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, 1998
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
incorporation or organization) Identification No.)
48 North Main Street,
Albion, New York 14411-0396
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 589-5501
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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 NO x
---- ----
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
1, 1999, was $7,530,580 (753,058 shares at $10.00 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, 1998
were $5,622,373.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1999 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
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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, 1998, the Company had total
assets of $76.5 million, total deposits of $59.1 million and shareholders'
equity of $6.4 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, 1998, the Association's loans
totaled $59.2 million, or 77.4% of total assets, including $48.4 million, or
81.8%, of gross loans secured by one-to-four family properties, $3.4 million,
or 5.7% of gross loans secured by other real estate properties and $7.9
million of consumer loans, or 13.3% of gross loans. Of the Association's
residential mortgage loans secured by one-to-four family and other real estate
properties, $39.1 million, or 80.8%, are fixed-rate loans and $9.3 million, or
19.2%, are adjustable rate residential mortgage loans (collectively referred
to as ARMs).
Selected Consolidated Financial Information
This information is incorporated by reference from page 2 of the 1998
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
This information is incorporated by reference from page 8 of the Annual
Report.
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<TABLE>
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).
1998 Compared to 1997 1997 Compared to 1996 1996 Compared to 1995
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........ $(183) $470 $(24) $263 $46 $ 69 $ 1 $116 $44 $135 $ 2 $181
Consumer loans........... 12 85 2 99 5 155 1 161 (14) 13 (1) (2)
----- ---- ---- ---- --- ---- --- ---- --- ---- --- ----
Total loans............. (171) 555 (22) 362 51 224 2 277 30 148 1 179
Mortgage-backed
securities.............. (89) 29 (4) (64) 19 303 33 355 10 12 1 23
Investment securities.... 1 (133) (1) (133) (3) (35) 1 (37) (8) (26) 1 (33)
Daily interest-earning
deposits................ -- -- -- -- -- -- -- -- -- -- -- --
Other interest-earning
assets (1).............. -- -- (1) (6) 162 (13) 143 (10) (116) 5 (121)
----- ---- ---- ---- --- ---- --- ---- --- ---- --- ----
Total net change in
income on interest-
earning assets........... (260) 451 (27) 164 61 654 23 738 22 18 8 48
----- ---- ---- ---- --- ---- --- ---- --- ---- --- ----
Interest-bearing liabilities:
Interest-bearing
deposits................ (25) 146 (2) 119 (27) 197 (2) 168 (73) 161 (6) 82
FHLB advances and
other borrowings........ (5) 14 (1) 8 24 284 27 335 9 (192) (4) (187)
----- ---- ---- ---- --- ---- --- ---- --- ---- --- ----
Total net change in
expense on interest-
bearing liabilities..... (30) 160 (3) 127 (3) 481 25 503 (64) (31) (10) (105)
----- ---- ---- ---- --- ---- --- ---- --- ---- --- ----
Net change in net
interest income......... $(230) $291 $(24) $ 37 $64 $173 $(2) $235 $86 $49 $18 $153
===== ==== ==== ==== === ==== ==== ==== === ==== === ====
</TABLE>
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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, 1998.
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 $3,878 $(3,558) (48)% 5.37% (421) bp
300 bp 4,999 (2,437) (33) 6.78 (280) bp
200 bp 6,060 (1,376) (19) 8.05 (153) bp
100 bp 6,932 (504) (7) 9.05 (53) bp
0 bp 7,436 9.58
(100) bp 7,606 170 2 9.71 13 bp
(200) bp 7,701 265 4 9.75 17 bp
(300) bp 7,978 542 7 10.00 42 bp
(400) bp 8,177 741 10 10.15 57 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, 1998 an
instantaneous 200 basis point increase in market interest rates would reduce
the Association's NPV by approximately $1.4 million, or 19%, and an
instantaneous 200 basis point (bp) decrease in market interest rates would
increase the Association's NPV by approximately $265,000, or 4%.
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 $58.8 million at December 31, 1998, representing approximately
76.9% 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,
------------------------------------------------------
1998 1997 1996
----------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real Estate Loans:
One-to-four family
residential.......... $48,396 81.0% $43,024 80.3% $39,393 81.4%
Commercial(1)......... 1,793 3.0 2,204 4.1 2,234 4.6
Construction(2)....... 1,589 2.7 413 0.8 578 1.2
------- ----- ------- ----- ------- -----
Total real estate
loans............... 51,778 86.7 45,641 85.2 42,205 87.2
Other Loans:
Automobile............ 93 0.2 100 0.2 129 0.3
Home improvement
and second
mortgage loans....... 7,415 12.4 7,152 13.3 4,960 10.2
Other................. 434 0.7 688 1.3 1,106 2.3
------- ----- ------- ----- ------- -----
Total other loans... 7,942 13.3 7,941 14.8 6,195 12.8
------- ----- ------- ----- ------- -----
Gross loans......... 59,720 100.0% 53,582 100.0% 48,400 100.0%
===== ===== =====
Less:
Undisbursed loans
in process........... (721) (327) (279)
Net deferred loan
origination costs
(fees)............. 74 39 23
Allowance for
loan losses.......... (267) (276) (306)
------- ------- -------
Total loans, net...... $58,806 $53,017 $47,838
======= ======= =======
_____________
(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, 1998,
approximately $48.4 million, or 81.0% of the Association's gross loan
portfolio consisted of loans secured by one- to-four family residential real
estate. The Association offers long-term, fixed rate mortgage loans and
adjustable-rate mortgage loans.
The Association presently originates both fixed rate mortgage loans and
ARMs secured by one-to-four family properties with loan terms of 10 to 30
years. ARMs originated since 1991 have interest rates that adjust at regular
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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.
As in fiscal 1997, during fiscal year 1998, the demand for ARM's
continued at a decreased rate 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 $9.2 million at December 31, 1998 from $13.6 million at
December 31, 1997.
During the year ended December 31, 1998 the Association's total
single-family mortgage loan originations were $17.1 million, all of which 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, 1998, the Association had $39.2
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, 1998, the Association had $1.6 million 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, 1998, the Association
had five loans secured by multi-family dwelling units which it originated and
retained the entire interest that totalled $422,334, or 0.7%, 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."
At December 31, 1998, the Association's largest multi-family residential
loan was a $126,950 loan secured by an eight unit apartment building in the
Association's primary market area. At December 31, 1998, the Association did
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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, 1998, this would limit the Association's aggregate non-residential real
estate loans to approximately $24 million. At such time, the Association had
commercial real estate loans outstanding of $1.4 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, 1998, the Association's consumer loan
portfolio was $7.9 million, or 13.2%, of the gross loan portfolio. Of this
amount, $7.4 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 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 $22,000.
Consumer loans have been offered under a variety of terms and conditions.
Secured consumer loans are limited to a maximum of 90% of the retail value of
the consumer collateral offered or real estate, including any other mortgages
or liens offered to secure the loan, except in the case of guaranteed student
loans, the amount which is established by the program. In recent years,
management has expanded its consumer lending to include automobile loans.
The Association's underwriting standards for consumer loans include an
assessment of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loans. Although the
applicant's creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral securing the
loan, if any, to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by assets that depreciate rapidly, such as automobiles. In the latter
case,
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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, 1998
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.....$ 8,871 $ 622 $ 993 $4,783 $33,529 $48,798
Commercial real estate.... 215 -- 308 218 666 1,407
Construction.............. 937 -- -- -- -- 937
Consumer.................. 4,474 230 360 1,430 1,310 7,804
Mortgage-backed
securities.............. -- -- 29 13 7,724 7,766
Other..................... 127 -- -- -- -- 127
------- ---- ------ ------ ------- -------
Total................$14,624 $852 $1,690 $6,444 $43,229 $66,839
======= ==== ====== ====== ======= =======
The following table sets forth all loans and mortgage-backed securities
due beyond December 31, 1999 which have fixed interest rates and have floating
or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Real estate mortgages........... $39,567 $ 360
Commercial real estate.......... 931 261
Construction.................... -- --
Consumer........................ 3,330 --
Mortgage-backed securities...... 3,944 3,822
------- ------
Total...................... $47,772 $4,443
======= ======
Mortgage Loan Solicitation and Processing. Loan originations are derived
through the Association's sales representative as well as walk-ins.
Advertising in local newspapers promotes loan products to the public in
general. The present customer base and walk-in traffic are solicited through
stuffers, brochures, lobby signs, and, occasionally through direct mail.
Telephone inquiries are also used.
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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, 1998, the Association had
$572,792 in whole loans which were purchased by the Association and which are
serviced by the Association, and $102,034 in mortgage pool securities which
are serviced by others.
The following table shows the dollar amount of loans originated,
purchased, sold and repaid during the periods indicated.
Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Total loans at
beginning of period................. $53,255 $48,400 $44,781
------- ------- -------
Real estate loans originated:
One-to-four family residential...... 14,373 6,300 7,076
Multi-family residential
and commercial real estate......... 140 767 185
Construction loans(1)............... 2,596 1,892 2,242
Other loans originated:
Consumer............................ 2,632 4,548 2,586
Other loans......................... -- -- --
------- ------- -------
Total loans originated............ 19,741 13,507 12,089
------- ------- -------
Real estate loans purchased.......... -- -- --
(table continued on following page)
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Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Loans sold:
Total one-to-four
family residential mortgages....... (1,375) (507) (459)
------- ------- -------
Total loans sold................. (1,375) (507) (459)
------- ------- -------
Loan principal repayments............ (12,506) (8,145) (7,718)
Transfers to foreclosed real
estate(2).......................... (116) -- (293)
------- ------- -------
Net loan activity.................... 5,744 4,855 3,619
------- ------- -------
Total loans at end of period......... $58,999 $53,255 $48,400
======= ======= =======
___________________
(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 $1.2 million at December 31, 1998. See Note 14
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 $74,255 of net deferred loan
costs at December 31, 1998.
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.
9
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<PAGE>
The Board of Directors is informed on a monthly basis as to the status of
all mortgage and non-mortgage loans that are delinquent 60 days or more, as
well as the status on all loans currently in foreclosure or owned by the
Association through foreclosure.
