ALBANK
Financial Corporation
LOGO
Summary Annual Report 1997
This year, in an attempt to make our Annual Report easier to read, we are
presenting it in two segments. This "Summary Annual Report" contains what we
believe is a concise overview of 1997 results and our five-year history. My
message to shareholders is also included. More detailed financial information is
included in the "Annual Report Supplement", including full consolidated
financial statements and footnotes as well as management's discussion and
analysis. Any comments you may have on this year's Annual Report format are
welcome.
/s/ Herbert G. Chorbajian
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
ALBANK Financial Corporation is the holding company for ALBANK, FSB, a federally
chartered savings bank founded in 1820, and ALBANK Commercial, a New York State
chartered commercial bank formed in 1997. With headquarters in Albany, New
York's capital city, the Banks and a brokerage and insurance subsidiary, Alvest
Financial Services, Inc., offer a wide range of financial products and services
through a branch network of 109 offices in upstate New York, western
Massachusetts and Vermont.
Contents
1 Financial Highlights
2 Five-Year Selected Financial Data
4 Letter to Shareholders
10 Statement of Management's Responsibility
11 Independent Auditors' Report
12 Consolidated Statements of Earnings
13 Consolidated Statements of Financial Condition
14 Consolidated Statements of Changes in Stockholders' Equity
15 Consolidated Statements of Cash Flows
16 Directors and Officers
IBC Corporate Information
Financial Highlights
(Dollars in thousands, except per share data)
December 31, 1997 1996
For the Year Ended Net income $ 43,424 26,207
Net interest income 136,746 125,641
Basic earnings per share 3.41 1.99
Diluted earnings per share 3.17 1.87
Core net income <F1> 37,139 32,584
Basic earnings per share
based on core net income <F1> 2.91 2.48
Diluted earnings per share
based on core net income <F1> 2.71 2.32
At Year End Total assets $4,083,097 3,506,136
Loans receivable 2,856,049 2,559,649
Deposits 3,483,791 3,013,129
Stockholders' equity 359,613 319,125
Book value per share 27.86 24.72
Tangible book value per share 21.64 21.35
Significant
Ratios Return on average stockholders' equity ("ROE") 13.03% 8.20%
for the Year Return on average assets ("ROA") 1.19 0.77
ROE based on core net income <F1> 11.14 10.20
ROA based on core net income <F1> 1.02 0.96
Net interest spread 3.51 3.52
Net interest margin 3.96 3.91
Stockholders' equity to total assets (at year end) 8.81 9.10
Efficiency ratio <F2> 50.78 54.32
Asset Quality
Ratios Nonperforming loans to loans receivable 1.11% 1.16%
at Year End Nonperforming assets to total assets 0.88 0.96
Allowance for loan losses to:
Loans receivable 1.02 0.94
Nonperforming loans 91.52 80.88
<FN>
<F1> Core net income for 1997 excludes a tax benefit that resulted from a
corporate realignment and the after-tax effect of a partial recovery of a
1995 investment write-off. Core net income for 1996 excludes the after-tax
effect of a special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF").
<F2> The efficiency ratio is calculated by dividing core noninterest expense by
net interest income plus core noninterest income. In addition to noncore
items, noninterest expense excludes capital securities expense, goodwill
amortization and foreclosure related costs, while noninterest income
excludes securities gains/losses and foreclosure related income.
</FN>
Five-Year Selected Financial Data
(Dollars in thousands, except per share data)
December 31, 1997 1996 1995 1994 1993
Selected Financial Condition Data at Year End
Total assets $4,083,097 3,506,136 2,970,170 2,963,843 2,773,223
Loans receivable 2,856,049 2,559,649 1,939,384 1,783,797 1,540,464
Securities available for sale 768,517 617,943 656,784 167,024 51,256
Investment securities 94,971 116,322 160,957 805,850 962,204
Deposits 3,483,791 3,013,129 2,558,288 2,541,962 2,381,714
Borrowed funds 88,808 72,407 1,290 15,300 4,200
Total stockholders' equity 359,613 319,125 323,182 316,789 313,283
Selected Operating Data for the Year
Interest income $ 269,176 248,526 212,502 186,804 183,986
Interest expense 132,430 122,885 104,015 82,092 86,416
Net interest income 136,746 125,641 108,487 104,712 97,570
Provision for loan losses 7,200 5,775 4,500 4,500 4,200
Net interest income after provision for loan losses 129,546 119,866 103,987 100,212 93,370
Net security transactions 476 8 (1,198) 14 130
Other noninterest income 13,790 12,146 10,646 10,077 9,905
Noninterest expense 84,390 90,303 65,804 61,833 59,718
Income before income taxes and cumulative
net effect of changes in accounting principles 59,422 41,717 47,631 48,470 43,687
Income tax expense 15,998 15,510 18,348 19,898 18,289
Income before cumulative net effect
of changes in accounting principles 43,424 26,207 29,283 28,572 25,398
Cumulative net effect of
changes in accounting principles -- -- -- -- 37
Net income $ 43,424 26,207 29,283 28,572 25,435
Earnings per share:
Basic 3.41 1.99 2.08 1.90 1.55
Diluted 3.17 1.87 1.96 1.79 1.47
Other Selected Financial Data
Book value per share $ 27.86 24.72 23.37 21.27 19.48
Tangible book value per share 21.64 21.35 22.05 19.98 19.15
Loan originations 682,208 638,423 459,198 556,785 407,125
Return on average stockholders' equity ("ROE") 13.03% 8.20% 9.09% 9.11% 8.23%
Return on average assets ("ROA") 1.19 0.77 0.99 1.02 0.92
Stockholders' equity to total assets 8.81 9.10 10.88 10.69 11.30
Net interest spread 3.51 3.52 3.40 3.49 3.28
Net interest margin 3.96 3.91 3.84 3.87 3.69
Efficiency ratio 50.78 54.32 52.91 51.99 53.97
Nonperforming loans to loans receivable 1.11 1.16 1.19 1.14 1.49
Nonperforming assets to total assets 0.88 0.96 0.91 0.81 0.99
Allowance for loan losses to:
Loans receivable 1.02 0.94 0.82 0.87 0.84
Nonperforming loans 91.52 80.88 68.88 76.39 56.67
Core net income <F1> $ 37,139 32,584 30,013 28,572 25,435
Earnings per share based on core net income: <F1>
Basic 2.91 2.48 2.14 1.90 1.55
Diluted 2.71 2.32 2.01 1.79 1.47
ROE based on core net income <F1> 11.14% 10.20% 9.32% 9.11% 8.23%
ROA based on core net income <F1> 1.02 0.96 1.01 1.02 0.92
Noninterest expense to average assets <F2> 2.24 2.36 2.22 2.20 2.17
Noninterest expense less other noninterest
income to average assets <F2> 1.86 2.00 1.86 1.84 1.81
<FN>
<F1> Core net income excludes for 1997, a $6.0 million tax benefit that resulted
from a corporate realignment and the after-tax recovery of $0.3 million
related to the 1995 Nationar write-off; for 1996, the after-tax effect of
the $6.4 million special assessment to recapitalize the SAIF; and, for
1995, the after-tax effect of a $0.7 million write-off of the capital
investment in Nationar.
<F2> Noninterest expense excludes the 1997 capital securities expense of $2.7
million and the 1996 pretax SAIF special assessment of $10.4 million.
</FN>
An investment in ALBANK stock at inception on April 1, 1992, has grown 517%.
/line graph of ALBANK prices vs. S&P 500/
ALBANK
April 1, 1992 $8.33
December 31, 1997 $51.44
S&P 500 Composite Index (excluding reinvestment of dividends)
Results
To Our Shareholders
Last year was the fifth consecutive year in which ALBANK Financial achieved
record core earnings. It was a busy and rewarding year on nearly all fronts. We
turned in an outstanding financial performance while maintaining asset quality.
At the same time, we completed the purchase of 35 branch offices from KeyBank
which brought our assets over the $4 billion mark; we opened 3 new branches and
improved the location of another office through a short distance relocation; we
provided our customers with a new debit card and new cash management services;
and we continued to build and strengthen our human and technical resources. The
market appears to have recognized our accomplishments. As the chart on the
preceding page shows, ALBANK's share price has risen steadily since April 1992,
reaching a closing high of $51.44 at the end of 1997 -- that is an increase of
517% or almost 3.7x the increase in the S&P 500 Index over the same time period.
Looking at the price rise from another perspective, an initial investment in the
shares of ALBANK, including the reinvestment of dividends, has provided an
annualized total return of 39% compared with 19% for the S&P 500 Index through
year-end 1997.
Core Net Income
(In millions)
1993 $25.4
1994 $28.6
1995 $30.0
1996 $32.6
1997 $37.1
Financial Summary
Our Company's 1997 diluted earnings per share based on
core net income rose 17% to an all-time high of $2.71 compared with $2.32 that
we earned in 1996. Basic earnings per share from core net income were $2.91 and
$2.48 for 1997 and 1996, respectively. Core net income for 1997 was $37.1
million, up 14% from the $32.6 million earned in 1996. Core net income for 1997
excludes a tax benefit of approximately $6.0 million, or $0.44 per diluted
share, that resulted from a corporate realignment completed in the fourth
quarter and the after-tax recovery of $0.3 million, or $0.02 per diluted share,
related to our 1995 Nationar investment write-off. Core net income in 1996
excludes ALBANK's share of the one-time Savings Association Insurance Fund
("SAIF") special assessment that the Federal Deposit Insurance Corporation
levied against all SAIF-insured institutions. The 1996 SAIF charge amounted to
$6.4 million after tax, or $0.45 per diluted share ($10.4 million pretax).
Diluted earnings per share and net income including these items were $3.17 and
$43.4 million, respectively, in 1997, and $1.87 and $26.2 million, respectively,
in 1996. Basic earnings per share were $3.41 in 1997 compared with $1.99 in
1996.
The earnings per share stated in the preceding paragraph, as well as through out
this Annual Report, conform to a new Financial Accounting Standard which became
effective last December. The calculation of diluted earnings per share takes
into account the weighted-average number of common shares outstanding plus the
increase in shares that would result from the exercise of all in-the-money
common stock options. The calculation of basic earnings per share takes into
account only the actual weighted-average number of common shares outstanding.
Return on average shareholders' equity in 1997 based on core net income was
11.14% compared with 10.20% in 1996; core return on average assets for the year
was 1.02% compared with 0.96% in 1996. Book value per share at December 31,
1997, was $27.86, up from $24.72 a year ago, an increase of 13%. Shareholders'
equity was $359.6 million at year end versus $319.1 million at year-end 1996.
Equity as a percentage of total assets at year end was 8.81% compared with 9.10%
at December 31, 1996.
In 1996, we introduced a new measure of financial
performance when we began reporting cash earnings. This concept is receiving
increasing attention from financial analysts and institutional investors. Cash
net income, which in our case is core net income plus amortization of goodwill
and costs associated with certain stock-related employee benefit plans, also
reached a new high last year. Earnings per diluted share based on cash net
income in 1997 rose 15% to a record $3.10, up from the $2.69 that we earned in
1996; cash net income rose 12% to $42.5 million from $37.9 million in 1996. The
return on tangible equity based on cash net income was 14.87%, up from 13.49% in
1996; cash return on average tangible assets in 1997 was 1.18% compared with
1.13% the prior year.
At December 31, 1997, nonperforming assets totaled $35.8 million, or 0.88% of
total assets; comparable figures for 1996 were $33.8 million and 0.96%.
Nonperforming loans amounted to $31.8 million, or 1.11% of loans receivable; the
1996 figure was $29.8 million, or 1.16% of loans receivable. At year end, loan
loss reserves were equal to 92% of nonperforming loans, up from 81% at December
31, 1996.
Diluted Core Earnings Per Share
1993 $1.47
1994 $1.79
1995 $2.01
1996 $2.32
1997 $2.71
Return on Equity
Based on Core Net Income
1993 8.23%
1994 9.11%
1995 9.32%
1996 10.20%
1997 11.14%
Expansion
Growth -- Internal and External
/picture of New York, Massachusetts, and Vermont with counties in which
ALBANK has branches/
The ALBANK market: in upstate New York, 27 counties from Rockland in the south
to the Canadian border and west from the Capital District to Syracuse and
Binghamton; in western Massachusetts, 2 counties encompassing the greater
Springfield area; in Vermont, 5 counties stretching from Rutland to Burlington
and east to the New Hampshire border.
During the past year, the number of ALBANK branch offices increased from 71 to
109. All of this growth was in New York State with the largest share coming from
the KeyBank purchase, which we completed in November. In order to retain the
public funds that were on deposit in the KeyBank offices, we formed a
state-chartered commercial bank, ALBANK Commercial, which purchased and now
operates these offices. With the formation of ALBANK Commercial, we took an
important step toward becoming more bank-like. The 35 offices with $541 million
in deposits bolstered ALBANK's presence in the northern part of the State as
well as the greater Hudson Valley, and gave us a new four-county market
presence centered in Binghamton. In January of this year, we further
strengthened our Hudson Valley franchise when we purchased two branch offices
from First Union National Bank. We expect to acquire a third office from First
Union later this year. Together, the three offices have approximately $33
million in deposits.
We believe that there is a good likelihood that there will be additional
opportunities within our market for acquisitions of other financial institutions
as well as for branch purchases. The KeyBank branch purchase was our sixth and
largest acquisition since 1992. Such external growth in or adjacent to our
existing markets remains an essential element in our longer-term strategy. We do
have, however, one concern: competition in the acquisition arena is fierce, and
prices could be driven to what we would consider prohibitively high levels.
Internally during the past year, we opened
corporate headquarters for ALBANK Commercial in downtown Albany, while
ALBANK,FSB opened a new full-service supermarket branch and a new traditional
freestanding branch, both in the Capital District. While we continue to believe
acquisitions offer us the best avenue for growth, we will continue to
selectively consider de novo branching opportunities.
We also had good
internal growth on the asset side of the balance sheet. Despite keen competition
for quality credits from banks and nonbanks, loan originations and purchases in
1997 rose to $682 million, up 7% from $638 million in 1996. The record level of
new bookings propelled the total loan portfolio to nearly $2.9 billion at year
end, up 12% from year-end 1996. We are committed to becoming more bank-like, to
move beyond the traditional thrift balance sheet with its reliance on
residential mortgage loans to an improved mix of assets and liabilities -- a
balance sheet that includes public funds, more lower-cost core deposits and
heavier asset concentrations in consumer and commercial credits. Consumer loans,
including home equity loans, and commercial loans at year end totaled $695
million and made up 24% of total loans.
While reporting on our lending activity,
it is appropriate to mention the status of our consent decree which we entered
into last August with the U.S. Justice Department. The Justice Department had
alleged that ALBANK's out-of-market mortgage loan purchasing policies violated
fair lending laws. We maintained, and still do, that the policies did not
violate any law, but we decided to avoid what certainly would have been a
distracting and expensive legal confrontation. In the consent decree, ALBANK
agreed to make $55 million in discounted mortgage loans and to provide financial
support for homebuyer education programs in designated neighborhoods located in
seven Connecticut cities and southern Westchester County in New York. We are
pleased with the progress we have made so far in implementing the provisions of
the decree and will continue to discharge our obligations thereunder. ALBANK has
always recognized the challenges and demands of assuring fair lending and
Community Reinvestment Act compliance. We expect to devote substantive
attention to maintaining high standards in this regard and to addressing related
regulatory concerns.
Under the heading of internal growth, it is also
appropriate to comment on new and enhanced product offerings. Last year we
introduced a new debit card which enables our bank customers direct access at
the point of sale to their checking accounts. Our commercial customers now enjoy
improved cash management services. Using their office PC, they can track and
transfer funds easier and faster, and take advantage of features like a zero
balance account, access to ACH facilities and on-line account reconciliation.
New product-support development has given us upgraded loan origination and
tracking software, which, among other features, generates loan documentation at
the branch office level, greatly improving our loan turnaround time. Finally,
speaking of technology driven product development, I would like to invite you to
visit ALBANK's new website which is currently under development at
www.albank.com.
In 1992, its first year as a publicly owned company, ALBANK had a branch network
of 38 offices in upstate New York. Today, after five transactions involving the
purchase of banking offices from other financial institutions, one bank
acquisition and de novo branching, the ALBANK network includes 109 offices in
three states.
/picture of two banks/
38 offices in 1992.
109 offices in 1997
Capital Management
We have continued to employ three principal capital management tools: stock
repurchases, regular quarterly dividends and leveraged acquisitions. Since 1992,
we have invested $113.8 million in acquiring 5.3 million shares of ALBANK common
stock. While we were not as active repurchasing our stock last year as in
previous years, repurchases remain a viable option which we will continue to
consider on a regular basis going forward. We did increase the quarterly
dividend last October, our fourth increase of 20% or more in the regular cash
distribution since we began paying a dividend in 1994. All of the acquisitions
we have completed since 1992 were fully leveraged. That is, we paid cash for
them and did not issue any new equity to finance the transactions.
Outlook
The Directors' Table
Henry M. Elliot, Jr., who retired from our Board of
Directors in January 1998, was an ALBANK Director for 21 years. He was a former
District and Agency Manager for the Equitable Life Assurance Society where he
had achieved outstanding success in building and managing agencies that were
consistently top producers. His background and experience were a great help to
the Bank as it began to offer new financial products and services.
The Board also elected a new Director in 1997. John J. Nigro is the President of
Nigro Companies, an Albany-based real estate development and management concern.
Nigro Companies is a specialist in commercial real estate development, primarily
in upstate New York. Mr. Nigro brings to our Board a wealth of business insight
and a strong community presence.
Stockholders' Equity (In millions, at year end)
1993 $313
1994 $317
1995 $323
1996 $319
1997 $360
/picture of Herbert G. Chorbajian/
Future Outlook
Sometime ago we
started reviewing our computer information
systems in anticipation of the arrival of the year 2000. Much has been written
about the potential chaos that could occur if a computer program failed to
process properly a date that included the year "00". Obviously, data processing
in the financial industry is heavily dependent on dates, and the regulatory
authorities have mandated procedures to insure that banks thoroughly examine all
their critical software. Our 1996-97 information systems and technology
investment, which included the purchase of new hardware and software, has put us
in a good position to meet these requirements. The review and analysis, however,
will still take a substantial amount of time and effort from our staff and
information managers. In addition, we have designated a special senior
management team with the responsibility to monitor our progress. We will
complete this task well in advance of the year 2000.
Nineteen ninety-eight will
no doubt confront us with new and different challenges as we pursue our efforts
to build our company and bring added value to your investment in ALBANK
Financial. Even before the year began, we were confronted with two
interconnected issues, albeit ones we have encountered before. During the fourth
quarter of 1997, the relatively stable interest rate environment that we had
enjoyed for the past two and a half years began to change. Rates, led by
long-term rates, began to decline. The 30-year Treasury bond eventually reached
a historic low in January of this year. This has led to a flattened yield curve
reflecting a much narrower spread between short- and long-term rates. The
combined effect of lower rates and a flatter yield curve could result in
increased refinancing in the Bank's mortgage loan portfolio. If this does
happen, our interest margin will come under some pressure. Lower rates and a
leveling yield curve could also make internal asset growth more difficult. These
are, however, challenges that we have successfully met in the past, and I am
confident we will do so again. Improving our asset/liability mix by continuing
to become more bank-like, successfully managing our interest spreads by reducing
pricing on the liability side of the balance sheet to counterbalance potentially
lower asset yields, building noninterest income and continued noninterest
expense control are the keys to achieving another winning year.
