SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
(Name of Registrant as Specified in its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: common
stock, par value $.01 per share, of the Registrant.
(2) Aggregate number of securities to which transaction applies:
689,055shares.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $15 million aggregate price for
all outstanding shares of the Registrant.
(4) Total fee paid: $3,000.00
[ X ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by Registration Statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
[ADIRONDACK FINANCIAL SERVICES BANCORP, INC. LETTERHEAD]
April 26, 1999
Dear Fellow Stockholder:
On behalf of the Board of Directors and management of Adirondack Financial
Services Bancorp, Inc., we cordially invite you to attend the special meeting of
stockholders of Adirondack. The meeting will be held at 4:00 p.m., New York
time, on May 24, 1999, at the office of Adirondack located at 52 North Main
Street, Gloversville, New York 12078.
At the Meeting, you are being asked to adopt a merger agreement with CNB
Bancorp, Inc. and a subsidiary of CNB. If the merger takes place, you will
receive cash in exchange for your Adirondack shares. The amount of cash you will
receive is currently expected to be approximately $21.92 per share, although
that amount could be reduced under certain circumstances as explained in the
enclosed Proxy Statement. Your Board of Directors unanimously recommends that
you vote FOR the adoption of the merger agreement.
We encourage you to attend the Meeting in person. Whether or not you plan
to attend, however, please read the enclosed Proxy Statement and then complete,
sign and date the enclosed proxy and return it in the accompanying postpaid
return envelope as promptly as possible. This will save us additional expense in
soliciting proxies and will ensure that your shares are represented at the
meeting.
Thank you for your attention to this important matter.
Very truly yours,
Lewis E. Kolar
President and Chief Executive Officer
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
52 North Main Street
Gloversville, New York 12078
(518) 725-6331
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on May 24, 1999
Notice is hereby given that the special meeting of stockholders of
Adirondack Financial Services Bancorp, Inc. will be held at the office of
Adirondack located at 52 North Main Street, Gloversville, New York, at 4:00
p.m., New York time, on May 24, 1999.
A proxy card and a Proxy Statement for the meeting are enclosed.
The meeting is for the purpose of considering and acting upon:
1. The adoption of the Agreement of Merger, dated as of January 23, 1999, as
amended, by and among Adirondack, CNB Bancorp, Inc. and CNB Acquisition
Corp., and the approval of the transactions contemplated by that
agreement;
and such other matters as may properly come before the meeting, or any
adjournments or postponements thereof. Our Board of Directors is not aware of
any other business to come before the meeting.
Any action may be taken on the foregoing proposal at the meeting on the
date specified above, or on any date or dates to which the meeting may be
adjourned or postponed. Stockholders of record as of the close of business on
April 26, 1999 are the stockholders entitled to vote at the meeting and any
adjournments or postponements thereof. A complete list of stockholders entitled
to vote at the meeting will be available for inspection by stockholders at the
office of Adirondack during the ten days prior to the meeting as well as at the
meeting.
You are requested to complete and sign the enclosed proxy card, which is
solicited on behalf of our Board of Directors, and to mail it promptly in the
enclosed envelope. The proxy card will not be used if you attend and vote at the
meeting in person.
By Order of the Board of Directors
Richard D. Ruby
Chairman of the Board
Gloversville, New York
April 26, 1999
- --------------------------------------------------------------------------------
Important: The Prompt Return of Proxies Will Save Adirondack The Expense
of Further Requests For Proxies to Ensure a Quorum at The Meeting.
A Self-addressed Envelope Is Enclosed For Your Convenience.
No Postage Is Required If Mailed Within The United States.
- --------------------------------------------------------------------------------
Proxy Statement
of
Adirondack Financial Services Bancorp, Inc.
52 North Main Street
Gloversville, New York 12078
(518) 725-6331
This Proxy Statement relates to a proposed merger between Adirondack and a
subsidiary of CNB Bancorp, Inc. CNB has agreed to pay $15 million for all
outstanding shares of Adirondack stock or approximately $21.92 per share,
although this amount may be reduced under certain circumstances. For a complete
explanation of how your payment will be calculated, see "Merger Consideration,"
page 7.
We cannot complete the merger unless the stockholders of our company and
the regulatory authorities approve it. We will hold a meeting of our
stockholders to vote on this merger proposal. Your vote is very important.
Whether or not you plan to attend the stockholder meeting, please take the time
to vote by completing and mailing the enclosed proxy card. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will be
counted as a vote in favor of the merger. Not returning your card or not
instructing your broker how to vote any shares held for you in "street name"
will have the same effect as a vote against the merger.
The date of this Proxy Statement is April 26, 1999. This Proxy Statement
and the accompanying notices and proxy cards are first being mailed to
stockholders of Adirondack on or about May 4, 1999.
1
TABLE OF CONTENTS
THE SPECIAL MEETING..........................................................1
Vote Required and Proxy Information.......................................1
Voting Securities and Principal Holders Thereof...........................1
THE MERGER...................................................................3
General...................................................................3
Background and Reasons for the Merger.....................................3
Opinion of CRG............................................................4
Recommendations of the Board of Directors.................................7
Merger Consideration......................................................7
Treatment of Adirondack Stock Options.....................................8
Appraisal Rights..........................................................8
Delivery of Cash..........................................................9
Interests of Directors and Officers in the Merger That Are Different From
Your Interests..........................................................9
Representations and Warranties............................................9
Conditions to the Merger.................................................10
The Bank Merger .........................................................10
Regulatory Approvals.....................................................10
Termination..............................................................10
Covenants Pending Closing................................................11
Expenses; Accounting Treatment...........................................11
Federal Income Tax Consequences of the Merger............................11
BUSINESS OF CNB BANCORP, INC................................................12
BUSINESS OF ADIRONDACK FINANCIAL SERVICES BANCORP, INC......................12
General..................................................................12
Lending Activities.......................................................15
Asset Quality............................................................24
Investment Activities....................................................29
Mortgage-Backed Securities...............................................30
Sources of Funds.........................................................32
Subsidiary Activities....................................................34
Competition..............................................................34
Employees................................................................34
Properties...............................................................35
Litigation...............................................................35
ADIRONDACK STOCK PRICES AND DIVIDEND INFORMATION............................37
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF ADIRONDACK FINANCIAL SERVICES BANCORP, INC.............................38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 1998...................................40
Forward Looking Statements...............................................40
Year 2000 ("Y2K") Issues.................................................40
Financial Condition......................................................41
Comparison of Operating Results for the Three-Month Periods Ended
December 31, 1998 and 1997.............................................42
Liquidity and Funding....................................................43
Capital..................................................................44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998.............44
Financial Condition......................................................45
Asset/Liability Management...............................................46
Comparison of Operating Results for the Years Ended September 30, 1998
and 1997...............................................................47
Comparison of Operating Results for the Years Ended September 30, 1997
and 1996...............................................................50
Asset Quality ...........................................................52
Liquidity................................................................53
Impact of Inflation and Changing Prices .................................54
Impact of New Accounting Standards.......................................54
Year 2000 Issues ........................................................55
i
INDEPENDENT ACCOUNTANTS.....................................................56
STOCKHOLDER PROPOSALS.......................................................56
OTHER MATTERS...............................................................57
INDEX TO FINANCIAL STATEMENTS
OF ADIRONDACK FINANCIAL SERVICES BANCORP, INC...............................58
APPENDICES
I. Agreement of Merger (omitting schedules and exhibits) II.Fairness Opinion
of Capital Resources Group, Inc. IIIText of Section 262 of the Delaware
General Corporation Law
ii
THE SPECIAL MEETING
This Proxy Statement is furnished in connection with the solicitation on
behalf of the Board of Directors of Adirondack Financial Services Bancorp, Inc.
of proxies to be used at a special meeting of stockholders to be held at the
office of Adirondack, located at 52 North Main Street, Gloversville, New York,
on May 24, 1999, at 4:00 p.m., New York time, and all adjournments and
postponements of the meeting. At the meeting, you are being asked to consider
and vote on the adoption of the Agreement of Merger, dated as of January 23,
1999, as amended, by and among Adirondack, CNB Bancorp, Inc. and CNB Acquisition
Corp., and the approval of the transactions contemplated by that agreement.
Vote Required and Proxy Information
All shares of our common stock represented at the meeting by properly
executed proxies will be voted at the meeting in accordance with the
instructions thereon. If no instructions are indicated, properly executed
proxies will be voted for the adoption of the merger agreement. The Board of
Directors does not know of any other matters that are to come before the
meeting. If any other matters are properly presented at the meeting for action,
the persons named in the enclosed form of proxy and acting pursuant thereto will
have the discretion to vote on such matters in accordance with their best
judgment.
The affirmative vote of a majority of all shares entitled to vote is
necessary to adopt the merger agreement. Proxies marked to abstain with respect
to the merger and broker non-votes will have the same effect as votes against
the merger. In all other matters, the affirmative vote of the majority of shares
on the matter shall be the act of the stockholders. One-third of the shares of
the common stock, present in person or represented by proxy, shall constitute a
quorum for purposes of the meeting. Abstentions and broker non-votes are counted
for purposes of determining a quorum.
A proxy given pursuant to this solicitation may be revoked at any time
before it is voted. Proxies may be revoked by: (i) filing with the Secretary of
Adirondack at or before the meeting a written notice of revocation bearing a
later date than the proxy, (ii) duly executing a subsequent proxy relating to
the same shares and delivering it to the Secretary of Adirondack at or before
the meeting, or (iii) attending the meeting and voting in person (although
attendance at the meeting will not in and of itself constitute revocation of a
proxy). Any written notice revoking a proxy should be delivered to Priscilla J.
Bell, Secretary, Adirondack Financial Services Bancorp, Inc., 52 North Main
Street, Gloversville, New York 12078.
On April 22, 1999, in connection with the settlement of outstanding
litigation against it, Adirondack entered into a Settlement and Standstill
Agreement with a number of stockholders who are believed to beneficially own
approximately 130,580, or 19.08%, of the outstanding shares of Adirondack common
stock. See "Business of Adirondack Financial Services Bancorp, Inc. -
Litigation." Under the terms of the standstill agreement, the parties have
agreed, among other things and subject to certain conditions, to vote in favor
of the merger and against any proposal or nomination opposed by Adirondack's
Board of Directors.
Voting Securities and Principal Holders Thereof
The record date for this special meeting is April 26, 1999. Stockholders of
record as of the close of business on the record date will be entitled to one
vote for each share then held. As of that date, Adirondack had 684,348 shares of
common stock issued and outstanding. The following table sets forth information
regarding share ownership of: (i) those persons or entities known by management
to beneficially own more than five percent of the common stock and (ii) all
directors and executive officers of Adirondack and Gloversville Federal Savings
and Loan Association as a group.
1
Shares Beneficially Owned Percent
Beneficial Owner at April 26, 1999 of Class
- ------------------------------------------------ ----------------------------- ---------
Five Percent Beneficial Owners
Gloversville Federal Savings and Loan Association 52,900(1) 7.73%
Employee Stock Ownership Plan.
Colvin G. Ryan(2)(3) 63,780 9.32
724 Fleming Farm Road
The Plains, VA 22171
Morris Massry(2)(4) 53,000 7.74
2 Cobblehill Road
Loudonville, NY 12211
SG Cowen Securities Corporation(5) 35,510 5.19
1221 Avenue of the Americas
New York, NY 10278
Directors and Named Officers
Lewis E. Kolar, Director, President and
Chief Executive Officer 9,242(6) 1.35%
Priscilla J. Bell, Director and Corporate Secretary 4,250(7) (9)
Timothy E. Delaney, Director 15,000(7) 2.19%
Donald I. Lee, Director 500(7) (9)
Richard D. Ruby, Director and Chairman of the Board 16,000(7) 2.34%
Robert J. Sofarelli, Director 1,420(7) (9)
All directors and officers as a group (7 persons) 47,854(8) 6.99%
- ---------------------
(1) The amount reported represents shares held by the Employee Stock Ownership
Plan ("ESOP"), 5,290 of which have been allocated to accounts of
participants. Community Bank N.A. of Utica, New York, the trustee of the
ESOP, may be deemed to beneficially own the shares held by the ESOP that
have not been allocated to accounts of participants. Participants in the
ESOP are entitled to instruct the trustee as to the voting of shares
allocated to their accounts under the ESOP. Unallocated shares held in the
ESOP's suspense account are voted by the trustee in the manner directed by
the majority of the participants who directed the trustee as to the manner
of voting their shares in the ESOP with respect to such issue. Shares for
which no voting instructions are received are voted by the trustee in the
trustee's discretion.
(2) Messrs. Ryan and Massry are parties to an agreement generally obligating
them, subject to certain conditions, to vote in favor of the merger and the
Board's nominees for director. See "Business of Adirondack Financial
Services Bancorp, Inc. - Litigation."
(3) Based on information included in a Schedule 13D/A filed by Colvin G. Ryan
with the Securities and Exchange Commission on October 13, 1998. Mr. Ryan's
principal occupation is believed to be President of Lee and Mason
Financial, Inc., an insurance agency. Mr. Ryan claimed sole voting power
and sole dispositive power with respect to all of the shares of common
stock reported in the Schedule 13D/A.
(4) Based on information included in a Schedule 13D filed by Morris Massry with
the Securities and Exchange Commission on October 16, 1998. Mr. Massry's
principal occupation is believed to be real estate investment. Mr. Massry
claimed sole voting power and sole dispositive power with respect to all of
the shares of common stock reported in the Schedule 13D.
2
(5) Based on information included in a Schedule 13G filed by SG Cowen
Securities Corporation ("SG") with the Securities and Exchange Commission
on February 8, 1999. SG is a broker/dealer and investment advisor which
claimed voting power over none of the shares of common stock reported and
shared dispositive power with respect to all of the shares of common stock
reported.
(6) Does not include either 6,613 unvested restricted shares as to which the
holder has no voting or dispositive power, or options to purchase 13,225
shares which may not be exercised within 60 days of the record date.
(7) Does not include either 1,322 unvested restricted shares as to which the
holder has no voting or dispositive power, or options to purchase 3,306
shares which may not be exercised within 60 days of the record date.
(8) Includes shares held directly, as well as shares held jointly with family
members, shares held in retirement accounts, held in a fiduciary capacity
or by certain family members, with respect to which shares the listed
individuals or group members may be deemed to have sole or shared voting
and/or investment power. This amount also includes an aggregate of 1,177
shares allocated to the accounts of participants under the ESOP. Does not
include any awards made under Adirondack's 1998 Stock Option and Incentive
Plan or the 1998 Recognition and Retention Plan as no such awards are yet
vested.
(9) Less than 1%.
The directors of Adirondack have entered into voting agreements whereby
such directors have agreed to vote all shares of Adirondack owned by them
(46,412 shares in the aggregate) for approval of the merger agreement. As of the
record date, the directors and executive officers of CNB and their affiliates as
a group beneficially owned 4,000 shares of Adirondack common stock.
THE MERGER
The information in this Proxy Statement concerning the terms of the merger
is qualified in its entirety by reference to the full text of the merger
agreement, which is attached as Appendix I and incorporated by reference herein.
You are urged to read the merger agreement in its entirety.
General
If the merger takes place, Adirondack will be merged with a subsidiary of
CNB and you will receive cash for your Adirondack shares. Our Board of Directors
expects that you will receive approximately $21.92 in cash for each share of
Adirondack that you own, but this amount may vary. Please read carefully the
section titled "Merger Consideration" on page 7.