The table below sets forth the amounts and categories of nonperforming
assets in the Association's loan portfolio at the dates indicated. Loans are
placed on non-accrual status through the establishment of a reserve for
uncollected interest when the loan becomes more than 90 days delinquent and
collection of interest becomes doubtful. The Association does not recognize
income on non-accrual loans. At December 31, 1998, uncollected cumulative
interest totaled $12,300. The Association would have recorded interest income
of $11,516, $14,470 and $8,926 and on non- accrual loans during the years
ended December 31, 1998, 1997, 1996, respectively, if such loans had been
performing during such periods. The Association did not recognize interest
income on loans placed on a non-accrual basis during the years ended December
31, 1998, 1997 and 1996, 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,
-----------------------
1998 1997 1996
---- ---- ----
(In thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
One-to-four family residential........................ $262 $276 $252
Commercial............................................ -- -- --
---- ---- ----
Total 262 276 252
---- ---- ----
Accruing loans which are contractually
past due 90 days or more............................... -- -- --
Total of nonaccrual and 90 days past due loans........... 262 276 252
Foreclosed real estate................................... -- -- 211
---- ---- ----
Total nonperforming assets............................ $262 $276 $463
==== ==== ====
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... 0.3% 0.4% 0.4%
Total nonperforming assets to total assets(1)............ 0.3% 0.4% 0.7%
- --------------------
(1) Total nonperforming assets include total nonaccrual and 90 days past
due loans and real estate owned.
The decrease in total nonperforming assets from $276,000 at December 31,
1997 to $262,000 at December 31, 1998 can be attributed to 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
10
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<PAGE>
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. The regulations also provide for a special mention category,
described as assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
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, 1998, 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, 1998, 1997 and 1996 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,
----------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Classified assets:
Doubtful..................... $ 4 $ 26 $ --
Substandard assets........... 258 250 372
Special mention.............. 148 541 510
Loan loss allowance:
General loss allowances...... 267 276 306
Specific loss allowances..... -- -- --
Net charge-offs................ 74 65 78
The following is a discussion of the Association's major substandard
loans at December 31, 1998:
The Association's largest nonperforming asset(s) consists of three
participation mortgage loan pool securities that totalled $102,034 at December
31, 1998. 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 $55,987, 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 $13,775 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, 1998,
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
11
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<PAGE>
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, 1996, 1997 and
1998, of approximately $140,239, $35,414 and $65,023, respectively. The
fluctuation in the annual provision for loan losses is the result of
management's assessment of economic conditions and such provisions are
computed based on management's established loan review process. In fiscal
1997, the provision for loan losses totalled $35,414, a decrease of $104,825
from fiscal 1996. This decrease in the provision between the periods was the
result of an improvement in credit quality of three participation mortgage
pool securities and a low delinquency level in the Association's loan
portfolio. In fiscal 1998, the provision for loan losses totalled $65,023, an
increase of $29,609 from fiscal 1997. The Association's ratio of
nonperforming assets to total assets remained low at .35%, while the ratio of
allowance for loan losses to total loans decreased to .45% 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, 1998 the Association had an allowance for loan losses of
$267,000 which represented .5% of total loans. Management believes that loan
loss reserves were adequate at December 31, 1998. 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,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ................ $276 $306 $244
Provision for loan losses........................ 65 35 140
Net charge offs:
Residential real estate........................ (64) (54) (58)
Commercial real estate......................... -- -- (4)
Consumer loans................................. (10) (11) (16)
Net charge offs....................... (74) (65) (78)
Allowance at end of period................... $267 $276 $306
Ratio of allowance to total loans outstanding
at the end of the period........................ 0.5% 0.5% 0.6%
Ratio of net charge offs to average loans
outstanding during the period................... 0.1% 0.1% 0.2%
12
<PAGE>
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,
-----------------------------------------------------
1998 1997 1996
----------------- ------------------ ---------------
Loan Loan Loan
Category Category Category
as a % of as a % of as a % of
Out Out Out
-standing -standing -standing
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Real estate loans:
One-to-four family
residential........ $197 81.0% $196 80.8% $218 81.4%
Commercial............ 2 3.0 26 4.1 34 4.6
Construction.......... 6 2.7 3 0.2 8 1.2
Consumer................ 43 13.3 51 14.9 46 12.8
---- ----- ---- ----- ---- -----
Total allowance for
loan losses........ $267 100.0% $276 100.0% $306 100.0%
==== ===== ==== ===== ==== =====
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, 1998, the
Association's regulatory liquidity was 23.5% 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, 1998, ranging from 6.0% to 10.25% with a weighted average yield
of 7.57% for the year ended December 31, 1998. At December 31, 1998, the
amortized cost of the Association's mortgage-backed securities portfolio
totaled $7.7 million. The market value of such mortgage-backed securities
totalled $7.8 million at December 31, 1998. Mortgage-backed securities
13
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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, $3.9
million are carried at fixed rates and $3.8 million are carried at adjustable
rates as of December 31, 1998.
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, 1998, the Association's investment and mortgage-backed
securities portfolio totaled $7.8 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 Annual Report.
Investment Securities Analysis
The following table sets forth the Association's investment and
mortgage-backed securities portfolio at carrying value at the dates indicated.
<PAGE>
<TABLE>
At December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
Book Percent of Book Percent of Book Percent of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
-------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. government treasury and
obligations of U.S.
government agencies.............. $3,944 50.8% $4,035 37.1% $3,946 35.1%
State and political subdivision.... -- -- -- -- -- --
Corporate obligations.............. -- -- -- -- -- --
------ ------ ------
Total available-for-sale........... $3,944 $4,035 $3,946
====== ====== ======
Held-to-Maturity:
U.S. government treasury and
obligations of U.S.
government agencies.............. $3,822 49.2% $6,834 62.9% $ 7,002 62.2%
State and political subdivision.... -- -- -- -- 200 1.8
Corporate obligations.............. -- -- -- -- 100 0.9
------ ----- ------- ----- ------- -----
Total held-to-maturity............. 3,822 6,834 7,302
------ ----- ------- ----- ------- -----
Total.............................. $7,766 100.0% $10,869 100.0% $11,248 100.0%
====== ===== ======= ===== ======= =====
- --------------
(1) The market value of the Association's investment securities portfolio, including mortgage-backed
securities, amounted to $7.8 million, $10.9 million and $11.2 million, at December 31, 1998, 1997
and 1996, respectively.
</TABLE>
14
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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, 1998.
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.......... -- -- $29 8.55% $13 8.55% $3,902 7.27%
Held-to-Maturity:
U.S. government
treasury and
obligations of
U.S. government
agencies.......... -- -- -- -- -- -- $3,822 7.86%
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.
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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, 1998.
Percentage
Weighted of Total
Average Interest-
Interest Minimum Bearing
Yield Term Category Amount Balance Deposits
- ------ ---- -------- ------ ------- --------
(Dollars in thousands)
Interest-Bearing Deposits
-------------------------
5.36% 18 Month IRA $ 1,000 $ 761 1.36%
5.63 42 Month IRA 1,000 580 1.04
3.05 None Passbook 50 14,838 26.56
4.10 32 - 44 days Fixed term and fixed rate 1,000 639 1.14
4.10 45 - 181 days Fixed term and fixed rate 1,000 -- --
4.97 182- 365 days Fixed term and fixed rate 1,000 3,074 5.50
5.36 1 year Fixed term and fixed rate 1,000 19,122 34.23
5.65 2 years Fixed term and fixed rate 1,000 4,084 7.31
5.66 3 years Fixed term and fixed rate 1,000 1,056 1.89
6.56 4 years Fixed term and fixed rate 1,000 911 1.63
6.27 5 years Fixed term and fixed rate 1,000 4,067 7.28
1.79 None NOW Accounts 1,000 4,680 8.38
3.05 None MMDA 2,500 2,055 3.68
------- ------
Total $55,867 100.00%
======= ======
16
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<PAGE>
<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.
At December 31,
--------------------------------------------------------------------------
1998 1997 1996
-------------------------- --------------------------- ---------------
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............ $ 3,253 5.5% $ 858 $ 2,395 4.4% $ 810 $ 1,585 3.3%
NOW checking................... 4,680 7.9 1,182 3,498 6.4 882 2,616 5.4
Regular savings accounts....... 14,838 25.1 864 13,974 25.4 1,085 12,889 26.6
Money market deposit........... 2,055 3.5 (165) 2,220 4.0 (1,324) 3,544 7.3
Fixed-rate certificates which
mature in the year ending
Within 1 year.............. 26,478 44.7 3,487 22,991 41.9 4,702 18,289 37.7
Within 1-3 years........... 6,068 10.3 (2,537) 8,605 15.7 791 7,814 16.1
Certificates maturing
thereafter.................. 1,748 3.0 521 1,227 2.2 (528) 1,755 3.6
------- ----- ------ ------- ----- ------ ------- -----
Total..................... $59,120 100.0% $4,210 $54,910 100.0% $6,418 $48,492 100.0%
======= ===== ====== ======= ===== ====== ======= =====
NOTE: IRA accounts are included in certificate balances: Amounts are $1.1 million, $1.1 million and
$1.1 million at December 31, 1998, 1997 and 1996, respectively.
</TABLE>
17
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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,
----------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Below 4.00%............... $ -- $ 11 $ 472
4.01% - 6.00%............. 31,512 29,446 22,852
6.01% - 8.00%............. 2,780 3,354 4,518
8.01% - 10.00%............ 2 11 15
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
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%......$ -- $ -- $ -- $ -- $ -- $ --
4.01% - 6.00%.... 24,506 4,323 1,306 599 778 31,512 91.9%
6.01% - 8.00%.... 1,970 430 9 194 177 2,780 8.1
8.01% - 10.00%... 2 -- -- -- -- 2 0.01
-------- ------ ------ ---- ---- -------
Total.......$26,478 $4,753 $1,315 $793 $955 $34,294
======= ====== ====== ==== ==== =======
The following table sets forth the savings activities of the Association
for the periods indicated.
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Beginning balance................... $54,910 $48,492 $46,559
======= ======= =======
Net increase (decrease)
before interest credited.......... $ 1,796 $ 4,121 $ (196)
Interest credited................... 2,414 2,297 2,129
------- ------- -------
Net increase in savings deposits.... 4,210 6,418 1,933
------- ------- -------
Ending balance...................... $59,120 $54,910 $48,492
======= ======= =======
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
18
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<PAGE>
secured by the Association's first mortgage loans. At December 31, 1998, the
Association had $9.0 million of fixed rate borrowings from the FHLB-New York
at a weighted average rate of 5.38%. Required principal repayments are as
follows: $1.0 million in 1999, $1.0 million in 2000, $2.0 million in 2001,
$2.0 million in 2002 and $3.0 million in 2003. The Association did not have
any overnight borrowings from the FHLB-New York at December 31, 1998.
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, 1998, 1997 and 1996, the Association had no short-term
borrowings or securities sold under agreements to repurchase.