/s/ Herbert G. Chorbajian
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
February 11, 1998
Net Interest Margin
1993 3.69%
1994 3.87%
1995 3.84%
1996 3.91%
1997 3.96%
Return on Assets
Based on Core Net Income
1993 0.92%
1994 1.02%
1995 1.01%
1996 0.96%
1997 1.02%
Statement of Management's Responsibility
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
To Our Stockholders:
The consolidated financial statements and the related financial information in
this 1997 Summary Annual Report and the 1997 Annual Report Supplement were
prepared by the management of ALBANK Financial Corporation in accordance with
generally accepted accounting principles and, where appropriate, reflect
management's best estimates and judgment. Management is responsible for the
integrity, objectivity, consistency and fair presentation of such consolidated
financial statements and financial information.
In order to fulfill its
responsibility, management relies in part on a system of internal accounting
control which has been designed to safeguard the Company's assets from material
loss or misuse and to ensure that transactions are properly authorized and
recorded in its financial records. An internal auditing program monitors
compliance with established procedures and controls to provide assurance that
the system of internal accounting control is functioning in a proper manner.
There are limits inherent in all systems of internal control based on the
recognition that the cost of such systems should not exceed the benefits to be
derived. Management believes the Company's system of internal accounting control
provides reasonable assurance that its assets are safeguarded and that its
financial records are reliable.
The consolidated financial statements have been
audited by KPMG Peat Marwick LLP, independent public accountants. Their
appointment was ratified by the stockholders of ALBANK Financial Corporation.
Their examination provides an objective assessment of the degree to which the
Company's management has met its responsibility for financial reporting. The
opinion of the independent public accountants on the consolidated financial
statements is based on auditing procedures which include reviewing the internal
control structure to determine the timing and scope of audit procedures and
performing selected tests of transactions and records as they deem appropriate.
Their auditing procedures are designed to provide a reasonable level of
assurance that the consolidated financial statements are fairly presented in all
material respects.
The Company's internal auditor and independent auditors have direct access to
the Audit Committee of the Board of Directors. This Committee, which is composed
entirely of outside directors, meets periodically with management, the internal
auditor and the independent auditors to gain assurance that the financial
accounting and audit process are properly conducted.
/s/ Herbert G. Chorbajian
Herbert G. Chorbajian
Chairman of the Board, President and Chief Executive Officer
/s/ Richard J. Heller
Richard J. Heller
Executive Vice President and Chief Financial Officer
Independent Auditors' Report
KPMG Peat Marwick LLP
Certified Public Accountants
515 Broadway
Albany, NY 12207
To the Board of Directors and Stockholders
ALBANK Financial Corporation and Subsidiaries:
We have audited, in accordance with generally
accepted auditing standards, the consolidated statements of financial condition
of ALBANK Financial Corporation and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 (not presented herein), and in our report dated
January 30, 1998, we expressed an unqualified opinion on those consolidated
financial statements.
In our opinion, the information set forth in the
accompanying consolidated condensed financial statements in the Summary Annual
Report is fairly stated, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
/s/ KPMG Peat Marwick LLP
February 11, 1998
Consolidated Statements of Earnings
(In thousands, except per share data)
Years Ended December 31, 1997 1996 1995
Interest Income
Mortgage loans $173,296 155,914 125,228
Other loans 45,051 38,194 28,571
Securities available for sale 41,943 41,676 11,098
Investment securities 6,767 8,959 43,520
Federal funds sold 137 508 918
Securities purchased under agreement to resell 656 2,225 1,888
Stock in Federal Home Loan Bank 1,326 1,050 1,279
Total interest income 269,176 248,526 212,502
Interest Expense
Deposits and escrow accounts 125,526 120,006 103,810
Short-term borrowed funds and repurchase agreements 5,771 1,338 125
Long-term debt 1,133 1,541 80
Total interest expense 132,430 122,885 104,015
Net interest income 136,746 125,641 108,487
Provision for loan losses 7,200 5,775 4,500
Net interest income after provision for loan losses 129,546 119,866 103,987
Noninterest Income
Service charges on deposit accounts 7,130 5,556 5,046
Net security transactions 476 8 (1,198)
Brokerage and insurance commissions 2,108 2,049 1,621
Other 4,552 4,541 3,979
Total noninterest income 14,266 12,154 9,448
Noninterest Expense
Compensation and employee benefits 41,368 38,455 31,817
Occupancy, net 10,055 9,186 8,260
Furniture, fixtures and equipment 6,651 5,270 4,036
Federal deposit insurance premiums 1,412 4,331 5,152
Federal deposit insurance special SAIF assessment -- 10,397 --
Professional, legal and other fees 2,976 3,242 2,512
Telephone, postage and printing 4,694 4,393 4,062
Goodwill amortization 3,872 3,078 1,570
Capital securities expense 2,666 -- --
Other 10,696 11,951 8,395
Total noninterest expense 84,390 90,303 65,804
Income before income taxes 59,422 41,717 47,631
Income tax expense 15,998 15,510 18,348
Net income $ 43,424 26,207 29,283
Earnings per share:
Basic $ 3.41 1.99 2.08
Diluted 3.17 1.87 1.96
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data) December 31, 1997 1996
Assets
Cash and due from banks $ 97,389 68,883
Securities purchased under agreement to resell 75,000 --
Total cash and cash equivalents 172,389 68,883
Securities available for sale 768,517 617,943
Investment securities 94,971 116,322
Loans receivable 2,856,049 2,559,649
Less: allowance for loan losses 29,117 24,114
Loans receivable, net 2,826,932 2,535,535
Accrued interest receivable 27,837 27,092
Office premises and equipment, net 57,435 48,554
Stock in Federal Home Loan Bank, at cost 21,408 16,913
Real estate owned 3,966 4,012
Goodwill 80,281 43,482
Other assets 29,361 27,400
$4,083,097 3,506,136
Liabilities
Deposits $3,483,791 3,013,129
Escrow accounts 21,172 26,603
Accrued income taxes payable 8,289 3,938
Short-term borrowed funds and repurchase agreements 68,747 42,346
Long-term debt 20,061 30,061
Obligation under capital lease 4,542 4,646
Other liabilities 66,882 66,288
Total liabilities 3,673,484 3,187,011
Corporation-obligated manditorily redeemable capital securities of subsidiary trust 50,000 --
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock, $.01 par value. Authorized 25,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; 15,697,500 shares issued;
12,906,845 shares outstanding at December 31, 1997 and 12,910,763 at December 31, 1996 157 157
Additional paid-in capital 182,704 180,670
Retained earnings, substantially restricted 248,402 214,283
Treasury stock, at cost (2,790,655 shares at December 31, 1997 and 2,786,737
at December 31, 1996) (73,200) (71,235)
Net Unrealized gain on securities available for sale, net of tax 6,578 1,781
Common stock acquired by:
Employee stock ownership plan ("ESOP") (5,023) (6,279)
Bank recognition plan ("BRP") (5) (252)
Total stockholders' equity 359,613 319,125
$4,083,097 3,506,136
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
Consolidated Statements of Changes in Stockholders' Equity
Net
Unrealized
Gain (Loss) Common Common
Additional on Securities Stock Stock
Common Paid-in Retained Treasury Available Acquired Acquired
(Dollars in thousands) Stock Capital Earnings Stock for Sale by ESOP by BRP Total
Balance at January 1, 1995 $157 151,433 235,065 (58,218) (735) (8,791) (2,122) 316,789
Net income -- -- 29,283 -- -- -- -- 29,283
Purchase of treasury stock (898,053 shares) -- -- -- (24,233) -- -- -- (24,233)
Exercise of stock options -- -- (10) 70 -- -- -- 60
Tax benefits related to vested BRP stock
and stock options exercised -- 536 -- -- -- -- -- 536
Adjustment of securities
available for sale to market, net of tax -- -- -- -- 4,263 -- -- 4,263
Cash dividends declared -- -- (5,707) -- -- -- -- (5,707)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1995 157 151,969 258,631 (82,381) 3,528 (7,535) (1,187) 323,182
Net income -- -- 26,207 -- -- -- -- 26,207
Purchase of treasury stock (926,517 shares) -- -- -- (25,847) -- -- -- (25,847)
Exercise of stock options -- -- 275 745 -- -- -- 1,020
Tax benefits related to vested BRP stock
and stock options exercised -- 898 -- -- -- -- -- 898
Adjustment of securities available for sale
to market, net of tax -- -- -- -- (1,747) -- -- (1,747)
Cash dividends declared -- -- (6,779) -- -- -- -- (6,779)
Stock dividend declared -- 27,803 (64,051) 36,248 -- -- -- --
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1996 157 180,670 214,283 (71,235) 1,781 (6,279) (252) 319,125
Net income -- -- 43,424 -- -- -- -- 43,424
Purchase of treasury stock (154,468 shares) -- -- -- (5,057) -- -- -- (5,057)
Exercise of stock options -- -- (821) 3,092 -- -- -- 2,271
Tax benefits related to vested BRP stock
and stock options exercised -- 2,034 -- -- -- -- -- 2,034
Adjustment of securities available for sale
to market, net of tax -- -- -- -- 4,797 -- -- 4,797
Cash dividends declared -- -- (8,484) -- -- -- -- (8,484)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 247 247
Balance at December 31, 1997 $157 182,704 248,402 (73,200) 6,578 (5,023) (5) 359,613
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
Consolidated Statements of Cash Flows
(In thousands) Years Ended December 31, 1997 1996 1995
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $ 43,424 26,207 29,283
Reconciliation of net income to net cash provided by operating activities:
Depreciation and lease amortization 6,799 5,385 3,962
Goodwill amortization 3,872 3,078 1,570
Amortization of capitalized costs related to the issuance of capital securities 27 -- --
Net amortization of premiums and accretion of discounts on securities 897 1,229 1,322
ESOP and BRP amortization 1,503 2,191 2,191
Net loss (gain) on security transactions (476) (8) 1,198
Net gain on sale of real estate owned (289) (383) (328)
Origination of loans receivable for sale (6,366) (22,631) (15,401)
Proceeds from sale of loans receivable 11,353 34,024 31,379
Provision for loan losses 7,200 5,775 4,500
Writedown of real estate owned 279 603 312
Net increase in accrued income taxes payable 6,385 277 2,632
Net decrease (increase) in accrued interest receivable (412) 2,814 (1,682)
Net increase in other assets (8,130) (619) (3,291)
Net increase (decrease) in other liabilities and obligation under capital lease (28) 18,692 (6,272)
Net cash provided by operating activities 66,038 76,634 51,375
Cash Flows from Investing Activities
Net cash provided (used) by acquisition activity 446,784 (61,439) 17,488
Proceeds from the sale of securities available for sale 15,019 22,985 --
Proceeds from the maturity or call of securities available for sale 237,738 154,445 90,008
Proceeds from the maturity or call of investment securities 71,691 70,538 173,465
Proceeds from the partial recovery of Nationar investment 453 -- --
Purchase of securities available for sale (396,110) (45,105) (79,902)
Purchase of investment securities (50,327) (25,678) (23,313)
Purchase of loans receivable (312,095) (229,342) (125,894)
Net decrease (increase) in loans receivable 53,444 (30,659) (55,387)
Redemption (purchase) of Federal Home Loan Bank stock (4,495) 2,912 (1,621)
Proceeds from the sale of real estate owned 4,944 6,950 5,648
Capital expenditures (9,558) (6,740) (9,882)
Net cash provided (used) by investing activities 57,488 (141,133) (9,390)
Cash Flows from Financing Activities
Net increase (decrease) in deposits (60,652) 20,530 (1,868)
Net increase (decrease) in escrow accounts (5,431) (8,465) 1,441
Net increase (decrease) in short-term borrowed funds and repurchase agreements 17,803 17,907 (12,010)
Proceeds from long-term debt -- 30,061 --
Repayment of long-term debt (10,000) -- (2,000)
Proceeds from issuance of capital securities 50,000 -- --
Purchase of treasury stock (5,057) (25,847) (24,233)
Dividends paid (8,117) (6,210) (5,565)
Cash proceeds from the exercise of stock options 1,434 404 60
Net cash provided (used) by financing activities (20,020) 28,380 (44,175)
Net increase (decrease) in cash and cash equivalents 103,506 (36,119) (2,190)
Cash and cash equivalents at beginning of year 68,883 105,002 107,192
Cash and cash equivalents at end of year $172,389 68,883 105,002
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest on deposits, escrows, short-term borrowed funds,
repurchase agreements and long-term debt $132,879 122,662 104,022
Income taxes 9,633 12,804 16,118
Supplemental schedule of noncash investing and financing activities:
Net reduction in loans resulting from transfers to real estate owned 4,908 5,941 5,710
Net unrealized gain (loss) on securities available for sale 8,110 (3,098) 7,251
Transfer of investment securities to securities available for sale -- -- 492,246
Tax benefits related to vested BRP stock and stock options exercised 2,034 898 536
Acquisition activity:
Fair value of noncash assets acquired 94,116 523,406 712
Fair value of liabilities assumed 540,900 461,967 18,200
See notes to consolidated financial statements in the 1997 Annual Report Supplement.
Directors and Officers
Board of Directors
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
William J. Barr
Retired Senior Vice President and Controller ALBANK,FSB
Henry M. Elliot, Jr.
Retired Agency Manager
Equitable Life Assurance Society of the United States Inc.
Karen R. Hitchcock, Ph.D.
President State University of New York at Albany
John E. Maloy, Sr.
President J.H. Maloy, Inc.
Francis L. McKone
President and Chief Executive Officer
Albany International Corp.
John J. Nigro
President Nigro Companies
Susan J. Stabile, Esq.
Professor of Law St. John's University School of Law
Anthony P. Tartaglia, M.D.
Professor of Medicine Albany Medical College
/picture of Board of Directors Nigro, Hitchcock, McKone, Tartaglia,
Elliot, Chorbajian, Stabile, Barr, Maloy/
Officers
Herbert G. Chorbajian
Chairman of the Board,
President and Chief Executive Officer
Clifford M. Apgar
Executive Vice President Senior Credit Officer
Barry G. Blenis
Executive Vice President Operations and Strategic Planning
Richard J. Heller
Executive Vice President and Chief Financial Officer
Freling H. Smith, Esq.
Senior Vice President, Secretary and General Counsel
Frank J. Vaselewski
Senior Vice President Retail Banking
John J. Donnelly
Senior Vice President Chief Information Officer
Margaret F. Ludington
Senior Vice President Human Resources
Robert L. Meyer
Senior Vice President Retail Lending
Joseph P. Richardson
Senior Vice President Commercial Lending
Patrick J. Rielly
Senior Vice President Operations
Margaret J. Welch
Senior Vice President Branch Administration
Mary Jean Laraway
Vice President Corporate Services
James F. McDonald
Vice President Investment Officer
Edward C. Tremblay
Vice President and Auditor
Michael C. Walajtys
Vice President and Controller
Edward J. Grover
President ALBANK Commercial
Thomas C. Nachod
Senior Vice President ALBANK Commercial
Corporate Information
Stock Transfer Agent/Dividend Reinvestment Plan
Inquiries regarding stock transfer, lost certificates, changes in name/address
and/or Dividend Reinvestment Plan the should be directed to the stock transfer
agent by writing to:
ChaseMellon Shareholders Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 851-9677
Certain information requests and address changes may also be made through
ChaseMellon's website at www.chasemellon.com.
Investor Information
Shareholders, investors and analysts interested in
additional information may contact:
Richard J. Heller
Executive Vice President and Chief Financial Officer
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
Stock Listing
The Company's common stock trades on The Nasdaq Stock Market under the symbol
ALBK.
Stock Price
The table below shows the reported closing prices
of ALBANK common stock during the periods indicated in calendar 1997 and 1996.
1997 Quarterly Stock Prices 1996 Quarterly Stock Prices
High Low Qtr. End High Low Qtr. End
First $37.50 $30.50 $36.38 $28.88 $22.92 $28.88
Second 41.00 34.00 39.50 30.63 26.38 26.38
Third 45.88 37.13 42.25 29.56 25.13 28.75
Fourth 51.44 42.25 51.44 32.81 27.38 31.38
Annual Meeting of Shareholders
The Annual Meeting of the shareholders of ALBANK Financial Corporation will be
held on May 19,1998 at 10:00 AM at:
ALBANK Operations Center
833 Broadway Albany, NY 12207-2415
All shareholders are welcome to attend.
Annual Report on Form 10-K
A copy of ALBANK Financial Corporation's Annual Report on Form 10-K filed with
the Securities and Exchange Commission is available without charge by writing
to:
Freling H. Smith, Esq.
Senior Vice President, Secretary and General Counsel
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
LOGO ALBANK
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
(518) 445-2100
ALBANK
Financial
Corporation
LOGO
Annual
Report
Supplement
1997
The 1997 Annual Report is presented in two sections. Among other information,
the "Summary Annual Report" segment includes financial highlights, five-year
selected financial data, the letter to shareholders, the statement of
management's responsibility and quarterly stock price data. This "Annual Report
Supplement" segment contains management's discussion and analysis, the
independent auditors' report and consolidated financial statements including
footnotes.
Contents
1 Management's Discussion and Analysis
14 Independent Auditors' Report
15 Consolidated Statements of Earnings
16 Consolidated Statements of Financial Condition
17 Consolidated Statements of Changes in Stockholders' Equity
18 Consolidated Statements of Cash Flows
19 Notes to Consolidated Financial Statements
The 1997 Annual Report contains certain forward-looking statements
that by their nature involve inherent risks and uncertainties. Actual
results may differ materially from the results indicated by such statements.
For more information regarding inherent risks and uncertainties, see Item I of
the 1997 Annual Report on Form 10-K.
Management's Discussion and Analysis
General
ALBANK Financial Corporation ("ALBANK" or the "Company") was formed in 1991 as a
savings and loan holding company under Delaware law. On April 1, 1992, ALBANK
completed its public offering of 15,697,500 shares of common stock at $10.00 per
share, realizing net proceeds of $150.8 million after expenses and concurrently
acquired ALBANK, FSB as part of its conversion from a mutual to a stock form
savings bank. On October 10, 1997, the Company became a bank holding company
when it formed ALBANK Commercial, a newly chartered New York State commercial
bank.
ALBANK's business currently consists primarily of the business of its
constituent banks. As such, the Company's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations and borrowings, in various loan products
and investment securities. The Company's results of operations are dependent on
net interest income, provisions for loan losses, the levels of noninterest
income earned and noninterest expense incurred and the effect of income taxes.
The Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and principal and interest
payments on loans and investment securities. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
ALBANK, FSB is required to maintain minimum levels of liquid assets as
promulgated by its primary regulator, the Office of Thrift Supervision ("OTS").
This requirement, which may vary at the direction of the OTS depending on
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio of liquid assets to deposits and
short-term borrowings is currently 4%. At December 31, 1997 and 1996, ALBANK,
FSB's liquidity ratios were 25.2% and 23.7%, respectively.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. At December 31, 1997 and 1996, cash and cash
equivalents totaled $172.4 million and $68.9 million, respectively.
At the time of its conversion to stock form, ALBANK, FSB was required to
establish a liquidation account in an amount equal to its regulatory net worth
as of December 31, 1991. The amount of this liquidation account reduces to the
extent that eligible depositors' accounts are reduced. In the unlikely event of
a complete liquidation (and only in such an event), each eligible depositor
would be entitled to receive a distribution from the liquidation account before
any liquidation distribution could be made to common stockholders of the
Company.
Stockholders' equity of $359.6 million at December 31, 1997, represented a
capital-to-assets ratio of 8.81%. At year-end 1997, book value and tangible book
value per common share were $27.86 and $21.64, respectively. At December 31,
1997, ALBANK, FSB and ALBANK Commercial exceeded all of the capital requirements
of their respective regulators. ALBANK, FSB's ratios at December 31, 1997, were
as follows: tangible capital, 6.67%; core capital, 6.67%; Tier 1 risk-based
capital, 10.81%; and total risk-based capital, 11.91%. ALBANK Commercial's
ratios at year-end 1997 were: leverage capital, 7.91%; Tier 1 risk-based
capital, 14.95%; and total risked-based capital, 16.01%, respectively.
Among other things, OTS regulations provide that an institution, such as ALBANK,
FSB, that exceeds all capital requirements before and after a proposed capital
distribution could, after prior notice to but without the approval of the OTS,
make capital distributions during the calendar year in an amount that would
reduce by one half its "excess capital ratio" plus its net income for the
current calendar year. Under such limitation, ALBANK, FSB could declare
dividends to the holding company in 1998 of approximately $46 million plus an
amount equal to 1998 earnings. ALBANK Commercial is subject to dividend
limitations under New York Banking Law, including a requirement that prior
regulatory approval be obtained for dividends paid in any year that would exceed
ALBANK Commercial's net profits for such year combined with retained net profits
for the prior two years.
As one method of enhancing shareholder value, the Company instituted a stock
repurchase program in June 1992. In May 1996, the Board authorized a seventh
repurchase of the Company's outstanding shares of common stock under this
program. Through December 31, 1997, the Company had repurchased 5,298,715 shares
of stock and had remaining authorization to repurchase another 187,227 shares.
On February 27, 1996, the Board of Directors of the Company declared a 6-for-5
stock split effected as a 20% stock dividend. This stock dividend was paid April
1, 1996, to shareholders of record on March 15, 1996. By maintaining the
quarterly per share cash dividend at $0.12 following the stock dividend, the
Board effectively increased the dividend by 20%, the second such increase in as
many years. On November 25, 1996, the Company announced that its Board increased
the Company's quarterly cash dividend an additional 25% by initiating payment at
a quarterly rate of $0.15 per share commencing with the dividend paid on January
2, 1997. The Company further increased its quarterly dividend 20% on August 26,
1997, when its Board declared an $0.18 per share cash dividend, which was paid
on October 1, 1997.
The analyses of net interest income that are shown in the following two tables
are an integral part of the discussion of the results of operations for 1997,
1996 and 1995 that follows:
Average Balance Sheets, Interest Rates and Interest Differential
Years Ended December 31,
1997 1996 1995
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets
Interest-earning assets:
Mortgage loans, net<F1> $2,159,981 173,296 8.02% $1,923,787 155,914 8.10% $1,586,878 125,228 7.89%
Other loans, net<F1> 487,462 45,051 9.24 411,602 38,194 9.28 296,479 28,571 9.64
Securities available
for sale 667,820 41,943 6.28 670,111 41,676 6.22 164,970 11,098 6.73
Investment securities 101,894 6,767 6.64 140,841 8,959 6.36 718,611 43,520 6.06
Federal funds sold 2,497 137 5.49 9,529 508 5.33 15,680 918 5.85
Securities purchased
under agreement to resell 11,140 656 5.89 38,115 2,225 5.84 30,247 1,888 6.24
Stock in Federal
Home Loan Bank 20,718 1,326 6.40 16,754 1,050 6.27 15,554 1,279 8.22
Total interest-earning
assets 3,451,512 269,176 7.80 3,210,739 248,526 7.74 2,828,419 212,502 7.51
Noninterest-earning assets 191,571 174,784 132,663
$3,643,083 $3,385,523 $2,961,082
Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
Deposits:
Savings accounts<F2> $ 822,727 23,691 2.88% $ 872,348 25,373 2.91% $ 909,019 26,544 2.92%
Transaction accounts<F3> 519,616 13,549 2.61 463,864 11,898 2.56 336,647 6,925 2.06
Certificate accounts 1,618,711 88,286 5.45 1,521,036 82,735 5.44 1,280,662 70,341 5.49
Short-term borrowed
funds and repurchase
agreements 103,306 5,771 5.59 25,337 1,338 5.28 1,898 125 6.59
Long-term debt 20,636 1,133 5.49 28,305 1,541 5.44 1,463 80 5.47
Total interest-bearing
liabilities 3,084,996 132,430 4.29 2,910,890 122,885 4.22 2,529,689 104,015 4.11
Demand deposits 115,814 83,634 53,935
Noninterest-bearing
liabilities 80,386 71,405 55,478
Total liabilities 3,281,196 3,065,929 2,639,102
Corporation-obligated
manditorily redeemable
capital securities of
subsidiary trust 28,630 -- --
Stockholders' equity 333,257 319,594 321,980
$3,643,083 $3,385,523 $2,961,082
Net interest income
and net interest spread $136,746 3.51% $125,641 3.52% $108,487 3.40%
Net interest-earning
assets and net interest
margin $ 366,516 3.96% $ 299,849 3.91%$ $ 298,730 3.84%
Interest-earning assets
to interest-bearing
liabilities 1.12x 1.10x 1.12x
Average balances are derived principally from average daily balances and include
nonaccruing loans. Tax-exempt securities income has not been calculated on a tax
equivalent basis. Interest on securities available for sale includes dividends
received on equity securities.
<FN>
<F1> Net of unearned discounts, premiums and related deferred loan fees and costs, where applicable.
<F2> Includes passbook, statement and interest-bearing escrow accounts.
<F3> Includes NOW, Super NOW, money market and interest-bearing demand deposit accounts.
</FN>
Analysis of Changes in Net Interest Income
Year Ended December 31, 1997 Year Ended December 31, 1996
Compared with Compared with
Year Ended December 31, 1996 Year Ended December 31, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
(In thousands) Volume Rate Net Volume Rate Net
Interest Income
Mortgage loans, net $18,965 (1,583) 17,382 27,224 3,462 30,686
Other loans, net 7,012 (155) 6,857 10,719 (1,096) 9,623
Securities available for sale (143) 410 267 31,478 (900) 30,578
Investment securities (2,572) 380 (2,192) (36,648) 2,087 (34,561)
Federal funds sold (386) 15 (371) (334) (76) (410)
Securities purchased under
agreement to resell (1,588) 19 (1,569) 465 (128) 337
Stock in Federal Home Loan Bank 254 22 276 93 (322) (229)
Total 21,542 (892) 20,650 32,997 3,027 36,024
Interest Expense
Savings accounts (1,431) (251) (1,682) (1,067) (104) (1,171)
Transaction accounts 1,451 200 1,651 3,008 1,965 4,973
Certificate accounts 5,326 225 5,551 13,081 (687) 12,394
Short-term borrowed funds and
repurchase agreements 4,352 81 4,433 1,243 (30) 1,213
Long-term debt (421) 13 (408) 1,461 -- 1,461
Total 9,277 268 9,545 17,726 1,144 18,870
Change in net interest income $12,265 (1,160) 11,105 15,271 1,883 17,154
Information in the above table is provided in each category with respect to (i)
changes attributable to changes in volume (change in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (change in rate multiplied
by prior volume) and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Results of Operations--1997 Compared With 1996
General
Net income for the year ended December 31, 1997, totaled $43.4 million, an
increase of $17.2 million (66%) from the $26.2 million recorded in 1996. Basic
earnings per share for 1997 were $3.41, up 71% from 1996's $1.99; 1997 diluted
earnings per share of $3.17 were 70% greater than the $1.87 recorded in 1996.
Return on average equity for 1997 was 13.03% compared with 8.20% in 1996. Return
on average assets totaled 1.19% in 1997 and 0.77% for 1996. Net income for 1997
included an approximate $6.0 million tax benefit that resulted from a corporate
realignment and a $0.3 million ($0.5 million pretax) recovery of a 1995
investment write-off. Net income for 1996 included a one-time Savings
Association Insurance Fund ("SAIF") special assessment of $6.4 million ($10.4
million before tax). Excluding these respective items, core net income for 1997
was $37.1 million, an increase of $4.5 million (14%) over the $32.6 million
recorded in 1996. Basic and diluted earnings per share based on 1997 core net
income were $2.91 and $2.71, respectively, each a 17% improvement over
comparable respective amounts of $2.48 and $2.32 recorded in 1996. Return on
average equity based on core net income was 11.14% in 1997 compared with 10.20%
in 1996. Core return on average assets for 1997 of 1.02% compared with 1996's
0.96%.
Cash net income, which is defined as core net income plus the amortization of
goodwill and costs associated with certain stock-related employee benefit plans,
are continuing to receive increased scrutiny from stock analysts as well as
institutional investors. Cash net income for 1997 amounted to $42.5 million, up
$4.6 million (12%) from the $37.9 million reported in 1996. Diluted earnings per
share based on cash earnings equaled $3.10, an increase of 15% from the $2.69
recorded for 1996. Cash return on average tangible equity (that is, average
stockholders' equity less unamortized goodwill) was 14.87% compared with 13.49%
in 1996. Return on average tangible assets (that is, average assets less
unamortized goodwill) amounted to 1.18% for 1997 compared with 1.13% for 1996.
On November 10, 1997, the Company purchased 35 New York State branch offices
from KeyBank. The offices, which are located in northern New York, the greater
Hudson Valley and the Binghamton area, had $540.9 million in deposits and $52.2
million in loans as of the closing date. The Company paid a 7% deposit premium
based on average deposits for a period prior to closing. This deposit premium
and certain other direct costs of the acquisition created accounting goodwill of
$40.6 million. Primarily in order to retain public deposits (which thrifts in
New York State are unable to accept), the Company merged the branches into a
newly formed subsidiary, ALBANK Commercial, a New York State chartered
commercial bank.
On January 3, 1996, ALBANK, FSB acquired all of the outstanding common stock of
Marble Financial Corporation of Rutland, Vermont for $18.00 per share in cash or
approximately $61 million in total consideration. On the date of closing, Marble
had consolidated assets and deposits of $396.2 million and $326.6 million,
respectively. An additional Vermont acquisition was completed on September 27,
1996, when the Company assumed the deposit liabilities and purchased loans owned
and serviced by six banking offices operated by the Green Mountain Bank of
Rutland, Vermont. This transaction included approximately $108 million in loans
and deposits. Both transactions were accounted for under the purchase method of
accounting and generated accounting goodwill of $20.1 million with respect to
the Marble acquisition and $8.2 million with respect to Green Mountain. The
banking offices from these Vermont acquisitions are currently operated as
ALBANK, FSB's Marble Division.
Interest Income
Total interest income of $269.2 million for the year ended December 31, 1997,
was up $20.7 million (8%) from 1996 as earning assets advanced $240.8 million
(7%) and the average yield earned rose 6 basis points (1%) to 7.80%. The
increase in average earning assets primarily reflected the growth in loans that
resulted from record 1997 loan originations and, secondarily, by the full year
impact of the Green Mountain branch acquisition and the Key branch acquisition
in November 1997.
Interest income on mortgage loans moved ahead $17.4 million (11%) to $173.3
million for 1997. The increase in average mortgage loans of $236.2 million (12%)
more than overcame an 8 basis point (1%) decline in the average rate earned to
8.02%. The increased average balance of mortgage loans was primarily
attributable to new loan originations. Over 70% of the 1997 loan originations
were comprised of residential mortgages, more than four-fifths of which were
adjustable-rate loans. Approximately one-sixth of the overall increase in the
average balance of mortgage loans was due to the aforementioned acquisitions.
Interest income from other loans rose $6.9 million (18%) above 1996 levels to
$45.1 million as increased average loan balances of $75.9 million (18%) were
slightly offset by a 4 basis point decline in portfolio yield to 9.24%. The
growth in average loans was driven mainly by an increase in average commercial
loans of $67.7 million (37%), about two-thirds of which came as a result of the
Green Mountain acquisition, and an $8.2 million increase in average consumer
loans that was generated primarily from acquisitions.
Interest income on securities available for sale for 1997 rose $0.3 million (1%)
to $41.9 million as a slight decrease in the average amount invested was more
than offset by a 6 basis point (1%) rise in the average rate earned. The average
balance of this investment category would have been approximately $120 million
lower for 1997 had it not been for the Key branch acquisition including the
Company's effort to prefund security purchases in anticipation of the closing
date.
Interest income on investment securities was $6.8 million for 1997, a decrease
of $2.2 million (24%) from 1996. The decrease was the net result of a $38.9
million (28%) decline in the average amount invested and a 28 basis point (4%)
increase in the average rate earned.
Declines in the average balances of federal funds sold and securities purchased
under agreement to resell of $7.0 million (74%) and $27.0 million (71%),
respectively, resulted in respective reductions in interest income of $0.4
million (73%) and $1.6 million (71%).
Earnings on stock in the Federal Home Loan Bank increased $0.3 million (26%) as
the cumulative result of a $4.0 million (24%) increase in the average amount
invested and a 13 basis point (2%) increase in the average rate earned.
Interest Expense
Total interest expense of $132.4 million for the year ended December 31, 1997,
was $9.5 million (8%) greater than the $122.9 million recorded for 1996 as a
$174.1 million (6%) increase in average interest-bearing liabilities combined
with a 7 basis point (2%) rise in the average rate paid to 4.29%. The increase
in average deposits of $103.8 million (4%) was the end product of acquired
balances in about equal proportion between the Green Mountain and Key branch
acquisitions, reduced by net deposit outflows. The net increase in average
borrowed funds of $70.3 million (131%) coupled with an increase in rate of 20
basis points (4%) resulted in increased interest expense of $4.0 million (140%).
Interest expense on savings accounts declined $1.7 million (7%) to $23.7 million
as decreases in average savings deposits of $49.6 million (6%) combined with a
decrease in the average rate paid of 3 basis points (1%). The decline in average
savings deposits occurred despite the addition of average balances of $13.5
million and $7.6 million from the Green Mountain and Key branch acquisitions,
respectively.
Growth in the average balance of transaction accounts of $55.8 million (12%) and
a rise in the average rate paid of 5 basis points (2%) resulted in an increase
in interest expense of $1.7 million (14%) to $13.5 million. The Green Mountain
and Key branch acquisitions increased average balances by $68.5 million, split
about equally from each acquisition.
Interest expense on certificate accounts rose $5.6 million (7%) to $88.3 million
while the average rate paid of 5.45% represented an increase of 1 basis point
over 1996. Balances acquired in the Green Mountain and Key branch acquisitions
accounted for about two-thirds of the $97.7 million (6%) increase in average
certificates outstanding.
Interest expense on short-term borrowed funds and repurchase agreements
increased $4.4 million (331%) to $5.8 million primarily as the result of an
approximate four-fold increase in average balances to $103.3 million. The
increase in average short-term borrowings of $78.0 million was split evenly
between repurchase agreements and other short-term borrowings and was incurred
primarily to finance the purchase of securities available for sale in
anticipation of the closing of the Key branch purchase. The average rate paid of
5.59% was 31 basis points (6%) higher than that of the previous year.
Interest expense on long-term debt fell $0.4 million (26%) to $1.1 million as
repayments reduced the average debt outstanding by $7.7 million (27%).
Net Interest Income
Net interest income for 1997 of $136.7 million represented an $11.1 million (9%)
increase over the previous year; this was a net result of a $20.7 million (8%)
rise in interest income and a $9.5 million (8%) increase in interest expense.
The increase in the total return on earning assets of 6 basis points was 1 basis
point less than the increase in the total average cost of interest-bearing
liabilities of 7 basis points. As a result, the net interest spread for 1997 of
3.51% was 1 basis point less than the prior year. Net interest-earning assets,
however, exceeded the previous year by $66.7 million (22%). Accordingly, the net
interest margin climbed 5 basis points (1%) over 1996 to finish the year at
3.96%.
Provision for Loan Losses
The provision for loan losses for the year ended December 31, 1997, was $7.2
million, an increase of $1.4 million (25%) over 1996. The increase reflected a
conscious effort to raise the level of the allowance for loan losses. At
year-end 1997, the allowance for loan losses totaled $29.1 million, a growth of
$5.0 million (21%) over year-end 1996. In addition to the provision for loan
losses, the allowance benefited from a $2.0 million addition that was made in
connection with the Key branch acquisition. Net chargeoffs for 1997 equaled $4.2
million compared with $8.9 million for 1996. It should be noted, however, that
1996 chargeoffs included a $4.1 million loss that was related to the sale of a
package of nonperforming one- to four-family loans that had a book value of
$10.3 million.
The provision for loan losses is utilized to maintain an allowance for loan
losses that is deemed appropriate to provide for known and inherent risks in the
loan portfolio. In determining the adequacy of the allowance for loan losses,
management takes into account the current status of the loan portfolio and
changes in appraised values of collateral as well as general economic
conditions. Although the allowance for loan losses is considered by management
to be adequate to provide for potential losses, there can be no absolute
assurance that such losses will not exceed the current estimated amounts. The
allowance for loan losses as a percentage of loans receivable at December 31,
1997, was 1.02% compared with 0.94% a year ago. At year end, the allowance as a
percentage of nonperforming loans was 92%, up from 81% at year-end 1996.
Nonperforming loans comprised 1.11% of loans receivable at December 31, 1997,
compared with 1.16% a year earlier. At year-end 1997, almost two-thirds of
nonperforming loans outstanding were secured by one- to four-family residences.
Nonperforming assets measured 0.88% and 0.96% of total assets at December 31,
1997 and 1996, respectively.
Noninterest Income
Total noninterest income increased $2.1 million (17%) to $14.3 million for the
year ended December 31, 1997, from the $12.2 million generated in the previous
year. The increase includes $0.5 million earned by ALBANK Commercial in its
first 52 days of operation and a $0.5 million recovery of the 1995 Nationar
investment write-off. The introduction of a debit card and charges for foreign
transactions on our ATM terminals netted additional fee income of approximately
$0.3 million. The remaining increase in noninterest income is primarily
attributable to increased charges for deposit services such as handling returned
checks coupled with the full year impact of the Green Mountain branches.