After the conditions to consummation of the merger described below have
been satisfied or waived (unless the merger agreement has been terminated),
Adirondack and CNB will file a certificate of merger with the Secretary of State
of Delaware that will make the merger effective.
Background and Reasons for the Merger
On November 7, 1998 and November 17, 1998, Adirondack's Board conducted an
extensive review of the strategic issues and choices facing Adirondack. In
particular, the Board sought to identify what future course of action would be
in the best interests of shareholders. The Board reviewed Adirondack's
operations and financial position, its competitive position within its local
market area, its ability to grow in the current economic environment, the costs
and risks of diversifying its revenue stream through new products and services
and its ability to reduce expenses. The Board also considered Adirondack's
business plan, alternative earnings scenarios prepared by management, additional
ways to enhance profitability, Adirondack's current stock price and the current
acquisition environment. The Board then analyzed, with the assistance of its
financial advisor, Capital Resources Group, Inc. ("CRG"), whether remaining
independent would be in the best interests of Adirondack's stockholders. As a
part of this process, the Board and CRG performed quantitative and qualitative
analyses in order to estimate the price that Adirondack would receive in a
merger transaction. The Board then compared the present value of the projected
cash flows which would accrue to the shareholders (under several different
earnings scenarios) were Adirondack to remain independent with the estimated
price that Adirondack would receive from a merger. Based on this analysis, the
Board concluded that it would be in the best interests of the stockholders to
explore the merger or sale of Adirondack.
3
The Board then considered an expression of interest which it had received
from another financial institution interested in acquiring Adirondack. After an
analysis of this potential acquiror and a discussion of the benefits which could
accrue to shareholders from a combination with this potential acquiror, the
Board concluded that it would be in the best interests of Adirondack's
stockholders to explore such a combination and authorized CRG to open
negotiations with it on Adirondack's behalf.
On December 16, 1998, the Board reviewed the progress of the negotiations
with the potential acquiror and the price per share that it had proposed. CRG
indicated that it believed that there were other potential acquirors that might
be willing to pay a higher price than the first potential acquiror. After
in-depth discussions and analyses of the process which would likely result in
the highest price per share and of various institutions that might be interested
in acquiring Adirondack, the Board authorized CRG to contact the two potential
acquirors, one of which was CNB, which it had identified as most likely (based
on financial capacity and business focus) to pay a high price per share to
acquire Adirondack.
On January 6, 1999, CRG informed the Board that the first potential
acquiror was willing to increase its proposed price per share by a modest amount
and that each of the two additional potential acquirors had initially expressed
interest in acquiring Adirondack at prices well in excess of the first potential
acquiror's most recent proposed price per share. The Board was further informed
that CNB's proposed price per share was significantly higher than the top of the
range of the other additional potential acquiror and that such other additional
potential acquiror had terminated discussions when it learned that Adirondack
was in discussions with other parties . The Board was also informed that CNB had
indicated that time was of the essence and that it was not willing to become
involved in a bidding war to acquire Adirondack. Furthermore, the Board was
informed that the consideration offered in the CNB proposal was cash and that
CNB would not consider changing its proposed consideration to stock without a
very substantial price reduction. Finally, the Board was informed that CNB had
insisted on a price reduction if Adirondack's capital was below a specified
level as of the month end prior to closing (the "minimum equity provision").
After reviewing (i) CNB's expression of interest, (ii) the factors considered at
the November 1998 strategic planning meetings, (iii) the fact that CNB's
proposed price was well above the price which CRG had originally estimated that
Adirondack would likely receive in a sales transaction and (iv) the advice of
its financial advisor, the Board authorized CRG and Adirondack's management to
commence negotiations with CNB on a definitive acquisition agreement.
On January 19, 1999, the Board reviewed the progress of negotiations with
CNB. At the meeting, CRG indicated its strong recommendation of the proposed
transaction. The Board also reviewed a draft of the definitive acquisition
agreement and noted that CNB had made most of the requested changes but had
refused to delete the minimum equity provision. On January 23, 1999, CRG
presented its formal financial analysis of the transaction and advised the Board
that the merger consideration offered by CNB was fair to Adirondack's
stockholders from a financial point of view. After reviewing the details of the
proposed definitive acquisition agreement and noting the statement of CNB that
it was unwilling to make any more material concessions (including the removal of
the minimum equity provision from the definitive acquisition agreement), the
Board concluded that the merger was in the best interests of Adirondack and its
stockholders and authorized the execution of the definitive acquisition
agreement.
Opinion of CRG
Adirondack retained CRG as its financial advisor in connection with the
merger and requested that CRG render its opinion with respect to the fairness,
from a financial point of view, of the merger consideration to the stockholders
of Adirondack. CRG rendered its written opinion to the Adirondack Board that, as
of January 23, 1999, the merger consideration was fair, from a financial point
of view, to the stockholders of Adirondack. CRG has consented to the inclusion
of this opinion as Appendix II and the related disclosure in this Proxy
Statement.
The full text of the opinion of CRG, which is attached as Appendix II to
this Proxy Statement, sets forth certain assumptions made, matters considered
and limitations on the review undertaken by CRG, and should be read in its
entirety. CRG's opinion should not be construed by holders of Adirondack shares
as a recommendation as to how such holders should vote at the special meeting.
CRG is an investment banking and financial consulting firm which, as part
of its specialization in financial institutions, is regularly engaged in
providing financial valuations and analyses of business enterprises and
securities in connection with mergers, acquisitions, mutual-to-stock
conversions, initial and secondary stock offerings and
4
other corporate transactions. The Adirondack Board chose CRG because of its
expertise, experience and familiarity with Adirondack and the financial
institution industry and its prior work for and relationship with Adirondack in
connection with Adirondack's initial public offering of common stock. CRG
reviewed the terms of the merger agreement and the related financial data and
reviewed these issues with the Board of Directors and executive management of
Adirondack. No limitations were imposed on CRG by the Adirondack Board with
respect to the investigation made or procedures followed by it in rendering its
opinion. As discussed previously, CRG participated in the negotiations between
Adirondack and CNB in which the amount of consideration for the Adirondack
shares was agreed upon.
In the course of rendering its fairness opinion, the following factors were
considered by CRG:
1. The proposed terms of the merger agreement;
2. The audited financial statements of Adirondack for the fiscal years
ended September 30, 1994 through 1998, the quarterly reports to the
OTS covering the period through September 30, 1998, the latest
available asset/liability reports and other miscellaneous
internally-generated management information reports and business plan,
as well as other publicly available information;
3. Annual Report on Form 10-K for fiscal 1998, which provides a
discussion of Adirondack's business and operations and a review of
various financial data and trends;
4. Discussions with executive management of Adirondack regarding the
business operations, recent financial condition and operating results
and future prospects of Adirondack;
5. Comparisons of Adirondack's financial condition and operating results
with those similarly sized thrift institutions operating in New York
and the United States;
6. Comparisons of Adirondack's financial condition and operating
performance with the published financial statements and market price
data of publicly traded thrift institutions in general and publicly
traded thrift institutions in Adirondack's region of the United States
specifically;
7. The relevant market information regarding the shares of common stock
of Adirondack including trading activity and information on options to
purchase shares of common stock;
8. Other financial and pricing analyses and investigations as deemed
necessary, including a comparative financial analysis and review of
the financial terms of other pending and completed acquisitions of
companies considered to be generally similar to Adirondack;
9. Examination of Adirondack's economic operating environment and the
competitive environment of Adirondack's market area; and
10. Available financial reports and financial data for CNB, including the
annual report to stockholders and form 10-K report covering the fiscal
year ended December 31, 1997, quarterly reports, other internal and
regulatory financial reports provided by management of CNB and other
published financial data; CNB's banking office network; and the
pricing trends of CNB's common stock and dividend payment history.
11. Visits to CNB's administrative and executive offices and interviews
with CNB's management.
The fairness opinion states that CRG has relied on the accuracy and
completeness of the information provided by the parties to the agreement and
obtained by it from public sources and the representations and warranties in the
merger agreement, without independent verification. CRG did not make an
independent evaluation or appraisal of the assets and liabilities of Adirondack
and CNB.
The summary set forth below describes the approaches utilized by CRG in
support of its fairness opinion. It does not purport to be a complete
description of the analyses performed by CRG in this regard.
Overview of Valuation Methodology. In preparing its fairness opinion, CRG
has evaluated whether the financial proposal for acquisition is fair from a
financial point of view to the stockholders of Adirondack. The fairness of the
acquisition offer is determined by comparing the offer to acquisition offers
received by other
5
comparable types of companies over a time-frame that reflects a similar economic
environment. The comparison included an examination of key financial
characteristics of the comparative acquisition companies, including balance
sheet, earnings and credit risk characteristics.
Adirondack's key operating statistics and ratios were compared to a select
group of thrift institutions that have also been the subject of a proposed or
completed acquisition. It is important to note that the comparative group
utilized in the fairness opinion was comprised only of thrift institutions
(rather than commercial banks), given the distinctive financial, operating and
regulatory characteristics of the thrift industry. These thrift institutions
were divided into two broad categories for purposes of the analysis; (a)
institutions that have recently completed an acquisition; and (2) institutions
subject to a pending acquisition. CRG reviewed relevant acquisition pricing
ratios, notably offer price-to-earnings, offer price-to-book value (and
price-to-tangible book value), offer price-to-deposits, offer price-to-assets,
and offer price-to-trading price (before the announcement, where available) of
the comparative group and compared these ratios to those of Adirondack. The
analysis included a review and comparison of the mean and median pricing ratios
represented by a sample of 13 comparative group thrifts concentrated in the Mid-
Atlantic, Midwestern, New England and Southeastern United States.
Pricing Comparison. Based on an offer price of $15 million in the aggregate
in cash for all outstanding shares of Adirondack common stock, there resulted
the following acquisition pricing ratios for Adirondack relative to those of the
comparative group:
(1) Adirondack's price/earnings multiple of 57.7x (or 46.6x based on
adjusted earnings) substantially exceeded the mean and median
price/earnings multiples of the comparative group. The mean and median
price/earnings multiples of the comparative group were 28.1x and 23.5x,
respectively.
(2) Adirondack's price/tangible book value ratio of 158.8% compared to the
mean and median price/tangible book value ratios of 145.7% and 149.4%,
respectively, for the comparative group.
(3) Adirondack's price/deposits ratio of 25.6% compared to a mean and
median price/deposits ratio of 22.7% and 18.9%, respectively, for the
comparative group.
(4) Adirondack's price/assets ratio of 21.3% compared to a mean and a
median price/assets ratio of 18.1% and 17.0%, respectively, for the
comparative group.
(5) Adirondack's offer price/trading price ratio of 156.5% (based on a
$14.00 per share recent trading price for Adirondack) prior to
announcement of the agreement compared to mean and median offer
price/trading price ratios of the comparative group of 126.6% and
121.7%, respectively.
In analyzing the reasonableness of Adirondack's acquisition pricing ratios
relative to those of the comparative group, CRG considered the following
factors:
(1) Adirondack reported a lower level of profitability compared to that of
the comparative group. Adirondack's return on assets ("ROA") of 36
basis points compared to an average ROA of 61 basis points for the
comparative group.
(2) Adirondack's lower level of profitability reflected a higher net
interest margin which was more than offset by a higher operating
expense ratio and lower non-interest operating income level relative to
the comparative group. The Association generated a higher yield/cost
spread relative to the comparative group.
(3) Adirondack's lower ROA but a similar net worth ratio translated into a
lower return on equity ("ROE"). Adirondack's ROE of 3.8% compared to an
average and median ROE for the peer group of 4.9% and 5.2%,
respectively.
(4) A review of other important financial ratios indicated that
Adirondack's non-performing asset level compared unfavorably to that of
the peer group.
Therefore, based on the above financial comparisons, CRG believed that, on
balance, Adirondack's acquisition pricing ratios were reasonable when compared
to the comparative group's acquisition pricing ratios.
6
Also, CRG noted that at the time of its initial public offering in April
1998, Adirondack's conversion price was $10.00 per share. Thus, the anticipated
acquisition price of $21.91per share represents a significant return on the
Association's conversion price, a yield of just over 119%.
Discounted Dividend Stream and Terminal Value Analysis. CRG also performed
an analysis of potential returns to shareholders of Adirondack, which was based
on an estimate of Adirondack's future cash dividend streams to shareholders and
Adirondack's future stock price and sell-out price (terminal value). This
analysis assumed Adirondack was not acquired but remained independent for at
least three to five years. This analysis utilized certain key assumptions for
Adirondack, including the most likely asset growth and earnings level scenario.
The analysis also incorporated a stock repurchase during year one of 15% of
outstanding shares (100,000) through a dutch auction and assumed regular,
periodic dividend payments.
To approximate the range of terminal values of Adirondack common stock at
the end of a three year and five year period, CRG applied a price-to-earnings
multiple of 28.1x, and a price/tangible book value ratio of 145.7%. The
resulting terminal values and dividend streams were then discounted to present
values using different discount rates (ranging from 10% to 15%) chosen to
reflect different assumptions regarding required rates of return of holders or
prospective buyers of Adirondack common stock.
The analysis indicated a present value for the Adirondack common stock and
future dividend payments ranging from $15.19 (based on a 15% discount rate) to
$17.34 (based on a 10% discount rate) assuming the Bank is acquired after three
years. Based on a five year time frame, the resulting present value figures were
lower.
The results of the above described analysis confirmed that the merger
consideration being offered by CNB to Adirondack stockholders was reasonable. In
preparing its analysis, CRG made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of CRG and Adirondack. The analysis performed by CRG is
not necessarily indicative of future results, which may be significantly more or
less favorable than suggested by such analysis.
CRG will receive approximately $180,000 for financial advisory services
rendered to Adirondack in connection with the merger, including $32,000 for its
fairness opinion and reimbursement for out-of-pocket expenses. Adirondack has
also agreed to indemnify CRG and certain related persons against certain
liabilities relating to or arising out of this engagement. CRG and its
wholly-owned subsidiary, Capital Resources, Inc., were paid fees of $100,000 in
connection with the services performed in connection with the Association's
mutual-to-stock conversion.
Recommendations of the Board of Directors
The Adirondack Board has unanimously adopted and approved the merger
agreement and the transactions contemplated thereby and has determined that the
merger is in the best interests of Adirondack and its stockholders. The
Adirondack Board therefore recommends a vote FOR adoption of the merger
agreement.
Merger Consideration
CNB has agreed to pay $15 million for all outstanding shares of Adirondack
stock, but this amount may be reduced under two circumstances.
o Section 1.1(f) of the merger agreement provides that the $15 million will
be reduced by the amount that the stockholders' equity of Adirondack
(subject to certain adjustments specified in the merger agreement) is less
than $9,114,959 as of the month end prior to the closing of the merger.
The adjusted stockholders' equity of Adirondack was $9,255,915 as of March
31, 1999.
o Section 4.18 (b) of the merger agreement provides that the $15 million
will be reduced by the amount that the after-tax costs of remediation
required under environmental laws exceed $50,000 (subject to certain
limitations specified in the merger agreement).
Each of your shares of Adirondack stock will be converted into the right to
receive a pro-rata share of the price paid by CNB. This pro-rata share will be
calculated by dividing the total price to be paid by the number of Adirondack
shares outstanding at the effective time, excluding any shares owned by CNB or
its subsidiaries.