Subsidiary Activities
In January 1994, the Company formed a subsidiary, New Frontier of Albion
("New Frontier"), to sell fixed rate annuities. In October 1994, New Frontier
was sold to Albion Federal to help facilitate the sale of fixed rate and
variable rate products. At December 31, 1998, 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.
19
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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 HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDIA"), and the regulations issued by the OTS and the FDIC to implement
these statutes. These laws and regulations delineate the nature and extent of
the activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Association's relationship
with its depositors and borrowers is also regulated to a great extent,
especially in such matters as the ownership of deposit accounts and the form
and content of the Association's mortgage documents. The Association must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Association's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment
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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.
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, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
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 (i.e., borrowings)
from the FHLB-New York. The Association is in compliance with this
requirement with an investment in FHLB-New York stock of $528,800 at December
31, 1998.
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 Bank Insurance Fund ("BIF") and the SAIF. The Association's
deposit accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Association's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period. The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Association, to recapitalize the SAIF.
As a result of the DIF Act and the special one-time assessment, 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 the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits are charged an assessment to help pay
interest on the FICO bonds
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at a rate of approximately .013%. Full pro rata sharing of the FICO payments
between BIF and SAIF members will not occur until the earlier of December 31,
1999, or the date the BIF and SAIF are merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the
Association.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. Management of the Association does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
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. The FDIA requires 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%.
The FDIA also provides that a federal banking agency may, after notice
and an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution
or an undercapitalized institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At December 31, 1998, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, 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; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety
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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. Management is aware of no conditions relating to these safety and
soundness standards which would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including Albion
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At December 31, 1998, Albion Federal met the test and its QTL
percentage was 97.2%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS' prompt corrective action regulation
provides 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
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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 totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, avings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. 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.
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At December 31, 1998, Albion Federal's core capital of approximately $5.8
million, or 7.6% of adjusted total assets, was $2.7 million in excess of the
OTS requirement of $3.0 million, or 3% of adjusted total assets. As of such
date, the Association's tangible capital of approximately $5.7 million, or
7.6% of adjusted total assets, was $4.6 million in excess of the OTS
requirement of $1.1 million, or 1.5% of adjusted total assets. Finally, at
December 31, 1998, the Association had risk-based capital of approximately
$6.0 million or15.7% of total risk-weighted assets, which was $3.0 million in
excess of the OTS risk-based capital requirement of $3.0 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.
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, 1998, the
Association's limit on loans to one borrower was $870,000. At December 31,
1998, the Association's largest single loan to one borrower was $438,171,
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
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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.
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
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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 thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated 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 required 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 no
post-1987 reserves subject to recapture. 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. 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
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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.
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.
Audits
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 12 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 offices are located in
Albion and Brockport.
The Association was the largest of the eight bank and thrift offices
located in Orleans County, New York, based on its total assets of $75.6
million at December 31, 1998. Based on data at June 30, 1998, the Marine
Midland branch and the Fleet Bank branch had approximately $50.3 million and
$18.1 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.
28
<PAGE>
<PAGE>
Personnel
As of December 31, 1998, the Association had 26 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 50 President and Chief Executive Officer
John S. Kettle 52 Senior Vice President and Treasurer
Mark F. Reed 40 Vice President and Chief Financial
Officer
- -----------------
(1) As of December 31, 1998.
The principal occupation of each executive officer of the Association is
set forth below. Unless otherwise noted, all officers have held the position
described below for at least the past five years and reside in Albion, New
York.
JEFFREY S. RHEINWALD has been employed in various capacities at Albion
Federal for over 25 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 Chief Financial Officer 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, 1998.
Net Book Value
Year Square Owned/ Total at December 31,
Name of Office Opened Footage Leased Cost 1998
- -------------- ------ ------- ------ ---- ---------------
Main Office 1976 8,522 Owned $1,653,537 $ 627,917
48 North Main Street
Albion, NY 14411
Loan Department 1993 3,314 Owned 281,457 218,472
34 North Main Street
Albion, NY 14411
(table continued on following page)
29
<PAGE>
<PAGE>
Net Book Value
Year Square Owned/ Total at December 31,
Name of Office Opened Footage Leased Cost 1998
- -------------- ------ ------- ------ ----- ---------------
Branch Office 1994 3,276 Owned $1,568,661 $1,326,579
Brockport, NY
The net book value of the Association's investment in all office
properties and equipment less accumulated depreciation totaled $2.2 million at
December 31, 1998. See Note 6 of the Notes to the Consolidated Financial
Statements for further information on office properties and equipment.
Item 3. Legal Proceedings
- --------------------------
From time to time, the Association is a party to legal proceedings in the
ordinary course of business wherein it enforces its security interest in
mortgage loans it has made. Other than such proceedings, the Association is
not involved in any legal proceedings of a material nature at this time.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
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, 1998, 1997
and 1996*
Consolidated Statement of Operations For the Years Ended December 31,
1998, 1997 and 1996*
Consolidated Statement of Changes in Shareholders' Equity For the Years
Ended December 31, 1998, 1997 and 1996*
Consolidated Statements of Cash Flows For the Years Ended December 31,
1998, 1997 and 1996*
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.
30
<PAGE>
<PAGE>
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.
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 -- Election of Directors
- -- Certain Transactions."
31
<PAGE>
<PAGE>
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 PricewaterhouseCoopers LLP
27 Financial Data Schedule
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended December 31,
1998.
- -----------------
(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.
32
<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 17, 1999 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 17, 1999
---------------------------------
Jeffrey S. Rheinwald
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark F. Reed March 17, 1999
---------------------------------
Mark F. Reed
(Principal Financial and Accounting Officer)
By: /s/ James H. Keeler March 17, 1999
---------------------------------
James H. Keeler
Chairman of the Board
By: /s/ Richard A. Pilon March 17, 1999
---------------------------------
Richard A. Pilon
Director
By: /s/ Dolores L. Giarrizzo March 17, 1999
---------------------------------
Dolores L. Giarrizzo
Director
By: /s/ Robert R. Brown II March 17, 1999
---------------------------------
Robert R. Brown II
Director
By: March , 1999
--------------------------------- ---
Harold P. Kludt
Director
By: March , 1999
--------------------------------- ---
Chriss M. Andrews
Director
By: /s/ Gregory L. Speer March 17, 1999
---------------------------------
Gregory L. Speer
Director
<PAGE>
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
<PAGE>
ALBION
[LOGO] BANC
CORPORATION
1998
----
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, 1998, the
Corporation had total assets of $76.5 million, total deposits of $59.1 million
and stockholders' equity of $6.4 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.......................... 17
Consolidated Financial Statements........................ 18
Notes to Consolidated Financial Statements............... 22
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 1998. 1998 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 $362,471 after tax profit for the year 1998, compared to a net
profit of $351,201 for the year 1997. This translates into earnings per share
of $.47 on a diluted basis. A contributing factor in our earnings improvement
was the continued growth in our Brockport branch. During 1998, deposits at
the branch grew by $3.8 million to a total of $22.7 million. This represents
a 20% increase at the branch from the end of 1997. 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 45% of the
branch's total deposits. As an institution, deposits grew $4.2 million, or
7.7%, to a total of $59.1 million.
Assets grew as a result of lending activity funded by our deposit growth.
During the year 1998, Albion Federal Savings and Loan Association originated
$17.1 million in first mortgage loans and $2.6 million in consumer loans. The
result was an increase in loans of $5.9 million, or an 11.2% increase from
December 31, 1997. The effect of the lending activity was an increase of 6.7%
in our total assets from year-end 1997 to $76.5 million at December 31, 1998.
I want to mention that we were also successful in controlling nonperforming
assets in 1998. At the end of 1997, we had $276,300 or .47% in nonperforming
assets. I am pleased to report that at the end of 1998, we had reduced that
amount to $262,000 or .44% of total loans.
There were also some very notable events relating to our stock. 1998 marked
the first year that we paid a cash 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.
Although we are pleased with our 1998 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
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA
Albion Banc Corp. (the "Company"), a Delaware corporation, is 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,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (In thousands)
Total assets................... $76,470 $71,719 $64,585 $56,992 $55,334
Loans, net .................... 58,929 53,017 47,839 44,049 47,010
Mortgage-backed securities .... 7,765 9,867 8,075 4,138 3,085
Cash and due from banks,
interest-bearing deposits and
investment securities ........ 6,551 5,391 5,299 5,677 3,240
Deposits ...................... 59,120 54,910 48,492 46,559 37,782
Federal Home Loan Bank
advances ..................... 9,000 9,000 9,000 3,000 10,295
Shareholders' equity .......... 6,423 6,155 5,864 6,089 5,898
Year Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING DATA: (In thousands)
Interest income ................ $5,347 $5,184 $4,446 $4,398 $3,852
Interest expense ............... 3,007 2,880 2,377 2,482 1,799
------- ------- -------- ------- ------
Net interest income ............ 2,340 2,304 2,069 1,916 2,053
Provision for loan losses ...... 65 35 140 36 132
------- ------- -------- ------- ------
Net interest income after
provision for loan losses .... 2,275 2,269 1,929 1,880 1,921
Noninterest income ............. 368 390 260 197 146
Noninterest expense ............ 2,073 2,081 2,231 1,817 1,550
------- ------- -------- ------- ------
Income ( loss) before income
taxes......................... 570 578 (42) 260 517
Provision (benefit) for income
taxes......................... 208 227 (38) 79 165
------- ------- -------- ------- ------
Net income (loss)............... $ 362 $ 351 $ (4) $ 181 $ 352
======= ====== ======== ======= ======
2
<PAGE>
<PAGE>
At December 31,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans serviced.... 1,090 1,019 998 931 1,015
Deposit accounts ............. 10,155 9,315 7,320 6,509 4,938
Offices ...................... 2 2 2 2 2
Per share:
Book value.................... $8.53 $8.20 $7.82 $7.79 $7.54
Dividends paid ............... .14 .16 .10 .10 .10
Basic earnings (loss)......... .49 .48 (.01) .24 .47
Diluted earnings (loss)....... .47 .46 (.01) .24 .47
Year Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets (net
income divided by average
assets)....................... .5% .5% .0% .3% .7%
Return on average equity (net
income divided by average
equity )...................... 5.8% 5.8% (.1)% 3.0% 6.1%
Average equity to average
assets ....................... 8.5% 8.7% 10.1% 10.2% 10.8%
Interest rate spread (difference
between average yield on
interest-earning assets and
average cost of interest-
bearing liabilities) ......... 2.9% 3.2% 3.2% 2.9% 3.6%
Net interest margin (net interest
income as a percentage of average
interest-earning assets) ..... 3.4% 3.6% 3.7% 3.4% 4.0%
Noninterest expense to average
assets ....................... 2.8% 3.0% 3.7% 3.3% 2.9%
Average interest-earning assets
to average interest-bearing
liabilities .................. 110.2% 108.7% 110.6% 111.1% 112.5%
Allowance for loan losses to total
loans at end of period ....... .5% .5% .6% .6% .5%
Ratio of nonperforming assets to
total assets ................. .3% .4% .6% .6% .4%
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 $4.8 million, or 6.6%, from $71.7
million at December 31, 1997 to $76.5 million at December 31, 1998. This
increase was due primarily to increases of $5.9 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 $4.2 million increase in deposits.