Noninterest Expense
Total noninterest expense for the year ended December 31, 1997, was $84.4
million, a decrease of $5.9 million (7%) from the previous year. Included in
noninterest expense for 1996 was a one-time Federal Deposit Insurance
Corporation ("FDIC") SAIF assessment of $10.4 million. Excluding the SAIF
assessment from 1996 results, noninterest expense would have increased $4.5
million (6%). Capital securities expense which totaled $2.7 million for 1997 was
a new category of noninterest expense. The expense represents the tax-deductible
carrying cost of $50 million in securities issued in June 1997 which are treated
as capital for regulatory purposes.
Compensation and employee benefits increased $2.9 million (8%) to $41.4 million
for the year ended December 31, 1997. An increase in salaries and benefits of
$3.8 million (12%) was primarily due to the expansion of the branch network from
the Green Mountain and Key branch acquisitions, additions to staff necessary to
support the formation of ALBANK Commercial and the effect of annual merit
increases. Offsetting the increase in salaries and benefits expense were
reductions in expense related to amortization of the cost of shares awarded
under the conversion related Bank Retention Plan of $0.6 million (30%) and a
reduction in temporary help expense of $0.3 million (58%).
Increases of $0.5 million (12%) in branch building depreciation and rental
expense, $0.1 million (8%) in maintenance and repairs and $0.3 million (22%) in
property taxes comprised the primary components of an increase of $0.9 million
(9%) in occupancy expense. These increases were brought about mainly by the
expansion of the branch network from the Green Mountain and Key branch
acquisitions.
Furniture, fixtures and equipment expense rose $1.4 million (26%) as
depreciation on equipment increased $1.2 million (34%) primarily as a result of
additional data processing hardware and software costs necessary to support
products and services for an expanded branch network.
As a direct result of the 1996 premium paid to the FDIC to recapitalize the
SAIF, insurance premiums paid to the FDIC decreased $2.9 million (67%) to $1.4
million for the year ended December 31, 1997.
The decrease in professional, legal and other fees of $0.3 million (8%) was
spread about evenly over reductions in legal, consulting and bank service
charges.
Telephone, postage and printing expense for 1997 was $4.7 million, an increase
of $0.3 million (7%) over the previous year. The increase is due primarily to
higher telephone expenses of $0.2 million (16%) for the year as a result of the
expanded branch network.
Goodwill amortization increased $0.8 million (26%) to $3.9 million as a direct
result of amortization of goodwill related to the Green Mountain and Key branch
acquisitions.
Other noninterest expense decreased $1.3 million (11%) to $10.7 million for the
year ended December 31, 1997. Sharing primary responsibility about equally for
the decrease were reductions in other real estate expense and an increase in
costs deferred in conjunction with new loan originations. Excluding capital
securities expense in 1997 and the FDIC special SAIF assessment in 1996, the
ratios of noninterest expense to average assets were 2.24% and 2.36% for 1997
and 1996, respectively. The efficiency ratio, calculated as noninterest expense
(excluding capital securities expense, the FDIC special SAIF assessment,
foreclosure related costs and goodwill amortization) as a percentage of net
interest income plus noninterest income (exclusive of net security transactions
and foreclosure related income), was 50.78% for 1997, down from the 54.32%
reported for 1996.
Income Tax Expense
Income tax expense for the year ended December 31, 1997, was up only $0.5
million (3%) from 1996 despite an increase of $17.7 million (42%) in pretax
income. The lower income tax expense for 1997 is due to a $6.0 million tax
benefit that resulted from a corporate restructuring that involved the
liquidation of an ALBANK, FSB subsidiary. Excluding this benefit, income tax
expense would have increased $6.5 million (42%) which corresponds to the
increase in pretax income. Excluding the restructuring benefit, the effective
income tax rate for 1997 would have been 36.9% compared with 37.2% in 1996.
Results of Operations--1996 Compared With 1995
General
Net income for 1996 decreased $3.1 million (11%) from 1995 to $26.2 million.
Basic and diluted per share earnings were a respective $1.99 and $1.87 for 1996
compared with $2.08 and $1.96 for 1995, down 4% and 5%, respectively. Return on
average equity was 8.20% compared with 9.09% in 1995, while return on average
assets was 0.77% and 0.99% for the respective years. Core net income for 1996
excluded the one-time SAIF special assessment of $6.4 million after tax while
1995 core net income excluded a $0.7 million after tax write-off of ALBANK,
FSB's investment in Nationar. Core net income equalled $32.6 million in 1996, an
increase of $2.6 million (9%) over 1995. Basic and diluted earnings per share
based on core net income were $2.48 and $2.32, respectively, for 1996 which
compared with $2.14 and $2.01 per share, respectively, earned in 1995. Return on
average equity based on core net income was 10.20% in 1996 and 9.32% in 1995;
core return on average assets totaled 0.96% and 1.01% for 1996 and 1995,
respectively. Cash earnings were $37.9 million in 1996, an increase of $4.1
million (12%) over 1995. Diluted earnings per share on a cash basis were $2.69
compared with $2.26 in 1995. Return on average tangible equity for 1996 amounted
to 13.49% compared with 11.14% the prior year, while return on tangible assets
of 1.13% compared with 1.15% in 1995.
Interest Income
Interest income of $248.5 million for 1996 was $36.0 million (17%) higher than
the prior year, as a $382.3 million (14%) increase in average interest-earning
assets that was primarily the result of the two 1996 Vermont acquisitions
combined with a 23 basis point (3%) rise in average rate earned to 7.74%.
Interest income on mortgage loans totaled $155.9 million for the year, a $30.7
million (25%) improvement from the prior year that was the result of increased
average balances of $336.9 million (21%), and an increase in the average rate
earned of 21 basis points (3%). The Vermont acquisitions accounted for
approximately two-thirds of the average balance growth.
Interest income on other loans increased $9.6 million (34%) to $38.2 million as
an increase in the average amount invested of $115.1 million (39%) was only
partially offset by a decrease of 36 basis points (4%) in the average rate
earned. Commercial loans accounted for over three-quarters of the increase in
the average balance. Again, about two-thirds of the higher average volume was
due to the Vermont acquisitions.
Interest income on securities available for sale amounted to $41.7 million, an
advance of $30.6 million (276%) over 1995 that was the net result of an increase
in average balance of $505.1 million (306%) and a 51 basis point (8%) reduction
in the average rate earned.
Earnings on investment securities declined $34.6 million (79%) from 1995 as a
net result of a $577.8 million (80%) reduction in the average amount invested
and an increase of 30 basis points (5%) in the average rate earned. A December
1995 reclassification of investment securities to securities available for sale
was largely responsible for the change in balances between these two earning
asset categories.
Interest on federal funds sold fell $0.4 million (45%) as the average amount
invested and the average rate earned dropped $6.2 million (39%) and 52 basis
points (9%), respectively. Interest income from securities purchased under
agreement to resell rose $0.3 million (18%) to $2.2 million as an increase in
the average amount invested of $7.9 million (26%) was partially offset by a
decline in the average rate earned of 40 basis points (6%).
Interest Expense
Interest expense for the year ended December 31, 1996, was $122.9 million, an
increase of $18.9 million (18%) over 1995. The higher level of expense resulted
from a $381.2 million (15%) increase in average interest-bearing liabilities and
a rise in the average rate paid of 11 basis points (3%) to 4.22%. Almost 90% of
the rise in average interest-bearing liabilities was the result of deposits
acquired in the Vermont acquisitions.
Interest paid on savings accounts declined $1.2 million (4%) and totaled $25.4
million for 1996 as average balances declined $36.7 million (4%), despite the
addition of $30.8 million in average balances that resulted from the Vermont
acquisitions, while the average rate paid declined 1 basis point.
Interest paid on transaction accounts increased by $5.0 million (72%) as the
average balance increased $127.2 million (38%) while the average rate paid rose
50 basis points (24%). About four-fifths of the average volume rise was the
result of the Vermont acquisitions.
Interest paid on certificate accounts for the year amounted to $82.7 million, an
advance of $12.4 million (18%) over 1995 as the average balance for 1996
increased $240.4 million (19%) over the prior year, while the average rate paid
declined 5 basis points (1%) compared with 1995. Again the Vermont acquisition
led to approximately four-fifths of the volume growth.
Interest paid on short-term borrowed funds and repurchase agreements increased
$1.2 million as the net effect of a $23.4 million increase in the average
balance and a 131 basis point (20%) decrease in the average rate paid.
Interest paid on long-term debt increased $1.5 million as a $26.8 million
increase in the average balance more than offset a 3 basis point (1%) decrease
in the average rate paid.
Net Interest Income
Net interest income totaled $125.6 million in 1996, an increase $17.2 million
(16%) from the prior year as interest income advanced $36.0 million (17%) while
interest expense rose $18.9 million (18%). The net interest spread increased 12
basis points (4%) to equal 3.52% for 1996, while the net interest margin
advanced 7 basis points (2%) to total 3.91%.
Provision for Loan Losses
The provision for loan losses increased to $5.8 million for 1996, up $1.3
million (28%) from the $4.5 million recorded in 1995. The allowance as a
percentage of loans receivable at year-end 1996 was 0.94% compared with 0.82% at
the end of 1995. The allowance as a percentage of nonperforming loans at
December 31, 1996, was 81% compared with 69% a year earlier. Nonperforming loans
at December 31, 1996, were 1.16% of loans receivable while nonperforming assets
to total assets were 0.96%; comparable 1995 percentages were 1.19% and 0.91%,
respectively.
Noninterest Income
Noninterest income totaled $12.2 million for 1996, an increase of $2.7 million
(29%) compared with 1995. Excluding the 1995 write-off of $1.2 million for
Nationar, the increase in noninterest income of $1.5 million (14%) was primarily
the result of service charges on deposits which rose $0.5 million (10%),
brokerage and insurance commissions which were up $0.4 million (26%) and
increased servicing income on mortgage loans of $0.3 million (19%). These
improvements in noninterest income were all positively impacted by the Company's
1996 acquisition activity and the resultant expansion of its branch network.
Noninterest Expense
Noninterest expense of $90.3 million for the year ended December 31, 1996,
included a one-time FDIC special SAIF assessment. Excluding this $10.4 million
special assessment, noninterest expense would have risen $14.1 million (21%)
over the $65.8 million recorded in 1995 primarily due to costs associated with
operating branches acquired in the Vermont acquisitions.
Compensation and employee benefits increased $6.7 million (21%) to equal $38.5
million for 1996, about two-thirds of which was directly related to the Vermont
acquisitions. The remaining increase was due to salary merit increases and
increases in employee benefit costs in nearly equal proportion.
Increases of $0.3 million (35%) in building depreciation, $0.3 million (16%) in
maintenance and repair expenses and $0.2 million (13%) in property taxes
contributed to the overall increase in occupancy expense of $0.9 million (11%)
which totaled $9.2 million for 1996. The increase was principally the result of
the Vermont acquisitions. Furniture, fixtures and equipment expense rose $1.2
million (31%) to $5.3 million in 1996, about three-fifths of which was the
result of a full year's depreciation of the Bank's 1995 data processing
upgrades.
Despite increased levels of total deposits, FDIC insurance expense declined $0.8
million (16%) below 1995 to equal $4.3 million for 1996. The reduction reflects
a change in the Bank's deposit mix as the percentage of Bank Insurance Fund
insured deposits increased as a result of deposits acquired in the two Vermont
acquisitions and a 25% reduction in the SAIF insurance rate that was effective
for the last quarter of 1996. The FDIC special SAIF assessment in 1996 of $10.4
million was a one-time charge to the Bank to recapitalize the SAIF insurance
fund; this change reduced deposit insurance premiums on SAIF insured deposits
beginning in 1997.
Professional, legal and other fees increased $0.7 million (29%) to $3.2 million
for 1996 with higher legal fees being the most significant component of the
rise. Telephone, postage and printing expense of $4.4 million for 1996 increased
$0.3 million (8%) above 1995 levels.
Goodwill amortization increased $1.5 million (96%) over 1995 levels as a direct
result of goodwill generated by the two Vermont acquisitions. Other noninterest
expense of $12.0 million represented a $3.6 million (42%) increase over 1995 due
primarily to the operation of the Bank's expanded branch network.
Excluding the FDIC special SAIF assessment in 1996, the ratios of noninterest
expense to average assets were 2.36% and 2.22% for 1996 and 1995, respectively.
The efficiency ratio of 54.32% for 1996 compared with 52.91% in 1995.
Income Tax Expense
Income tax expense for the year ended December 31, 1996, was $15.5 million, a
decrease of $2.8 million (15%) from the previous year. The decrease was the
combined result of a lower amount of income before income taxes combined with a
lower overall effective income tax rate for 1996 of 37.2% compared with 38.5% in
1995. The reduction in the effective income tax rate for 1996 resulted from a
continuing trend of tax rate reductions in New York State coupled with an
expansion of operations into the State of Vermont.
Impact of Year 2000
Much has been written about the general concern that computer systems in all
walks of life are currently incapable of adequately dealing with any date beyond
1999. As with any financial services company, computer systems play a vital role
in the daily operations of ALBANK. As such, the Board of Directors and senior
management of the Company are keenly aware of the oversight responsibilities
they have to see that an appropriate plan to deal with the "Year 2000" issue is
developed and implemented. The Company commenced work on a formal Year 2000 plan
in the Spring of 1997. That plan identifies each of the Company's systems that
need to be addressed; specifies a target date of no later than December 31,
1998, that each system is to be certified as Year 2000 compliant; and sets a
time frame during which compliant programs are to be extensively tested that
runs through June 30, 1999. The Company's plan also takes into account
third-party "vendors" on whom the Company relies, setting parameters similar to
those outlined above. Additionally, there is a separate section of the plan that
establishes standards whereby significant commercial loan and commercial real
estate customers will be surveyed to ascertain their preparedness for Year 2000
issues; such customer inquiries will provide loan officers a basis to determine
if there is undue risk that will potentially adversely affect an outstanding
credit commitment of the Company.
As a result of the Company's relatively recent conversion to a new IBM system,
approximately one-half of the systems and application software currently
installed in production are stated by the vendor to be Year 2000 compliant.
Based on this factor and the fact that there is not a significant amount of
customized programming, the Company does not currently believe that the
expenditures related to Year 2000 compliance will be material to the Company's
results of operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of Changes in Accounting Standards
Earnings per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which establishes standards for computing and presenting earnings per
share ("EPS"). This Statement simplifies the standards for computing EPS and
supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings per
Share" and related interpretations. SFAS No. 128 replaces the presentation of
primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the diluted EPS computation.
Basic EPS exclude dilution and are computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS are calculated by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period plus the share effect of dilutive common stock equivalents.
Stock options are regarded as common stock equivalents and are therefore
considered in the diluted earnings per share calculation if dilutive. All EPS
disclosures in this 1997 Annual Report Supplement comply with SFAS No. 128.
Capital Structure
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which establishes standards for disclosure about a company's
capital structure. In accordance with SFAS No. 129, companies are required to
provide in the financial statements a complete description of all aspects of
their capital structure, including call and put features, redemption
requirements and conversion options. The disclosures required by SFAS No. 129
are for financial statements issued for periods ending after December 15, 1997.
Management has provided the required information in this Annual Report
Supplement.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income.
SFAS No. 130 states that comprehensive income includes the reported net income
of a company adjusted for items that are currently accounted for as direct
entries to equity, such as the mark-to-market adjustment on securities available
for sale, foreign currency items and minimum pension liability adjustments. This
Statement is effective for fiscal years beginning after December 15, 1997.
Management anticipates developing the required information in the 1998
consolidated financial statements.
Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for reporting
by public companies about operating segments of their business. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for periods
beginning after December 15, 1997. Management will report the required
information in the 1998 consolidated financial statements.
Asset/Liability Management
The Company employs many strategies to manage interest rate risk, the general
goal of which has been to minimize fluctuations in net interest income from
changes in interest rates. This goal has been pursued actively in the management
of the mortgage loan and investment portfolios. Since the early 1980's, the
Company has generally emphasized the origination of one- to four-family
adjustable-rate mortgages ("ARMs") for portfolio retention. As a result, ARMs
represented 75% of total mortgage loans outstanding at December 31, 1997.
Additions to the investment securities and securities available for sale
portfolios in 1997 of $446.4 million generally had maturities or expected
average lives of three to five years; applying current prepayment assumptions to
the securities backed by certain tangible assets, the entire investment
portfolio at year-end 1997 had an expected average life of between three and
four years.
The interest rate risk analysis table that follows sets forth at December 31,
1997, the approximate amounts of interest-earning assets and interest-bearing
liabilities outstanding which are expected to reprice or mature within each of
the time periods indicated. Loans that have an adjustable interest rate are
shown as being due in the period during which the interest rate is next subject
to change.
Principal amortization of loans is shown in accordance with contractual terms
(scheduled amortization) and by using assumptions on the rate at which the loan
will repay in excess of scheduled amortization (prepayments). Monthly prepayment
factors were developed taking into account current economic forecasts as well as
historic prepayment activity. The monthly prepayment factors utilized were as
follows: ARMs, 0.57% to 0.99%; convertible ARMs, 3.94%; residential fixed-rate
mortgage loans, 0.11% to 1.29%; fixed-rate home equity loans, 0.97% to 1.26%;
adjustable-rate home equity loans, 1.06%; nonresidential fixed-rate mortgage
loans, 0.19% to 0.80%; consumer loans, 0.92% to 3.84%; and student loans, 1.00%.
With regard to deposit accounts, the following withdrawal/repricing rates have
been assumed: savings accounts, 20% per year; NOW and super NOW accounts, 10%
per year, in years one through four with the remainder repricing in year five;
regular money market accounts, 25% per year; premium money market accounts, 100%
repricing in less than one year. The 20% sensitivity of savings accounts
represents the portion of total savings that management believes to be interest
rate sensitive. In arriving at this judgment, management considered a number of
factors including the trend and level of overall interest rates and the review
of historic, current and projected future deposit flows. The perceived
sensitivity of premium money market accounts to interest rate shifts is
reflected in their 100% classification in the less than one year category. The
lower relative interest rate sensitivity of regular money market accounts is
reflected in their 25% per year classification. The classification of 10% of the
NOW and super NOW accounts in the less than one year category illustrates their
lesser degree of interest rate sensitivity.
Interest rate "gap" analysis is a common, though imperfect, measure of interest
rate risk. It measures the relative dollar amounts of interest-earning assets
and interest-bearing liabilities which reprice within a specific time period,
either through maturity or by rate adjustment.
A "positive" gap for a given period means that the amount of interest-earning
assets maturing or otherwise repricing exceeds the amount of interest-bearing
liabilities maturing or otherwise repricing within the same period. Accordingly,
in a rising interest rate environment, an institution with a positive gap would
generally be expected, absent the effects of other factors, to experience a
greater increase in the yield of its assets relative to the cost of its
liabilities. Conversely, the cost of funds for an institution with a positive
gap would generally be expected to decline less quickly than the yield on its
assets in a falling interest rate environment. Changes in interest rates
generally have the opposite effect on an institution with a "negative" gap.