7
Based on the 684,348 shares of Adirondack outstanding on April 26, 1999,
and assuming the full $15 million is paid by CNB and that there are no
reductions attributable to either of the provisions discussed above, each of
your shares should be exchanged for $21.92 in cash. However, there can be no
guarantee that unexpected developments will not cause a reduction of that
amount.
Treatment of Adirondack Stock Options
At the record date, there were options for 46,039 shares outstanding under
Adirondack's 1998 Stock Option and Incentive Plan. At the effective time, each
option to purchase one share of Adirondack stock shall become an option to
purchase 0.575 shares of CNB common stock upon the same terms and conditions,
except the exercise price per share will be similarly adjusted. The Adirondack
stock option plan will be assumed by CNB. CNB will register the shares to be
issued pursuant to these options under the Securities Act.
Options of persons who will not serve as directors, officers, employees or
advisory directors of CNB is any of its subsidiaries will be forfeited when they
terminate service. However, Adirondack has been informed by CNB that the amount
of any stock options forfeited as a result of the involuntary termination
without cause of an Adirondack employee will be taken into amount in
establishing a severance payment for such employee.
Appraisal Rights
If you comply with the statutory provisions of Section 262 of the Delaware
General Corporation Law (a copy of which is attached as Appendix III and
incorporated in this Proxy Statement by reference), you will be entitled to an
appraisal by the Delaware Court of Chancery of the fair value of your Adirondack
common stock and to receive payment of such amount instead of the amount to be
paid pursuant to the merger agreement. The value as determined by the Delaware
Court of Chancery may be more or less than the value to which you are entitled
to under the merger agreement. If you desire to exercise rights of appraisal,
you should refer to the statute in its entirety and should consult with legal
counsel prior to taking any action to ensure that you comply strictly with the
applicable statutory provisions.
In summary, to exercise appraisal rights, you must:
o Hold your shares of Adirondack common stock on the date of the making
of a demand for appraisal of such shares and continuously hold your
shares through the effective time of the merger;
o Deliver to Adirondack a written demand for appraisal of your shares
before the vote on the merger is taken; and
o Not vote in favor of the merger (note that a vote, in person or by
proxy, against adoption of the merger agreement will not by itself
constitute a written demand for appraisal).
If you properly exercise your appraisal rights, you will be notified of the
merger within 10 days after the effective time.
Within 120 days after the effective time, if you have properly exercised
your appraisal rights, you may file a petition with the Delaware Court of
Chancery seeking a determination of the value of the stock of all Adirondack
stockholders properly exercising their appraisal rights. The Court of Chancery
must hold a hearing and determine the fair value (exclusive of any element of
value arising from the merger), together with a fair rate of interest to be paid
on the fair value. CNB, as Adirondack's successor, will pay the fair value of
Adirondack common stock held by stockholders seeking appraisal and interest
determined by the Court in cash. Notwithstanding the foregoing, at any time
within 60 days after the effective time, any stockholder will have the right to
withdraw his or her demand for appraisal rights and accept the terms offered in
the merger.
Your failure to vote against the proposal to adopt the merger agreement
will not constitute a waiver of your appraisal rights under Delaware Law.
However, a vote against adoption of the merger agreement will not satisfy your
obligations if you are seeking an appraisal. You must still give notice pursuant
to Section 262 of the Delaware Law.
8
Delivery of Cash
An exchange agent designated by CNB will deliver to each Adirondack holder
of record a transmittal letter and instructions to be used in surrendering stock
certificates in exchange for a check representing the amount of cash which such
stockholder has the right to receive. Adirondack stockholders should not forward
their Adirondack certificates until they receive the transmittal letter and
instructions. After the effective time of the merger, there will be no further
transfers on the records of Adirondack of the certificates, and, if such
certificates are presented to CNB for transfer, they will be cancelled against
delivery of cash.
Interests of Directors and Officers in the Merger That Are Different From
Your Interests
Set forth below are descriptions of interests of directors and executive
officers of Adirondack in the merger in addition to their interests as
stockholders of Adirondack generally. The Adirondack Board was aware of these
interests and considered them in approving the merger agreement and the
transactions contemplated thereby.
Directors after the Merger. Two of the persons listed below, each of whom
is currently a director of Adirondack, will be added both to the board of CNB
and to the board of CNB's subsidiary bank. In addition, each other person listed
below, shall be entitled to serve as either a director or advisory director of
CNB or its subsidiary bank until October 9, 2003. The persons entitled to such
positions are Dr. Priscilla J. Bell, Timothy E. Delaney, Lewis E. Kolar, Donald
I. Lee, Richard D. Ruby and Dr. Robert J. Sofarelli.
Employment Arrangements. Under a change in control severance agreement with
Adirondack's subsidiary, Mr. Kolar will receive a lump sum payment of $168,000
and continued health insurance benefits through April 21, 2001. Under
Adirondack's Employee Severance Compensation Plan, the merger will cause Michael
J. Pepe to become entitled to a severance payment of $50,500 if he is terminated
by CNB, or if he voluntary terminates for certain specified reasons, within one
year from the merger.
Stock Option and Recognition and Retention Plan. The currently outstanding
stock options of Adirondack will be converted into options of CNB and the
Adirondack stock option plan will remain in effect until at least October 9,
2003. The Adirondack Recognition and Retention Plan will remain in effect until
at least October 9, 2003 and awards will continue to vest as long as a recipient
maintains continuous service as an employee, director, or advisory director.
Adirondack has been informed by CNB that the value of any unvested RRP or stock
option awards which are forfeited as the result of the involuntary termination
without cause of an Adirondack employee will be taken into account in
establishing a severance payment for such employee.
Employee Stock Ownership Plan. Promptly after closing, Adirondack's ESOP
shall be terminated and, after repayment of its borrowings and other
liabilities, the remaining assets shall be distributed to eligible employees in
accordance with applicable Internal Revenue Service rules.
Representations and Warranties
In the merger agreement each of CNB and Adirondack has made representations
and warranties relating to, among other things, the parties' respective
organization, accuracy of consolidated financial statements, the absence of
material adverse changes in its business, financial condition, operations or
properties, corporate actions in connection with the approval and execution of
the merger agreement and related documents, authority relative to the merger
agreement, employment arrangements and year 2000 compliance. In addition,
Adirondack has made representations and warranties relating to its
capitalization, the absence of certain legal proceedings, compliance with laws,
regulations and other requirements, employment arrangements, employee benefits,
properties and assets, material agreements and contracts, tax matters,
environmental matters and loan portfolio. CNB has represented and warranted that
it has the financial ability to pay the merger consideration. For detailed
information on such representations and warranties, see Articles II and III of
the merger agreement attached hereto as Appendix I.
9
Conditions to the Merger
The obligations of CNB and Adirondack to complete the merger are
conditioned on:
o The material accuracy of the other party's representations and
warranties as of the closing and the performance by the other party of
all agreements.
o The receipt of certain documents evidencing compliance with the
agreement.
o The approval of all regulatory authorities.
o The approval of the merger agreement by the other party's board.
o The adoption of the merger agreement by the stockholders of
Adirondack.
o The absence of certain litigation.
o The receipt of a legal opinion from the other party's counsel.
o The updating, if necessary, of the other party's representation and
warranties.
In addition, the obligation of CNB to complete the merger is conditioned
on:
o The resignation of an Adirondack employee.
o No increase in awards under Adirondack benefit plans.
o The receipt of non-competition agreements from Adirondack directors.
The obligation of Adirondack to complete the merger is also conditioned on
CNB's deposit of the merger consideration with the exchange agent.
For more detailed information on the conditions to the merger, see Article
V of the merger agreement attached hereto as Appendix I.
The Bank Merger
After the effective time, Adirondack's subsidiary savings association will
be merged with CNB's subsidiary bank.
Regulatory Approvals
The merger is subject to prior approval by the Board of Governors of the
Federal Reserve System and the merger of their subsidiaries is subject to prior
approval of the Office of Comptroller of the Currency.
The merger may not proceed in the absence of the requisite regulatory
approvals. There can be no assurance that all such regulatory approvals will be
obtained or as to the dates of such approvals. The merger may not be consummated
for a period of 30 days after receipt of the final approval under federal law,
unless no adverse comment has been received from the Department of Justice, in
which case the transaction may be consummated on or after the 15th day after
such final approval.
Termination
The representations, warranties and agreements in the merger agreement will
not survive the effective time, and will terminate at that time, except with
respect to agreements which by their terms are intended to be performed after
the effective time.
10
The merger agreement may be terminated at any time prior to the effective
time, whether before or after approval by the stockholders of Adirondack:
o By mutual consent of the parties.
o By either party if all regulatory approvals have not been obtained by
September 30, 1999.
o By either party if the merger has not closed by December 31, 1999.
o By either party if the other party materially defaults.
o By Adirondack, if the fiduciary duty of its Board of Directors
requires them to accept a superior proposal.
o By Adirondack, if after-tax costs of remediation required under
environmental laws exceed $300,000.
For additional information, see Section 6.5 of the merger agreement,
attached hereto as Appendix I.
If the merger agreement is terminated due to a material default, the
defaulting party must pay a termination fee of $500,000 to the terminating
party. If Adirondack terminates to accept a superior proposal, or defaults in
connection with a competing proposal, Adirondack must pay an aggregate of
$750,000 to CNB. For additional information see Section 6.3 of the merger
agreement attached hereto as Appendix I.
Covenants Pending Closing
Pursuant to the merger agreement, Adirondack has agreed, except as
otherwise contemplated by the merger agreement, to conduct its business in the
usual and ordinary course, consistent with prudent banking practices, pending
completion of the merger. For detailed information regarding additional
restrictions applicable to Adirondack, see Section 4.1 of the merger agreement,
attached hereto as Appendix I. CNB has agreed to conduct its business consistent
with prudent banking.
Expenses; Accounting Treatment
All expenses incurred in connection with the merger agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses. The merger will be treated as a purchase in accordance with generally
accepted accounting principles.
Federal Income Tax Consequences of the Merger
The following is a general discussion, based on current law, of certain of
the expected federal income tax consequences applicable to Adirondack
stockholders who receive cash in exchange for their shares pursuant to the
merger. This summary discusses only certain tax consequences to United States
persons (i.e., citizens or residents of the United State and domestic
corporations) who hold shares as capital assets. It does not discuss the tax
consequences that might be relevant to stockholders entitled to special
treatment under the federal income tax law (such as Individual Retirement
Accounts and other deferred accounts, life insurance companies and tax exempt
organizations) or to stockholders who hold their shares in special circumstances
(such as stockholders who hold shares as part of a straddle or conversion
transaction).
A stockholder will recognize taxable gain or loss for federal income tax
purposes equal to the difference, if any, between the amount of cash received
pursuant to the merger and such stockholder's tax basis in the shares
surrendered in exchange therefor. In general, such gain or loss will be capital
gain or loss if such shares are capital assets in the hands of such stockholder
at the time of the exchange and will be long-term capital gain or loss if, at
the time of the exchange, such stockholder's holding period for the shares is
more than one year.
No ruling has been requested from the IRS as to any of the tax effects to
stockholders of the transactions discussed in this Proxy Statement, and no
opinion of counsel has or will be rendered to stockholders with respect to any
of the tax effects of the merger or the other related transactions.
Stockholders are urged to consult their own tax and financial advisors as
to the federal income tax consequences of the merger to them, and also as to any
state, local, foreign or other tax consequences.
11
BUSINESS OF CNB BANCORP, INC.
CNB Bancorp, Inc. is the holding company for City National Bank and Trust
Company, which is headquartered in Gloversville, New York and has four branches
located in Fulton County, New York. City National Bank and Trust Company is
engaged in a general banking business with a range of banking and fiduciary
services including checking, negotiable orders of withdrawal, savings,
certificates of deposit and club deposit accounts. The bank offers a wide range
of loan products, including commercial, real estate, and installment loans.
Overdraft banking lines of credit are also offered.
The mailing address of CNB Bancorp, Inc. is 12-24 North Main Street,
Gloversville, New York 12078. Its telephone number is 518-773-7911. There have
been no arrangements, understandings, relationships, negotiations or
transactions between Adirondack and CNB except as contemplated by the merger
agreement.
BUSINESS OF ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
General
Adirondack Financial Services Bancorp, Inc. was incorporated under Delaware
law in December 1997 as a savings and loan holding company to purchase 100% of
the common stock of Gloversville Federal Savings and Loan Association (the
"Association"). On April 6, 1998, the Association converted from a mutual form
to a stock institution, at which time Adirondack purchased all of the
outstanding stock of the Association, and Adirondack completed its initial
public offering, issuing 661,250 shares at $10.00 per share. Net proceeds to
Adirondack were $6.0 million after conversion and stock offering costs, and $5.5
million excluding the shares acquired by Adirondack's newly formed Employee
Stock Ownership Plan (the "ESOP").
The consolidated financial condition and operating results of Adirondack
are primarily dependent upon its wholly owned subsidiary, the Association, and
all references to Adirondack and its financial data prior to April 6, 1998,
except where otherwise indicated, refer to the Association and its financial
data.
The Association has operated as a community-oriented financial institution,
obtaining deposits from its local community and investing those deposits
principally in residential one-to-four family mortgage loans and, to a lesser
extent, multi-family and commercial real estate, commercial business, home
equity and consumer loans. In addition, the Association invests excess funds not
used for loan originations in securities issued by the United States government
or its agencies, and mortgage backed securities. Deposits are offered at various
interest rates only within the Association's primary market area. There are no
brokered deposits maintained by the Association.
Regulation. The Association is a federally-chartered savings and loan
association and is a member of the Savings Association Insurance Fund ("SAIF"),
which is administered by the Federal Deposit Insurance Corporation ("FDIC"),
which insures the Association's deposits up to applicable limits. The SAIF is
backed by the full faith and credit of the United States Government.
Accordingly, the Association is subject to broad federal regulation and
oversight extending to all its operations. As a savings and loan holding company
of the Association, Adirondack is also subject to federal regulation and
oversight. The purpose of the regulation of Adirondack and other holding
companies is to protect subsidiary savings associations. The Association is also
a member of the Federal Home Loan Bank of New York ("FHLB") and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board").
The Office of Thrift Supervision ("OTS") has extensive supervisory
authority over the operations of federally-chartered savings associations. As
part of this authority, the Association is required to file periodic reports
with the OTS and is subject to periodic examinations by the OTS. The last
regular OTS examination of the Association was March 1998. Under agency
scheduling guidelines, it is likely that another examination will be initiated
in the near future. When these examinations are conducted by the OTS, the
examiners may require the Association to provide for higher general or specific
loan loss reserves. All federally-chartered savings associations are subject to
a semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. The Association's assessment for the semi-annual
period ended December 31, 1998 was $14,640.
The OTS also has extensive enforcement authority over all
federally-chartered savings institutions and their holding companies, including
the Association and Adirondack. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
12
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching of the Association is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. The Association is in compliance with the noted restrictions.
Adirondack is a unitary savings and loan holding company, and it sole
FDIC-insured subsidiary, the Association, is a qualified thrift lender ("QTL").