Cash and Cash Equivalents. Cash and due from banks increased by
$341,455, or 22.2%, from $1,539,966 at December 31, 1997 to $1,881,421 at
December 31, 1998. Federal funds sold increased from $2,850,000 at December
31, 1997 to $4,670,000 at December 31, 1998.
Investment Securities Available For Sale. The Company's investment
securities available for sale decreased $91,084, or 2.3%, from $4.0 million at
December 31, 1997 to $3.9 million at December 31, 1998. This decrease was the
result of normal amortization and paydowns of securities in the portfolio
offset by the purchase of a $1.5 million government agency security.
Investment Securities Held to Maturity. Investment securities held to
maturity decreased by $3.0 million or 44.1%, from $6.8 million at December 31,
1997 to $3.8 million at December 31, 1998. This decrease was the result of
normal maturities and calls of securities in the held to maturity portfolio
which totaled $3.0 million.
4
<PAGE>
<PAGE>
Net Loans. The balance of net loans increased $5.9 million, or 11.2%,
from $53.0 million at December 31, 1997 to $58.9 million at December 31, 1998.
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 decreased $177,997, or
7.6%, from $2.35 million at December 31, 1997 to $2.17 million at December 31,
1998. This decrease is attributable to the normal depreciation and
amortization of premises and equipment.
Deposits and Borrowings. Deposits increased $4.2 million, or 7.7%, from
$54.9 million at December 31, 1997 to $59.1 million at December 31, 1998.
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. Advances from the Federal Home Loan Bank of New York (FHLB-NY) and
other borrowings declined from $9.2 million at December 31, 1997 to $9.1
million at December 31, 1998.
Shareholders' Equity. Shareholders' equity increased $268,644, or 4.4%,
from $6.15 million at December 31, 1997 to $6.42 million at December 31, 1998.
This increase is due primarily to earnings for the year and the resulting
increase in equity, offset by cash dividends on common stock of $100,490. The
Company's equity as a percentage of total assets at December 31, 1998 was 8.4%
and exceeds all regulatory requirements.
Results of Operations
Fiscal Year Ended December 31, 1998 Compared to December 31, 1997
Net Income. The Company reported net income of $362,471 for the year
ended December 31, 1998 as compared to net income of $351,201 for the year
ended December 31, 1997. This increase was primarily the result of increased
net interest income and decreased noninterest expenses.
Net Interest Income. Net interest income increased by $36,337, or 1.6%,
from $2.30 million for the year ended December 31, 1997 to $2.34 million for
the year ended December 31, 1998. Total interest income increased $162,900,
or 3.1%, during the period. Interest and fees on loans increased $360,385, or
8.6%, during this period due to a higher average outstanding balance in the
portfolio. Interest and dividends on investments decreased $197,485, or
19.6%, from $1,006,631 during the year ended December 31, 1997 to $809,146
during the year ended December 31, 1998. This decrease can be attributed to a
decrease in the average outstanding balance in the portfolio and lower yields.
Total interest expense increased $126,563, or 4.4%, primarily due to an
increase in the average balance outstanding of deposits. The average
outstanding balance of deposits increased $3.2 million, or 6.4%, from $50.2
million for the year ended December 31, 1997 to $53.4 million for the year
ended December 31, 1998. 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 4.57% for the year ended
December 31, 1997 to 4.52% for the year ended December 31, 1998, as a result
of lower interest rates being offered on certificates of deposit. Interest on
advances from the FHLB-NY increased $17,039 or 3.1%, primarily due to an
increase in the average balance outstanding from $9.2 million in 1997 to $9.4
million in 1998.
5
<PAGE>
<PAGE>
Provision for Loan Losses. The Company's provision for loan losses for
the year ended December 31, 1998 was $65,023, a $29,609 increase compared to
the same period in 1997. Management charges earnings for an amount necessary
to maintain the allowance for possible loan losses at a level considered
adequate to absorb estimated 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 and other relevant factors. The allowance for loan losses of the
Company at December 31, 1998 was $267,000, or .45% of total loans, compared to
$276,300, or .52% of total loans at December 31, 1997. The increase in the
provision between the periods was due primarily to the deterioration in credit
quality of three one-to-four family properties that totaled $96,903.
Noninterest Income. Noninterest income for the year ended December 31,
1998 was $368,035 compared with $389,589 for the year ended December 31, 1997.
However, included in December 31, 1997 was $59,203 of income related to
profits on the sale of real estate owned. Other noninterest income increased
from $330,386 at December 31, 1997 to $351,237 at December 31, 1998. This
increase was due primarily to increased fee income from transaction accounts
and fee income from New Frontier of Albion Corp.
Noninterest Expense. Noninterest expense decreased $7,831, or 0.4%, from
$2.08 million for the year ended December 31, 1997, to $2.07 million for the
year ended December 31, 1998. This decrease in noninterest expense resulted
primarily from decreased other operating expenses of $52,185 or 14.2%. In
1997, other operating expenses included a nonrecurring charge of $41,642 for
expenses related to the conversion to our in-house data processing system.
Also decreased were FDIC premiums of $12,680, or 27.2%, due to reduced
premiums being charged. These decreases were partially offset by an increase
in compensation and employee benefits of $15,804, or 1.6%, from $985,588 for
the year ended 1997 to $1.0 million for the year ended 1998, primarily due to
inflationary increases in salaries and benefits. Occupancy expenses increased
$32,297, or 8.3%, from $390,136 for the year ended December 31, 1997 to
$422,433 for the year ended December 31, 1998 primarily due to the operation
of the Association's in-house data processing system and related supplies.
Data processing fees increased $12,873, or 6.8% from $188,350 for the year
ended December 31, 1997 to $201,223 for the year ended December 31, 1998,
primarily due to increases in telecommunication costs and supplies.
Income Taxes. The provision for income taxes decreased to $208,000 for
the year ended December 31, 1998 from $226,265 for the year ended December 31,
1997 primarily as a result of increased mortgage tax credits due to the
increased mortgage loan originations. The effective tax rate for 1998 was
36.5%.
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 $1.0 million 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.
6
<PAGE>
<PAGE>
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 $9.2 million in 1997 and an increase in the weighted
average rate paid from 5.69% in 1996 to 6.23% in 1997.
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 FDIC premiums of $69,988, or 60.0%, due
to reduced premiums being charged as a result of the prior year
recapitalization of the 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%.
7
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<PAGE>
Yields Earned and Rates Paid
The earnings of the Company depend largely on the spread between the
yield on interest-earning assets (primarily loans, mortgage-backed securities
and investments) and the cost of interest-bearing liabilities (primarily
deposit accounts and borrowings), as well as the relative size of the
Association's interest-earning assets and interest-bearing liability
portfolios.
The following tables set forth, for the periods indicated, information
relating to average balances of consolidated assets and liabilities. These
tables reflect the average yields on assets and the average costs of
liabilities for the periods indicated (derived by dividing income or expense
by the average balance of assets or liabilities, respectively), as well as the
"net interest margin" (which reflects the effect of the net earning balance)
for the periods shown.