There are some shortcomings inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities have
similar periods to maturity or to repricing, they may react in different degrees
to changes in market rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets such as adjustable-rate mortgage loans have
features which restrict changes in interest rates on a short-term basis and over
the life of the assets. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the table. Another shortcoming of gap
analysis is the fact that it is static with regard to new business volumes.
Finally, the ability of many borrowers to service their debt may decrease in the
event of a significant interest rate increase. Management takes these factors
into account when reviewing the Company's gap position and regularly runs
interest rate risk simulations to assess the effects of interest rate increases
and decreases upon net interest income and market value prior to establishing
asset/liability strategy.
As of December 31, 1997, the following table indicates that total
interest-earning assets maturing or repricing within one year exceeded total
interest-bearing liabilities maturing or repricing in the same time period by
$58.1 million.
(Dollars in thousands) December 31, 1997 One Year One to Three to Five to Over
or Less Three Years Five Years Ten Years Ten Years Total
Interest-Earning Assets
Mortgage loans $1,253,547 534,641 122,793 142,016 247,132 2,300,129<F1>
Other loans 251,545 103,764 63,051 71,098 34,648 524,106<F1>
Securities purchased under
agreement to resell 75,000 -- -- -- -- 75,000
Securities available for sale 218,260 244,785 140,032 153,839 595 757,511<F2>
Investment securities 50,613 24,638 13,123 6,597 -- 94,971
Stock in Federal Home Loan Bank -- -- -- 21,408 -- 21,408
Total interest-earning assets 1,848,965 907,828 338,999 394,958 282,375 3,773,125
Interest-Bearing Liabilities
Deposits:
Savings accounts 161,910 323,818 323,818 -- 21,172 830,718<F3>
Transaction accounts 239,218 152,260 242,866 -- -- 634,344<F4>
Certificate accounts 1,310,987 498,071 34,016 7,166 -- 1,850,240
Short-term borrowed funds
and repurchase agreements 68,747 -- -- -- -- 68,747
Long-term debt 10,000 10,000 -- -- 61 20,061
Total interest-bearing liabilities 1,790,862 984,149 600,700 7,166 21,233 3,404,110
Interest sensitivity gap per period $ 58,103 (76,321) (261,701) 387,792 261,142 369,015
Cumulative $ 58,103 (18,218) (279,919) 107,873 369,015 369,015
Cumulative interest sensitivity gap
as a percentage of total assets 1.42% (0.45)% (6.86)% 2.64% 9.04%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities 103.24% 99.34% 91.71% 103.19% 110.84%
<FN>
<F1> Mortgage and other loans are reduced for nonperforming loans but are not reduced for the allowance for loan losses.
<F2> Does not include SFAS No. 115 unrealized gain of $11,006.
<F3> Includes interest-bearing escrow accounts of $21,172.
<F4> Does not include noninterest-bearing demand deposits of $189,661.
</FN>
The following table shows the expected maturity of the Company's
interest-earning assets and interest-bearing liabilities along with the
weighted-average yield and estimated fair market value data as of December 31,
1997. Prepayment/maturity assumptions are consistent with those applied in the
interest rate sensitivity table on the immediately preceding page. Actual
prepayments/maturities obviously may differ from those assumed.
Expected Maturity Dates as of December 31, 1997
Estimated
(Dollars in thousands) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
Interest-Earning Assets
Mortgage loans $ 377,318 281,816 227,025 38,332 44,470 1,331,168 2,300,129 2,298,976
8.07% 8.03% 8.04% 8.30% 8.39% 7.91% 7.98%
Other loans $ 251,545 59,788 43,976 34,067 28,984 105,746 524,106 524,878
9.26% 9.12% 8.93% 8.90% 8.89% 9.58% 9.24%
Securities purchased
under agreement to
resell $ 75,000 -- -- -- -- -- 75,000 75,000
6.03% -- -- -- -- -- 6.03%
Securities available
for sale $ 218,260 136,623 108,162 72,310 67,722 154,434 757,511 768,517
6.19% 6.57% 6.91% 6.55% 6.59% 6.32% 6.46%
Investment securities $ 50,613 18,574 6,064 9,488 3,635 6,597 94,971 96,481
6.80% 6.73% 7.46% 7.44% 8.29% 8.22% 7.05%
Stock in Federal
Home Loan Bank $ -- -- -- -- -- 21,408 21,408 21,408
-- -- -- -- -- 7.05% 7.05%
Total interest-earning
assets $ 972,736 496,801 385,227 154,197 144,811 1,619,353 3,773,125 3,785,260
7.73% 7.71% 7.82% 7.56% 7.65% 7.86% 7.78%
Interest-Bearing
Liabilities
Deposits:
Savings accounts $ 161,910 161,909 161,909 161,909 161,909 21,172 830,718 830,718
2.84% 2.84% 2.84% 2.84% 2.84% 1.84% 2.81%
Transaction accounts $ 239,218 76,130 76,130 76,130 166,736 -- 634,344 634,344
3.49% 2.82% 2.82% 2.82% 1.10% -- 2.62%
Certificate accounts $1,310,987 442,592 55,479 24,890 9,126 7,166 1,850,240 1,863,904
5.39% 5.86% 5.77% 5.68% 5.68% 6.07% 5.52%
Short-term borrowed funds
and repurchase agreements $ 68,747 -- -- -- -- -- 68,747 68,747
5.37% -- -- -- -- -- 5.37%
Long-term debt $ 10,000 10,000 -- -- -- 61 20,061 19,998
5.41% 5.52% -- -- -- 7.47% 5.47%
Total interest-bearing
liabilities $1,790,862 690,631 293,518 262,929 337,771 28,399 3,404,110 3,417,711
4.90% 4.81% 3.39% 3.10% 2.06% 2.92% 4.31%
Quarterly Results of Operations
The Company's quarterly results of operations for the years ended December 31,
1997 and 1996 are as follows:
(In thousands, except per share data) Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
Quarterly Operating Data
Interest income $64,430 65,618 67,522 71,606
Interest expense 31,394 32,168 33,005 35,863
Net interest income 33,036 33,450 34,517 35,743
Provision for loan losses 1,800 1,800 1,800 1,800
Noninterest income 3,257 3,509 3,289 4,211
Noninterest expense 19,806 20,206 21,122 23,256
Income before income taxes 14,687 14,953 14,884 14,898
Income tax expense (benefit) 5,370 5,512 5,506 (390)
Net income $ 9,317 9,441 9,378 15,288
Core net income<F1> $ 9,317 9,282 9,378 9,162
Basic earnings per share:
Based on net income $ 0.73 0.74 0.73 1.19
Based on core net income 0.73 0.73 0.73 0.72
Diluted earnings per share:
Based on net income 0.68 0.69 0.68 1.11
Based on core net income 0.68 0.68 0.68 0.67
Dividends declared per share 0.15 0.15 0.18 0.18
(In thousands, except per share data) Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Quarterly Operating Data
Interest income $61,588 61,089 61,660 64,189
Interest expense 30,696 29,847 30,282 32,060
Net interest income 30,892 31,242 31,378 32,129
Provision for loan losses 1,425 1,425 1,425 1,500
Noninterest income 3,010 3,092 2,910 3,142
Noninterest expense 19,648 19,729 30,571 20,355
Income before income taxes 12,829 13,180 2,292 13,416
Income tax expense 5,118 5,345 644 4,403
Net income $ 7,711 7,835 1,648 9,013
Core net income<F2> $ 7,711 7,835 8,025 9,013
Basic earnings per share:
Based on net income $ 0.58 0.59 0.13 0.70
Based on core net income 0.58 0.59 0.62 0.70
Diluted earnings per share:
Based on net income 0.54 0.55 0.12 0.65
Based on core net income 0.54 0.55 0.58 0.65
Dividends declared per share 0.12 0.12 0.12 0.15
<FN>
<F1> Core net income for 1997 excludes a December 1997 tax benefit of $6.0 million
that resulted from a corporate realignment and the after-tax effect of $0.3
million related to a partial recovery of a 1995 investment write-off.
<F2> Core net income for 1996 excludes the after-tax effect of the $6.4 million special
assessment to recapitalize the SAIF.
</FN>
Independent Auditors' Report
KPMG Peat Marwick LLP
Certified Public Accountants
515 Broadway
Albany, NY 12207
The Board of Directors and Stockholders
ALBANK Financial Corporation and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of ALBANK Financial Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ALBANK Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 30, 1998
Consolidated Statements of Earnings
(In thousands, except per share data) Years Ended December 31,
1997 1996 1995
Interest Income
Mortgage loans $173,296 155,914 125,228
Other loans 45,051 38,194 28,571
Securities available for sale 41,943 41,676 11,098
Investment securities 6,767 8,959 43,520
Federal funds sold 137 508 918
Securities purchased under agreement to resell 656 2,225 1,888
Stock in Federal Home Loan Bank 1,326 1,050 1,279
Total interest income 269,176 248,526 212,502
Interest Expense
Deposits and escrow accounts 125,526 120,006 103,810
Short-term borrowed funds and repurchase agreements 5,771 1,338 125
Long-term debt 1,133 1,541 80
Total interest expense 132,430 122,885 104,015
Net interest income 136,746 125,641 108,487
Provision for loan losses 7,200 5,775 4,500
Net interest income after provision for loan losses 129,546 119,866 103,987
Noninterest Income
Service charges on deposit accounts 7,130 5,556 5,046
Net security transactions 476 8 (1,198)
Brokerage and insurance commissions 2,108 2,049 1,621
Other 4,552 4,541 3,979
Total noninterest income 14,266 12,154 9,448
Noninterest Expense
Compensation and employee benefits 41,368 38,455 31,817
Occupancy, net 10,055 9,186 8,260
Furniture, fixtures and equipment 6,651 5,270 4,036
Federal deposit insurance premiums 1,412 4,331 5,152
Federal deposit insurance special SAIF assessment -- 10,397 --
Professional, legal and other fees 2,976 3,242 2,512
Telephone, postage and printing 4,694 4,393 4,062
Goodwill amortization 3,872 3,078 1,570
Capital securities expense 2,666 -- --
Other 10,696 11,951 8,395
Total noninterest expense 84,390 90,303 65,804
Income before income taxes 59,422 41,717 47,631
Income tax expense 15,998 15,510 18,348
Net income $ 43,424 26,207 29,283
Earnings per share:
Basic $ 3.41 1.99 2.08
Diluted 3.17 1.87 1.96
See accompanying notes to consolidated financial statements.
Consolidated Statements of Financial Condition
Dollars in thousands, except per share data) December 31, 1997 1996
Assets
Cash and due from banks $ 97,389 68,883
Securities purchased under agreement to resell 75,000 --
Total cash and cash equivalents 172,389 68,883
Securities available for sale 768,517 617,943
Investment securities 94,971 116,322
Loans receivable 2,856,049 2,559,649
Less: allowance for loan losses 29,117 24,114
Loans receivable, net 2,826,932 2,535,535
Accrued interest receivable 27,837 27,092
Office premises and equipment, net 57,435 48,554
Stock in Federal Home Loan Bank, at cost 21,408 16,913
Real estate owned 3,966 4,012
Goodwill 80,281 43,482
Other assets 29,361 27,400
$4,083,097 3,506,136
Liabilities
Deposits $3,483,791 3,013,129
Escrow accounts 21,172 26,603
Accrued income taxes payable 8,289 3,938
Short-term borrowed funds and repurchase agreements 68,747 42,346
Long-term debt 20,061 30,061
Obligation under capital lease 4,542 4,646
Other liabilities 66,882 66,288
Total liabilities 3,673,484 3,187,011
Corporation-obligated manditorily redeemable capital securities of subsidiary trust 50,000 --
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock, $.01 par value. Authorized 25,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; 15,697,500 shares issued;
12,906,845 shares outstanding at December 31, 1997 and 12,910,763 at December 31, 1996 157 157
Additional paid-in capital 182,704 180,670
Retained earnings, substantially restricted 248,402 214,283
Treasury stock, at cost (2,790,655 shares at December 31, 1997 and 2,786,737
at December 31, 1996) (73,200) (71,235)
Unrealized gain on securities available for sale, net of tax 6,578 1,781
Common stock acquired by:
Employee stock ownership plan ("ESOP") (5,023) (6,279)
Bank recognition plan ("BRP") (5) (252)
Total stockholders' equity 359,613 319,125
$4,083,097 3,506,136
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Net
Unrealized
Gain (Loss) Common Common
Additional on Securities Stock Stock
Common Paid-in Retained Treasury Available Acquired Acquired
(Dollars in thousands) Stock Capital Earnings Stock for Sale by ESOP by BRP Total
Balance at January 1, 1995 $157 151,433 235,065 (58,218) (735) (8,791) (2,122) 316,789
Net income -- -- 29,283 -- -- -- -- 29,283
Purchase of treasury stock (898,053 shares) -- -- -- (24,233) -- -- -- (24,233)
Exercise of stock options -- -- (10) 70 -- -- -- 60
Tax benefits related to vested BRP stock
and stock options exercised -- 536 -- -- -- -- -- 536
Adjustment of securities
available for sale to market, net of tax -- -- -- -- 4,263 -- -- 4,263
Cash dividends declared -- -- (5,707) -- -- -- -- (5,707)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1995 157 151,969 258,631 (82,381) 3,528 (7,535) (1,187) 323,182
Net income -- -- 26,207 -- -- -- -- 26,207
Purchase of treasury stock (926,517 shares) -- -- -- (25,847) -- -- -- (25,847)
Exercise of stock options -- -- 275 745 -- -- -- 1,020
Tax benefits related to vested BRP stock
and stock options exercised -- 898 -- -- -- -- -- 898
Adjustment of securities available for sale
to market, net of tax -- -- -- -- (1,747) -- -- (1,747)
Cash dividends declared -- -- (6,779) -- -- -- -- (6,779)
Stock dividend declared -- 27,803 (64,051) 36,248 -- -- -- --
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 935 935
Balance at December 31, 1996 157 180,670 214,283 (71,235) 1,781 (6,279) (252) 319,125
Net income -- -- 43,424 -- -- -- -- 43,424
Purchase of treasury stock (154,468 shares) -- -- -- (5,057) -- -- -- (5,057)
Exercise of stock options -- -- (821) 3,092 -- -- -- 2,271
Tax benefits related to vested BRP stock
and stock options exercised -- 2,034 -- -- -- -- -- 2,034
Adjustment of securities available for sale
to market, net of tax -- -- -- -- 4,797 -- -- 4,797
Cash dividends declared -- -- (8,484) -- -- -- -- (8,484)
Amortization of ESOP stock -- -- -- -- -- 1,256 -- 1,256
Amortization of BRP stock -- -- -- -- -- -- 247 247
Balance at December 31, 1997 $157 182,704 248,402 (73,200) 6,578 (5,023) (5) 359,613
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(In thousands) Years Ended December 31, 1997 1996 1995
Increase (Decrease) in Cash and Cash EquivalentsCash
Flows from Operating Activities
Net income $ 43,424 26,207 29,283
Reconciliation of net income to net cash provided by operating activities:
Depreciation and lease amortization 6,799 5,385 3,962
Goodwill amortization 3,872 3,078 1,570
Amortization of capitalized costs related to the issuance of capital securities 27 -- --
Net amortization of premiums and accretion of discounts on securities 897 1,229 1,322
ESOP and BRP amortization 1,503 2,191 2,191
Net loss (gain) on security transactions (476) (8) 1,198
Net gain on sale of real estate owned (289) (383) (328)
Origination of loans receivable for sale (6,366) (22,631) (15,401)
Proceeds from sale of loans receivable 11,353 34,024 31,379
Provision for loan losses 7,200 5,775 4,500
Writedown of real estate owned 279 603 312
Net increase in accrued income taxes payable 6,385 277 2,632
Net decrease (increase) in accrued interest receivable (412) 2,814 (1,682)
Net increase in other assets (8,130) (619) (3,291)
Net increase (decrease) in other liabilities and obligation under capital lease (28) 18,692 (6,272)
Net cash provided by operating activities 66,038 76,634 51,375
Cash Flows from Investing Activities
Net cash provided (used) by acquisition activity 446,784 (61,439) 17,488
Proceeds from the sale of securities available for sale 15,019 22,985 --
Proceeds from the maturity or call of securities available for sale 237,738 154,445 90,008
Proceeds from the maturity or call of investment securities 71,691 70,538 173,465
Proceeds from the partial recovery of Nationar investment 453 -- --
Purchase of securities available for sale (396,110) (45,105) (79,902)
Purchase of investment securities (50,327) (25,678) (23,313)
Purchase of loans receivable (312,095) (229,342) (125,894)
Net decrease (increase) in loans receivable 53,444 (30,659) (55,387)
Redemption (purchase) of Federal Home Loan Bank stock (4,495) 2,912 (1,621)
Proceeds from the sale of real estate owned 4,944 6,950 5,648
Capital expenditures (9,558) (6,740) (9,882)
Net cash provided (used) by investing activities 57,488 (141,133) (9,390)
Cash Flows from Financing Activities
Net increase (decrease) in deposits (60,652) 20,530 (1,868)
Net increase (decrease) in escrow accounts (5,431) (8,465) 1,441
Net increase (decrease) in short-term borrowed funds and repurchase agreements 17,803 17,907 (12,010)
Proceeds from long-term debt -- 30,061 --
Repayment of long-term debt (10,000) -- (2,000)
Proceeds from issuance of capital securities 50,000 -- --
Purchase of treasury stock (5,057) (25,847) (24,233)
Dividends paid (8,117) (6,210) (5,565)
Cash proceeds from the exercise of stock options 1,434 404 60
Net cash provided (used) by financing activities (20,020) 28,380 (44,175)
Net increase (decrease) in cash and cash equivalents 103,506 (36,119) (2,190)
Cash and cash equivalents at beginning of year 68,883 105,002 107,192
Cash and cash equivalents at end of year $172,389 68,883 105,002
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest on deposits, escrows, short-term borrowed funds,
repurchase agreements and long-term debt $132,879 122,662 104,022
Income taxes 9,633 12,804 16,118
Supplemental schedule of noncash investing and financing activities:
Net reduction in loans resulting from transfers to real estate owned 4,908 5,941 5,710
Net unrealized gain (loss) on securities available for sale 8,110 (3,098) 7,251
Transfer of investment securities to securities available for sale -- -- 492,246
Tax benefits related to vested BRP stock and stock options exercised 2,034 898 536
Acquisition activity:
Fair value of noncash assets acquired 94,116 523,406 712
Fair value of liabilities assumed 540,900 461,967 18,200
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
ALBANK Financial Corporation (the "Holding Company") completed its initial
public offering on April 1, 1992. Simultaneously, the Holding Company purchased
all of the outstanding stock of ALBANK, FSB. On November 10, 1997, the Holding
Company formed ALBANK Commercial, a newly chartered New York commercial bank. To
date, the principal operations of ALBANK Financial Corporation and subsidiaries
(the "Company") have been those of ALBANK, FSB and ALBANK Commercial, along with
their respective subsidiaries.