Therefore, Adirondack generally has broad authority to engage in various types
of business activities. If Adirondack were to acquire another insured
institution as a separate subsidiary or if the Association fails to remain a
QTL, Adirondack's activities will be limited to those permitted of multiple
savings and loan holding companies. In general, a multiple savings and loan
holding company (or subsidiary thereof that is not an insured institution) may,
subject to OTS approval in most cases, engage in activities comparable to those
permitted for bank holding companies, certain insurance activities, and certain
activities related to the operations of its FDIC-insured subsidiaries.
Capital Requirements. Federally insured savings associations, such as the
Association, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The Association must maintain (a) tangible capital of 1.5% of tangible
assets, (b) core capital of 4.0% of adjusted tangible assets, and (c) a
risk-based capital of 8.0% of risk-weighted assets. Under current law and
regulations, there are no capital requirements directly applicable to
Adirondack. The Association exceeds all minimum capital standards imposed by the
OTS. At September 30, 1998, the Association had a tangible capital and core
capital ratio of 10.59% and a risk-based capital ratio of 19.62%. At December
31, 1998, the Association had a tangible capital and core capital ratio of
10.44% and a risk-based capital ratio of 20.01%.
OTS regulations (the implementation of which have been delayed) require
that certain institutions with more than normal interest rate risk must make a
deduction from capital before determining compliance with the minimum capital
requirements. The Association is currently exempt from the deduction requirement
because it has total assets less than $300 million and risk-based capital in
excess of 12%. However, the Association's capital ratios are high enough that
even if the rules are implemented and the exemption is withdrawn, the deduction
would not have a material effect on the Association's compliance with OTS
capital requirements.
The OTS has the authority to require that an institution take prompt
corrective action to solve problems if the institution is undercapitalized,
significantly undercapitalized or critically undercapitalized. Because of the
Association's high capital ratios, the prompt corrective action regulations are
not expected to have an effect on the Association.
Deposit Insurance Premiums. The FDIC's deposit insurance premiums are
assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation. Under the
system, institutions classified as well capitalized and considered healthy pay
the lowest premium. If the Association's capital ratios substantially
deteriorate or if the Association is found to be otherwise unhealthy, the
deposit insurance premiums payable by the Association could increase.
In September 1996, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (the "1996 Act") became law. Before the 1996 Act, SAIF insured
institutions were paying deposit insurance premiums at a rate much greater than
Bank Insurance Fund ("BIF") insured institutions. The 1996 Act imposed a one
time assessment on all SAIF institutions and then equalized the insurance
premiums for BIF and SAIF institutions. At the same time, the 1996 Act required
BIF and SAIF institutions to contribute to the costs of the "FICO" bonds sold in
the late 1980's to
13
finance the savings and loan bailout. The "FICO" bond assessment for the
semi-annual period ended December 31, 1998 for SAIF institutions was .061% of
insured deposits or $8,206 for the Association.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose limits on dividends or other capital distributions by savings
institutions based on capital levels and net income. An institution, such as the
Association, that meets or exceeds all of its capital requirements (both before
and after giving effect to the distribution) and is not in need of more than
normal supervision, may make capital distributions during a calendar year of up
to the greater of (i) 100% of net income for the current calendar year plus 50%
of its capital surplus (capital in excess of regulatory requirements) or (ii)
75% of its net income over the most recent four quarters. Any additional capital
distributions require prior regulatory approval.
The Association's capital levels exceed regulatory minimums to such an
extent that the substantive restrictions on dividends are not expected to have a
material effect on the Association. However, OTS regulations also impose
procedural restrictions. The Association must give the OTS at least 30 days'
written notice before making any capital distributions. All such capital
distributions are subject to the OTS' right to object to a distribution on
safety and soundness grounds. The OTS has proposed regulations that would
eliminate the notice requirement for the highest rated institutions so that
advance notice would not be required for most normal dividends. The Association
expects that it will not be required to give notice under normal circumstances
if the new proposal is adopted in its current form.
Qualified Thrift Lender. A savings association will be a QTL if its
qualified thrift investments equal or exceed 65% of its portfolio assets on a
monthly average basis in nine of every 12 months. Qualified thrift investments
include, among others, (i) certain housing-related loans and investments
(notably including residential one-to-four family mortgage loans), (ii) certain
federal government and agency obligations, (iii) loans to purchase or construct
churches, schools, nursing homes and hospitals (subject to certain limitations),
(iv) shares of stock issued by any Federal Home Loan Bank, and (vi) shares of
stock issue by the FHLMC or the FNMA (subject to certain limitations). At
September 30 and December 31, 1998, the Association satisfied the QTL test.
If the Association fails to remain a QTL, it must either convert to a
national bank charter or be subject to restrictions on its activities specified
by law and the OTS regulations, which restrictions would generally limit
activities to those permitted for national banks. Also, three years after the
savings institution ceases to be a QTL, it would be prohibited from retaining
any investment or engaging in any activity not permissible for a national bank
and would be required to repay any outstanding borrowings from any Federal Home
Loan Bank.
Community Reinvestment Act. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, the Association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Association is periodically examined by the OTS for
compliance with the CRA. Subject to certain exceptions and elections, the
Association's CRA performance will be evaluated based upon the lending,
investment and service activities of the Association. In the last CRA
examination performed by the OTS, the Association received a rating of
satisfactory.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. The Association was in compliance
with the reserve requirements at September 30 and December 31, 1998.
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Taxation. Adirondack pays federal and New York State income taxes on its
income. Adirondack will file a consolidated income tax return with the
Association for the taxable year ending December 31, 1998. As a Delaware holding
company, Adirondack is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual fee to the State of
Delaware. Adirondack is also subject to an annual franchise tax imposed by the
State of Delaware.
14
Market Area. The Association conducts business through its main office
located at 52 North Main Street, Gloversville, New York and a branch office
located at 295 Broadway, Saratoga Springs, New York. The Association's market
area for deposits consists primarily of Fulton and Saratoga Counties. The
Association's primary market area for lending activities consist of communities
within Fulton and Saratoga Counties, as well as portions of Hamilton and
Montgomery Counties, New York.
Gloversville, New York is located in Fulton County approximately 50 miles
Northwest of Albany, New York. Gloversville and the surrounding communities
include a population of low- and moderate-income neighborhoods. Gloversville has
undergone significant economic hardships as the major leather industries that
were once the focal point of industrial strength for the region have relocated
to other parts of the world. Gloversville, with its neighboring city Johnstown,
have recently experienced some revitalization as a number of manufacturing
entities have opened manufacturing plants in the area, capitalizing on the
region's lower labor and operating costs. The housing in the Gloversville area
consists mainly of one-to-four family residences within the city limits. Outside
Gloversville, in the rural areas leading into the Adirondack Mountains, there
are many nonconforming properties which are generally used as summer homes and
camps. Real estate values in these areas have experienced a steady decline in
recent years.
Saratoga Springs, New York is located in Saratoga County approximately 40
miles North of Albany, New York. Saratoga Springs and the surrounding
communities include a diverse population of low income neighborhoods, as well as
middle class and more affluent neighborhoods. The housing market has been very
strong in Saratoga County and expectations are that the trend will continue.
This part of the Association's market also includes substantial commercial areas
supporting small to large manufacturing, industrial and professional service
companies.
Lending Activities
Historically, the Association originated 30-year, fixed-rate mortgage loans
secured by one-to-four family residences. In fiscal 1995, the Association began
to diversify its portfolio by more actively originating multi-family and
commercial real estate loans and commercial business loans; however, subsequent
to the end of fiscal 1998, the Board determined to reduce its origination of
such loans. Currently, all loans originated by the Association are held to
maturity as portfolio loans. At September 30, 1998, the Association's gross loan
portfolio totaled $51.8 million. At December 31, 1998, the Association's gross
loan portfolio totaled $51.4 million.
Pursuant to Federal law the aggregate amount of loans that the Association
is permitted to make to any one borrower or a group of related borrowers is
generally limited to 15% of unimpaired capital and surplus. At September 30,
1998, based on the above, the Association's loans-to-one borrower limit was
approximately $1.6 million. On the same date, the Association had no borrowers
with balances in excess of this amount. As of September 30, 1998, the largest
dollar amount outstanding to one borrower, or group of related borrowers, was
$528,000 and was secured by commercial real estate and building located in
Saratoga County. This loan was performing in accordance with its terms at
September 30, 1998, and the Association has obtained personal guarantees (or
direct personal liability) from the principals on this loan. As of September 30,
1998, there were 11 other multi-family and commercial real estate or commercial
business loans with carrying values in excess of $300,000. See also
"Multi-family and Commercial Real Estate Lending."
The Association's lending is subject to its written underwriting standards
and to loan origination procedures. Decisions on loan applications are made on
the basis of detailed applications and property valuations (consistent with the
Association's appraisal policy) by the Association's independent appraisers. The
loan applications are designed primarily to determine the borrower's ability to
repay and the more significant items on the application are verified through use
of credit reports, financial statements, tax returns and/or confirmations.
Association employees with lending authority are designated, and their
lending limit authority defined, by the Board of Directors of the Association.
The lending authority limits are applied based on aggregate loan balances due
the Association, including any pending loan requests. The approval of the
Association's Board of Directors is required for any loans where the aggregate
borrowings of the subject entity or individual exceed $250,000. Loan Committee
approval is required for all loans where the aggregate borrowings of the subject
entity or individual exceed $150,000 but are less than $250,000. The Loan
Committee includes the President, the Vice President of Commercial Lending, one
outside Board member and two other Association officers.
15
For multi-family and commercial real estate and commercial business loans,
the President and Vice President of Commercial Lending each have the authority
to approve secured loans up to $100,000 and unsecured loans up to $50,000. Joint
approval by the President and Vice President of Commercial Lending is required
for multi-family and commercial real estate and commercial business loans
greater than $100,000 ($50,000 for unsecured loans) but not exceeding $150,000.
The President or the Vice President of Commercial Lending have the
authority to approve residential mortgages up to $150,000. The President also
has the authority to approve secured consumer loans up to $150,000 and unsecured
consumer loans up to $50,000. The Vice President of Commercial Lending has the
authority to approve secured consumer loans up to $50,000 and unsecured consumer
loans up to $10,000.
The following table presents the composition of the Association's loan
portfolio by loan type at the dates indicated.
At September 30,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ------------------- ------------------- -------------------- --------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- --------- -------- -------- -------- ------- ---------
Real Estate
Loans
One-to-four
family .......... $35,706 68.9 $36,891 71.92 $40,262 78.8 $42,578 86.41 $42,973 91.89%
Multi-family and
commercial ...... 8,614 16.62 7,950 15.50 4,635 9.07 1,712 3.47 878 1.88
Construction .... 606 1.17 539 1.05 938 1.84 742 1.51 701 1.50
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Real Estate
Loans ........... $44,926 86.7 $45,380 88.47 $45,835 89.71 5,032 91.39 $44,552 95.27%
Other Loans
Commercial
business ........ 2,624 5.06 1,422 2.77 1,230 2.41 1,052 2.14 -- --
Home Equity ..... 3,143 6.07 3,379 6.59 2,869 5.62 2,265 4.60 1,352 2.89
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Other consumer .. 1,122 2.17 1,111 2.17 1,154 2.26 920 1.87 861 1.84
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Other Loans $ 6,889 13.30 $ 5,912 11.53 $ 5,253 10.29% 4,237 8.61 $ 2,213 4.73%
Gross loans ..... $51,815 100.00 $51,292 100.00 $51,088 100.00 $49,269 100.0 $46,765 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Less
Net deferred loan
fees ............ (118) (153) (201) (251) (264)
Allowance for
loan losses ..... (1,496) (1,613) (1,251) (779) (856)
-------- -------- -------- -------- --------
Total loans
receivable, net . $ 50,201 $ 49,526 $ 49,636 $ 48,239 $ 45,645
======== ======== ======== ======== ========
16
The following table presents the composition of the Association's loan
portfolio by fixed and adjustable rate at the dates indicated:
At September 30,
----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- --------------------- ------------------ ------------------- ------------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- --------- --------- ------- --------- -------- --------- --------- ---------
Fixed Rate
Loans
Real Estate:
One-to-four
family .......... $31,539 60.86% $31,732 61.86 $34,929 68.37% $37,356 75.82% $39,632 84.75%
Multi-family and
commercial ...... 884 1.71 1,206 2.35 924 1.81 1,527 3.10 878 1.88
Construction .... 606 1.17 392 0.76 423 0.83 293 0.59 485 1.04
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Real Estate
Loans ........... $33,029 63.74% $33,330 64.97% $36,276 71.01% 39,176 79.51% $40,995 87.67%
Commercial
business ........ 703 1.36 283 0.55 23 0.05 -- -- -- --
Home Equity ..... 1,331 2.57 1,244 2.43 645 1.26 14 0.03 -- --
Other consumer .. 1,122 2.17 1,111 2.17 1,154 2.26 920 1.87 861 1.84
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Fixed Rate
Loans ........... $36,109 69.69% $35,913 70.01% $38,002 74.39% 40,106 81.40% $41,856 89.51%
Adjustable Rate
Loans
Real Estate:
One-to-four
family .......... $ 4,167 8.04% $ 5,159 10.06% $ 5,333 10.44% $ 5,222 10.60% $ 3,341 7.14%
Multi-family and
commercial ...... 7,730 14.92 6,744 13.15 3,711 7.26 1,052 2.14 -- --
Construction .... -- 0.00 147 0.29 515 1.01 449 0.91 216 0.46
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Real Estate
Loans ........... $11,897 22.96% $12,050 23.50% $ 9,559 18.71% $ 6,723 13.65% $ 3,557 7.60%
Commercial
business ........ 1,921 3.71 1,139 2.22 1,207 2.361 185 0.38 -- --
Home Equity ..... 1,812 3.50 2,135 4.16 2,224 4.35 2,251 4.56 1,352 2.89
Other consumer .. 76 0.14 55 0.11 96 0.19 4 0.01 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Adjustable
Rate Loans ...... $15,706 30.31% $15,379 29.99% $13,086 25.61% $ 9,163 18.60% $ 4,909 10.49%
Gross loans ..... $51,815 100.00% $51,292 100.00% $51,088 100.00% $49,269 100.00% $46,765 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Less
Net deferred loan (118) (153) (201) (251) (264)
fees
Allowance for
loan losses ..... (1,496) (1,613) (1,251) (779) (856)
-------- -------- -------- -------- --------
Total loans
receivable, net . $ 50,201 $ 49,526 $ 49,636 $ 48,239 $ 45,645
======== ======== ======== ======== ========
17
The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at September 30, 1998. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contracts are due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
Home Equity and
Multi-family and Real Estate Commercial
One-to-four family Commercial Construction Business Other Consumer
------------------- --------------------- ------------------- ------------------ --------------------------
Weighted Average Weighted Average Weighted Average Weighted Average Weighted Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
--------- -------- ------------ --------- --------- --------- --------- ----------- -------- -----------
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
1999 ........ $ 374 7.04% $ 139 10.16% $ 606 7.38% $ 835 9.52% $ 233 7.32%
2000 ........ 91 9.30 -- -- -- -- -- -- 111 10.47
2001 ........ 265 8.50 -- -- -- -- 219 10.25 283 9.86
2002 and 2003 1,041 8.70 -- -- -- -- 819 9.57 295 9.38
2004 and 2008 6,413 8.23 2,391 9.78 -- -- 716 9.59 511 8.61
2009 to 2023 16,998 8.34 6,084 9.51 -- -- 13 10.50 2,832 9.21
2024 and
following ... 10,524 7.92 -- -- -- -- 22 11.02 -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total ....... $35,706 $ 8,614 $ 606 $ 2,624 $4,265
======= ======= ======= ======= =======
One-to-four Family Residential Real Estate Lending. The cornerstone of the
Association's lending program has historically been the origination of loans
secured by mortgages on owner-occupied one-to-four family residences at both
fixed and adjustable rates. At September 30, 1998, $35.7 million, or 68.9%, of
the Association's loan portfolio consisted of mortgage loans on one-to-four
family residences. Substantially all of the residential loans originated by the
Association are secured by properties located in the Association's primary
lending area. All loans originated by the Association are retained and serviced
by it. At December 31, 1998, $35.5 million, or 69.1%, of the Association's loan
portfolio consisted of mortgage loans on one-to-four family residences.
