock options 23,720
Dividends paid (113,925) (80,000) (76,104)
Net increase (decrease) in advances from
borrowers for taxes and insurance 67,772 (145,091) (595,410)
Purchase of treasury stock (221,595)
---------- ---------- ----------
Net cash provided by financing
activities 6,296,860 7,486,517 1,429,659
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,264,037 (271,089) 1,736,757
Cash and cash equivalents at beginning
of year 2,125,929 2,397,018 660,261
---------- ---------- ----------
Cash and cash equivalents at end of year $4,389,966 $2,125,929 $2,397,018
========== ========== ==========
Cash paid during the year for:
Interest $2,902,589 $2,307,861 $2,527,052
Income taxes $ 150,273 $ 46,000 $ 97,363
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
<PAGE>
Albion Banc Corp.
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Description of Operations
Albion Banc Corp. (the "Holding Company" or the "Company") is 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. The fair
values of investment securities are estimated utilizing independent
pricing services and are based on available market data. Unrealized
gains or losses related to securities available for sale are reflected
in a separate component of shareholders' equity, net of applicable
income taxes.
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.
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.
21
<PAGE>
<PAGE>
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.
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.
This accounting policy does 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.
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 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.
22
<PAGE>
<PAGE>
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
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," in the fourth quarter of 1997. SFAS No.
128 establishes new standards for computing and presenting earnings
(loss) per share and is effective for financial statements for both
interim and annual periods ending after December 15, 1997. SFAS No. 128
requires that all prior period earnings (loss) per share data be
restated to conform with the provisions of the statement. SFAS No. 128
eliminates primary earnings (loss) per share and fully diluted earnings
(loss) per share and requires the presentation of basic and diluted
earnings (loss) per share.
Basic earnings (loss) per share is determined by dividing income (loss)
available to common shareholders by the weighted average number of
common shares outstanding during the period. Shares issued during
the period and shares reacquired during the period are weighted for the
portion of the period that they were outstanding. ESOP shares not
committed to be released are not considered outstanding for purposes of
the calculation. Diluted earnings (loss) per share is determined by
dividing income (loss) available to common shareholders by the weighted
average number of common shares outstanding, adjusted for the number of
additional common shares that would have been outstanding if the
Dilutive potential common shares outstanding during the period had been
issued.
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.
2. Investment Securities
The amortized cost and estimated fair value of investment securities
available for sale are as follows:
December 31, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Mortgage-backed securities $3,954,539 $ 84,422 $ (4,061) $4,034,900
========== ======== ========= ==========
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
========== ======== ========= ==========
23
<PAGE>
<PAGE>
The amortized cost and estimated fair value of investment securities
held to maturity are as follows:
December 31, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Mortgage-backed securities $5,832,311 $ 50,389 $ $5,882,700
U.S. government agency
securities 1,001,266 (966) 1,000,300
---------- -------- --------- ----------
Total $6,833,577 $ 50,389 $ (966) $6,883,000
========== ======== ========= ==========
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
========== ========== ========== ==========
The amortized cost and estimated fair value by contractual maturity of
investment securities at December 31, 1997 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 after one year through
5 years $ - $ - $1,001,266 $1,000,300
---------- ---------- ---------- ----------
Mortgage-backed securities 3,954,539 4,034,900 5,832,311 5,882,700
---------- ---------- ---------- ----------
$3,954,539 $4,034,900 $6,833,577 $6,883,000
========== ========== ========== ==========
24
<PAGE>
<PAGE>
3. Loans Receivable
Loans receivable consist of the following:
December 31,
1997 1996
Real estate loans:
Secured by one to four family residence $42,473,738 $38,734,967
Secured by other properties 2,203,839 2,234,372
Construction loans 413,200 578,318
----------- -----------
45,090,777 41,547,657
----------- -----------
Other loans:
Automobile loans 100,607 129,271
Home improvement loans 7,152,228 4,959,798
Other 688,245 1,106,331
----------- -----------
7,941,080 6,195,400
----------- -----------
Undisbursed portion of loans (327,480) (278,927)
Net deferred loan origination costs 38,935 22,905
Allowance for loan losses (276,300) (305,900)
----------- -----------
(564,845) (561,922)
----------- -----------
$52,467,012 $47,181,135
=========== ===========
The balance of nonaccrual loans at December 31, 1997 and 1996 was
$276,300 and $251,500, respectively. There were no impaired loans at
December 31, 1997 or 1996. The average balance of impaired loans during
1997 and 1996 was $-0- and $52,100, respectively. Interest income
recognized on impaired loans and interest income recognized on a cash
basis was not significant.