The accounting and reporting policies of the Company conform in all material
respects to generally accepted accounting principles and to general practice
within the banking industry. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates. Certain
amounts in prior years have been reclassified to conform to current year
classifications.
The following is a description of the more significant policies which the
Company followed in preparing and presenting its consolidated financial
statements.
A. Basic Presentation
The accompanying consolidated financial statements include the accounts of the
Holding Company; its wholly owned banking subsidiaries, ALBANK, FSB and ALBANK
Commercial, along with their related subsidiaries; and its wholly owned business
trust subsidiary, ALBANK Capital Trust I. Significant intercompany transactions
and balances have been eliminated in consolidation.
B. Cash Equivalents
For purposes of the consolidated statements of financial condition and
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
C. Restriction on Cash Balances
The Company was required to retain cash funds of $19,118,000 at December 31,
1997, and $28,164,000 at December 31, 1996, to satisfy minimum reserve
requirements established by the Federal Reserve Bank of New York.
D. Securities
Securities are classified at the time of purchase as investment securities,
securities available for sale, or trading account securities. Investment
securities are those securities that management has the positive intent and
ability to hold to maturity and are carried at amortized cost. Securities
available for sale are those that management intends to hold for an indefinite
period of time. Such securities may be sold in response to changes in interest
rates, prepayment risk, liquidity needs or other similar factors. Securities
available for sale are reported at fair value, with unrealized gains and losses
reported, net of tax, as a separate component of stockholders' equity. If
securities are purchased for the purpose of selling them in the near term, they
are classified as trading securities and are reported at fair value with
unrealized gains and losses reflected in current earnings. The Company had no
trading account securities during the three-year period ended December 31, 1997.
Any portion of unrealized loss on an individual security deemed to be other than
temporary is recognized as a realized loss in the accounting period in which
such determination is made. Gains and losses on the sale of securities are
determined using the specific identification method. Discounts and premiums on
securities are accreted into or amortized against interest income using a method
which approximates the level-yield method.
E. Loans Receivable/Allowance for Loan Losses
Loans receivable are stated at unpaid principal amounts, net of unearned
discounts, unamortized premiums and deferred loan fees and costs. Discounts,
premiums and deferred loan fees and costs are accreted into or amortized against
interest income using a method that approximates the level-yield method over the
estimated lives of the loans.
When management deems full collection of all principal and interest to be
uncertain, loans are placed on nonaccrual status. Generally, nonperforming one-
to four-family residential mortgage loans continue to accrue interest income
until they become 120 days delinquent, at which time they are placed on
nonaccrual status. Most delinquent consumer loans are not placed on nonaccrual
status as they are charged against the allowance for loan losses prior to 180
days delinquency. Loans, other than consumer and residential mortgage loans,
past due 90 days or more as to principal or interest are placed on nonaccrual
status except for those loans which, in management's judgment, are adequately
secured or are in the process of collection. Generally, previously accrued
income that has not been collected is reversed from current income, and
subsequent cash receipts are applied to reduce the unpaid principal balance.
Amortization of related deferred fees is suspended when a loan is placed on
nonaccrual status.
1. Summary of Significant Accounting Policies (continued)
The Company accounts for impairment of loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosure." These Statements prescribe
recognition criteria for loan impairment, generally related to commercial type
loans. The Statements also prescribe measurement methods for certain impaired
loans as well as all loans whose terms are modified in troubled debt
restructurings. A loan is considered impaired when collection of principal and
interest is doubtful, and there is insufficient collateral or other repayment
resources available to repay the principal balance of the loan along with all
interest that would accrue until the loan is fully satisfied.
The Company generally places impaired loans on nonaccrual status and recognizes
interest income on such loans only upon receipt of interest payments from the
borrower. In some instances, all moneys received from the borrower, or from the
proceeds of collateral, are applied directly to reduce the principal balance of
the loan, and no interest income is recognized until the principal balance of
the impaired loan is paid in full or is no longer considered impaired.
The Company's subsidiary banks maintain valuation allowances for losses on loans
for estimable and probable future losses. The allowances for loan losses are
maintained at levels deemed appropriate by management to adequately provide for
known and inherent risks in the present loan portfolios. The determination of
the amount of the allowances includes estimates that are susceptible to
significant changes due to changes in appraised values of collateral and general
economic conditions. In connection with such deter mination concerning
collateral, management obtains independent appraisals for significant
properties. While management uses available information to recognize losses on
loans, future additions to the allowances may be necessary based on changes in
relevant facts and circumstances including changes in general economic
conditions. In addition, various regulatory agencies as an integral part of
their examination process periodically review the allowance for loan losses of
each subsidiary bank of the Company. Such agencies may require the subsidiary
banks to recognize additions to the allowances based on their judgments of
information available to them at the time of their examinations.
F. Real Estate Owned
It is the Company's policy to include in real estate owned assets received from
loan foreclosures and loans deemed to be in-substance foreclosures. A loan is
considered an in-substance foreclosure when the Company has taken possession of
the collateral regardless of whether formal foreclosure proceedings have taken
place.
Real estate owned is recorded on an individual asset basis at net realizable
value which is the lower of fair value minus estimated costs to sell or "cost"
(defined as the fair value at initial foreclosure). When a property is acquired,
any excess of the loan balance over fair value is charged to an allowance for
loan losses. Subsequent write-downs to carry the property at net realizable
value are included in other noninterest expense.
G. Office Premises and Equipment
Office premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization of premises and equipment are
primarily computed using the straight-line method over the estimated useful life
of the respective asset. Useful lives vary between 20 and 50 years for banking
facilities and between 3 and 15 years for furniture, fixtures and equipment.
Amortization of capital leases and leasehold improvements is computed on the
straight-line method over the lesser of the term of the lease or the useful life
of the property.
H. Goodwill
In acquisitions accounted for as a purchase, goodwill results when the
consideration paid exceeds the fair value of net assets acquired. Goodwill
resulting from acquisition activity by the Company is being amortized using the
straight-line method, generally over 15 years.
I. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes arise from the recognition
of certain items of income and expense for tax purposes in years different from
those in which they are recognized in the consolidated financial statements. The
Company records deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. To the extent that current available
evidence about the future raises doubt about the realization of a deferred tax
asset, a valuation allowance is established.
J. Treasury Stock
Repurchases of common stock are accounted for under the cost method and recorded
in a contra-equity account.
K. Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board("APB")Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense was recorded on the date of grant only if the then
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," with respect to employee stock options granted subsequent to
1994. As such, the Company has adopted the provision of SFAS No. 123 whereby it
will continue to apply the provisions of APB Opinion No. 25 in its financial
statements and supplementally provide in its footnotes to financial statements
proforma net income and proforma earnings per share disclosures as if the fair
value based method of valuing options defined in SFAS No. 123 had been applied.
L. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share," which establishes standards for computing and
presenting earnings per share. The Company adopted the provisions of SFAS No.
128 as of December 31, 1997. All earnings per share data reflect the adoption of
this Statement. Basic earnings per share are calculated by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share are calculated by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding during the period plus the share effect of
dilutive common stock equivalents. Stock options are regarded as common stock
equivalents and, therefore, are considered in the earnings per share calculation
if dilutive. Common stock equivalents are computed using the treasury stock
method.
M. Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a financial components approach that focuses on control. The
Company adopted SFAS No. 125 on January 1, 1997. The adoption of SFAS No. 125
did not have a material impact on the Company's consolidated financial
statements.
2. Restrictions on Stockholders' Equity
As part of its conversion to a stock form savings bank, ALBANK, FSB established
a liquidation account for the benefit of eligible depositors who continue to
maintain their deposit accounts in ALBANK, FSB after conversion. In the unlikely
event of a complete liquidation of ALBANK, FSB, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation account, in
the proportionate amount of the then current adjusted balance, before
distribution may be made with respect to the capital stock of ALBANK, FSB.
ALBANK, FSB may not declare or pay a cash dividend to the Holding Company, or
repurchase any of its capital stock, if the effect thereof would cause the
retained earnings of ALBANK, FSB to be reduced below the amount required for the
liquidation account. Except for such restrictions, the existence of the
liquidation account does not restrict the use or application of retained
earnings.
The capital of ALBANK, FSB exceeds all capital regulatory requirements. The
Office of Thrift Supervision ("OTS") regulations provide that an institution
that exceeds all capital requirements before and after a proposed capital
distribution could, after prior notice to but without the approval of the OTS,
make capital distributions during the calendar year of an amount that would
reduce by one half its "excess capital ratio" plus its net income for the
current calendar year. Under such limitation, ALBANK, FSB could declare
dividends to the Holding Company in 1998 of approximately $46 million plus an
amount equal to 1998 earnings.
ALBANK Commercial is subject to dividend limitations under New York Banking Law,
including a requirement that prior regulatory approval be obtained for dividends
paid in any year that would exceed ALBANK Commercial's net profits for such year
combined with retained net profits for the prior two years.
3. Acquisitions
On November 10, 1997, the Company assumed the deposit liabilities and purchased
loans owned and serviced by 35 New York State branch offices of KeyBank. The
acquisition included $540.9 million in deposits and $52.2 million in loans. This
acquisition, which was accounted for under the purchase method of accounting,
generated accounting goodwill of $40.6 million which is being amortized over 15
years.
On September 27, 1996, the Company assumed the deposit liabilities and purchased
loans owned and serviced by 6 banking offices formerly operated by the Green
Mountain Bank of Rutland, Vermont. The acquisition included $107.7 million in
deposits and loans with a net book value of $108.4 million. This acquisition,
which was accounted for under the purchase method of accounting, generated
accounting goodwill amounting to $8.2 million which is being amortized over a
period of 15 years.
On January 3, 1996, ALBANK, FSB acquired all of the outstanding common stock of
Marble Financial Corporation of Rutland, Vermont for $18.00 per share in cash or
approximately $61 million in total consideration. On the date of closing, Marble
Financial had consolidated assets and deposits of $396.2 million and $326.6
million, respectively. The transaction, which was accounted for under the
purchase method of accounting, generated accounting goodwill of $20.1 million
which is being amortized over 15 years.
4. Securities
The amortized cost and estimated market value of investment securities
are as follows:
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1997 Amortized Cost Gains Losses Market Value
U.S. Government obligations $ 1,845 8 (1) 1,852
U.S. Government agency obligations 55,000 221 -- 55,221
Mortgage-backed securities 19,815 1,348 -- 21,163
Corporate bonds 219 -- -- 219
Collateralized mortgage obligation and real estate
mortgage investment
conduit securities 7,472 8 (90) 7,390
Asset-backed securities 3,580 1 (19) 3,562
Other debt securities 7,040 34 -- 7,074
Total $ 94,971 1,620 (110) 96,481
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1996 Amortized Cost Gains Losses Market Value
U.S. Government obligations $ 1,744 9 (6) 1,747
U.S. Government agency obligations 25,140 129 -- 25,269
Mortgage-backed securities 25,082 1,456 (5) 26,533
Corporate bonds 219 -- -- 219
Collateralized mortgage obligation and real estate mortgage
investment conduit securities 34,587 21 (248) 34,360
Asset-backed securities 21,532 141 (48) 21,625
Other debt securities 8,018 35 -- 8,053
Total $116,322 1,791 (307) 117,806
There were no sales of investment securities in the three-year period ended
December 31, 1997. Gains and losses recorded on investment securities
are as follows:
(In thousands) Years Ended December 31, 1997 1996 1995
Recovery on securities previously written off $453 -- --
Gross gains recognized on call of securities -- 3 1
Write-off of securities -- -- (1,199)
Total $453 3 (1,198)
The contractual maturity schedule of investment securities at amortized cost and
estimated market value is as follows:
Estimated
(In thousands) December 31, 1997 Amortized Cost Market Value
Within 1 year $ 1,378 1,381
After 1 year through 5 years 68,156 68,413
After 5 years through 10 years 6,488 6,669
After 10 years 18,949 20,018
Total $94,971 96,481
In the foregoing table and the contractual maturity table of securities
available for sale below, maturities of mortgage-backed securities,
collateralized mortgage obligation securities, real estate mortgage investment
conduit securities and asset-backed securities are based on the maturity of the
final scheduled payment. Such securities, which comprise most of the balances
shown as maturing beyond five years, generally amortize on a regular basis,
predominantly monthly, and are subject to prepayment. Taking into account such
contractual amortization and expected prepayments, a significant amount of
principal reduction on the aforementioned securities will occur within five
years.
The amortized cost and estimated market value of securities available for sale
are as follows:
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1997 Amortized Cost Gains Losses Market Value
U.S. Government obligations $ 45,305 761 (9) 46,057
U.S. Government agency obligations 3,028 -- (24) 3,004
Mortgage-backed securities 460,939 3,523 (2,305) 462,157
Corporate bonds 193,333 1,923 (153) 195,103
Collateralized mortgage obligation and
real estate mortgage
investment conduit securities 13,385 -- (253) 13,132
Asset-backed securities 34,689 83 (13) 34,759
Equity securities 6,832 7,477 (4) 14,305
Total $757,511 13,767 (2,761) 768,517
Gross Gross
Unrealized Unrealized Estimated
(In thousands) December 31, 1996 Amortized Cost Gains Losses Market Value
U.S. Government obligations $ 75,910 604 (252) 76,262
U.S. Government agency obligations 6,032 24 (42) 6,014
Mortgage-backed securities 200,870 1,407 (2,235) 200,042
Corporate bonds 282,867 1,862 (869) 283,860
Collateralized mortgage obligation and
real estate mortgage
investment conduit securities 19,443 -- (392) 19,051
Asset-backed securities 23,093 94 (31) 23,156
Equity securities 6,832 2,732 (6) 9,558
Total $615,047 6,723 (3,827) 617,943
Proceeds from the sale of securities available for sale in 1997, 1996 and 1995
amounted to $15,019,000, $22,985,000, and $0, respectively. In 1997, gains and
losses amounted to $25,645 and $3,217, respectively. In 1996, gains and losses
amounted to $11,198 and $6,575, respectively. There were no gains or losses in
1995.
The contractual maturity schedule of securities available for sale (exclusive of
equity securities) at amortized cost and estimated market value is as follows:
Estimated
(In thousands) December 31, 1997 Amortized Cost Market Value
Within 1 year $132,571 132,261
After 1 year through 5 years 215,968 218,245
After 5 years through 10 years 174,224 175,277
After 10 years 227,916 228,429
Total $750,679 754,212
The book value of securities pledged as required by law and for other purposes
amounted to $214.3 million and $107.2 million at December 31, 1997 and 1996,
respectively. Such securities were primarily used to secure public deposits.
The Company has entered into an agreement to loan certain securities to
investment brokers for which the Company receives a fee. The total book value of
securities loaned to brokers under this agreement was approximately $25.3
million and $67.0 million at December 31, 1997 and 1996, respectively.
5. Office Premises and Equipment
A summary of office premises and equipment follows:
(In thousands) December 31, 1997 1996
Banking house, land and land improvements $44,392 37,975
Leasehold improvements 11,038 9,010
Furniture, fixtures and equipment 42,730 35,488
Capitalized lease 5,775 5,775
103,935 88,248
Less: accumulated depreciation and amortization 46,500 39,694
Total $57,435 48,554
Amounts charged to expense for depreciation and amortization aggregated
$6,799,000, $5,385,000 and $3,962,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
6. Loans Receivable
Loans receivable consist of the following:
(In thousands) December 31, 1997 1996
Mortgage Loans
One- to four-family $1,984,783 1,730,059
Home equity 164,991 169,214
Commercial real estate 111,989 135,284
Multi-family 32,968 31,792
Construction 16,393 13,338
Total 2,311,124 2,079,687
Other Loans
Commercial 285,266 241,002
Student 96,884 94,478
Automobile 68,316 64,864
Home improvement 24,737 23,593
Personal, secured and unsecured 23,731 19,444
Credit cards 13,428 14,754
Overdraft and other 21,799 16,222
Total 534,161 474,357
Total mortgage and other loans 2,845,285 2,554,044
Net discounts, premiums and deferred loan fees and costs 10,764 5,605
Loans receivable $2,856,049 2,559,649
Real estate mortgage loans serviced for other institutions of approximately
$260.8 million and $289.7 million at December 31, 1997 and 1996, respectively,
are not included in loans receivable.
Nonperforming loans are as follows:
(In thousands) December 31, 1997 1996 1995
Mortgage Loans
Nonaccrual $18,477 15,298 12,571
Delinquent more than 90 days and still accruing 2,871 7,367 5,567
Total nonperforming mortgage loans 21,348 22,665 18,138
Other Loans
Nonaccrual 6,074 3,933 372
Delinquent more than 90 days and still accruing 4,392 3,218 4,646
Total nonperforming other loans 10,466 7,151 5,018
Total nonperforming loans $31,814 29,816 23,156
Assuming all nonaccrual loans had been current, the amounts of interest income
recorded on such loans during the years ended December 31, 1997, 1996 and 1995,
based on such loans' original rates of interest, would have totaled $2.1
million, $1.7 million and $1.0 million, respectively. The amounts included in
interest income recorded in these periods with respect to such loans were
$452,000, $320,000 and $295,000, respectively. The Company has no commitments to
extend further credit on nonaccrual loans.
Certain directors and executive officers of the Company, as well as certain
affiliates of directors, were customers of and had other transactions with the
Company in the ordinary course of the Company's business. Loans to these parties
were made in the ordinary course of business at the Company's normal credit
terms, including interest rate and collateralization. The aggregate of such
loans totaled $1,679,000 and $463,000 at December 31, 1997 and 1996,
respectively. Total advances to these directors and executive officers during
the year ended December 31, 1997, were $1,592,000. Total payments made on these
loans were $376,000.
7. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
(In thousands) Years Ended December 31, 1997 1996 1995
Balance, beginning of year $24,114 15,949 15,510
Allowance recorded/acquired from acquisition activity 2,000 11,310 --
Provision charged to operations 7,200 5,775 4,500
Loans charged off (5,272) (9,648) (4,421)
Recoveries of loans previously charged off 1,075 728 360
Balance, end of year $29,117 24,114 15,949
Of the total loans charged off in 1996, $4.1 million was related to a sale of a
group of one- to four-family nonperforming loans.
8. Accrued Interest Receivable
Accrued interest receivable consists of the following:
(In thousands) December 31, 1997 1996
Loans $18,558 18,193
Securities available for sale 7,405 7,669
Investment securities 1,081 1,019
Other earning assets 793 211
Total $27,837 27,092
9. Accounting by Creditors for Impairment of a Loan
The allowance for loan losses related to impaired loans is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent loans).
Impaired loans at December 31, 1997 and 1996, were generally collateral
dependent. The Company considers estimated costs to sell, on a discounted basis,
when determining the fair value of collateral in the measurement of impairment
if those costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
At December 31, 1997 and 1996, the recorded investment in loans that were
considered to be impaired under SFAS No. 114 totaled $3,210,000 and $4,358,000,
respectively. Restructured loans included in the foregoing impaired loan
balances amounted to $272,000 and $320,000 at the respective year-end dates. The
allowance for loan losses allocated to impaired loans at December 31, 1997 and
1996, was $1,053,000 and $1,375,000, respectively. The average recorded
investment in impaired loans during the twelve months ended December 31, 1997,
1996 and 1995, was approximately $3,345,000, $3,560,000 and $1,433,000,
respectively.