The Association offers conventional fixed-rate loans with maximum terms of
up to 30 years. The interest rate on these loans are established on a regular
basis according to market conditions. The Association underwrites its fixed-rate
one-to-four family loans in accordance with Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
standards. As of September 30, 1998, the Association had $31.5 million of fixed
rate loans secured by one-to-four family residential properties. During fiscal
1998, the Association began originating fixed-rate Federal Home Authority
("FHA") guaranteed loans. These loans are underwritten based on qualifying and
credit standards established by FHA which are generally less stringent than
conventional guidelines. These loans carry the guarantee of the FHA if the
customer defaults on the loan, provided the Association complies with all
collection procedures established by the FHA. At September 30, 1998, the
Association had $908,000 in FHA loans outstanding. At December 31, 1998, the
Association had $1.1 million in FHA loans outstanding.
The Association also offers ARMs which carry interest rates which adjust
annually at a margin (generally 275 basis points) over the yield on the One Year
Average Monthly U.S. Treasury Constant Maturity Index ("one year CMT"). Such
loans may carry terms to maturity of up to 30 years. The ARM loans currently
offered by the Association provide for up to 200 basis point annual interest
rate change cap and a lifetime cap generally 600 basis points over the initial
rate. Initial interest rates offered on the Association's ARMs may be 100 to
350basis points below the fully indexed rate, although borrowers are generally
qualified at the fully indexed rate. As a result, the risk of default on these
loans may increase as interest rates increase. In addition, the Association's
ARMs typically do not adjust below the initial rate. At September 30, 1998,
one-to-four family ARMs totaled $4.2 million or 8.0% of the Association's total
loan portfolio. At December 31, 1998, one-to-four family ARMs totaled $4.0
million or 7.0% of the Association's total loan portfolio.
18
The Association also originates loans secured by non-conforming second
homes and vacation homes. The rates charged for these loans are generally at
higher rates than those offered for conventional one-to-four family loans.
Generally, the same underwriting criteria is used when evaluating applications
made for mortgages on second homes and vacation homes as used for applications
taken for mortgages on one-to-four family residences.
The Association will generally lend up to 97% of the lesser of the sales
price or appraised value of the security property on owner occupied one-to-four
family loans. For loans exceeding an 80% loan-to-value ratio, the Association
requires private mortgage insurance in amounts intended to reduce the
Association's exposure to 80% or less. Borrowers are required to purchase the
mortgage insurance protection provided by the FHA for FHA mortgages where
loan-to-value ratios exceed 80%. The maximum loan-to-value ratio for non-owner
occupied one-to-four family residences is 75% (65% where there is a cash out
refinancing). For mortgages on second homes and vacation homes, the
loan-to-value ratio cannot exceed 80% for one-family residences and 75% for
two-to-four family residences. Mortgages on non-owner occupied second homes and
vacation homes cannot exceed 70% loan-to-value, and non-owner occupied cash out
refinances for non-conforming second homes and vacation homes cannot exceed 50%
loan-to-value.
In underwriting one-to-four family residential real estate loans, the
Association currently evaluates the borrower's ability to make principal,
interest and escrow payments, and the value of the property that will secure the
loan.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Although the Association
currently originates mortgage loans only for its portfolio, the Association's
loans are now generally underwritten according to secondary market standards.
While the Association seeks to originate most of its one-to-four family
residential loans in amounts which are less than or equal to the applicable
FHLMC maximum, the Association may, on an exception basis, make one-to-four
family residential loans in amounts in excess of such maximum.
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise transfers any rights to the property subject to the mortgage.
Multi-family and Commercial Real Estate Lending. In order to increase the
yield on its loan portfolio and to complement the residential lending
opportunities, since fiscal 1995, the Association has significantly increased
its originations of permanent multi-family and commercial real estate loans
secured by properties in its primary market area; however, subsequent to the end
of fiscal 1998, as a result of an increase in nonperforming commercial real
estate loans, the Board determined to reduce the Association's originations of
such loans. At September 30, 1998, the Association had $8.6 million in
multi-family and commercial real estate loans, representing 16.6% of the gross
loan portfolio. At December 31, 1998, multi-family and commercial real estate
loans were $8.7 million, or 17.25% of the Association's gross loans.
The Association's multi-family and commercial real estate loan portfolio
includes loans secured by apartment buildings, office buildings, warehouses and
other income producing properties located in its market area. In addition, at
September 30, 1998, the Association had $139,000 of commercial construction
loans and none at December 31, 1998.
The Association's multi-family and commercial real estate loans generally
carry a maximum term of 20 years and, more often than not, have interest rates
which are fixed for three to five years and adjust periodically thereafter. The
Association's multi-family and commercial real estate loans are generally made
in amounts up to 75% of the lesser of the appraised value or the purchase price
of the property, with a projected debt service coverage ratio of at least 120%.
Appraisals on properties securing multi-family and commercial real estate
loans are performed by independent appraisers designated by the Association at
the time the loan is made. All appraisals on multi-family and commercial real
estate loans are reviewed by the Association's management. In addition, the
Association's underwriting procedures require verification of the borrower's
credit history, income and financial statements, banking relationships,
references and income projections for the property. Where feasible, the
Association seeks to obtain personal guarantees on these loans and key man life
insurance on individuals critical to the success of the borrower's business.
19
Set forth below is a summary of the Association's multi-family and
commercial real estate loans which had an outstanding principal balance in
excess of $300,000 at September 30, 1998:
Balance at
Date of Collateral Maturity Personal September 30,
Origination Description Loan Terms Date Guarantee 1998 Status
- -------------- ----------------- --------------- ------------ ------------- -------------- ---------------------------
July 1996 Warehouse located Interest rate July 2016 Yes $528,439(1) Current; $250,000 SBA
in Saratoga County. adjusts every five second lien on same
years. collateral.(2)
July 1996 Office building Interest rate April 2017 Yes 517,161(3) Current; "Of concern" as
located in Saratoga adjusts every retail business not meeting
County. year. projections; building fully
occupied with assignment
of leases to Association.
June 1997 Land located in Interest rate June 2007 Yes 441,507(4) Current; $760,000
Albany County. adjusts every mortgage on building
year. subordinated to Association
loan; direct assignment of
monthly rental income,
which is above amount
required for debt service.
July 1995 Trooper barracks in Interest rate August 2010 Yes 421,091(5) Current; loan represents a
Saratoga County and adjusts every five refinance of subject
12 unit residential years. properties to fund new
complex in Saratoga venture which is not subject
County. to the Association's lien.(2)
June 1997 Warehouse/office Interest rate October 2007 Yes 411,000(6) Nonaccrural at September
located in Saratoga adjusts every 30, 1998; substandard
County and three years. classification; property
warehouse/office in obtained by Association
Albany County. through deed-in-lieu of
foreclosure October
1998.(7)
June 1997 Newly renovated Interest rate November Yes 389,195(8) Current; classification due
takeout restaurant adjusts every 2017 to poor cash flow and high
in Saratoga County. year. LTV; foreclosure process
begun December 1998.(9)
April 1996 3-story, 16 unit Interest rate May 2016 Yes 381,994(10) Current; 100% occupancy
apartment complex in adjusts every five at September 30, 1998.
Saratoga County. years.
October 1996 Restaurant/marina Interest rate October 2008 Yes 358,187(11) Current; borrower
located in Fulton adjusts every five prepaying principal;
County. years. exclusive location on major
lake.
October 1996 39 unit adult home Interest rate December Yes 341,684(12) Current; 97% occupancy as
in Saratoga County. adjusts every two 2016 of April 1, 1999.
years.
April 1994 Three residential Interest rate is May 2009 Yes 322,105(13) Current; 100% occupancy
rental units located is fixed. at September 30, 1998.
in Saratoga County
- ---------------------------
(1) $526,585, as of December 31, 1998.
(2) Paid off in full since December 31, 1999.
(3) $514,682, as of December 31, 1998.
(4) $439,552, as of December 31, 1998.
(5) $416,427, as of December 31, 1998.
(6) $411,000, as of December 31, 1998.
(7) Purchase and sale contract signed as of March 4, 1999.
(8) $209,149, as of December 31, 1998.
(9) Borrowers filed for Chapter 11 bankruptcy protection on January 12, 1999.
20
(10) $379,776, as of December 31, 1998.
(11) $344,828, as of December 31, 1998.
(12) $339,965, as of December 31, 1998.
(13) $317,395, as of December 31, 1998.
Multi-family and commercial real estate loans are generally believed to
present a higher level of risk than loans secured by one-to-four family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and commercial real
estate is dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. In addition, the Association's multi-family and commercial real estate
loans, particularly those originated when the Association first expanded this
product line, may be subject to additional risks related to the Association's
relative inexperience with this type of lending (including the absence of tested
procedures with respect thereto). The Association's portfolio is relatively
unseasoned and no assurance can be given that the Association will not
experience losses or unsatisfactory results on it. As a result of the above as
well as financial concerns with respect to the borrowers, the Association rated
$641,000 of its multi-family and commercial real estate loans as "of concern" at
September 30, 1998. In addition, there were $896,000 in nonperforming
multi-family and commercial real estate loans at September 30, 1998. As of
December 31, 1998, the Association rated $144,000 of its multi-family and
commercial real estate loans as "of concern" and $304,000 as nonperforming.
Construction. The Association offers residential single family construction
loans to persons who intend to occupy the property upon completion of
construction. Upon completion of construction, these loans are automatically
converted into permanent residential mortgage loans and classified as such. The
proceeds of the construction loan are advanced in stages on a percentage of
completion basis as construction progresses. The loans generally provide for a
construction period of not more than twelve months during which the borrower
pays interest only. In recognition of the risks involved with such loans, the
Association carefully monitors construction through regular inspections and the
borrower must qualify for the permanent mortgage loan before the construction
loan is made. At September 30, 1998, the Association had $606,000 in
construction loans outstanding, or 1.2% of gross loans. As of December 31, 1998,
the Association had $1.2 million in construction loan outstanding, or 2.32% of
gross loans. There were no nonperforming construction loans at September 30 and
December 31, 1998.
Construction lending is generally considered to involve a higher level of
credit risk than permanent one-to-four family residential lending. The nature of
these loans is such that they are more difficult to evaluate and monitor. The
Association's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value upon completion of the
project and the essential cost (including interest) of the project. If the cost
estimate proves to be inaccurate, the Association may be required to advance
funds beyond the amount originally committed in order to permit completion of
the project.
Commercial Business. Subject to the restrictions contained in federal laws
and regulations, the Association is authorized to make secured or unsecured
commercial business loans. At September 30, 1998 $2.6 million or 5.1%, and at
December 31, 1998 $2.0 million or 3.8%, of the Association's total loan
portfolio consisted of commercial business loans.
The commercial business loans are generally structured as short-term time
notes and term loans. Time notes generally have terms of less than one year to
accommodate seasonal peaks and valleys in the borrower's business cycle.
Commercial business term loans generally have terms of ten years or less and,
more often than not, have adjustable interest rates.
The Association's commercial business loans generally are secured by
equipment, machinery or other corporate assets including real estate and
inventory. In addition, the Association generally obtains personal guarantees
from the principals of the borrower with respect to all commercial business
loans.
Generally, the Association's commercial business lending has been limited
to borrowers headquartered, or doing business, in the Association's market area.
Unlike residential mortgage loans, which are generally made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of
21
the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself, which in turn may be dependent on the local economy, which is currently
not performing at a high level. Further, the collateral securing the loans, if
any, may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. In addition, commercial business
lending generally requires substantially greater oversight efforts compared to
residential real estate lending. Finally, the Association's relative
inexperience with this type of lending (including the relatively untested nature
of its new procedures related to this type of lending) may be deemed to add to
the risks of this type of lending. At September 30, 1998, $6,000 in commercial
business loans were classified as nonperforming, and $18,000 were rated "of
concern." As of December 31, 1998, $2,000 in commercial business loans were
classified as nonperforming and $18,000 were rated "of concern."
Set forth below is a description of the Association's only commercial
business loan which had an outstanding principal balance in excess of $300,000
at September 30, 1998:
Balance at
Date of Collateral Personal September 30,
Origination Description Loan Terms Maturity Date Guarantee 1998 Status
- ------------- ---------------- --------------- --------------- ---------- --------------- --------------------------
May 1997 11 fully equipped Interest rate November Yes $418,251(1) Current; insurance on
1998/99 29-foot adjusts daily 1998 vehicles with Association as
Recreational vehicles. based on beneficiary; quarterly
established index. inspections performed on
collateral by Association;
loan renewed with new
maturity of December 1999.
- -----------------
(1) Unchanged as of December 31, 1998.
Home Equity Loans and Lines. Home equity loans are secured by second
mortgages on one-to-four family owner-occupied residences. These loans are of
two types. The Association's home equity loans are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
may not exceed 80% of the appraised value of the property with a maximum loan of
$100,000. These loans are written with fixed terms of up to 15 years and carry
fixed interest rates. Home equity lines of credit ("HELOCs") are written so that
the total commitment amount, when combined with the balance of the first
mortgage lien, may not exceed 80% of the appraised value of the property, with a
maximum line of credit of $100,000. HELOCs are written for terms up to 25 years
(with the first 5 year period requiring only interest payments and the last 20
year period being fully amortized) and carry a prime-based floating rate of
interest after the first year. At September 30, 1998, the Association's home
equity loans and HELOCs totaled $3.1 million or 6.1% of the gross loans
outstanding. At September 30, 1998, $30,000 in home equity loans were
nonperforming. At December 31, 1998, home equity loans and HELOCs totaled $3
million, or 5.85% of gross loans, and none of these loans were nonperforming.
Consumer Lending. Management believes that offering consumer loan products
helps to expand the Association's customer base and to create stronger ties to
its existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable market risk analysis tools. The Association
originates a variety of different types of consumer loans, including automobile,
mobile home and deposit account loans for household and personal purposes. At
September 30 and December 31, 1998, consumer loans totaled $1.1 million, or
2.22% and 2.08% of total gross loan outstanding on those dates, respectively.
Consumer loan terms vary according to the type and value of collateral,
length of contract and credit worthiness of the borrower. The Association's
consumer loans are made with fixed or adjustable interest rates, with terms of
up to 25 years.
The underwriting standards employed by the Association for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
credit worthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are
22
unsecured or are secured by rapidly depreciable assets, such as automobiles. In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
At September 30 and December 31, 1998, there were no nonperforming consumer
loans.
Origination of Loans. The lending activities of the Association are subject
to the written, non-discriminatory, underwriting standards and loan origination
procedures established by the Association's Board of Directors and management.