At December 31, 1997, the carrying value and market value of loans
pledged as collateral for advances from the Federal Home Loan Bank of
New York was $9,702,100 and $9,900,000, respectively.
4. Allowance for Loan Losses
An analysis of changes in the allowance for loan losses is as follows:
December 31,
1997 1996 1995
Balance at beginning of period $ 305,900 $ 244,100 $ 224,00
Provision expense 35,414 140,239 36,000
Net charge-offs (65,014) (78,439) (15,900)
--------- --------- ---------
Balance at end of period $ 276,300 $ 305,900 $ 244,100
========= ========= =========
25
<PAGE>
<PAGE>
5. Loan Servicing
Loans serviced for others, amounting to approximately $10,463,700 and
$11,079,500 at December 31, 1997 and 1996, respectively, are not
included in the statement of financial condition. Custodial escrow
balances maintained in connection with loans serviced for others were
approximately $189,600 and $196,600 at December 31, 1997 and 1996,
respectively.
6. Premises and Equipment
Premises and equipment, net of accumulated depreciation and
amortization, consist of the following:
December 31,
1997 1996
Land $ 350,642 $ 350,642
Premises 1,740,135 1,727,760
Furniture, fixtures and equipment 1,354,487 918,380
---------- ----------
3,445,264 2,996,782
Less - Accumulated depreciation (1,094,300) (901,254)
---------- ----------
$2,350,964 $2,095,528
========== ==========
Depreciation expense on premises and equipment was: $193,400, $158,900,
and $104,300 for the years ended December 31, 1997, 1996 and 1995,
respectively.
7. Deposits
Deposits were comprised of the following:
December 31,
-----------------------------------------
1997 1996
-----------------------------------------
Per Per
Amount cent Amount cent
Noninterest bearing deposits $ 2,395,245 4.4% $ 1,584,823 3.3%
Savings deposits 13,974,443 25.5 12,889,380 26.6
Negotiable order of withdrawal
deposits 3,498,122 6.4 2,615,737 5.4
Money market deposits 2,219,913 4.0 3,544,009 7.3
----------- ----- ----------- -----
22,087,723 40.3 20,633,949 42.6
----------- ----- ----------- -----
Certificates of deposit:
4.00% and less 10,915 53.6 472,108 1.0
4.01% - 6.00% 29,446,514 6.1 22,852,167 47.1
6.01% - 8.00% 3,353,533 4,518,302 9.3
8.01% and greater 11,496 15,493
----------- ----- ----------- -----
32,822,458 59.7 27,858,070 57.4
----------- ----- ----------- -----
$54,910,181 100.0% $48,492,019 100.0%
=========== ===== =========== =====
26
<PAGE>
<PAGE>
<TABLE>
The weighted average interest rates paid on total deposits were 4.6% and
4.4% at December 31, 1997 and 1996, respectively.