(Tables begin on next page)
8
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<PAGE>
<TABLE>
Year Ended December 31,
-----------------------------------------------------------
1998 1997
--------------------------- ---------------------------
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 ..................... $48,396 $3,794 7.84% $42,717 $3,532 8.27%
Consumer loans......................... 7,866 744 9.46 6,956 646 9.29
------- ------ ---- ------- ------ ----
Total loans.......................... 56,262 4,538 8.07 49,673 4,178 8.41
Mortgage-backed securities............. 9,007 574 6.37 8,614 637 7.39
Investment securities.................. 222 13 5.86 2,502 146 5.84
Other interest-earning assets.......... 4,013 222 5.53 4,009 223 5.56
------- ------ ---- ------- ------ ----
Total interest-earning assets........ 69,504 5,347 7.69 64,798 5,184 8.00
------- ------ ---- ------- ------ ----
Noninterest-earning assets:
Office properties and equipment, net... 2,262 2,223
Foreclosed real estate, net............ -- --
Other noninterest-earning assets....... 2,268 1,990
------- -------
Total assets ........................ $74,034 $69,011
======= =======
Interest-bearing liabilities:
Passbook accounts...................... $14,839 $ 450 3.03% $13,724 $ 421 3.07%
NOW accounts........................... 4,045 70 1.73 3,258 57 1.75
Money market accounts.................. 2,241 68 3.03 2,622 80 3.05
Certificates of deposit................ 32,336 1,826 5.65 30,632 1,739 5.68
------- ------ ---- ------- ------ ----
Total deposits....................... 53,461 2,414 4.52 50,236 2,297 4.57
Other interest-bearing liabilities..... 9,588 593 6.18 9,358 583 6.23
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities... 63,049 3,007 4.77 59,594 2,880 4.83
------- ------ ---- ------- ------ ----
Noninterest-bearing liabilities:
Noninterest-bearing deposits........... 3,557 767
Other liabilities...................... 1,139 2,641
------- -------
Total liabilities.................... 67,745 62,659
Shareholders' equity................... 6,289 6,009
------- -------
Total liabilities and
shareholders' equity............... $74,034 $69,011
======= =======
Net interest income..................... $2,341 $2,304
====== ======
Interest rate spread.................... 2.92% 3.17%
Contribution of interest-free funds..... .45% .39%
---- ----
Net interest margin on interest-
earning assets........................ 3.37% 3.56%
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 110.24% 108.73%
</TABLE>
9
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<PAGE>
Year Ended December 31,
---------------------------
1996
---------------------------
Interest
Average and Yield/
Balance Dividends Cost
------- --------- -----
(Dollars in thousands)
Interest-earning assets:
Real estate loans ...................... $41,867 $3,416 8.16%
Consumer loans.......................... 5,276 485 9.20
------- ------ -----
Total loans........................... 47,143 3,901 8.27
Mortgage-backed securities.............. 4,137 282 6.82
Investment securities .................. 3,089 183 5.92
Other interest-earning deposits ........ 1,339 80 5.97
------- ------ -----
Total interest-earning assets......... 55,708 4,446 7.98
------- ------ -----
Noninterest-earning assets:
Office properties and equipment, net.... 2,170
Foreclosed real estate, net............. 129
Other noninterest-earning assets ....... 1,328
-------
Total assets ......................... $59,335
=======
Interest-bearing liabilities:
Passbook accounts....................... $12,512 $ 383 3.06%
NOW accounts ........................... 2,667 47 1.76
Money market accounts................... 2,349 72 3.07
Certificates of deposit................. 28,484 1,627 5.71
------- ------ -----
Total deposits........................ 46,012 2,129 4.72
Other interest-bearing liabilities...... 4,362 248 5.69
------- ------ -----
Total interest-bearing liabilities.... 50,374 2,377 4.72
------- ------ -----
Noninterest-bearing liabilities:
Noninterest-bearing deposits............ 796
Other liabilities....................... 2,189
-------
Total liabilities..................... 53,359
Shareholders' equity.................... 5,976
-------
Total liabilities and
shareholders' equity................ $59,335
=======
Net interest income...................... $2,069
======
Interest rate spread..................... 3.26%
Contribution of interest-free funds...... .45%
----
Net interest margin on interest-
earning assets.......................... 3.71%
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................. 110.59%
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,
--------------------------
1998 1997 1996
---- ---- ----
Average yield on loan
portfolio .......................... 8.1% 8.4% 8.3%
Average yield on mortgage-backed
securities ......................... 6.4% 7.4% 6.8%
Average yield on investment
portfolio .......................... 5.9% 5.8% 5.9%
Average yield on all
interest-earning assets ............ 7.7% 8.0% 8.0%
Average cost of deposits ............. 4.5% 4.6% 4.6%
Average cost of Federal Home
Loan Bank advances and
other borrowings ................... 6.2% 6.2% 5.7%
Average cost of all
interest-bearing liabilities ....... 4.8% 4.8% 4.7%
Interest rate spread (spread between
average yield on all interest-
earning assets and average cost of
all interest-bearing liabilities) .. 2.9% 3.2% 3.3%
Net interest margin (net interest
income as a percentage of
average interest-earning assets) ... 3.4% 3.6% 3.7%
11
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<PAGE>
Liquidity and Capital Resources
The Company'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 Company is the origination of
mortgage loans. During the three years ended December 31, 1998, 1997 and
1996, the Company's origination of mortgage loans were $17.1 million, $9.0
million and $9.5 million, respectively. The volume in mortgage loan
originations during 1998, 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 $1.5 million, $3.0 million and $5.0 million for the years
ending December 31, 1998, 1997 and 1996, respectively. Other investing
activities included the purchase of investment securities, which totaled $0
during the year ended December 31, 1998, $2.6 million during the year ended
December 31, 1997 and $2.1 million for the year ended December 31, 1996.
These activities were funded primarily by deposits, principal repayments on
loans and mortgage-backed securities and maturities of investment securities.
The net cash provided by financing activities for the year ended December
31, 1998 totaled $4.1 million. This resulted primarily from a net increase
in deposits of $4.2 million.
The Company 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 Company'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 1998, 1997
and 1996, the Company used its sources of funds primarily to fund loan
commitments, purchase mortgage-backed securities, pay maturing savings
certificates and deposit withdrawals. At December 31, 1998, the Company had
approved loan commitments totaling $1.2 million, including $.7 million of
undisbursed loans in process.
At December 31, 1998, certificates of deposit amounted to $34.3 million,
or 58.0%, of the Company's total deposits, including $26.5 million that are
scheduled to mature by December 31, 1999. Historically, the Company 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 $22.7 million
at December 31, 1998. Management of the Company 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. The Association's average liquidity ratios were 23%,
12% and 9% during the years ended December 31, 1998, 1997 and 1996,
respectively. The Association's actual liquidity ratio at December 31, 1998
was 24%. The Association consistently maintains liquidity levels in excess of
regulatory requirements, and believes this is an appropriate strategy for
proper asset and liability management. The Company does not utilize any
off-balance sheet derivative instruments.
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 7.6%,
7.6% and 15.7%,
12
<PAGE>
<PAGE>
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 to 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, 1998, as calculated by the OTS.
At December 31, 1998
- -------------------------------------------------------------------------
Change in Net Portfolio Value
Interest Rates (Dollars in thousands) NPV as % of PV of Assets
- -------------- -------------------------------- ------------------------
(Basis Points) $ Amount $ Change % Change NPV Ratio BP Change
- -------------- -------- -------- -------- --------- ---------
+400 bp 3,878 -3,558 - 48 5.37% - 421
+300 bp 4,999 -2,437 - 33 6.78% - 280
+200 bp 6,060 -1,376 - 19 8.05% - 153
+100 bp 6,932 - 504 - 7 9.05% - 53
0 7,436 9.58%
-100 bp 7,606 170 + 2 9.71% + 13
-200 bp 7,701 265 + 4 9.75% + 17
-300 bp 7,978 542 + 7 10.00% + 42
-400 bp 8,177 741 + 10 11.15% + 57
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
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<PAGE>
Year 2000
The year 2000 problem (Y2K), which is common to most companies, concerns
the inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. The Y2K issue affects the entire banking industry because of it's
reliance on computers and other equipment that use computer chips and may have
significant effects on banking customers, bank regulators and the general
economy.
In 1997, management of the Company established a Y2K Plan to prevent or
mitigate adverse effects of the Y2K issue on the Company and its customers.
Goals of the Y2K Plan include: identifying risks, testing data processing and
other systems and equipment used by the Company, informing customers of Y2K
issues and risks, establishing a contingency plan for operating if Y2K issues
cause important systems or equipment to fail, implementing changes necessary
to achieve Y2K compliance and verifying that these changes are effective. The
Board of Directors reviews progress under the plan each quarter.
Management designed the Y2K Plan to comply with the requirements for Y2K
efforts established by the OTS, the primary federal regulator of the Company.
The OTS has performed Y2K examinations of the Company's Y2K Plan and the
Company's progress in implementing the plan. Federal regulations prevent the
Company from disclosing the results of Y2K examinations by banking regulators.
The examinations do not represent approval or certification of a Company's Y2K
plans or efforts.
The Company continues to implement the Y2K Plan. The Company has met its
Y2K goals to date and believes that it will continue to meet the goals of the
Y2K Plan. As of December 31, 1998, the Company had completed an assessment of
its systems to identify the systems that could be affected by the Y2K issue,
had implemented its customer awareness program, had begun development of the
Y2K contingency plan and was in the process of testing and implementing
necessary changes in hardware and software. The Y2K contingency plan calls
for the Company to manually process bank transactions and to use other data
processing methods in the event that Y2K effort of the Company and its data
service providers are not successful. Delays in processing banking
transactions would result if the Company were required to use manual
processing or other methods instead of its normal computer processes. These
delays could disrupt the normal business activities of the Company and its
customers. The Company must assure that the computer systems it uses to
process transactions are Y2K ready in order to avoid these disruptions.
All of the Company's applications used in operations are purchased from
outside vendors. These vendors are responsible for maintenance of their
systems and modifications to become year 2000 compliant. In June 1997, the
Company converted its data processing to an in-house client-server system,
which is reported to be year 2000 compliant. The supplier of the software has
performed extensive testing and has assured the Company that it is year 2000
compliant. At the time of the data processing conversion, the majority of the
Company's computer hardware was upgraded to meet the new system requirements
and meet year 2000 compliance. The Company and the supplier are in the
process of testing hardware and software and will continue to do so into the
year 2000. The Company's plan includes obtaining certification from third
parties and testing all of the impacted applications.
At this time, the Company believes that the cost of resolving Y2K issues
will not be material to the Company's business, operations, liquidity, capital
resources or financial condition, based on information developed to date and
communications from data processing suppliers. The Company estimates that its
total cash outlays in connection with Y2K compliance will be approximately
$20,000, excluding costs of Company employees involved in Y2K compliance
activities. As of December 31, 1998, the Company had expensed approximately
$8,000 towards Y2K compliance. To the extent that costs are incurred related
to the year 2000 problem, they will be expensed.
15
<PAGE>
<PAGE>
Although the Company has completed an assessment of Y2K effects on its
current commercial lending and other customers, the actual effects on
individual, corporate and governmental customers of the Company and on
governmental authorities that regulate the Company and its subsidiaries and
any resulting consequences to the Company, cannot be determined with any
assurance. The Company's belief that it and its primary suppliers of data
processing services will achieve Y2K compliance, are based on a number of
assumptions and on statements made by third parties and are subject to
uncertainty. The Company also is not able to predict the effects, if any, on
the Company, financial markets or society in general of the public's reaction
to Y2K. Because of this uncertainty and reliance upon assumptions and
statements of third parties, the Company cannot be assured that the results of
its Y2K Plan will be achieved. Management believes, however, that the Company
will be able to accomplish its Y2K goals and that the Company will be able to
continue providing financial services to its customers into the year 2000 and
beyond.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts and for hedging activities. The
Company does not currently hold derivative financial instruments covered by
this Statement and therefore, does not believe it will have a material impact
on the Company upon odoption.
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 Company 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 Company's assets and liabilities
are critical to the maintenance of acceptable profitability.