Loan originations come from a number of sources. Residential loan originations
can be attributed to depositors, retail customers, telephone inquiries,
advertising, the efforts of the Association's loan officers and referrals from
other borrowers, real estate brokers and builders. The Association originates
loans through its own efforts and does not compensate mortgage brokers, mortgage
bankers or other loan finders. However, the Association frequently obtains
multi-family and commercial real estate and commercial business loans through
commercial loan brokers paid by the borrower. Beginning in fiscal 1998, an
Association employee was assigned the task of solely originating residential
mortgages and home equity loans.
All whole loans held in portfolio at September 30, 1998 were originated by
the Association. The Association does not purchase whole loans. There have been
no loan sales made by the Association, and it is the Association's intention
that all loans originated be held in portfolio until maturity. Management may
consider selling loans in the future depending on market conditions and the
asset/liability management requirements of the Association.
While the Association originates both fixed and adjustable rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the local economy and the interest
rate environment. From time to time, in order to supplement loan demand in the
Association's market area, the Association has acquired mortgage-backed
securities which are held in the "available for sale" portfolio. See
"-Investment Activities - Mortgage-Backed Securities."
23
The following table shows the loan origination and repayment activities of
the Association for the periods indicated:
Year Ended September 30,
----------------------------------------
1998 1997 1996
----------- --------- -----------
(In Thousands)
Fixed Rate:
Real Estate:
One-to-four-family..................... $4,989 $1,577 $2,140
Multi-family and commercial............ 428 978 955
One-to-four-family construction........ 1,472 683 428
Non-real Estate:
Commercial Business.................... 135 436 76
Home Equity............................ 331 215 865
Other Consumer......................... 584 348 449
-------- -------- --------
Total Fixed Rate....................... $7,939 $4,237 $4,913
----- ----- -----
Adjustable Rate:
Real Estate:
One-to-four-family..................... --- 24 243
Multi-family and commercial............ 1,742 3,115 1,795
One-to-four-family construction........ --- 40 125
Non-real Estate:
Commercial Business.................... 890 456 1,078
Home Equity............................ 275 773 530
Other Consumer......................... 40 206 97
-------- -------- --------
Total Adjustable Rate.................. $ 2,947 $4,614 $3,868
-------- ------ ------
Total Loans Originated................. $10,886 $8,851 $8,781
Principal Repayments................... (9,146) (7,670) (6,173)
Decrease in other items, net........... (1,217) (977) (552)
======= ===== =======
Net Increase........................... $ 523 $ 204 $2,056
====== === =====
Asset Quality
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Association attempts to cause the deficiency to be cured by
contacting the borrower. Late notices are generally sent when a payment on a
residential or consumer loan is more than 15 days past due and a late charge is
generally assessed at that time. For multi-family and commercial real estate
loans and commercial business loans, the Association sends a late notice on the
11th day after payment is due, and a late fee is assessed at that time. For
residential and consumer loans, the Association's asset review officer attempts
to contact personally any borrower who is more than 30 days past due. For
multi-family and commercial real estate and commercial business loans, the Vice
President Commercial Loans telephones the borrower when payment is 15 days
delinquent. For all loans past due 60 days or more, and, beginning in July 1997,
all loans where the borrower is delinquent in the payment of real estate taxes
regardless of payment status, the asset review officer or the Vice President -
Commercial Loans contacts the borrower on a regular basis to seek to cure the
delinquency. If a loan becomes past due 90 days, the Association refers the
matter to an attorney, who first seeks to obtain payment without litigation and,
if unsuccessful, generally commences a foreclosure action or other appropriate
legal action to collect the loan. The Association also seeks to recover any
shortfall by pursuing the borrower on the note. A foreclosure action, if the
default is not cured, typically leads to a judicial sale of the mortgaged real
estate. The judicial sale is normally delayed if the borrower files a bankruptcy
petition because the foreclosure action cannot be continued unless the
Association first obtains relief from the automatic stay provided by the
Bankruptcy Code.
If the Association acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the acquired property is then
classified as Other Real Estate Owned ("OREO") until it is sold. When OREO is
acquired, the property is recorded at the lower of cost (defined as carrying
value of the foreclosed property at initial foreclosure) or fair value of the
asset acquired less estimated costs to sell the property. The shortfall (if any)
between the fair value of the property and the carrying value of the loan is
charged to the allowance for loan losses. The Association also seeks to recover
any shortfall by pursuing the borrower on the note. Thereafter, changes in the
24
value of the OREO are taken as current expenses. The Association is permitted to
finance sales of OREO by "loans to facilitate," which may involve a lower down
payment or a longer repayment term or other more favorable features than
generally would be granted under the Association's underwriting guidelines. At
September 30 and December 31, 1998, there was one "loan to facilitate"
outstanding for $128,000 which was classified as substandard and non-accruing at
the same dates as the borrower was more than 90 days delinquent as to payments.
The "loan to facilitate" was originated December 1993 and has been classified as
substandard since that time. On March 4, 1999, the Association accepted at the
foreclosure sale of this property a purchase offer of $75,000.
It is the Association's policy to discontinue accruing interest on a loan
when it becomes 90 days or more delinquent, regardless of the collateral
supporting the loan, or sooner if management believes it is prudent to do so.
Once the accrual of interest is discontinued, the Association generally records
interest as and when received until the loan is restored to accruing status. The
loan remains on nonaccrual until such time that the borrower has repaid all
delinquency and has maintained the loan in a current status for at least three
consecutive months, provided management concludes that full payment of principal
and interest is reasonably assured in the future.
The following table sets forth Adirondack's loan delinquencies as to
principal and interest payments by type, by number, amount and by percentage of
total amount of loans of that type at September 30, 1998 and December 31, 1998.
Loan Delinquencies at December 31, 1998
- -------------------------------------------------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
---------------------------------- ------------------------------------- -------------------------------------
% of % of % of
Number Amount Amount Number Amount Amount Number Amount Amount
--------- ---------- ----------- ----------- ----------- -------- ------- ----------- --------------
(Dollars in Thousands)
Real Estate:
Multi-family and
commercial........ --- $ --- --- 1 $209 1.96% 1 $209 1.96%
One-to-four 4 169 0.43 6 299 0.75 10 468 1.18
- ----- ---- - ----- ---- -- ----- ----
family............
Total............. 4 $169 0.33 7 $508 0.99% 11 $677 1.32%
= === = === ==== == === =====
Loan Delinquencies at September 30, 1998
- -------------------------------------------------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
---------------------------------- --------------------------------- -------------------------------------
% of % of % of
Number Amount Amount Number Amount Amount Number Amount Amount
--------- ---------- ----------- --------- ---------- ----------- ---------- --------- -------------
(Dollars in Thousands)
Real Estate:
Multi-family and
commercial............ --- $--- --- 1 $411 4.77% 1 $411 4.77%
One-to-four family.... --- --- --- 7 326 0.91 7 326 0.91
--- --- --- - ----- ---- - ----- -----
Total................. --- $--- --- 8 $737 1.42% 8 $737 1.42%
=== === === = === ==== = === =====
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. The Association classifies all of its loans monthly based on
delinquency status. Multi-family and commercial real estate and commercial
business loans are reviewed annually regardless of delinquency status. There are
three classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Association will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS. As of September 30, 1998, the Association had $1.8 million
of loans classified as substandard. At that time, the Association also had
$142,000 of loans classified as "special mention." In addition, at December 31,
1998, the Association had $1.1 million of loans classified as substandard and
$144,000 of loans designated as "special mention." As of the same dates, the
Association had no assets classified as doubtful or loss.
Nonperforming assets. The table below sets forth the amounts and categories
of the Association's nonperforming assets. Foreclosed assets include assets
acquired in settlement of loans.
At Years Ended September 30,
December -------------------------------------------------------------------------
31, 1998 1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- ------------- -----------
(Dollars in Thousands)
Non-accruing loans:
One-to-four-family(1) ........................ $ 756 $ 894 $3,730 $2,212 $2,576 $3,438
Multi-family and Commercial .................. 304 896 -- -- -- --
Commercial Business .......................... 2 6 -- -- -- --
Home Equity(2) ............................... -- 30 63 -- -- --
Other Consumer ............................... -- -- -- -- 5 80
------ ------ ------ ------ ------ ------
Total non-performing loans(3) ................ $1,062 $1,826 $3,793 $2,212 $2,581 $3,518
------ ------ ------ ------ ------ ------
Foreclosed assets:
One-to-four-family ........................... 175 256 313 70 182 334
Commercial real estate ....................... 375 -- -- -- -- --
------ ------ ------ ------ ------ ------
Total non-performing assets .................. $1,612 $2,082 $4,106 $2,282 $2,763 $3,852
====== ====== ====== ====== ====== ======
Total non-performing assets as a percentage of
total assets ................................. 2.28% 3.05% 6.73% 3.74% 4.38% 5.53%
====== ====== ====== ====== ====== ======
Allowance as a percentage of non-performing
loans (end of period) ........................ 117.33% 81.91% 42.53% 56.53% 30.20% 24.34%
====== ====== ====== ====== ====== ======
- -------------------------------
(1) Includes $457,000, $535,000 and $1,598,000 of nonaccruing, restructured
loans at December 31, 1998, September 30, 1998 and 1997, respectively.
(2) Includes $0 and $15,000 of restructured loans that are also non-accruing
loans at December 31, 1998 and September 30, 1998, respectively.
(3) There are no loans past due greater than 90 days and accruing interest or
restructured loans accruing interest.
For the year ended September 30, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $174,000. The amount that was included in
interest income on such loans was $143,000.
25
At September 30, 1998, the Association's nonperforming loans consisted of
17 loans secured by one-to-four family residences totaling $924,000 (two of
these loans were secured solely by second mortgages while the remaining 15 loans
were secured, at a minimum, by a first mortgage on the collateral), three loans
secured by commercial real estate totaling $896,000 and two unsecured commercial
business loans totaling $6,000. At September 30, 1998, there were four
one-to-four family properties held as OREO with a net carrying value of
$256,000. Three of these OREO properties were either sold or under contract for
sale by December 31, 1998 without material loss.
As of December 31, 1998, the Association's nonperforming loans consisted of
12 loans secured by one-to-four family residences totaling $756,000, two loans
secured by commercial real estate totaling $304,000 and one unsecured commercial
business loan of $2,000. In addition, at December 31, 1998, there were three
one-to-four family properties held as OREO with a net carrying value of
$175,000. Also at December 31, 1998, the Association held one commercial real
estate property as OREO with a net carrying value of $375,000.
In fiscal 1998 and 1997, the Association noted delinquent real estate taxes
on a number of loans which were not previously classified as nonperforming. The
Association contacted all of the borrowers of such loans and, in cases where the
taxes were not promptly paid by the borrower, advanced funds for the payment of
the taxes and rewrote such loans to add the advanced funds to the loan principal
and to include tax escrow provisions. Such rewritten loans were classified as
troubled debt restructurings where deemed appropriate based on the financial
position of the borrower. As of September 30, 1998 and December 31, 1998, the
Association's troubled debt restructurings totaled $550,000 and $456,000,
respectively. While all such loans were classified as nonperforming at September
30 and December 31, 1998, none were 90 days or more delinquent as of such dates.
Since these loans were written at market interest rates, it is anticipated that,
provided that these loans continue to perform in accordance with their new
terms, they will become performing loans, generally after one year of
performance. All current originations by the Association provide for tax
escrows.
Other Loans of Concern. In addition to the nonperforming assets set forth
in the table above, as of September 30 and December 31, 1998, there were
$659,000, of other loans of concern, all of which were multi-family and
commercial real estate or commercial business loans, with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have concerns as to
the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the nonperforming
asset categories. While none of these loans were 30 days or more delinquent as
of December 31, 1998, weak or negative cash flows, failure to attain budgeted
income projections or declines in collateral values have been the primary
reasons which have caused the Association to monitor such loans more carefully.
The largest other loan of concern is a $515,000 (December 31, 1998 balance)
commercial real estate loan secured by an office building located in Saratoga
County. Although this loan has experienced no delinquency greater than 30 days
since origination in July 1996, the Association has classified it as "of
concern" because the borrower's business, which commenced operations in March
1997 and occupies a major portion of the property, is not meeting financial
projections. The loan is guaranteed by the business principals and was current
at December 31, 1998.
Other loans of concern at December 31, 1998 consisted of three multi-family
and commercial real estate loans totaling $126,000 and one commercial business
loan totaling $18,000. All other loans of concern were less than 60 days
delinquent at December 31, 1998 but were classified because of lower than
expected debt service coverage. The Association's loans of concern have been
considered by management in conjunction with the analysis of the adequacy of the
allowance for loan losses.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to earnings based on the
Association's evaluation of the risks inherent in its entire loan portfolio.
Such evaluation, which includes a review of all loans for which full
collectibility may not be reasonably assured, considers the market value of the
underlying collateral, growth and composition of the loan portfolio, delinquency
trends, adverse situations that may affect the borrower's ability to repay,
prevailing and projected economic conditions and other factors that warrant
recognition in providing for an adequate allowance for loan losses.
Management believes its allowance for loan losses was adequate at September
30 and December 31, 1998. While the Association believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
economic and market conditions could result in adjustments to the allowance for
loan losses, and net earnings could be significantly affected, if circumstances
differ substantially from the assumptions used in making the final
determination.
26
The following table sets forth an analysis of the Association's allowance
for loan losses:
Three Months Years Ended September 30,
Ended -----------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
---------------- -------- ---------- --------- ---------- -----------
(Dollars in Thousands)
Balance a beginning of period ............ $ 1,496 $ 1,613 $ 1,251 $ 779 $ 856 $ 875
Charge-offs:
One-to-four-family ....................... 33 (258) (417) (218) (160) (115)
Commercial business ...................... 226 (24) (7) (4) -- --
Home equity .............................. -- -- (10) -- -- --
Other consumer ........................... 4 (34) (32) (32) (50) (142)
------- ------- ------- ------- ------- -------
Total Charge-offs ........................ 262 (316) (466) (254) (210) (257)
------- ------- ------- ------- ------- -------
Recoveries:
One-to-four-family ....................... 5 61 21 3 1 13
Commercial business ...................... -- 7 -- -- -- --
Other consumer ........................... 3 11 15 9 3 14
------- ------- ------- ------- -------
Total recoveries ......................... 8 79 36 12 4 27
------- ------- ------- ------- ------- -------
Net charge-offs .......................... 254 (237) (430) (242) (206) (230)
-------
Provisions charged to operations ......... 4 120 792 714 129 211
------- ------- ------- ------- -------
Balance at end of period ................. $ 1,246 $ 1,496 $ 1,613 $ 1,251 $ 779 $ 856
======= ======= ======= ======= ======= =======
Ratio of net charge-offs during the period
to average gross loans outstanding during
the period ............................... 0.49% 0.85% 0.84% 0.49% 0.42% 0.53%
======= ======= ======= ======= ======= =======
Ratio of net charge-offs during the period
to average non-performing assets ......... 20.84% 13.89% 13.46% 9.64% 6.23% 7.11%
======= ======= ======= ======= ======= =======
Ratio of allowance to gross loans
outstanding at end of period ............. 2.42% 2.89% 3.14% 2.45% 1.58% 1.83%
======= ======= ======= ======= ======= =======
27
Allocation of the Allowance for Loan Losses. The following table sets forth
the allocation of the allowance for loan losses by category as prepared by the
Association. This allocation is based on management's assessment as of the dates
indicated of the risk characteristics of each of the component parts of the
total loan portfolio and is subject to changes as and when the risk factors of
each such component part change. The allocation is not indicative of either the
specific amounts or the loan categories in which future charge-offs may be
taken, nor should it be taken as an indicator of future loss trends. The
allocation of the allowance to each category does not restrict the use of the
allowance to absorb losses in any category.