At December 31, 1997, certificates of deposit have scheduled maturity
dates as follows:
1998 1999 2000 2001 2002 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
4.00% or less $ 10,915 $ $ $ $ $ $ 10,915
4.01% - 6.00% 22,390,236 5,181,098 1,017,675 572,718 262,533 22,254 29,446,514
6.01% - 8.00% 580,245 1,987,513 416,199 16,869 192,351 160,356 3,353,533
8.01% and greater 9,496 2,000 11,496
----------- ---------- ---------- -------- -------- -------- -----------
Total $22,990,892 $7,170,611 $1,433,874 $589,587 $454,884 $182,610 $32,822,458
=========== ========== ========== ======== ======== ======== ===========
</TABLE>
<PAGE>
<PAGE>
At December 31, 1997, certificates of deposit in amounts of $100,000 or
more have the following scheduled time remaining until maturity:
Three months or less $ 958,240
Over three through six months 788,595
Over six through twelve months 531,082
Over twelve months 872,136
----------
$3,150,053
==========
Interest expense on deposits is as follows:
Years Ended December 31,
1997 1996 1995
Savings deposits $ 421,071 $ 382,701 $ 364,458
Negotiable order of withdrawal
deposits 56,650 47,091 34,748
Money market deposits 80,148 72,388 74,561
Certificates of deposit 1,739,288 1,626,926 1,573,310
---------- ---------- ----------
$2,297,157 $2,129,106 $2,047,077
========== ========== ==========
8. Advances from Federal Home Loan Bank and Other Borrowings
At December 31, 1997 and 1996, the Company had advances, secured by
residential real estate loans, from the Federal Home Loan Bank of New
York of $9,000,000. The borrowings outstanding at December 31, 1997 had
fixed and variable rates of interest ranging from 5.88% to 6.60%, with a
weighted average interest rate of 6.19%, and mature at various dates
through 2002. 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%. Required principal repayments
at December 31, 1997 are as follows: $5,000,000 in 1998, $1,000,000 in
1999 and 2000, and $2,000,000 in 2002.
27
<PAGE>
<PAGE>
At December 31, 1997 and 1996, the Company had $200,526 and $275,675,
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, 1997, principal payments of $29,000, $88,400, $42,200 and $40,900
are required in 1998, 1999, 2000 and 2001, respectively.
9. Earnings (Loss) Per Share
The full year calculations shown below for 1997, 1996 and 1995 reflect
an average of the quarterly calculations during those years. During
1996, only one of four quarters experienced a loss even though there was
a net loss for the year. Therefore, the dilutive effect of the
incremental shares included in the quarterly EPS calculations for the
quarters with income are excluded from the year-to-date calculation.
For the Year Ended
December 31, 1997
-----------------------------
Per-Share
Income Shares Amount
Basic EPS $ 351,201 733,047 $ .48
========= ======= ======
Effect of Dilutive Securities:
Options 23,498
--------- ------- ------
Diluted EPS $ 351,201 756,545 $ .46
========= ======= ======
For the Year Ended
December 31, 1996
-----------------------------
Per-Share
Loss Shares Amount
Basic and Diluted EPS $ (4,352) 738,284 $(.01)
======== ======= =====
For the Year Ended
December 31, 1995
-----------------------------
Per-Share
Income Shares Amount
Basic EPS $ 180,733 748,493 $ .24
========= ======= =====
Effect of Dilutive Securities:
Options 15,446
--------- -------
Diluted EPS $ 180,733 769,939 $ .24
========= ======= =====
28
<PAGE>
<PAGE>
10. 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
$46,000, $33,500 and $27,700 for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company has 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 are
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 $52,000, $45,400 and $42,000 during 1997, 1996 and 1995,
respectively.
A summary of ESOP shares is as follows:
December 31,
1997 1996
Shares released for allocation and allocated $ 41,118 $ 33,534
Unreleased shares 13,629 21,213
--------- ---------
Total ESOP shares $ 54,747 $ 54,747
========= =========
Fair value of unreleased shares $ 181,720 $ 118,439
========= =========
Under the 1993 Stock Option and Incentive Plan (Stock Option Plan),
78,210 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. 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. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for the Stock
Option Plan. Accordingly, no compensation
29
<PAGE>
<PAGE>
expense was recognized in 1996 for stock option awards since the
exercise price of stock options granted was not less than the fair
market value of the common stock at date of grant. Had the Company
recognized compensation expense in accordance with SFAS No. 123,
"Accounting for Stock Based Compensation," net loss and loss per basic
and diluted common share would have been $26,729 and $.04, respectively,
for the year ended December 31, 1996. To calculate those pro forma
amounts, the Company utilized the Black-Scholes option pricing model
and the following assumptions: a risk-free interest rate of 6.38%; an
expected option life of six years; expected volatility of 31.33%; and
an expected dividend yield of 1.77%.