16
<PAGE>
<PAGE>
[Letterhead of PricewaterhouseCoopers LLP]
REPORT OF INDEPENDENT ACCOUNTANTS
February 11, 1999
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, 1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, 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/PricewaterhouseCoopers LLP
17
<PAGE>
<PAGE>
ALBION BANC CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------
December 31,
1998 1997
Assets
Cash and due from banks, including interest-bearing
accounts of $60,455 and $18,600, respectively $1,881,421 $1,539,966
Federal funds sold 4,670,000 2,850,000
Investment securities available for sale 3,943,816 4,034,900
Investment securities held to maturity (fair value of
$3,869,466 and $6,883,000, respectively) 3,821,624 6,833,577
Loans held for sale 122,912 550,340
Loans receivable, net of allowance for loan losses of
$267,000 and $276,300, respectively 58,806,027 52,467,012
Federal Home Loan Bank stock, at cost 528,800 500,000
Premises and equipment, net 2,172,967 2,350,964
Other assets 522,686 592,490
----------- -----------
Total assets $76,470,253 $71,719,249
=========== ===========
Liabilities and Shareholders' Equity
Deposits $59,120,090 $54,910,181
Advances from Federal Home Loan Bank and other
borrowings 9,118,734 9,200,526
Advances from borrowers for taxes and insurance 933,248 891,392
Other liabilities 874,705 562,318
----------- -----------
Total liabilities 70,046,777 65,564,417
----------- -----------
Commitments and contingencies (Note 15)
Shareholders' equity:
Preferred stock, $.01 par value - 500,000
shares authorized, none outstanding
Common stock, $.0033 par value - 3,000,000 shares
authorized, 792,163 and 789,258 issued 2,649 2,631
Capital surplus 2,410,463 2,383,434
Retained earnings, substantially restricted 4,248,716 3,986,735
Unearned employee stock ownership plan (ESOP) shares (35,290) (44,638)
Accumulated other comprehensive income 18,533 48,265
Treasury stock, 39,105 shares, at cost (221,595) (221,595)
----------- -----------
Total shareholders' equity 6,423,476 6,154,832
----------- -----------
Total liabilities and shareholders' equity $76,470,253 $71,719,249
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
<PAGE>
ALBION BANC CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
Interest income:
Interest and fees on loans $4,538,145 $4,177,760 $3,901,270
Interest and dividends on investment
securities and federal funds sold 809,146 1,006,631 544,863
---------- ---------- ----------
Total interest income 5,347,291 5,184,391 4,446,133
---------- ---------- ----------
Interest expense:
Interest on deposits 2,413,807 2,297,157 2,129,106
Interest on borrowed funds 592,979 583,066 248,402
---------- ---------- ----------
Total interest expense 3,006,786 2,880,223 2,377,508
---------- ---------- ----------
Net interest income 2,340,505 2,304,168 2,068,625
Provision for loan losses 65,023 35,414 140,239
---------- ---------- ----------
Net interest income after
provision for loan losses 2,275,482 2,268,754 1,928,386
---------- ---------- ----------
Noninterest income:
Gain on sale of mortgage loans,
investment securities available for
sale and foreclosed real estate 16,798 59,203 38,031
Other noninterest income 351,237 330,386 222,100
---------- ---------- ----------
Total noninterest income 368,035 389,589 260,131
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 1,001,392 985,588 898,745
Occupancy expenses 422,433 390,136 307,886
Deposit insurance premiums 33,952 46,632 391,541
Professional fees 98,844 102,784 101,428
Data processing fees 201,223 188,350 201,153
Other operating expenses 315,202 367,387 330,165
---------- ---------- ----------
Total noninterest expense 2,073,046 2,080,877 2,230,918
---------- ---------- ----------
Income (loss) before income taxes 570,471 577,466 (42,401)
Provision (benefit) for income taxes 208,000 226,265 (38,049)
---------- ---------- ----------
Net income (loss) $ 362,471 $ 351,201 $ (4,352)
========== ========== ==========
Basic earnings (loss) per common share $ .49 $ .48 $ (.01)
========== ========== ==========
Diluted earnings (loss) per common share $ .47 $ .46 $ (.01)
========== ========== ==========
19
<PAGE>
<PAGE>
<TABLE>
ALBION BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Accumulated
Unearned other com-
Common Capital Retained ESOP prehensive Treasury
stock surplus earnings shares income stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $2,607 $2,305,975 $3,833,811 $(97,617) $44,344 $ -- $6,089,120
Comprehensive income:
Net loss (4,352) (4,352)
Other comprehensive income,
net of tax:
Unrealized gains on
investment securities 11,271 11,271
----------
6,919
Exercise of stock options 24 23,696 23,720
Cash dividends paid ($.10
per share) (80,000) (80,000)
ESOP shares committed to be
released 18,514 26,909 45,423
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
Comprehensive income:
Net income 351,201 351,201
Other comprehensive income,
net of tax:
Unrealized losses on
investment securities (7,350) (7,350)
----------
343,851
Cash dividends paid ($.16
per share) (113,925) (113,925)
ESOP shares committed to be
released 35,249 26,070 61,319
------ ---------- ---------- -------- ------- --------- ----------
Balance at December 31,
1997 2,631 2,383,434 3,986,735 (44,638) 48,265 (221,595) 6,154,832
Comprehensive income:
Net income 362,471 362,471
Other comprehensive income,
net of tax:
Unrealized losses on
investment securities (29,732) (29,732)
----------
Exercise of stock options 18 9,663 9,681
Cash dividends paid ($.14
per share) (100,490) (100,490)
ESOP shares committed to
be released 17,366 9,348 26,714
------ ---------- ---------- -------- ------- --------- ----------
Balance at December 31,
1998 $2,649 $2,410,463 $4,248,716 $(35,290) $18,533 $(221,595) $6,423,476
====== ========== ========== ======== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
<PAGE>
ALBION BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income (loss) $362,471 $351,201 $(4,352)
Depreciation, amortization and accretion 321,435 183,938 142,208
Provision for loan losses 65,023 35,414 140,239
Provision for losses on foreclosed real
estate 41,000
Provision (benefit) for deferred
income taxes 49,600 133,700 (12,800)
Gain on sale of mortgage loans,
investment securities and foreclosed
real estate (16,798) (59,203) (38,031)
ESOP expense 26,714 61,319 45,423
Originations of loans held for sale (945,721) (392,566) (1,116,740)
Proceeds from sale of loans held
for sale 1,390,516 506,641 464,990
Changes in operating assets and
liabilities -
Decrease (increase) in other assets (17,239) 32,142 (168,005)
Increase in other liabilities 281,962 305,894 54,749
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,517,963 1,158,480 (451,319)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of foreclosed
real estate 87,043 254,586 159,537
Proceeds from maturities and calls of
investment securities available
for sale 1,512,183 881,521 1,203,432
Proceeds from maturities and calls
of investment securities held to
maturity 2,950,231 5,116,163 2,206,792
Purchases of investment securities
available for sale (1,493,899) (1,001,757) (1,011,009)
Purchases of investment securities
held to maturity (4,621,649) (6,193,497)
Net increase in loans receivable (6,404,038) (5,321,291) (3,632,264)
(Purchase) redemption of Federal
Home Loan Bank stock (28,800) (50,000) 25,000
Expenditures for capital assets (58,391) (448,876) (64,278)
---------- ---------- ----------
Net cash used in investing activities (3,435,671) (5,191,303) (7,306,287)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in savings, NOW, money
market and noninterest-bearing
deposits 2,738,619 1,453,774 4,067,121
Net increase (decrease) in time deposits 1,471,289 4,964,388 (2,134,531)
Proceeds from Federal Home Loan Bank and
other borrowings 5,000,000 5,000,000 9,500,000
Payments on advances from Federal
Home Loan Bank and other borrowings (5,081,792) (5,075,149) (3,523,107)
Proceeds from exercise of stock options 9,681 23,720
Dividends paid (100,490) (113,925) (80,000)
Net increase (decrease) in advances
from borrowers for taxes and insurance 41,856 67,772 (145,091)
Purchase of treasury stock (221,595)
---------- ---------- ----------
Net cash provided by financing activities 4,079,163 6,296,860 7,486,517
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,161,455 2,264,037 (271,089)
Cash and cash equivalents at beginning
of year 4,389,966 2,125,929 2,397,018
---------- ---------- ----------
Cash and cash equivalents at end of
year $6,551,421 $4,389,966 $2,125,929
========== ========== ==========
Cash paid during the year for:
Interest $3,031,309 $2,902,589 $2,307,861
Income taxes $5,000 $150,273 $46,000
21
<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.
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.
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 are 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 other comprehensive income, net of applicable income
taxes.
Interest income includes interest earned on 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.
22
<PAGE>
<PAGE>
The allowance for loan losses is maintained at a level which, in the
opinion of management, is considered adequate to absorb potential losses
inherent in the existing 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 loan losses is established through charges to earnings
in the form of a provision for loan loss. 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. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest
and principal is considered probable.
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.
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.
23
<PAGE>
<PAGE>
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. Employee Stock Ownership Plan ("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.
STOCK SPLIT
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.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available for sale are as follows:
December 31, 1998
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
Mortgage-backed securities $3,912,927 $47,184 $(16,295) $3,943,816
========== ======= ======== ==========
December 31, 1997
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
Mortgage-backed securities $3,954,539 $84,422 $(4,061) $4,034,900
========== ======= ======== ==========
The amortized cost and estimated fair value of investment securities held
to maturity are as follows:
December 31, 1998
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
Mortgage-backed securities $3,821,624 $47,842 $ $3,869,466
========== ======= ======== ==========
December 31, 1997
---------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair 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
========== ======= ======== ==========
24
<PAGE>
<PAGE>
3. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31,
1998 1997
Real estate loans:
Secured by one to four family residences $48,396,513 $42,473,738
Secured by other properties 1,792,947 2,203,839
Construction loans 1,588,951 413,200
----------- -----------
51,778,411 45,090,777
----------- -----------
Other loans:
Automobile loans 93,438 100,607
Home improvement loans 7,413,971 7,152,228
Other 434,444 688,245
----------- -----------
7,941,853 7,941,080
----------- -----------
Undisbursed portion of loans (721,492) (327,480)
Net deferred loan origination costs 74,255 38,935
Allowance for loan losses (267,000) (276,300)
----------- -----------
(914,237) (564,845)
----------- -----------
$58,806,027 $52,467,012
=========== ===========
The balance of nonaccrual loans at December 31, 1998 and 1997 was $262,243
and $276,300, respectively. The recorded investment in impaired loans for
which there was a related valuation allowance for possible impairment
included in the allowance for credit losses, and the amount of such
impairment allowance were $164,177 and $45,894, respectively, at December
31, 1998 and $162,855 and $32,829, respectively, at December 31, 1997. The
average balance of impaired loans in 1998, 1997 and 1996 was $232,900,
$211,700 and $52,100, respectively. There was no interest income
recognized on the impaired loans in 1998, 1997 or 1996 as they were on a
non-accrual basis.
At December 31, 1998, there was approximately $11,000,000 of one to four
family residential real estate loans pledged as collateral for advances
from the Federal Home Loan Bank of New York.
The Company does not have reportable operating segments as defined by
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information." A summary of
revenues by loan products consists of the following:
Year ended December 31,
1998 1997 1996
Real estate loans $3,794,547 $3,531,567 $3,415,988
Other loans 743,598 646,193 485,282
---------- ---------- ----------
$4,538,145 $4,177,760 $3,901,270
========== ========== ==========
As discussed in Note 14, the Company's customers are located primarily in
Western Monroe County and Orleans County in New York State. There are no
transactions with a single customer that in the aggregate result in
revenues that exceed ten percent of consolidated total revenues.