Impaired loans are included in nonperforming loans generally as nonaccrual
loans. Commercial loans past due greater than 90 days and still accruing are
generally not considered to be impaired as the Company expects to collect all
amounts due, including interest accrued at the contractual interest rate for the
delinquent period. As of December 31, 1997, the balance of loans restructured
prior to the adoption of SFAS No. 114 amounted to $163,000; such loans were not
considered impaired.
The Company did not recognize interest income on any impaired loans during the
three-year period ended December 31, 1997.
10. Real Estate Owned
A summary of real estate acquired through foreclosure follows:
(In thousands) December 31, 1997 1996
Residential (1-4 family) $2,251 2,750
Commercial properties 1,715 1,262
Total $3,966 4,012
11. Deposits
A summary of depositors' balances is as follows:
(Dollars in thousands) December 31, 1997 1996
Weighted- Weighted-
Amount Average Rate Amount Average Rate
Passbook and statement accounts $ 809,546 2.84% $ 824,151 2.94%
Certificate accounts:
2.01% to 3.00% 9,420 9,215
3.01% to 4.00% 9,340 11,908
4.01% to 5.00% 218,927 411,986
5.01% to 6.00% 1,466,338 967,800
6.01% to 7.00% 90,313 110,113
7.01% to 8.00% 53,675 69,572
8.01% to 9.00% 2,227 3,196
9.01% to 10.00% -- --
10.01% to 11.00% -- 135
Total certificate accounts 1,850,240 5.52 1,583,925 5.37
Money market accounts 356,449 3.60 260,521 3.14
Super NOW accounts 22,556 1.81 27,908 1.82
NOW accounts 246,846 1.11 195,479 1.02
Commercial demand deposit accounts
from 0% to 2.25% in 1997 and
0% to 2.47% in 1996 116,706 0.12 74,238 0.29
Demand deposit accounts 81,448 -- 46,907 --
Total $3,483,791 4.05% $3,013,129 3.99%
At December 31, 1997 and 1996, the aggregate amounts of certificate accounts
with balances equal to or in excess of $100,000 were approximately $232.3
million and $174.5 million, respectively.
The approximate amount of contractual maturities of certificate accounts for the
years subsequent to December 31, 1997, is as follows:
(In thousands) Amount
1998 $1,310,987
1999 442,592
2000 55,479
2001 24,890
2002 9,126
Thereafter 7,166
Total $1,850,240
Components of interest expense on deposits and escrow accounts
are detailed as follows:
(In thousands) Years Ended December 31, 1997 1996 1995
Passbook and statement accounts $ 23,303 24,773 25,870
Certificate accounts 88,286 82,735 70,341
Money market accounts 10,785 9,320 4,346
Super NOW and NOW accounts 2,570 2,499 2,557
Commercial demand deposit accounts 194 79 22
Escrow accounts 388 600 674
Total $125,526 120,006 103,810
12. Short-Term Borrowed Funds and Repurchase Agreements
Short-term borrowed funds and repurchase agreements, consisting of advances with
original maturities of less than one year are as follows:
(Dollars in thousands) December 31, Interest Rate 1997 1996
Federal Home Loan Bank advances 6.13% to 6.88% $47,000 --
6.88% to 7.38% -- 36,000
Repurchase agreements 3.50% to 5.00% 21,097 --
4.00% -- 4,796
Other short-term borrowings 5.88% 650 --
6.00% -- 1,550
Total $68,747 42,346
Short-term Federal HomeLoan Bank advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities, and are collateralized by Federal Home Loan Bank stock and real
estate mortgages. The Company enters into sales of securities under short-term,
fixed coupon repurchase agreements. Such agreements are accounted for as
financings and the repurchase agreements are reflected as liabilities on the
Company's consolidated statements of financial condition. During the period of
such agreements, the underlying securities (which may take the form of
mortgage-backed or other qualifying securities) are transferred to a segregated
account held by the Company's custodian.
13. Long-Term Debt
The contractual maturity of long-term debt, consisting of advances from the
Federal Home Loan Bank with original maturities of one year or more, is as
follows:
(Dollars in thousands) December 31, Interest Rate 1997 1996
Year of Maturity:
1997 5.40% $ -- 10,000
1998 5.41% 10,000 10,000
1999 5.52% 10,000 10,000
2016 7.47% 61 61
Total $20,061 30,061
Long-term Federal HomeLoan Bank advances are collateralized by Federal Home Loan
Bank stock and real estate mortgages.
14. Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust
On June 6, 1997, the Holding Company through ALBANK Capital Trust I (the
"Trust"), a 100% owned subsidiary business trust formed for the sole purpose of
issuing capital securities, issued $50 million of 9.27% capital securities due
June 6, 2027 (the "Capital Securities"). The Capital Securities qualify as Tier
I capital under regulatory definitions.
The net proceeds of the Capital Securities, along with the funds provided by the
Holding Company to the Trust as a capital contribution, were lent by the Trust
to the Holding Company as long-term junior subordinated debentures. The
debentures are subordinated to all Holding Company debt, but senior to all
common stock. The Holding Company, in turn, used the proceeds for general
corporate purposes. The Capital Securities, which are callable at a premium, in
whole or in part, on or after June 6, 2007, include provisions that provide for
the temporary deferral of dividend payments for up to five years under certain
conditions.
The long-term junior subordinated debentures are the sole assets of the Trust,
and interest payments on such debentures are the Trust's sole revenue source.
The Holding Company's primary sources of funds to pay interest on the
subordinated debentures are current dividends from its subsidiary banks.
Accordingly, the Holding Company's ability to service the subordinated
debentures is dependent upon the continued ability of its subsidiary banks to
pay dividends.
15. Income Taxes
Income tax expense consists of the following:
(In thousands) Years Ended December 31, 1997 1996 1995
Current tax expense:
Federal $12,427 10,860 15,648
State 3,158 2,835 3,626
15,585 13,695 19,274
Deferred tax expense (benefit) 413 1,815 (926)
Total $15,998 15,510 18,348
The income tax provisions differ from the statutory federal income tax rate. The
reasons for the differences are as follows:
Years Ended December 31, 1997 1996 1995
% of % of % of
Pretax Pretax Pretax
(Dollars in thousands) Amount Amount Amount Amount Amount Amount
Federal income tax at 35% $20,798 35.0% $14,601 35.0% $16,671 35.0%
Federal income tax benefit
of corporate realignment (5,963) (10.0) -- -- -- --
State income taxes, net of
federal tax benefit 2,053 3.4 1,843 4.4 2,357 4.9
Tax-exempt income and dividend
received deduction (345) (0.6) (272) (0.7) (178) (0.4)
Other (545) (0.9) (662) (1.5) (502) (1.0)
Total $15,998 26.9% $15,510 37.2% $18,348 38.5%
Prior to 1996, ALBANK, FSB was allowed to claim a special bad debt deduction in
excess of its actual loss experience; such special deduction was not subject to
deferred tax allocation prior to 1988 in accordance with SFAS No. 109.
Accordingly, no deferred tax liability has been recorded for the tax bad debt
reserve at December 31, 1987 (the "base year reserve"). The pre-1988 tax bad
debt reserve, which was approximately $27.3 million at December 31, 1997, will
not be subject to tax as long as ALBANK, FSB does not redeem stock or distribute
amounts to the Company in excess of historical tax earnings.
As a result of tax legislation passed by Congress in 1996, ALBANK, FSB is no
longer eligible to claim the special bad debt deduction for federal income tax
purposes. The total federal tax bad debt reserve, aggregating approximately
$33.5 million at December 31, 1995, exceeds the base year reserve by
approximately $6.2 million (the "excess reserve"). The excess reserve is to be
recaptured as taxable income over a defined number of years. The Company had
previously established a deferred tax liability for this excess reserve such
that there is no impact on total tax expense for the Company for 1997 or any
future year based on current tax rates.
Significant net temporary differences and carryforwards that give rise to net
deferred tax assets are as follows:
(In thousands) December 31, 1997 1996
S>
Allowance for loan losses $ 8,030 6,279
Net operating loss carryforwards 10 247
Employee benefit plans 6,267 5,589
Net deferred fees on loans (3,086) (1,225)
Prepaid expenses (1,483) (1,907)
Accrued expenses 822 1,246
Unrealized gain on securities available for sale (4,428) (1,115)
Other items (267) (92)
5,865 9,022
Valuation reserve (1,558) (1,689)
Net deferred tax asset--at year end 4,307 7,333
Less: net deferred tax asset--at beginning of year 7,333 4,597
Decrease (increase) in deferred tax asset 3,026 (2,736)
Change in temporary difference for unrealized (gain) loss on securities available for sale (3,313) 1,351
Deferred tax asset recorded/acquired from acquisition activity 700 3,200
Deferred tax expense for the years ended $ 413 1,815
The Company established valuation reserves at December 31, 1997 and 1996, based
on an evaluation of the Company's historical levels of taxable income in prior
years and the anticipated time period for the reversal of the items giving rise
to the deferred tax asset. Management believes that it is more likely than not
that the results of future operations of the Company will generate sufficient
taxable income to realize the net deferred tax asset as of December 31, 1997.
16. Postretirement Benefits Other Than Pensions
The Company sponsors defined benefit postretirement medical and life insurance
plans that cover full-time employees who have retired and met minimum age and
service requirements. The medical plan currently does not require a contribution
from qualified pre-1993 retirees 65 or older; the Company's frozen contribution
on behalf of all other qualified retirees varies based on years of service. The
Company's postretirement life insurance plan is currently 100% employer paid.
The following table sets forth the plans' funded status and amounts recognized
in the consolidated financial statements:
(In thousands) December 31, 1997 1996
Accumulated postretirement benefit obligation:
Retired employees $(5,902) (5,586)
Active employees (3,418) (2,520)
Unfunded postretirement benefit obligation (9,320) (8,106)
Unrecognized net loss resulting from past experience
different from that assumed and changes in assumptions 1,191 521
Accrued postretirement benefit liability $(8,129) (7,585)
Net periodic postretirement benefit cost included the following components:
(In thousands) Years Ended December 31, 1997 1996 1995
Service cost--benefits earned during the year $237 169 81
Interest cost 652 580 474
Net amortization and deferral 28 6 (56)
Net periodic postretirement benefit cost $917 755 499
For measurement purposes, an 8.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal year 1998; the rate was
assumed to decrease gradually down to 5.5% for fiscal year 2003 and remain at
that level thereafter. The healthcare cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997, by $745,000 (8%) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for fiscal year 1997
by $64,000 (7%). The weighted-average discount rates used in determining the
accumulated postretirement benefit obligation were 7.35%, 7.50% and 7.25% as of
December 31, 1997, 1996 and 1995, respectively.
17. Retirement Plans
The Company maintains a noncontributory defined benefit pension plan covering
substantially all employees 21 years of age or older who have completed at least
one year of service. The amounts contributed to the plan are determined annually
on the basis of (a) the maximum amount that can be deducted for federal income
tax purposes or (b) the amount certified by a consulting actuary as necessary to
avoid an accumulated funding deficiency as defined by the Employee Retirement
Income Security Act of 1974. Contributions are intended to provide for benefits
attributed to service to date and for those expected to be earned in the future.
Assets of the plan are primarily invested in pooled equity funds and fixed
income funds.
The following table sets forth the plan's funded status and amounts recognized
in the consolidated financial statements at or for the years ended December 31,
1997 and 1996:
(In thousands) December 31, 1997 1996
Accumulated benefit obligation, including vested benefits
of $22,931 in 1997 and $21,081 in 1996. $(23,805) (23,488)
Projected benefit obligation for service rendered to date $(30,958) (30,379)
Plan assets at fair value 38,331 33,261
Plan assets greater than projected benefit obligation 7,373 2,882
Unrecognized net loss (gain) from past experience different
from that assumed and effects and changes in assumptions (4,598) 359
Unrecognized prior service cost 657 758
Unrecognized net asset at July 1, 1987, being recognized
over a weighted-average period of 13 years (681) (879)
Prepaid pension asset $2,751 3,120
Net periodic pension cost includes the following components:
(In thousands) Years Ended December 31, 1997 1996 1995
Service cost--benefits earned during the year $ 1,102 820 561
Interest cost on projected benefit obligation 2,149 2,119 1,959
Actual return on plan assets (7,241) (4,245) (5,196)
Net amortization and deferral 4,359 1,652 2,994
Net periodic pension cost $ 369 346 318
Significant assumptions used in the accounting for the plan are as follows:
As of December 31, 1997 1996 1995
Settlement rate 7.35% 7.50% 7.50%
Expected long-term rate of return on plan assets 9.00 8.50 8.50
Salary increase rate 5.00 5.00 5.00
The Company also has a directors' retirement plan which was amended to freeze
participation in the plan to directors who were participants in the plan on
January 1, 1992. The directors' retirement plan, which is unfunded, provides a
benefit of $500 for each quarter of service not to exceed 40 quarters or a total
annual maximum pension payment of $20,000. The amount of pension liability
recorded on the books of the Company related to the directors' retirement plan
was $2.7 million and $2.4 million at December 31, 1997 and 1996, respectively.
Net periodic pension costs for this plan for the years ended December 31, 1997,
1996 and 1995, were $240,000, $248,000 and $284,000, respectively. Settlement
rates used in accounting for the plan were 7.35%, 7.50% and 7.50% as of December
31, 1997, 1996 and 1995, respectively.
The Company also has supplemental retirement contracts with certain key
executives. The amount of pension liability recorded on the books of the Company
related to these supplemental retirement contracts was $1.4 million and $1.0
million at December 31, 1997 and 1996, respectively. Net periodic pension costs
in connection with these contracts for the years ended December 31, 1997, 1996
and 1995 were $285,000, $239,000 and $173,000, respectively. Settlement rates
used in accounting for the plan were 7.35%, 7.50% and 7.50% as of December 31,
1997, 1996 and 1995, respectively.
18. Stock Benefit Plans
At December 31, 1997, the Company had several stock-based compensation plans,
which are described below. As allowed by SFAS No. 123, the Company has continued
to apply APB Opinion No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans. Alternatively, had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value based method
outlined in SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the proforma amounts indicated below:
(In thousands, except per share data) Years Ended December 31, 1997 1996 1995
Net income:
As reported $43,424 26,207 29,283
Proforma 42,499 25,822 29,236
Basic earnings per share:
As reported 3.41 1.99 2.08
Proforma 3.33 1.96 2.08
Diluted earnings per share:
As reported 3.17 1.87 1.96
Proforma 3.10 1.84 1.95
Under the 1992 Incentive Stock Option Plan as amended, the Company may grant up
to 1,674,500 shares to senior officers. Under this plan, the exercise price of
each option equals the market price of the Company stock on the date of grant.
Options granted before December 18, 1995, become exercisable on a cumulative
basis in equal installments at a rate of one-fifth per year commencing one year
from the date of grant; however, all options become 100% exercisable in the
event the employee's employment is terminated due to death, disability or in the
event of a change in control of ALBANK, FSB or the Company. Options granted on
or after December 18, 1995, become exercisable on a cumulative basis in equal
installments at a rate of one-third per year commencing one year from the date
of grant. All options granted under the 1992 Incentive Stock Option Plan as
amended give rise to a "limited right" with respect to the shares covered by the
options. Limited rights granted are subject to certain terms and conditions and
can be exercised only in the event of a change in control of the Company. Upon
exercise of a limited right, the holder shall receive from the Company a cash
payment equal to the difference between the exercise price of the option and the
fair market value of the underlying shares of the Company's common stock. All
options granted under the 1992 Incentive Stock Option Plan as amended, including
limited rights, expire ten years following the date of grant.
Under the 1992 Directors' Option Plan, the Company granted to directors who were
not officers or employees of the Company options to acquire 330,000 shares.
Under this plan, the exercise price of each option equals the market price of
the Company stock on the date of grant with limited rights. Options are
exercisable by a director on a cumulative basis in equal installments at the
rate of one-fifth per year commencing one year from the date of grant; however,
all options become 100% exercisable in the event a director dies or becomes
disabled or in the event of a change in control of ALBANK, FSB or the Company.
All options granted under this Directors' Option Plan, including limited rights
which have characteristics similar to the rights granted under the 1992
Incentive Stock Option Plan as amended, expire upon the earlier of ten years
following the date of grant or one year following the date the optionee's term
as a director or a director emeritus expires.
18. Stock Benefit Plans (continued)
Under the 1995 Directors' Option Plan, which superseded the 1992 Directors'
Option Plan, the Company may grant up to 240,000 options to acquire shares to
directors who are not officers or employees of the Company. Options are
exercisable by a director on a cumulative basis in equal installments at a rate
of one-third per year commencing one year from the date of grant. All other
significant provisions of this plan are identical to those of the 1992
Directors' Option Plan.
In connection with the acquisition of Marble, the Company assumed liability for
the Marble stock option plan (the "Marble Option Plan"). All options granted
under the Marble Option Plan were converted to options to acquire 0.732 shares
of ALBANK stock, based on the market price of the Company's stock and cash
consideration paid for the Marble common stock on the acquisition date. All
options granted under these plans have an original maximum term of ten years
from the date of grant and are fully vested. The Company recorded a liability of
$1,867,000 for the estimated fair value of these options on the assumption date.
In regard to the disclosure required by SFAS No. 123, the fair value of each of
the option grants in the years ended December 31, 1997, 1996 and 1995 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1997, 1996 and
1995, respectively: dividend yields of 1.40%, 1.91% and 1.92%; expected
volatility of 25%, 25% and 25%; risk-free interest rates of 5.74%, 6.50% and
5.60%; and expected lives of 7.5 years for all plan options.
A summary of the status of the Company's fixed-stock option plans as of December
31, 1997, 1996 and 1995 is as follows:
Years Ended December 31, 1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 1,715,973 $12.9633 1,464,960 $10.7550 1,263,960 $ 8.5791
Granted 166,650 48.0000 192,000 31.1146 208,200 23.8809
Assumed in acquisition -- -- 112,362 8.1784 -- --
Exercised (150,550) 9.5248 (53,349) 7.5708 (7,200) 8.3333
Outstanding at end of year 1,732,073 $16.6332 1,715,973 $12.9633 1,464,960 $10.7550
Options exercisable at end of year 1,355,619 1,113,893 722,400
Weighted-average fair value of
options granted during the year $2,876,000 $2,077,000 $1,611,000
The following table summarizes information about fixed-stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
$6.6598 to $9.9999 1,115,959 4.1 years $ 8.3007 1,115,959 $ 8.3007
$10.0000 to $14.9999 31,464 5.2 years 13.3605 25,464 13.3424
$15.0000 to $24.9999 250,000 7.3 years 22.9923 158,200 22.7236
$25.0000 to $34.9999 168,000 8.9 years 32.0179 55,996 32.0179
$35.0000 to $48.0000 166,650 10.0 years 48.0000 -- --
$6.6598 to $48.0000 1,732,073 5.6 years $16.6332 1,355,619 $11.0582
Incentive Savings and Employee Stock Ownership Plans
ALBANK, FSB maintains an Incentive Savings Plan which is a tax-qualified defined
contribution plan. All salaried employees of the Company become eligible to
participate in the plan after completing one year of service. The Incentive
Savings Plan was amended effective April 1, 1992, to discontinue after-tax
contributions and instead provide for pretax contributions pursuant to Section
401(k) of the Internal Revenue Code. The plan as amended requires a minimum age
of 21 for participation.