A summary of the status of the Company's stock option plan as of
December 31, 1997, 1996 and 1995 and changes during the years ended on
those dates is as follows:
1997 1996 1995
---------------- ---------------- ----------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning
of year 50,022 $ 4.00 46,533 $ 3.33 53,103 $ 3.33
Granted 10,533 5.79
Exercised (7,116) 3.33
Forfeited $ 3.33
(6,570)
------ ------ ------
Outstanding and
exercisable
at end of year 50,022 $ 4.00 50,022 $ 4.00 46,533 $ 3.33
====== ====== ======
Fair value of options
granted during the year $2.11
=====
At December 31, 1997, there are 39,417 options outstanding with an
exercise price of 3.33 and a remaining contractual life of six years,
and 10,605 options outstanding with an exercise price of $5.79 and a
remaining contractual life of nine years. Additionally, at December 31,
1997, there are 21,072 shares available for future grant.
11. Income Taxes
The Company, the Association, and New Frontier file a consolidated
federal return. The Company and the Association file a combined state
return, while New Frontier files a separate state return. All returns
are filed 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. Federal legislation enacted in 1996 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.
30
<PAGE>
<PAGE>
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, 1997, 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 the percentage method in 1997.
The components of the provision (benefit) for income taxes are as
follows:
December 31,
1997 1996 1995
Current:
Federal $ 88,740 $(25,499) $ 84,400
State 3,825 250 6,000
--------- -------- --------
92,565 (25,249) 90,400
Deferred 133,700 (12,800) (11,600)
--------- -------- --------
$ 226,265 $(38,049) $ 78,800
========= ======== ========
A summary of deferred income taxes is as follows:
December 31,
1997 1996
Deferred income tax assets:
Allowance for loan losses $ 97,400 $ 106,000
Other 23,300 44,500
--------- ---------
$ 120,700 $ 150,500
========= =========
Deferred income tax liabilities:
Depreciation $(135,300) $ (85,000)
Unrealized gain on investment securities (32,100) (38,000)
Deferred loan origination fees and costs (15,600) (9,000)
Other (19,000) (8,000)
--------- ---------
(202,000) (140,000)
--------- ---------
Net deferred income tax (liability) asset $ (81,300) $ 10,500
========= =========
31
<PAGE>
<PAGE>
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:
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
Per- Per- Per-
cent cent cent
of of of
pretax pretax pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
Expected tax at
federal statutory
rate $196,338 34.0% $(14,416) (34.0) $ 88,200 34.0%
Increases (decreases)
resulting from:
State franchise
taxes, less
applicable federal
income tax benefit 23,034 4.0 (18,975) (44.7) 10,200 3.9
Tax exempt interest
on investments
in state and
political
subdivision
securities (1,349) (.2) (4,866) (11.5) (7,900) (3.0)
Book bad debt
deduction
less than tax (17,700) (6.8)
Other, net 8,242 1.4 208 .5 6,000 2.3
-------- ----- -------- ----- -------- -----
Provision (benefit)
for income taxes $226,265 39.2% $(38,049) (89.7)% $ 78,800 30.4%
======== ===== ======== ===== ======== =====
12. 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:
Years Ended
December 31,
1997 1996
Balance of loans outstanding at beginning of year $ 371,650 $ 364,601
New originations and increases in existing loans 209,575 38,046
Principal repayments (103,986) (30,997)
---------- ----------
Balance of loans outstanding at end of year $ 477,239 $ 371,650
========== ==========
32
<PAGE>
<PAGE>
At December 31, 1997 and 1996, there were approximately $985,900 and
$438,900, respectively, in deposits from such related parties.
13. 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, 1997. 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, 1997, the
Company's total commitments to extend credit, all of which were fixed
rate, approximated $1,463,900. 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.
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.
14. 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.
33
<PAGE>
<PAGE>
15. 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.
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
------------------------------------------------
1997 1996
----------------------- -----------------------
Carrying Fair Carrying Fair
amount value amount value
Financial assets:
Cash and cash
equivalents $ 4,389,966 $ 4,389,966 $ 2,125,929 $ 2,125,929
Investment securities
Loans held for sale
and loans receivable,
net of allowance
for possible loan
losses 53,017,352 53,798,000 47,838,833 48,002,000
Federal Home Loan Bank
stock 500,000 500,000 450,000 450,000
Financial liabilities:
Deposits 54,910,181 54,987,000 48,492,019 48,658,000
Advances from the
Federal Home Loan
Bank and other
borrowings 9,200,526 9,142,000 9,275,675 9,278,000
34
<PAGE>
<PAGE>
16. 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 judgments 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, 1997, that the Association
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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.