At December 31, 1998 At September 30, 1998
--------------------------------------------- -------------------------------------------------
(Dollars in Thousands)
Total Percent of Total Percent of
Amount of Loans in Each Amount of Loans in Each
Loan Loss Loan Amounts Category of Loan Loss Loan Amounts Category of
Allowance by Category Loans Allowance by Category Loans
------------ -------------- --------------- ------------ -------------- -------------------
One-to-four-family .......... $ 421 $34,730 67.56% $ 411 $35,706 68.91%
Multi-family and commercial . 440 10,683 20.78 627 8,614 16.62
Construction and development -- 1,193 2.32 4 606 1.17
Construction business ....... -- -- -- 76 2,624 5.06
Home equity ................. 26 2,958 5.75 25 3,143 6.07
Other consumer .............. 63 1,841 3.58 64 1,122 2.17
Unallocated ................. 296 -- -- 259 -- --
------- ------- ------ ------- ------- ------
Total ....................... $ 1,246 $51,405 100.00% $ 1,496 $51,815 100.00%
======= ======= ====== ======= ======= ======
At September 30, 1997 At September 30, 1996
----------------------------------------------- -----------------------------------------------------
(Dollars in Thousands)
Total Percent of Total Percent of
Amount of Loans in Each Amount of Loans in Each
Loan Loss Loan Amounts Category of Loan Loss Loan Amounts Category of
Allowance by Category Loans Allowance by Category Loans
-------------- ------------- ---------------- ------------ -------------- --------------------
One-to-four-family .......... $ 932 $36,891 71.92% $ 770 $40,262 78.81%
Multi-family and commercial . 238 7,950 15.50 93 4,635 9.07
Construction and development 3 539 1.05 4 938 1.84
Construction business ....... 43 1,422 2.77 27 1,230 2.41
Home equity ................. 36 3,379 6.59 19 2,869 5.62
Other consumer .............. 87 1,111 2.17 84 1,154 2.26
Unallocated ................. 274 -- -- 254 -- --
------- ------- ------ ------- ------- ------
Total ....................... $ 1,613 $51,292 100.00% $ 1,251 $51,088 100.00%
======= ======= ====== ======= ======= ======
28
At September 30, 1995 At September 30, 1994
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Total Percent of Total Percent of
Amount of Loans in Each Amount of Loans in Each
Loan Loss Loan Amounts Category of Loan Loss Loan Amounts Category of
Allowance by Category Loans Allowance by Category Loans
----------- ---------------- ---------------- ------------- -------------- --------------------
One-to-four-family .......... $ 592 $42,578 86.41% $ 706 $42,973 91.89%
Multi-family and commercial . 52 2,579 5.23 18 878 1.88
Construction and development 3 742 1.51 3 701 1.50
Construction business ....... 4 185 0.38 -- -- --
Home equity ................. 9 2,265 4.60 5 1,352 2.89
Other consumer .............. 72 920 1.87 108 861 1.84
Unallocated ................. 47 -- -- 16 -- --
------- ------- ------ ------- ------- ------
Total ....................... $ 779 $49,269 100.00% $ 856 $46,765 100.00%
======= ======= ====== ======= ======= ======
Investment Activities
The Association must maintain minimum levels of investments and other
assets that qualify as liquid assets under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. At September 30, 1998,
the Association's liquidity ratio for regulatory purposes (liquid assets as a
percentage of net withdrawable savings deposits and current borrowings) was
15.5%.
Securities. At September 30, 1998, Adirondack's securities totaled $7.2
million, or 10.5% of total assets. All securities held by Adirondack are
classified as "available for sale." Generally, the investment policy of
Adirondack is to invest funds among categories of investments and maturities
based upon Adirondack's market risk analysis policies, investment quality, loan
and deposit volume, liquidity needs and performance objectives. To date,
Adirondack's investment strategy has been directed toward callable government
agency obligations with terms not exceeding 15 years and certificates of deposit
with maturities of one year or less. At September 30 ,1998, the weighted average
term to maturity of the security portfolio, excluding marketable equity
securities, was 5.71 years. See Note 2 of the Notes to the Consolidated
Financial Statements for information regarding the maturities of Adirondack's
securities available for sale portfolio.
In order to supplement its lending activities and achieve its market risk
analysis goals, the Association from time to time invests in mortgage-backed
securities. As of September 30, 1998, all of the mortgage-backed securities
owned by the Association were issued, insured or guaranteed either directly or
indirectly by a federal agency. However, it should be noted that, while a
(direct or indirect) federal guarantee may indicate a high degree of protection
against default, they do not indicate that the securities will be protected from
declines in value based on changes in interest rates or prepayment speeds.
29
Mortgage-Backed Securities. The Association primarily invests in fixed-rate
mortgage backed securities with average lives of seven years or less and
variable rate mortgage-backed securities with rate reset intervals not to exceed
three years and average lives of seven years or less. The average lives of the
Association's mortgage-backed securities are determined by reference to industry
standard tables which take into account historical prepayments on mortgage loans
with specified interest rates and terms to maturity. At September 30, 1998, all
of the Association's mortgage backed securities were issued or guaranteed by
FHLMC, GNMA or FNMA, and all were pass-through securities. On that date,
$749,000 of the mortgage backed securities were at fixed rates with a weighted
average rate of 6.00% and weighted average life of 2.58 years. The remaining
$3.2 million of mortgage backed securities had adjustable rates with a weighted
average rate of 6.22% and weighted average period to rate reset of 6 months.
Mortgage-backed securities generally have higher yields than investment
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage- backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Association. However, these securities generally yield less
than the loans that underlie them because of the cost of payment guarantees or
credit enhancements that reduce credit risk. For information regarding the
Association's mortgage-backed securities portfolio, see Note 2 of the Notes to
the Consolidated Financial Statements.
30
The following table sets forth the composition of the Association's
securities and other earning assets at the dates indicated:
At September 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------------- --------------------------------
Amortized Amortized Amortized
Cost % of Total Cost % of Total Cost % of Total
---------- ------------- -------------- -------------- ------------ ----------------
(Dollars in Thousands)
Securities available for
sale:
US Government agency
obligations .............. $ 6,252 56.32% $ 2,998 42.50% $ 2,998 39.43%
------- ------ ------- ------ ------- ------
Mortgage-backed
securities:
FNMA ..................... $ 1,420 12.79% $ 753 10.66% $ 766 10.07%
FHLMC .................... 1,552 13.98 2,843 40.30 3,379 44.44
GNMA ..................... 967 8.71 -- -- -- --
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities AFS ........... $ 3,939 35.48% $ 3,596 50.96% $ 4,145 54.51%
------- ------ ------- ------ ------- ------
Certificates of deposit .. 400 3.60 -- -- -- --
Common Stock ............. 50 0.45 -- -- -- --
FHLB Stock ............... 461 4.15 461 6.54 461 6.06
------- ------ ------- ------ ------- ------
Total Securities available
for sale ................. $11,102 100.00% $ 7,055 100.00% $ 7,604 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of 12.5 10.88 12.03
securities: Years Years Years
Other interest-earning
assets:
Term deposit with FHLB $ --- --- $--- --- $ --- ---
Reverse repurchase
agreement............ 1,500 60.00% --- --- --- ---
Federal Funds sold... 1,000 40.00 --- --- 100 100.00
------- ------ --- ----- ----- ------
Total................ $2,500 100.00% $--- 0.00% $100 100.00%
===== ====== === ===== === ======
As of December 31, 1998, the Association's portfolio of securities, all
classified as "available for sale," totaled $14.1 million, or 20.03% of total
assets. Mortgage-backed, pass-through securities totaled $7.4 million, or 10.55%
of total assets, and were all issued or guaranteed by FHLMC, GNMA or FNMA. All
other securities available for sale, including FHLB and other equity securities,
totaled $6.7 million, or 9.48% of total assets.
The Association's securities portfolio at September 30, 1998 and at
December 31, 1998, did not contain securities of any issuer with an aggregate
book value in excess of 10% of the Association's equity, excluding those issued
by federal agencies.
The composition and maturities of the available for sale portfolio as of
September 30, 1998, excluding FHLB and common stock, are indicated in the
following table:
At September 30, 1998
----------------------------------------------------------------------------------------------------------
Less Than 1 1 to 5 5 to 10 Over
Year Years Years 10 Years Total Securities
------------- ------------ ----------- ------------ --------------------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
------------- ------------ ----------- ------------ ----------- -------------------------
(Dollars in Thousands)
US Government agency
obligations ........... $ 2,500 $ -- $ 3,002 $ 750 $ 6,252 $ 6,302
Mortgage-backed
securities ............ -- 749 -- 3,190 3,939 3,959
Certificates of Deposit 400 -- -- -- 400 400
------- ------- ------- ------- ------- -------
Total Securities AFS .. $ 2,900 $ 749 $ 3,002 $ 3,940 $10,591 $10,661
======= ======= ======= ======= ======= =======
Weighted average yield 5.92% 6.00% 6.47% 6.27% 6.23%
31
The following table sets forth the final contractual maturities of the
Association's mortgage-backed securities portfolio at September 30, 1998:
Less Than 1 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Year Years Years Years Years Years
------------ -------- ---------- ------------- -------------- ----------------
(Dollars in Thousands)
FNMA................. $--- $ --- $--- $--- $--- $1,419
FHLMC................ --- 749 --- --- --- 803
GNMA................. --- ---- --- --- --- 968
---- ------ ---- ---- ----- ------
Total................ $--- $749 $--- $--- $--- $3,190
=== === === === === =====
Weighted average yield --- 6.00% --- --- --- 6.22%
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Association for the periods indicated:
Year Ended September 30,
------------------------------------------------
1998 1997 1996
---------- ------------ ------------
(In Thousands)
Purchases:
Adjustable rate ....... $ 2,026 $--- $ 2,281
Fixed rate ............ -- -- 1,301
------- -------- -------
Total purchases ....... $ 2,026 $--- $ 3,582
Sales:
Adjustable rate ....... $--- $--- $ --
Fixed rate ............ -- -- --
------- -------- -------
Total sales ........... $--- $--- $ --
Principal repayments .. (1,678) (550) (431)
Discount/premium
accretion/amortization (5) 1 2
Fair value net change . 54 66 (101)
------- -------- -------
Net increase (decrease) $ 397 $ (483) $ 3,052
======= ======== =======
Sources of Funds
General. Although deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes, the Association has occasionally relied upon borrowed funds or
repurchase agreements to supplement them. The Association has borrowed funds,
either through direct borrowings or through the sale of securities under
agreements to repurchase, when the cost of borrowings was attractive when
compared to the rate required to be paid on deposits plus the deposit insurance
premium required to be paid.
Borrowings. The Association may borrow under a line of credit agreement
with the FHLB of New York. FHLB advances typically are collateralized by all of
the assets of the Association. There were $2.0 million in FHLB advances
outstanding at September 30, 1998 and $4.5 million at December 31, 1998.
Under an agreement with the Association's investment portfolio safekeeping
agent, the Association may from time to time enter into security repurchase
agreements brokered through such agent whereby the Association obtains funds
from the sale of securities held in the securities portfolio with an agreement
to repurchase the securities either the next day or a set number of days
following the sale. There were no borrowings represented by repurchase
agreements at September 30, 1998 and December 31, 1998.
See Note 7 of the Notes to the Consolidated Financial Statements for
information pertaining to the maximum month-end balance, average balance and
rates of the Association's borrowings for years ended September 30, 1998 and
1997.
Deposits. The Association offers a variety of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and time deposits. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other factors. The
Association's deposit are obtained predominantly from its Fulton County market
area. The Association relies primarily on customer service and long-standing
relationships with customers to attract and retain deposits; however, market
interest rates and rates offered by competing financial institutions
significantly affect the Association's ability to attract and retain deposits.
The Association does not generally pay premium rates for time deposits in excess
of $100,000 nor does the Association use brokers to obtain deposits.
32
The Association prices its deposit offerings based upon market and
competitive conditions in its market area. Based on its experience, the
Association believes that its checking, savings and money market accounts are
relatively stable sources of deposits. However, the ability of the Association
to attract and maintain certificates of deposit and the rates paid on those
deposits has been and will continue to be significantly affected by market
conditions.
The following table sets forth the dollar amount of deposits in various
types of deposit programs offered by the Association as of the dates indicated:
At September 30,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------------- ------------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
-------- ------------- ------------ ---------------- ----------- --------------
(Dollars in Thousands)
Transaction and savings
accounts
------
Passbook and statement
savings ............... $11,296 19.89% $12,004 21.40% $13,140 23.58%
Demand and N.O.W ......
accounts .............. 5,742 10.11 5,148 9.17 5,174 9.29
Money market accounts . 12,564 22.12 10,950 19.51 10,392 18.65
------- ------ ------- ------ ------- ------
Total transaction and
savings accounts ...... $29,602 52.12% $28,102 50.08% $28,706 51.52%
======= ====== ======= ====== ======= ======
Time Deposits
------
Under 4.00% ........... $ -- ---% $ 3 --% $ -- ---%
4.00 - 4.99 ........... 2,721 4.79 3,994 7.12 11,357 20.38
5.00 - 5.99 ........... 23,257 40.95 21,942 39.10 11,101 19.93
6.00 - 6.99 ........... 1,181 2.08 2,046 3.65 4,525 8.12
7.00 - 7.99 ........... 32 0.06 -- -- -- --
8.00 - and over ....... -- -- 30 0.05 27 0.05
Total time deposits ... $27,191 47.88% $28,015 49.92% $27,010 48.48%
------- ------ ------- ------ ------- ------
Total deposits ........ $56,793 100.00% $56,117 100.00% $55,716 100.00%
======= ====== ======= ====== ======= ======
At December 31, 1998, the Association's deposits totaled $56.4 million. At
the same date, deposit balances by account types and as a percentage of total
deposits were (i) passbook and statement savings, $11.6 million, or 20.61%; (ii)
demand and N.O.W. accounts, $5.4 million, or 9.66%; (iii) money market accounts,
$12.9 million, or 22.82%; and, (iv) time deposits, $26.4 million, or 46.91%.