In connection with the amendment of the Incentive Savings Plan, ALBANK, FSB
established an employee stock ownership plan ("ESOP"). The ESOP borrowed $12.4
million from the Holding Company and, along with $126,000 contributed by ALBANK,
FSB, purchased 8%, or 1,255,800 shares, of common stock issued in ALBANK, FSB's
conversion to stock form. The cost of the purchased shares is being amortized
over a ten-year period. At December 31, 1997, the total unamortized cost of $5.0
million is reflected as a reduction of stockholders' equity. Shares purchased by
the ESOP are held in a suspense account for allocation among participants as the
ESOP loan is repaid. ALBANK, FSB's current intention is to repay the loan in
substantially equal installments over a remaining term of four years. ALBANK,
FSB will make scheduled discretionary cash contributions as approved by the
Board of Directors to the ESOP at least sufficient to fund the scheduled
principal and interest payments on the debt of the ESOP. During 1997 and 1996,
dividends on unallocated ESOP shares amounting to $511,000 and $427,000,
respectively, were used to reduce the Company's compensation expense. The
Company has elected to make payments on the loan obligation equal to the amount
of these dividends; such amounts were used to reduce the regularly scheduled
principal and interest payments due on the ESOP obligation. At December 31, 1997
and 1996, the loan had an outstanding balance of $5.0 million and $6.3 million,
respectively, and respective interest rates of 8.25% and 8.00%, both of which
were based on the prime lending rate less 0.25%. Interest paid by ALBANK, FSB on
the obligation of $499,000 and $596,000 for the years ended December 31, 1997
and 1996, respectively, was eliminated in consolidation. ESOP shares are
allocated to contributing participants in ALBANK, FSB's amended 401(k) plan in
order to satisfy the Company's minimum matching obligation. The shares released
from the ESOP in excess of the amount necessary to satisfy the minimum matching
allocation of the 401(k) plan are allocated to eligible employees on the basis
of compensation subject to Internal Revenue Code limitations. In connection with
these plans, an expense of $731,000, $815,000 and $790,000 was recognized for
the years ended December 31, 1997, 1996 and 1995, respectively.
Bank Recognition Plans and Trusts
In conjunction with ALBANK, FSB's conversion, a BRP was established to acquire,
in the aggregate, 3% of the shares of common stock issued in the conversion to
provide employees, officers, and directors of the Company with a proprietary
interest in the Holding Company in a manner designed to encourage such persons
to remain with the Company. ALBANK, FSB's BRP trustee acquired a total of
470,925 shares of common stock in the conversion and an additional 6,183 shares
during the first quarter of 1993. The BRP vests on the anniversary of the date
of award at a rate of one-fifth per year. The BRP becomes 100% vested in the
event an employee, officer or director's employment is terminated due to death,
disability or in the event of a change in control of ALBANK, FSB or the Company.
The $4.8 million contributed to the BRP is being amortized to compensation
expense as the Company's employees become vested in those shares. Amortized
expense related to the BRP of $224,000, $900,000 and $907,000 was recognized for
the years ended December 31, 1997, 1996 and 1995, respectively. The expense
includes the pro-rata amount of shares earned but not yet vested. The Bank
distributed 91,011, 93,583 and 80,010 shares of common stock pursuant to the BRP
during the years ended December 31, 1997, 1996 and 1995, respectively. The
unamortized cost is reflected as a reduction of stockholders' equity.
19. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
the Company to disclose estimated fair values for its financial instruments.
SFAS No. 107 defines fair value of financial instruments as the amount at which
the instrument could be exchanged in a current transaction between willing
parties other than in a forced or liquidation sale. SFAS No. 107 defines a
financial instrument as cash, evidence of ownership interest in an entity, or a
contract that imposes on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other financial
instruments on potentially unfavorable terms with a second entity and conveys to
that second entity a contractual right to receive cash or another financial
instrument from the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
office premises and equipment. In addition, tax ramifications related to the
realization of the unrealized gains and losses on securities available for sale,
which can have a significant effect on fair value estimates, have not been
considered in the estimates of fair value under SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Bank's branch network and
other items generally referred to as "goodwill".
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments:
(In thousands) December 31, 1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Cash and cash equivalents $ 172,389 172,389 68,883 68,883
Securities available for sale 768,517 768,517 617,943 617,943
Investment securities 94,971 96,481 116,322 117,806
Stock in Federal Home Loan Bank 21,408 21,408 16,913 16,913
Accrued interest receivable 27,837 27,837 27,092 27,092
Loans receivable 2,845,285 2,847,151 2,554,044 2,595,445
Allowance for loan losses (29,117) -- (24,114) --
Net discounts, premiums and deferred loan fees and costs 10,764 -- 5,605 --
Loans receivable, net 2,826,932 2,847,151 2,535,535 2,595,445
Deposits:
Demand deposits 198,154 198,154 121,145 121,145
Passbook, statement, NOW and super NOW accounts 1,078,948 1,078,948 1,047,538 1,047,538
Money market accounts 356,449 356,449 260,521 260,521
Certificates of deposit 1,850,240 1,863,904 1,583,925 1,589,489
Escrow accounts 21,172 21,172 26,603 26,603
Short-term borrowed funds and repurchase agreements 68,747 68,747 42,346 42,346
Long-term debt 20,061 19,998 30,061 29,958
Capital securities 50,000 57,302 -- --
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks, federal funds sold and
securities purchased under agreement to resell (collectively defined as ("cash
and cash equivalents"), accrued interest receivable and stock in the Federal
Home Loan Bank is considered to be equal to fair value as a result of their
short-term nature or limited marketability.
Securities Available for Sale and Investment Securities
The fair value of securities available for sale and investment securities is
estimated based on bid prices published in financial newspapers and bid
quotations received from either quotation services or securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one- to four-family,
commercial real estate, consumer and commercial loans. Each loan category is
further segmented into fixed- and adjustable-rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the contractual term of the loans to maturity, adjusted for
estimated prepayments.
The fair value estimate for credit card loans is based on the value of existing
loans at December 31, 1997 and 1996. This estimate does not include the value of
estimated cash flows from new loans generated from existing cardholders over the
remaining life of the portfolio.
Fair value for nonperforming loans is based on recent external appraisals and
discounting of cash flows. Estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower information.
Deposits and Escrow Accounts
Under SFAS No. 107, the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, passbook, statement, NOW and super NOW
accounts, money market accounts and escrow accounts, is estimated to be the
amount payable on demand as of December 31, 1997 and 1996. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. As per SFAS No. 107, the fair value
estimates of deposit liabilities in the foregoing table do not include the
benefit that results from the low cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the debt market.
Short-Term Borrowed Funds and Repurchase Agreements, Long-Term Debt and Capital
Securities
The fair value of short-term borrowed funds and repurchase agreements for 1997
and 1996 is considered to be equal to the carrying amount due to their
short-term nature. The fair value of long-term debt for 1997 and 1996 and
capital securities for 1997 is estimated using the present value of the
anticipated cash flows related to the debt considering the remaining maturity
and yield.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. Fees such as these are not a major part of
the Company's business. Based on an analysis of the foregoing factors, the fair
value of these items is deemed insignificant at December 31, 1997 and 1996.
20. Commitments and Contingent Liabilities
A. Financial Instruments with Off-Balance Sheet Risk and Concentrations
of Credit
The Company enters into financial agreements in the normal course of business
that have off-balance sheet risk. These agreements include commitments to extend
credit and standby letters of credit and involve, to varying degrees, elements
of credit risk in excess of the amount recognized on the consolidated statements
of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit and standby letters of credit is
represented by a contractual amount. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments.
Off-balance sheet commitments are as follows:
(In thousands) December 31, 1997 1996
Mortgage loans $ 43,671 30,314
Home equity loans 75,742 81,353
Commercial real estate loans 7,833 9,726
Construction loans 5,746 12,247
Credit cards 41,348 42,002
Commercial loans 104,039 98,115
Student loans 4,818 6,322
Overdraft loans 31,109 17,883
314,306 297,962
Standby letters of credit 2,801 1,599
Total $317,107 299,561
The range of interest rates on fixed-rate commitments was 5.50% to 18.00% at
December 31, 1997, and 7.13% to 18.00% at December 31, 1996. The Company offers
a variety of adjustable-rate mortgage ("ARM") products on one- to four-family
residential dwellings. Generally, the principal one-year ARM offered by the
Company has a 2.00% annual interest rate adjustment cap, and uses the weekly
average from the one-year Treasury Constant Maturity Index, plus a margin of
3.00%, as an index for rate adjustments. The lifetime rate ceilings for one-year
ARM originations generally are 6.00% over the initial first year rate. Another
one-year product offered by the Company is an ARM that is convertible to a fixed
rate loan between the 13th and 60th months. Three- and, five-year ARMs are also
available; such loans have a 3.00% periodic adjustment cap at the first
adjustment date and a 2.00% cap in all subsequent years. Additionally, 3/1, 5/1,
and 7/1 ARMs are offered that are fixed for 3, 5 and 7 years, respectively, then
adjust annually thereafter. The Company does not originate loans which provide
for negative amortization. Loan terms vary from 5 to 30 years.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if any, required
by the Company upon the extension of credit is based on management's credit
evaluation of the customer. Mortgage and construction loan commitments are
secured by a first lien on real estate. Collateral on extensions of credit for
commercial loans varies but may include accounts receivable, inventory,
property, plant and equipment, and income producing commercial property.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support borrowing arrangements. The credit risk involved in
issuing standby letters of credit is essentially the same as that involved in
extending loan facilities to customers.
B. Leases
The Company leases branch office facilities and equipment used in its operations
which are accounted for as operating leases. These leases expire (excluding
renewal options) in periods ranging from 1 to 25 years. The Company also
occupies its main office building under a lease agreement which is accounted for
as a "capital lease" for financial reporting purposes. Minimum rental
commitments under operating and capital leases at December 31, 1997 are as
follows:
(In thousands) Operating Leases Capital Leases
1998 $ 2,064 415
1999 1,935 415
2000 1,620 415
2001 1,375 415
2002 1,240 415
Thereafter 6,218 6,241
Total minimum lease payments 14,452 8,316
Imputed interest at 6.76% n.a. 3,774
Present value of minimum lease payments $ n.a. 4,542
Rent expense aggregated $2,859,000, $2,544,000 and $2,082,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
C. Litigation
There are legal proceedings against the Company arising in the ordinary course
of business. Although it is not possible to determine the ultimate outcome of
the Company's legal proceedings, management believes that the outstanding
litigation will not result in material losses to the Company upon resolution.
21. Earnings Per Share
The following table reconciles basic and diluted earnings per share
calculations:
(Dollars in thousands, except per share data)
Years Ended December 31, 1997 1996 1995
Net Average Per Share Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
Basic earnings per share $43,424 12,746,012 $3.41 $26,207 13,146,097 $1.99 $29,283 14,046,507 $2.08
Dilutive effect of
stock options and grants 953,770 902,074 910,849
Diluted earnings per share $43,424 13,699,782 $3.17 $26,207 14,048,171 $1.87 $29,283 14,957,356 $1.96
22. Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition as of December 31,
1997 and 1996, and condensed statements of earnings and cash flows for each of
the years in the three-year period ended December 31, 1997, for ALBANK Financial
Corporation (parent company only) should be read in conjunction with the
consolidated financial statements and accompanying notes.
Statements of Financial Condition (Parent Company Only)
(In thousands) December 31, 1997 1996
Assets
Cash and cash equivalents $ 26,625 13,813
Securities available for sale 14,152 9,453
Investment securities 6,191 6,715
Loan receivable from ESOP 5,023 6,279
Equity in net assets of subsidiaries 360,384 284,813
Intercompany accounts receivable 3,129 3,037
Other assets 1,424 180
$416,928 324,290
Liabilities
Accrued income taxes payable $2,782 1,031
Junior subordinated debentures 51,547 --
Other liabilities 2,986 4,134
Total liabilities 57,315 5,165
Stockholders' Equity
Preferred stock -- --
Common stock 157 157
Additional paid-in capital 182,704 180,670
Retained earnings 248,402 214,283
Treasury stock (73,200) (71,235)
Unrealized gain on securities available for sale, net of tax 6,578 1,781
Common stock acquired by ESOP (5,023) (6,279)
Common stock acquired by BRP (5) (252)
Total stockholders' equity 359,613 319,125
$416,928 324,290
Statements of Earnings (Parent Company Only)
(In thousands) Years Ended December 31, 1997 1996 1995
Interest income $ 3,036 1,984 2,091
Interest expense 2,721 63 215
Net interest income 315 1,921 1,876
Noninterest income -- 2 157
Noninterest expense 818 967 782
Income (loss) before income taxes and equity in earnings of subsidiaries (503) 956 1,251
Income tax expense (benefit) (320) 256 459
Income (loss) before equity in earnings of subsidiaries (183) 700 792
Equity in earnings of subsidiaries 43,607 25,507 28,491
Net income $43,424 26,207 29,283
Statements of Cash Flows (Parent Company Only)
(In thousands) Years Ended December 31, 1997 1996 1995
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $ 43,424 26,207 29,283
Reconciliation of net income to net cash provided (used) by operating
activities:
Equity in earnings of subsidiary (43,607) (25,507) (28,491)
Net amortization of premiums and accretion of discounts on securities (4) 28 102
Net decrease (increase) in other assets (1,246) (51) 61
Net increase in intercompany accounts receivable (92) (964) (47)
Net increase in accrued income taxes payable 851 103 5
Net increase (decrease) in other liabilities (678) 2,372 (128)
Net cash provided (used) by operating activities (1,352) 2,188 785
Cash Flows from Investing Activities
Net decrease in loan receivable from ESOP 1,256 1,256 1,256
Investment in ALBANK Commercial (67,880) -- --
Investment in ALBANK Capital Trust (1,547) -- --
Proceeds from the maturity of investment securities 528 506 7,852
Proceeds from the maturity of securities available for sale -- 10,000 --
Purchase of investment securities -- -- (2,963)
Purchase of securities available for sale -- (2,065) (3,205)
Net cash provided (used) by investing activities (67,643) 9,697 2,940
Cash Flows from Financing Activities
Net decrease in repurchase agreements -- -- (11,800)
Dividends received 42,000 32,000 28,000
Dividends paid (8,117) (6,210) (5,565)
Proceeds of junior subordinated debentures 51,547 -- --
Purchase of treasury stock (5,057) (25,847) (24,233)
Cash proceeds from the exercise of stock options 1,434 404 60
Net cash provided (used) by financing activities 81,807 347 (13,538)
Net increase (decrease) in cash and cash equivalents 12,812 12,232 (9,813)
Cash and cash equivalents at beginning of year 13,813 1,581 11,394
Cash and cash equivalents at end of year $ 26,625 13,813 1,581
Supplemental Disclosures of Cash Flow Information
Net unrealized gain on securities available for sale $ 4,699 1,282 1,149
Tax benefits related to stock options exercised 1,081 100 40
23. Regulatory Capital Requirements
ALBANK, ALBANK Commercial and ALBANK, FSB are each subject to federal regulatory
capital requirements, administered respectively by the Federal Reserve Board,
the Federal Deposit Insurance Corporation ("FDIC") and the OTS (collectively,
the "Regulators").
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies, such as ALBANK (on a consolidated basis with their
subsidiaries), and the FDIC has adopted comparable guidelines for state
non-member banks such as ALBANK Commercial. For holding companies and state
non-member banks, the minimum ratio of qualifying total capital to risk-weighted
assets (including certain off-balance sheet items) is 8%, with "Tier 1 capital"
(principally common equity, retained earnings and certain types of preferred
stock) comprising at least half that amount. In addition, the Federal Reserve
Board has established a minimum leverage ratio (Tier 1 capital to average total
assets) to supplement its risk-based ratio, and the FDIC has adopted
substantially similar requirements. The applicable capital guidelines provide
for a minimum leverage ratio of 3% for the bank holding companies and banks that
meet certain specified criteria, including those having the highest regulatory
rating. All other institutions are required to maintain a leverage ratio of at
least 4%. The Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
The OTS requires savings associations such as ALBANK, FSB to comply with each of
three separate capital adequacy standards. They must have "tangible" capital
equal to at least 1.5% of adjusted total assets and "risk-based capital" equal
to at least 8% of risk-weighted assets (including certain off-balance sheet
items), of which 4% must be "core capital." In addition, ALBANK, FSB must
maintain a "leverage ratio" of 3% of core capital (analogous to "Tier 1
capital") to adjusted total assets. The OTS has proposed that the 3% core
capital requirement apply only to the strongest institutions and that all other
institutions maintain core capital of at least 4% or more of adjusted total
assets depending on the circumstances and the respective institution's risk
profile.
Under their prompt corrective action regulations, the Regulators are required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to undercapitalized institutions. Such actions could have a direct
material effect on an institution's financial statements. The regulations
establish a framework for the classification of institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage ratio of at
least 5%; a Tier 1 risk-based capital ratio of at least 6%; and a total
risk-based capital ratio of at least 10%.
As of December 31, 1997, ALBANK's leverage ratio, Tier 1 risk-based ratio and
total risk-based ratio were 8.38%, 12.97% and 14.15%, respectively. ALBANK
Commercial's leverage ratio, Tier 1 risk-based ratio and total risk-based ratio
were 7.91%, 14.95% and 16.01%, respectively. ALBANK, FSB's tangible capital
ratio, core ("leverage") ratio, Tier 1 risk-based ratio and total risk-based
ratio were 6.67%, 6.67%, 10.81% and 11.99%, respectively. At December 31, 1996,
ALBANK, FSB's tangible capital ratio, core ("leverage") ratio, Tier 1
risked-based ratio and total risk-based ratio were 7.00%, 7.00%, 10.80% and
11.88%, respectively.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the Regulators about capital components,
risk weightings and other factors.
Management believes that the Holding Company and Banks met all pertinent
regulatory capital adequacy requirements at December 31, 1997 and 1996.
Furthermore, the most recent OTS notification categorized ALBANK, FSB as a
well-capitalized institution under the prompt corrective action regulations.
There have been no conditions or events since the most recent notification that
management believes have changed the capital classification of ALBANK, FSB. As
of December 31, 1997, ALBANK and ALBANK Commercial had not as of yet received
capital adequacy categorizations from their respective Regulators.
LOGO ALBANK
ALBANK Financial Corporation
10 North Pearl Street
Albany, NY 12207-2774
(518) 445-2100