<PAGE>
<TABLE>
The Association's actual capital amounts (in thousands) and ratios are
also presented in the table.
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
Greater or Greater or Greater or Greater or
Actual Equal to Equal to Equal to Equal to
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted
assets) $ 5,591 15.7% $ 2,857 8.0% $ 3,571 10.0%
Tier I capital (to risk-weighted
assets) 5,352 15.0 1,428 4.0 2,143 6.0
Tier I capital (to adjusted
total assets) 5,352 7.5 2,139 3.0 3,566 5.0
Tangible capital (to adjusted
total assets) 5,352 7.5 1,070 1.5 N/A N/A
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 adjusted
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
35
</TABLE>
<PAGE>
<PAGE>
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 Holding 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. Additionally, the
Association is subject to OTS regulations which limit its ability to
upstream dividends to the Holding Company. As a Tier 1 savings
association, the Association may make capital distributions during a
calendar year up to 100% of its net income to date during the calendar
year plus one half of its surplus capital ratio at the beginning of the
calendar year.
On July 19, 1995, the Association entered into a Supervisory Agreement
with the OTS, which required the Company to develop policies and
procedures primarily relating to its internal operations. On August 25,
1997, the OTS terminated the Agreement having determined that the
Company had complied with its terms and conditions.
17. Subsequent Events
On December 17, 1997, the Company s Board of Directors voted a
three-for-one stock split of its common stock, effected in the form of a
stock dividend to holders of record on January 16, 1998. The stock
split was completed on February 5, 1998. Common stock issued, treasury
stock held and per share data have been restated to reflect the split.
36
<PAGE>
<PAGE>
18. 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,
1997 1996
Assets
Cash $5,100,208 $ 194,853
Federal funds sold 600,000
Investment securities held to maturity (fair value
of $-0- and $585,000, respectively) 584,667
Investment in subsidiary 5,242,219 4,898,877
Loan to ESOP 52,140 78,210
Other assets 3,115 3,115
---------- ----------
Total assets $5,997,682 $5,759,722
========== ==========
Liabilities and Shareholders' Equity
Accrued liabilities $ 833 $ 149
Shareholders' equity:
Common stock 2,631 2,631
Capital surplus 2,229,078 2,229,078
Retained earnings 3,986,735 3,749,459
Treasury stock, 39,105 shares, at cost (221,595) (221,595)
---------- ----------
Total liabilities and shareholders' equity $5,997,682 $5,759,722
========== ==========
Condensed Statement of Operations
Years Ended December 31,
1997 1996 1995
Equity in undistributed earnings (loss)
of subsidiary $343,342 $(24,363) $ 98,788
Dividends received - Albion Federal
Savings and Loan Association 76,104
Interest and fees on loans 6,648 8,286 10,564
Interest and dividends on investment
securities 31,231 38,501 11,858
Other operating expenses (30,020) (26,776) (16,581)
-------- -------- --------
Net income (loss) $351,201 $ (4,352) $180,733
======== ======== ========
37
<PAGE>
<PAGE>
Condensed Statement of Cash Flows
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities:
Net income (loss) $ 351,201 $ (4,352) $ 180,733
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities -
Accretion of bond discount (31,058) (38,483)
Equity in (income) loss of
subsidiary (343,342) 24,363 (174,892)
Decrease in other assets (2,798) (317)
Increase (decrease) in accrued
liabilities 684 149 (18,753)
---------- ----------- -----------
Net cash used in operating activities (22,515) (21,121) (13,229)
---------- ----------- -----------
Cash flows from investing activities:
Dividends received - Albion Federal
Savings and Loan Association 76,104
Proceeds from repayment of ESOP loan 26,070 34,673 37,476
Proceeds from maturities of investment
securities held to maturity 1,215,000 1,500,000 900,000
Purchases of investment securities
held to maturity (599,275) (1,274.969) (1,671,312)
Net decrease (increase) in loans
receivable 120,182 (120,182)
---------- ----------- -----------
Net cash provided by (used in)
investing activities 641,795 379,886 (777,914)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 23,720
Dividends paid (113,925) (80,000) (76,104)
Purchase of treasury stock (221,595)
---------- ----------- -----------
Net cash used in financing activities (113,925) (277,875) (76,104)
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 505,355 80,890 (867,247)
Cash and cash equivalents at beginning
of year 194,853 113,963 981,210
---------- ----------- -----------
Cash and cash equivalents at end of
year $ 700,208 $ 194,853 $ 113,963
========== =========== ===========
38
<PAGE>
<PAGE>
COMMON STOCK INFORMATION
The common stock of Albion Banc Corp. is traded on the Nasdaq Small Cap
Market under the symbol "ALBC". The Company's common stock closed at $10.75 on
March 2, 1998, on which date, there were approximately 587 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 following table sets forth market price and dividend information for
the Corporation's Common Stock for the years 1997 and 1996.