25
<PAGE>
<PAGE>
4. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses is as follows:
December 31,
1998 1997 1996
Balance at beginning of period $276,300 $305,900 $244,100
Provision expense 65,023 35,414 140,239
Net charge-offs (74,323) (65,014) (78,439)
-------- -------- --------
Balance at end of period $267,000 $276,300 $305,900
======== ======== ========
5. LOAN SERVICING
Loans serviced for others, amounting to approximately $9,836,000 and
$10,463,700 at December 31, 1998 and 1997, respectively, are not included
in the statement of financial condition. Custodial escrow balances
maintained in connection with loans serviced for others were approximately
$181,100 and $189,600 at December 31, 1998 and 1997, respectively.
6. PREMISES AND EQUIPMENT
Premises and equipment, net of accumulated depreciation and amortization,
consist of the following:
December 31,
1998 1997
Land $ 350,642 $ 350,642
Premises 1,740,135 1,740,135
Furniture, fixtures and equipment 1,412,878 1,354,487
---------- ----------
3,503,655 3,445,264
Accumulated depreciation (1,330,688) (1,094,300)
---------- ----------
$2,172,967 $2,350,964
========== ==========
Depreciation expense on premises and equipment was: $236,388, $193,400,
and $158,900 for the years ended December 31, 1998, 1997 and 1996,
respectively.
26
<PAGE>
<PAGE>
7. DEPOSITS
Deposits were comprised of the following:
December 31,
----------------------------------------
1998 1997
----------------------------------------
Per Per
Amount cent Amount cent
Noninterest bearing deposits $ 3,254,052 5.5 % $ 2,395,245 4.4%
Savings deposits 14,838,088 25.1 13,974,443 25.5
Negotiable order of withdrawal
deposits 4,679,530 7.9 3,498,122 6.4
Money market deposits 2,054,672 3.5 2,219,913 4.0
----------- ----- ----------- -----
24,826,342 42.0 22,087,723 40.3
----------- ----- ----------- -----
Certificates of deposit:
4.00% and less 10,915
4.01% - 6.00% 31,511,709 53.3 29,446,514 53.6
6.01% - 8.00% 2,780,039 4.7 3,353,533 6.1
8.01% and greater 2,000 11,496
----------- ----- ----------- -----
34,293,748 58.0 32,822,458 59.7
----------- ----- ----------- -----
$59,120,090 100.0% $54,910,181 100.0%
=========== ===== =========== =====
The weighted average interest rates paid on total deposits were 4.5%, 4.6%
and 4.4% at December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998, certificates of deposit have scheduled maturity
dates as follows:
<PAGE>
<TABLE>
1999 2000 2001 2002 2003 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
4.00% or less $ - $ - $ - $ - $ - $ - $ -
4.01% - 6.00% 24,505,917 4,322,633 1,306,336 599,327 772,566 4,930 31,511,709
6.01% - 8.00% 1,970,097 429,950 8,275 194,327 144,403 32,987 2,780,039
8.01% and greater 2,000 2,000
----------- ---------- ---------- -------- -------- ------- -----------
Total $26,478,014 $4,752,583 $1,314,611 $793,654 $916,969 $37,917 $34,293,748
=========== ========== ========== ======== ======== ======= ===========
</TABLE>
<PAGE>
At December 31, 1998, certificates of deposit in amounts of $100,000 or
more have the following scheduled time remaining until maturity:
Three months or less $ 403,813
Over three through six months 805,062
Over six through twelve months 863,172
Over twelve months 675,032
----------
$2,747,079
==========
27
<PAGE>
<PAGE>
Interest expense on deposits is as follows:
Years Ended December 31,
1998 1997 1996
Savings deposits $ 449,792 $ 421,071 $ 382,701
Negotiable order of
withdrawal deposits 69,684 56,650 47,091
Money market deposits 67,905 80,148 72,388
Certificates of deposit 1,826,426 1,739,288 1,626,926
---------- ---------- ----------
$2,413,807 $2,297,157 $2,129,106
========== ========== ==========
8. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
At December 31, 1998 and 1997, 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, 1998 had fixed
and variable rates of interest ranging from 5.15% to 6.60%, with a
weighted average interest rate of 5.96%, and mature at various dates
through 2003. 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%. Required remaining principal
repayments at December 31, 1998 are as follows: $1,000,000 in 1999 and
2000, $2,000,000 in 2001 and 2002 and $3,000,000 in 2003.
At December 31, 1998 and 1997, the Company had $118,734 and $200,526,
respectively, outstanding on a loan used for construction of a branch
office. The loan has a fixed rate of interest of 8.50% and requires
monthly payments of principal and interest through 2001. At December 31,
1998, remaining principal payments of $88,400, $42,200 and $40,900 are
required in 1999, 2000 and 2001, respectively.
9. EARNINGS (LOSS) PER SHARE
The full year calculations of earnings (loss) per share for 1998, 1997 and
1996 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.
28
<PAGE>
<PAGE>
Year Ended December 31, 1998
-------------------------------
Per-share
Income Shares amount
Basic EPS $362,471 739,867 $ .49
======== ======= ======
Effect of Dilutive Securities:
Options 28,749
-------- -------
Diluted EPS $362,471 768,616 $ .47
======== ======= ======
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
======== ======= ======
Year Ended December 31, 1996
-------------------------------
Per-share
Income Shares amount
Basic and Diluted EPS $(4,352) 738,284 $ (.01)
======== ======= ======
10. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
first quarter of 1998. SFAS No. 130 establishes standards for reporting
and displaying comprehensive income and its components. Adoption of SFAS
No. 130 had no impact on the Company's results of operations nor its
financial position. Financial Statements presented for periods prior to
1998 were required to be reclassified to reflect application of the
provisions of SFAS No. 130.
The following tables display the components of other comprehensive income:
Year ended December 31,
1998 1997 1996
Unrealized (losses) gains
on investment securities:
Before tax amount $(49,472) $(14,834) $18,765
Income taxes 19,740 7,484 (7,494)
-------- -------- -------
Net $(29,732) $ (7,350) $11,271
======== ======== =======
11. 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
29
<PAGE>
<PAGE>
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 $43,600, $46,000, and $33,500 for
the years ended December 31, 1998, 1997 and 1996, 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 $26,700, $52,000, and $45,400 during 1998, 1997
and 1996, respectively.
A summary of ESOP shares is as follows:
December 31,
1998 1997
Shares released for allocation and allocated $43,900 $ 41,118
Unreleased shares 10,534 13,629
------- --------
Total ESOP shares $54,434 $ 54,747
======= ========
Fair value of unreleased shares $97,440 $181,720
======= ========
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 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 $0.04,
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
30
<PAGE>
<PAGE>
expected option life of six years; expected volatility of 31.33%; and an
expected dividend yield of 1.77%. No options were granted in 1998 and
1997.
A summary of the status of the Company's stock option plan as of December
31, 1998, 1997 and 1996 and changes during the years ended on those dates
is as follows:
1998 1997 1996
------------------ ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares price Shares price Shares price
Outstanding at
beginning of year 50,022 $4.00 50,022 $4.00 46,533 $3.33
Granted 10,605 $5.79
Exercised (2,905) $3.33 (7,116) $3.33
Forfeited - - -
------ ------ ------
Outstanding and
exercisable at
end of year 47,117 $3.89 50,022 $4.00 50,022 $4.00
====== ====== ======
Fair value of
options granted
during the year $ 2.11
======
At December 31, 1998, there are 36,512 options outstanding with an
exercise price of $3.33 and a remaining contractual life of five years,
and 10,605 options outstanding with an exercise price of $5.79 and a
remaining contractual life of eight years. Additionally, at December 31,
1998 there are 21,072 shares available for future grant.
12. 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 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
that portion of existing tax bad debt reserves created in years beginning
after December 31, 1987.
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, 1998, 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
31
<PAGE>
<PAGE>
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 specific charge-off method in 1996 and the
percentage method in 1997 and 1998.
The components of the provision (benefit) for income taxes are as follows:
December 31,
1998 1997 1996
Current:
Federal $154,900 $ 88,740 $(25,499)
State 3,500 3,825 250
-------- -------- --------
158,400 92,565 (25,249)
Deferred 49,600 133,700 (12,800)
-------- -------- --------
$208,000 $226,265 $(38,049)
======== ======== ========
A summary of deferred income taxes is as follows:
December 31,
1998 1997
Deferred income tax assets:
Allowance for loan losses $ 90,800 $ 97,400
Other 24,000 23,300
--------- ---------
$ 114,800 $ 120,700
========= =========
Deferred income tax liabilities:
Depreciation $(162,000) $(135,300)
Unrealized gain on investment
securities (12,300) (32,100)
Deferred loan origination fees
and costs (29,700) (15,600)
Other (24,800) (19,000)
--------- ---------
(228,800) (202,000)
--------- ---------
Net deferred income tax liability $(114,000) $ (81,300)
========= =========
32
<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:
<PAGE>
<TABLE>
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
<S> <C> <C> <C> <C> <C> <C>
Expected tax at federal statutory rate $193,960 34.0 % $196,338 34.0 % $(14,416) (34.0)%
Increases(decreases) resulting from:
State franchise taxes, less
applicable federal income tax benefit 13,860 2.4 23,034 4.0 (18,975) (44.7)
Tax exempt interest on investments in
state and political subdivision
securities (1,349) (.2) (4,866) (11.5)
Other, net 180 .1 8,242 1.4 208 .5
-------- ------ -------- ------ --------- -------
Provision (benefit) for income taxes $208,000 36.5 % $226,265 39.2 % $(38,049) (89.7)%
======== ====== ======== ====== ========= =======
/TABLE
<PAGE>
13. 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,
1998 1997
Balance of loans outstanding at
beginning of year $477,239 $371,650
New originations and increases
in existing loans 240,446 209,575
Principal repayments (170,753) (103,986)
-------- --------
Balance of loans outstanding at
end of year $546,932 $477,239
======== ========
At December 31, 1998 and 1997, there were approximately $239,000 and
$985,900, respectively, in deposits from such related parties.
33
<PAGE>
<PAGE>
14. 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, 1998. 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, 1998, the Company's total
commitments to extend credit, all of which were fixed rate, were
$1,186,100. 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.
15. 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.
16. 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.
34
<PAGE>
<PAGE>
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. The
estimated fair value of financial commitments was not significant.