FISCAL 1997 HIGH LOW CLOSE DIVIDENDS PAID
----------- ---- --- ----- --------------
First Quarter $ 6.33 $ 5.50 $ 6.17 $.11
Second Quarter $ 7.67 $ 6.00 $ 7.67 --
Third Quarter $ 8.58 $ 7.33 $ 8.58 .05
Fourth Quarter $13.58 $ 8.83 $13.33 --
FISCAL 1996 HIGH LOW CLOSE DIVIDENDS PAID
----------- ---- --- ----- --------------
First Quarter $ 6.00 $ 5.50 $ 5.50 $.10
Second Quarter $ 6.17 $ 5.54 $ 5.58 --
Third Quarter $ 5.83 $ 5.50 $ 5.50 --
Fourth Quarter $ 6.08 $ 5.58 $ 5.58 --
39
<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 Chairman of the Board of the
Corporation and President, Chief Association and President, Chief
Executive Officer and majority Executive Officer and majority
shareholder of Keeler Construction shareholder of Keeler Construction
Co., Inc. Co., Inc.
RICHARD A. PILON RICHARD A. PILON
Vice Chairman of the Board of the Vice Chairman of the Board of the
Corporation President, Treasurer Association President, Treasurer
and a majority stockholder of and a majority stockholder of
Dale's Plaza, Inc. and Secretary Dale's Plaza, Inc. and Secretary
and Treasurer of Dale & Son and Treasurer of Dale & Son
Supermarket, Inc. (DBA Jubilee Supermarket, Inc. (DBA Jubilee
Foods). Foods).
DOLORES L. GIARRIZZO DOLORES L. GIARRIZZO
Retired, prior to that, associated Retired, prior to that, associated
with Agway, Inc. Agway, Inc.
ROBERT R. BROWN II ROBERT R. BROWN II
Self-employed and Vice President of Self-employed and Vice President of
Orchard Dale Fruit Farms, Inc. Orchard Dale Fruit Farms, Inc.
HAROLD M. KLUDT HAROLD M. KLUDT
Partner and part owner Kludt Bros., Partner and part owner Kludt Bros.,
Inc. Inc.
CHRISS M. ANDREWS CHRISS M. ANDREWS
Owner and President of Barclay & Owner and President of Barclay &
Fowler Oil Corp. Fowler Oil Corp.
GREG SPEER GREG SPEER
Owner and Chief Executive Officer of Owner and Chief Executive Officer of
Speer Equipment. Speer Equipment.
OFFICERS: OFFICERS:
JEFFREY S. RHEINWALD JEFFREY S. RHEINWALD
President and Chief Executive Officer President and Chief Executive Officer
JOHN S. KETTLE JOHN S. KETTLE
Senior Vice President and Treasurer Senior Vice President and Treasurer
MARK F. REED MARK F. REED
Vice President and Chief Financial Vice President and Chief Financial
Officer Officer
40
<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 15,
1998 at 10:00 a.m., Eastern Time, at Tillman's Village Inn, Corner of Routes
98 and 104, Albion, New York.
41
<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>
[Letterhead of Price Waterhouse LLP]
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 19, 1998 appearing on page 16 of the 1997 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, 1997.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Buffalo, New York
March 27, 1998
<PAGE>
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the consolidated
financial statements of Albion Banc Corp., Inc. for the year ended December
31, 1997 and is qualified in its entirety by reference to such financial
statements.
Financial Data
as of or for the year
Item Number ended December 31, 1997 Item Description
- ----------- ----------------------- ----------------
9-03(1) 1,539,966 Cash and due from the Banks
9-03(2) 0 Interest-bearing deposits
9-03(3) 2,850,000 Federal funds sold - purchased
securities for resale
9-03(4) 0 Trading account assets
9-03(6) 4,034,900 Investment and mortgage backed
securities held for sale
9-03(6) 6,833,577 Investment and mortgage backed
securities held to maturity -
carrying value
9-03(6) 6,883,000 Investment and mortgage backed
securities held to maturity -
market value
9-03(7) 53,017,352 Loans
9-03(7)(2) (276,300) Allowance for losses
9-03(11) 71,719,249 Total assets
9-03(12) 54,910,181 Deposits
9-03(13) 5,000,000 Short-term borrowings
9-03(15) 1,453,710 Other liabilities
9-03(16) 4,200,526 Long-term debt
9-03(19) 0 Preferred stock - mandatory
redemption
9-03(20) 0 Preferred stock - no mandatory
redemption
9-03(21) 2,631 Common stocks
9-03(22) 6,152,201 Other stockholders' equity
9-03(23) 71,719,249 Total liabilities and
stockholders' equity
9-04(1) 4,177,760 Interest and fees on loans
9-04(2) 1,006,631 Interest and dividends on
investments
9-04(4) 0 Other interest income
9-04(5) 5,184,391 Total interest income
9-04(6) 2,297,157 Interest on deposits
9-04(9) 2,880,223 Total interest expense
9-04(10) 2,304,168 Net interest income
9-04(11) 35,414 Provision for loan losses
9-04(13)(h) 0 Investment securities
gains/(losses)
9-04(14) 2,080,877 Other expenses
9-04(15) 577,466 Income/loss before income tax
9-04(17) 577,466 Income/loss before
extraordinary items
9-04(18) 0 Extraordinary items, less tax
9-04(19) 0 Cumulative change in
accounting principles
9-04(20) 351,201 Net income or loss
9-04(21) .48 Earnings per share - basic
9-04(21) .46 Earnings per share - diluted
I.B.5 8.00 Net yield - interest earning
assets - actual
III.C.1.(a) 276,300 Loans on non-accrual
III.C.1.(b) 0 Accruing loans past due 90
days or more
<PAGE>
<PAGE>
III.C.2.(c) 0 Troubled debt restructuring
III.C.2 0 Potential problem loans
IV.A.1 305,900 Allowance for loan loss -
beginning of period
IV.A.2 65,014 Total chargeoffs
IV.A.3 0 Total recoveries
IV.A.4 276,300 Allowance for loan loss - end
of period
IV.B.1 276,300 Loan loss allowance to
allocated to domestic loans
IV.B.2 0 Loan loss allowance to foreign
loans
IV.B.3 0 Loan loss allowance -
unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1539966
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2850000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4034900
<INVESTMENTS-CARRYING> 6833577
<INVESTMENTS-MARKET> 6883000
<LOANS> 53017352
<ALLOWANCE> (276300)
<TOTAL-ASSETS> 71719249
<DEPOSITS> 54910181
<SHORT-TERM> 5000000
<LIABILITIES-OTHER> 1453710
<LONG-TERM> 4200526
0
0
<COMMON> 2631
<OTHER-SE> 6152201
<TOTAL-LIABILITIES-AND-EQUITY> 71719249
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<EXPENSE-OTHER> 2080877
<INCOME-PRETAX> 577466
<INCOME-PRE-EXTRAORDINARY> 577466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351201
<EPS-PRIMARY> .48
<EPS-DILUTED> .46
<YIELD-ACTUAL> 8.00
<LOANS-NON> 276300
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 305900
<CHARGE-OFFS> 65014
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