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 values of the Company's financial instruments are as
follows:
December 31,
---------------------------------------------
1998 1997
---------------------- --------------------
Carrying Fair Carrying Fair
amount value amount value
Financial assets:
Cash and cash equivalents $6,551,421 $6,551,421 $4,389,966 $4,389,966
Investment securities 7,765,440 7,813,282 10,868,477 10,917,900
Loans held for sale and
loans receivable, net of
allowance for possible
loan losses 58,928,939 59,502,000 53,017,352 53,798,000
Federal Home Loan Bank stock 528,800 528,800 500,000 500,000
Financial liabilities:
Deposits 59,120,090 59,336,000 54,910,181 54,987,000
Advances from the Federal
Home Loan Bank and other
borrowings 9,118,734 9,116,000 9,200,526 9,142,000
17. 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, 1998, that the Association meets
all capital adequacy requirements to which it is subject.
35
<PAGE>
<PAGE>
As of December 31, 1998, 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.
The Association's actual capital amounts (in thousands) and ratios are
also presented in the table.
<PAGE>
<TABLE>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
amount Ratio > Amount > Ratio > Amount > Ratio
- - - -
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk-
weighted assets) $6,010 15.7% $3,059 8.0% $3,823 10.0 %
Tier I capital (to risk-
weighted assets) 5,757 15.1 1,529 4.0 2,300 6.0
Tier I capital (to adjusted
total assets) 5,757 7.6 3,018 4.0 3,772 5.0
Tangible capital (to
adjusted total assets) 5,757 7.6 1,132 1.5 N/A N/A
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
</TABLE>
<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
36
<PAGE>
<PAGE>
dividends to the Holding Company. As a Tier I 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.
18. PARENT COMPANY FINANCIAL INFORMATION
The following condensed statement of financial condition and condensed
statements of operations and of cash flows for the Holding Company should
be read in conjunction with the consolidated financial statements and
notes thereto.
Condensed Statement of Condition
December 31,
1998 1997
Assets
Cash $ 26,685 $ 100,208
Federal funds sold 570,000 600,000
Investment in subsidiary 5,620,995 5,242,219
Loan to ESOP 41,712 52,140
Other assets 13,448 3,115
---------- ----------
Total assets $6,272,840 $5,997,682
========== ==========
Liabilities and Shareholders' Equity
Accrued liabilities $ 4,330 $ 833
Shareholders' equity:
Common stock 2,649 2,631
Capital surplus 2,238,740 2,229,078
Retained earnings 4,248,716 3,986,735
Treasury stock (221,595) (221,595)
---------- ----------
Total liabilities and
shareholders' equity $6,272,840 $5,997,682
========== ==========
37
<PAGE>
<PAGE>
Condensed Statement of Condition
Years Ended December 31,
1998 1997 1996
Equity in undistributed
earnings (loss) of subsidiary $373,263 $343,342 $(24,363)
Interest and fees on loans 4,432 6,648 8,286
Interest and dividends on
federal funds sold 31,409 31,231 38,501
Other operating expenses (46,633) (30,020) (26,776)
-------- -------- -------
Net income (loss) $362,471 $351,201 $(4,352)
======== ======== =======
Condensed Statement of Cash Flows
Years Ended December 31,
1998 1997 1996
Cash flows from operating
activities:
Net income (loss) $362,471 $351,201 $(4,352)
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 (373,263) (343,342) 24,363
Other (12,350) 684 (2,649)
-------- -------- --------
Net cash used in
operating activities (23,142) (22,515) (21,121)
-------- -------- --------
Cash flows from investing
activities:
Proceeds from repayment of
ESOP loan 10,428 26,070 34,673
Proceeds from maturities of
investment securities held
to maturity 1,215,000 1,500,000
Purchases of investment
securities held to maturity (599,275) (1,274,969)
Net decrease in loans receivable 120,182
-------- -------- --------
Net cash provided by
investing activities 10,428 641,795 379,886
-------- -------- --------
Cash flows from financing
activities:
Proceeds from exercise of
stock options 9,681 23,720
Dividends paid (100,490) (113,925) (80,000)
Purchase of treasury stock (221,595)
-------- -------- --------
Net cash used in
financing activities (90,809) (113,925) (277,875)
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (103,523) 505,355 80,890
Cash and cash equivalents at
beginning of year 700,208 194,853 113,963
-------- -------- --------
Cash and cash equivalents at
end of year $596,685 $700,208 $194,853
======== ======== ========
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 $10.00 on
March 1, 1999, on which date, there were approximately 565 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 1998 and 1997.
Fiscal 1998 High Low Close Dividends Paid
----------- ---- --- ----- --------------
First Quarter $14.58 $ 9.75 $10.25 $.05
Second Quarter $11.00 $ 8.00 $ 8.47 .03
Third Quarter $ 9.75 $ 7.75 $ 8.00 .03
Fourth Quarter $11.00 $ 7.63 $ 9.13 .03
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 --
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 Corporation Chairman of the Board of the
and President, Chief Executive Officer Association and President, Chief
and majority shareholder of Keeler Executive Officer and majority
Construction Co., Inc. shareholder of Keeler Construction
Co., Inc.
Richard A. Pilon Richard A. Pilon
Vice Chairman of the Board of the Vice Chairman of the Board of the
Corporation President, Treasurer and Association, President, Treasurer
a majority stockholder of Dale's and a majority stockholder of
Plaza, Inc. and Secretary and Treasurer Dale's Plaza,Inc. and Secretary
of Dale & Son Supermarket, Inc. (DBA and Treasurer of Dale & Son Super-
Jubilee Foods). market, Inc. (DBA Jubilee Foods).
Dolores L. Giarrizzo Dolores L. Giarrizzo
Retired, prior to that, associated with Retired, prior to that, associated
Agway, Inc. with Agway, Inc.
Robert R. Brown II Robert R. Brown II
Self-employed and Vice President of Self-employed and Vice President
Orchard Dale Fruit Farms, Inc. of Orchard Dale Fruit Farms, Inc.
Harold M. Kludt Harold M. Kludt
Partner and part owner Kludt Bros., Inc. Partner and part owner Kludt
Bros., Inc.
Chriss M. Andrews Chriss M. Andrews
Owner and President of Barclay & Fowler Owner and President of Barclay
Oil Corp. & Fowler Oil Corp.
Greg Speer Greg Speer
Owner and Chief Executive Officer of Owner and Chief Executive
Speer Equipment. Officer of 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 Officer Vice President and Chief
Financial 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
PricewaterhouseCoopers 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 Associates PC
Washington, D.C.
-----------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Wednesday, April 21, 1999
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 PricewaterhouseCoopers LLP
<PAGE>
<PAGE>
Exhibit 23
----------
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 11, 1999 appearing on page 17 of the 1998 Annual Report to
Shareholders of Albion Banc Corp., which is incorporated in this Annual Report
on Form 10-KSB.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Buffalo, New York
March 29, 1999
<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, 1998 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, 1998 Item Description
- ----------- ----------------------- ----------------
9-03(1) 1,881,421 Cash and due from the Banks
9-03(2) 0 Interest-bearing deposits
9-03(3) 4,670,000 Federal funds sold - purchased
securities for resale
9-03(4) 0 Trading account assets
9-03(6) 3,943,816 Investment and mortgage backed
securities held for sale
9-03(6) 3,821,624 Investment and mortgage backed
securities held to maturity -
carrying value
9-03(6) 3,869,466 Investment and mortgage backed
securities held to maturity -
market value
9-03(7) 58,928,939 Loans
9-03(7)(2) (267,000) Allowance for losses
9-03(11) 76,470,253 Total assets
9-03(12) 59,120,090 Deposits
9-03(13) 1,000,000 Short-term borrowings
9-03(15) 1,807,953 Other liabilities
9-03(16) 8,118,734 Long-term debt
9-03(19) 0 Preferred stock - mandatory
redemption
9-03(20) 0 Preferred stock - no mandatory
redemption
9-03(21) 2,649 Common stocks
9-03(22) 6,420,827 Other stockholders' equity
9-03(23) 76,470,253 Total liabilities and stockholders'
equity
9-04(1) 4,538,145 Interest and fees on loans
9-04(2) 809,146 Interest and dividends on
investments
9-04(4) 0 Other interest income
9-04(5) 5,347,291 Total interest income
9-04(6) 2,413,807 Interest on deposits
9-04(9) 3,006,786 Total interest expense
9-04(10) 2,340,505 Net interest income
9-04(11) 65,023 Provision for loan losses
9-04(13)(h) 0 Investment securities gains/(losses)
9-04(14) 2,073,046 Other expenses
9-04(15) 570,471 Income/loss before income tax
9-04(17) 570,471 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) 362,471 Net income or loss
9-04(21) .49 Earnings per share - basic
9-04(21) .47 Earnings per share - diluted
I.B.5 3.37 Net yield - interest earning assets
- actual
III.C.1.(a) 262,000 Loans on non-accrual
III.C.1.(b) 0 Accruing loans past due 90 days or
more
III.C.2.(c) 0 Troubled debt restructuring
<PAGE>
<PAGE>
III.C.2 0 Potential problem loans
IV.A.1 276,300 Allowance for loan loss - beginning
of period
IV.A.2 74,323 Total chargeoffs
IV.A.3 0 Total recoveries
IV.A.4 267,000 Allowance for loan loss - end of
period
IV.B.1 267,000 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1881421
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4670000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3943816
<INVESTMENTS-CARRYING> 3821624
<INVESTMENTS-MARKET> 3869466
<LOANS> 58928939
<ALLOWANCE> (267000)
<TOTAL-ASSETS> 76470253
<DEPOSITS> 59120090
<SHORT-TERM> 1000000
<LIABILITIES-OTHER> 1807953
<LONG-TERM> 8118734
0
0
<COMMON> 2649
<OTHER-SE> 6420827
<TOTAL-LIABILITIES-AND-EQUITY> 76470253
<INTEREST-LOAN> 4538145
<INTEREST-INVEST> 809146
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5347291
<INTEREST-DEPOSIT> 2413807
<INTEREST-EXPENSE> 3006786
<INTEREST-INCOME-NET> 2340505
<LOAN-LOSSES> 65023
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2073046
<INCOME-PRETAX> 570471
<INCOME-PRE-EXTRAORDINARY> 570471
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362471
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
<YIELD-ACTUAL> 3.37
<LOANS-NON> 262000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 276300
<CHARGE-OFFS> 74323
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 267000
<ALLOWANCE-DOMESTIC> 267000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