The following table sets forth the savings flows at the Association during
the periods indicated:
Year Ended September 30,
--------------------------------------------------------------
1998 1997 1996
--------------------- ------------------ -----------------
(Dollars In Thousands)
Opening balance ........... $ 56,117 $ 55,716 $ 57,866
Deposits .................. 134,900 143,875 116,344
Withdrawals ............... (136,624) (145,899) (120,910)
Interest credited ......... 2,400 2,425 2,416
--------- --------- ---------
Ending balance ............ $ 56,793 $ 56,117 $ 55,716
========= ========= =========
Net increase (decrease) ... $ 676 $ 401 $ (2,150)
========= ========= =========
Percent increase (decrease) 1.20% 0.72% (3.72%)
========= ========= =========
The following table indicates the amount of the Association's certificates
of deposit and other deposits by time remaining until maturity as of September
30, 1998:
Maturity
-------------------------------------------------------------------- --------------------
3 Months Over 3 to 6 Over 6 to 12
or Less Months Months Over 12 Months Total
------------- -------------- ----------- -------------------- ---------------------
Certificates of deposit less than
$100,000..................... $6,750 $3,777 $8,587 $5,794 $24,908
Certificates of deposit $100,000
or more...................... 1,185 452 --- 646 2,283
------- -------- ---------- -------- ---------
Total certificates of deposit $7,935 $4,229 $8,587 $6,440 $27,191
===== ===== ===== ===== ======
33
The following table shows the rate and maturity information for the
Association's time deposits as of September 30, 1998:
Under 4.00 - 5.00 - 6.00 - 7.00 - 8.00 - Percent of
4.00% 4.99% 5.99% 6.99% 7.99% 8.99% Total Total
----------- ----------- ------------ ----------- ----------- ---------- ------------ ------------
(Dollars In Thousands)
Time deposit accounts
maturing in quarter
ending:
December 31, 1998 ... $--- $ 1,801 $ 6,043 $ 91 $--- $--- $ 7,935 29.18%
March 31, 1999 ...... -- 1,251 2,977 -- -- -- 4,228 15.55
June 30, 1999 ....... -- 10 3,458 -- -- -- 3,468 12.75
September 30, 1999 .. -- 60 5,059 -- -- -- 5,119 18.83
December 31, 1999 ... -- -- 735 259 -- -- 994 3.66
March 31, 2000 ...... -- -- 408 260 -- -- 668 2.46
June 30, 2000 ....... -- -- 515 275 -- -- 790 2.91
September 30, 2000 .. -- 1 1,166 259 -- -- 1,426 5.24
December 31, 2000 ... -- -- 199 8 -- -- 207 0.76
March 31, 2001 ...... -- -- 184 -- -- -- 184 0.68
June 30, 2001 ....... -- -- 131 -- -- -- 131 0.48
September 30, 2001 .. -- -- 544 -- -- -- 544 2.00
December 31, 2001 ... -- -- 286 -- -- -- 286 1.05
Thereafter .......... -- -- 1,179 -- -- 32 1,211 4.45
----- ------- ------- ------- ----- ------- ------- ------
Total ............... $--- $ 3,123 $22,884 $ 1,152 $ --- $ 32 $27,191 100.00%
===== ======= ======= ======= ===== ======= ======= ======
Percent of total........ --- 11.49% 84.15% 4.24% --- 0.12% 100.00%
Subsidiary Activities
As a federally chartered savings and loan association, the Association is
permitted by OTS regulations to invest up to 2% of its assets in the stock of,
or loans to, service corporation subsidiaries, and may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
savings association may engage directly. At September 30, 1998, the Association
did not have any subsidiaries.
Competition
The Association faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating loans comes
primarily from commercial banks, credit unions, mortgage bankers and other
savings institutions, which also make loans secured by real estate located in
the Association's market area. The Association competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Competition for deposits is principally from commercial banks, credit
unions, mutual funds, securities firms and other savings institutions located in
the same communities. The ability of the Association to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Association competes for these
deposits by offering competitive rates, maintaining close ties within its local
community, advertising and marketing programs, convenient business hours and a
customer-oriented staff.
Employees
At September 30, 1998, the Association had a total of 27 employees
including 2 part-time employees. None of the Association's employees are
represented by any collective bargaining agreement. Management considers its
employee relations to be good.
34
Properties
The following table sets forth information concerning the main office and
the branch office of the Association at September 30, 1998. At September 30,
1998, the Association's premises had an aggregate net book value of
approximately $780,000.
Net Book Value at
Location Year Acquired Owned or Leased September 30, 1998
- ----------------------------------- ---------------------- --------------------- -----------------------------
Main Office: 1962 Own $550,000
52 North Main Street
Gloversville, NY 12078
Full Service Branch: 1983 Own $230,000
295 Broadway
Saratoga Springs, NY 12866
The Association believes that its current facilities are adequate to meet
the present and foreseeable future needs of the Association and Adirondack.
The Association's depositor and borrower customer files are maintained
in-house. The net book value of the data processing and computer equipment
utilized by the Association at September 30, 1998 was approximately $230,000.
Litigation
From time to time, Adirondack is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on Adirondack's consolidated financial
position or results of operations.
On February 19, 1999, John D. Shepherd, a shareholder of Adirondack, filed
a complaint against Adirondack and Richard D. Ruby, its Chairman of the Board,
in United States District Court for the Northern District of New York. The
action is entitled John D. Shepherd v. Adirondack Financial Services Bancorp,
Inc., and Richard D. Ruby, as Chairman of the Board of Directors of Adirondack
Financial Services Bancorp, Inc., Case No. 99-CV- 0241 NAM-TNH.
In his complaint, Mr. Shepherd alleged that he had properly nominated
Leslie M. Apple and Henry J. MacDonald as candidates for election as directors
of Adirondack and that Adirondack improperly refused to honor such nominations
and to include such nominations in its proxy statement for its Annual Meeting of
Stockholders held on March 4, 1999. Adirondack believes that Mr. Shepherd's
purported nominations were not made in accordance with Adirondack's bylaws and
that disclosure of such purported nominations in Adirondack's proxy statement is
not required by the federal securities law.
On March 1, 1999, a hearing was held on the Plaintiff's request for a
preliminary injunction against Adirondack's use of its proxy statement in
connection with the March 4, 1999 stockholder meeting. At that hearing, the
court declined to issue a preliminary injunction, indicating that the Plaintiff
had not shown irreparable harm or a substantial likelihood of success on the
merits.
On April 22, 1999, Adirondack entered into a standstill agreement with John
D. Shepherd as well as Leslie M. Apple, Henry J. MacDonald, Colvin G. Ryan and
Morris Massry (collectively, the "Investors"). Adirondack has been informed that
these persons own approximately 130,580 shares, or 19.08%, of the outstanding
shares of the common stock. Under the terms of the standstill agreement, Mr.
Shepherd and the Investors agreed to dismiss the litigation with prejudice in
exchange for the payment of approximately $29,000 of legal fees and expenses.
Subject to certain limitations discussed below, Mr. Shepherd and the Investors
also generally agreed (i) not to participate in any litigation against
Adirondack, (ii) not to contact any government agency or regulatory body with
respect to Adirondack, (iii) to limit their public statements with respect to
Adirondack, (iv) not to acquire any additional shares of Adirondack Common Stock
unless such shares become subject to the restrictions discussed
35
herein, (v) not to solicit proxies with respect to any matters submitted for
shareholder vote, (vi) not to submit any nominations for election as director or
any shareholder proposal for business at a meeting of Adirondack's stockholders,
(vii) to withdraw the nominations which Mr. Shepherd purported to make in
connection with Adirondack's 1999 Annual Meeting of Stockholders, (viii) to vote
all shares owned by them in favor of the merger and the reelection of any
current director and to vote against any proposal or nomination opposed by the
Board, (ix) not to assist any other person in opposing the merger or the
renomination of a current director, (x) not to solicit any acquisition offers
for Adirondack, and (xi) not to deposit their shares in a voting trust or sell
them to any person owning more than 1% of the outstanding stock of Adirondack.
Subject to certain limitations discussed below, Adirondack also generally agreed
not to participate in any litigation against the Investors, not to contact any
regulatory agency with respect to any Investor and to limit its public
statements with respects thereto.
The agreements of the parties set forth above will be void if: (i) the per
share consideration payable to the stockholders in connection with the merger is
less than $20.00, (ii) the merger agreement is terminated, or (iii) the merger
shall not have been completed as of October 31, 1999.
36
ADIRONDACK STOCK PRICES AND DIVIDEND INFORMATION
The common stock of Adirondack trades on the over-the-counter market under
the symbol "AFSB." Adirondack common stock was issued at $10.00 per share in
connection with Adirondack's initial public offering completed April 6, 1998.
Quotations are available through the OTC Bulletin Board. The following table
shows the range of high and low sale prices for each quarterly period since
Adirondack's stock began trading in April 1998. Adirondack did not pay any
dividends on its common stock during these periods.
Adirondack Common Stock
---------------------------------------------------------
High Low
------------ ------------
1998 Calendar Year
Second Quarter .................. $14.13 $10.00
Third Quarter ................... 14.00 11.50
Fourth Quarter ................ 15.00 12.13
1999 Calendar Year
First Quarter ................... 19.75 13.75
Second Quarter (through April 26) 22.13 19.25
As of the record date, the 684,348 outstanding shares of Adirondack common
stock were held by approximately 200 record owners.
37
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
(In Thousands)
We are providing the following financial information to aid you in your
analysis of the financial aspects of the merger. We derived this information
from Adirondack's financial statements for the periods indicated. The
information is only a summary and you should read it in conjunction with
Adirondack's historical financial statements and related notes.
For the Three Months Ended For the Year Ended
December 31, (unaudited) September 30,
------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income Statement Data:
Interest income................ $1,319 $1,184 $5,005 $4,905 $4,733 $4,816 $4,805
Interest expense............... 646 627 2,525 2,447 2,416 2,527 2,148
------- -------- ------ ------ ------ ------ ------
Net interest income............ 673 557 2,480 2,458 2,317 2,289 2,657
Provision for loan losses...... 4 15 120 792 714 129 211
--------- --------- ------- ------ ------ ------ ------
Net interest income after provision
for loan losses............. 669 542 2,360 1,666 1,603 2,160 2,446
Noninterest income............. 58 54 176 155 109 392 69
Noninterest expense............ 552 557 2,213 2,319 2,970 2,198 2,119
------ ------- ------ ------ ------ ------ ------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change. 175 39 323 (498) (1,258) 354 396
Provision (benefit) for income taxes 71 16 89 85 (222) 103 124
Extraordinary item, net of tax. --- --- --- --- --- --- ---
Cumulative effect of accounting
change, net of tax.......... --- --- --- --- --- --- ---
------ ----- ------ -------- ----------- ------ ------
Net income (loss).............. $104 $23 $234 $(583) $(1,036) $251 $272
==== === ==== ====== ======== ==== ====
At December 31, (unaudited) At September 30,
---------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
-------------- ----------- ------------ ---------- ------------- ------------ ------------
Balance Sheet Data:
Cash and cash equivalents...... $3,862 $1,435 $4,745 $1,922 $1,198 $3,181 $6,509
Trading securities............. --- --- --- --- --- --- ---
Securities available-for-sale.. 6,204 2,993 6,752 2,994 2,933 3,696 5,337
Securities held-to-maturity.... --- --- --- --- --- 4,500 5,459
Mortgage-backed securities
available-for sale............. 7,416 3,416 3,959 3,562 4,044 993 3,968
Mortgage-backed securities held-
to-maturity.................. --- --- --- --- --- --- ---
Loans, net..................... 50,050 48,880 50,201 49,526 49,636 48,239 45,645
Federal Home Loan Bank stock... 461 461 461 461 461 444 444
All other assets............... 2,313 2,438 2,123 2,557 2,734 2,020 2,235
--------- -------- -------- -------- -------- -------- --------
Total assets................... $70,306 $59,623 $68,241 $61,022 $61,006 $63,073 $69,597
======= ======= ======= ======= ======= ======= =======
Deposits....................... $56,377 $54,271 $56,793 $56,117 $55,716 $57,886 $64,703
FHLB advances.................. 4,463 200 2,000 --- 300 --- ---
Securities sold under
repurchase agreements........ --- 1,500 --- 1,300 --- --- ---
Other borrowings............... --- --- --- --- --- --- ---
All other liabilities.......... 234 331 293 325 1,200 333 189
Stockholders' equity........... 9,232 3,321 9,155 3,280 3,790 4,854 4,705
-------- --------- --------- -------- ------ --------- ------
Total liabilities and stockholders'
equity...................... $70,306 $59,623 $68,241 $61,022 $61,006 $63,073 $69,597
======= ======= ======= ======= ======= ======= =======
38
For the Three Months Ended For the Year Ended
December 31, (unaudited) September 30,
----------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ -------------- ------------
Selected Financial Ratios:
Performance Ratios:
Return on average assets ..... 0.60% 0.15% 0.36% (0.94)% (1.69)% 0.38% 0.42%
Return on average equity...... 4.48 2.78 5.14 (16.30) (22.22) 5.30 5.97
Net interest rate spread...... 3.56 3.72 3.87 3.96 3.68 3.35 4.43
Net interest margin........... 4.04 3.82 4.02 4.11 3.91 3.55 4.42
Other expense to average assets 3.37 3.62 3.39 3.63 3.61 3.11 3.17
Average interest-earning assets to
average interest-bearing 112.42 102.54 103.87 103.76 105.53 105.01 99.70
liabilities...................
Asset Quality Ratios:
Non-performing loans to total 2.07% 4.91% 3.52% 7.39% 4.33% 5.24% 7.52%
loans.........................
Non-performing assets to total
assets........................ 2.28 6.10 3.05 6.73 3.74 4.38 5.53
Allowance for loan losses to total
loans...................... 2.42 3.09 2.89 3.14 2.45 1.58 1.83
Allowance for loan losses to non-
performing loans........... 117.33 44.32 81.91 42.53 56.53 30.20 24.34
Capital Ratios:
Average equity to average assets 13.47% 5.46% 7.08% 5.78% 7.62% 7.11% 6.99%
Equity to total assets........ 13.13 5.57 13.42 5.38 6.21 7.70 6.76
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 1998
The following discussion and analysis should be read in conjunction with
the unaudited consolidated interim financial statements and related notes and
with the statistical information and consolidated financial data appearing in
this report for the fiscal year ended September 30, 1998.
Forward Looking Statements
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties-including, changes in
economic conditions in Adirondack's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in
Adirondack's market area, and competition that could cause actual results to
differ materially from historical results and those presently anticipated or
projected. Adirondack wishes to caution the reader not to place undue reliance
on any such forward looking statements, which speak only as of the date made.
Adirondack wishes to advise readers that the factors listed above could affect
Adirondack's financial performance and could cause Adirondack's actual results
for future periods to materially differ from any opinions or statements
expressed with respect to future periods in any current statements.
The company does not undertake -- and specifically disclaims any obligation
- -- to publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000 ("Y2K") Issues
Year 2000 issues are the result of computer programs having been written
using two digits rather than four to define the applicable year. Any of
Adirondack's programs that have time sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
major system failure or miscalculations. Adirondack is also aware of these risks
to third parties, including vendors (and to the extent appropriate, depositors
and borrowers), and the potential adverse impact on Adirondack that could result
from failures by these parties to adequately address the Year 2000 issues.
Adirondack processes all customer information on an in-house data
processing system utilizing computer programs from several vendors. Most of the
ancillary programs have a direct interface to the core processing system. To
mitigate the Y2K risk, Adirondack has developed a Y2K Action Plan that was
approved by the Board in July 1998. As a part of the Plan, a Y2K Committee was
formed to conduct a review of Adirondack's core computer system and the
ancillary software to identify the mission critical applications that could be
affected by the Y2K problem. The Y2K committee reports on a quarterly basis to
the Board of Directors as to Adirondack's status in resolving any Y2K issues. In
order to complete the final phases of the Y2K Plan, it will be necessary to
document contingency and disaster recovery plans, which will be completed by the
Association's employees in 1999.
To date, the Y2K Committee has received Y2K compliance
certifications/progress forms from all of Adirondack's vendors. Of the responses
received, 85% of the vendors have certified that they are Y2K compliant, with
the remaining 15% informing Adirondack of their progress and anticipated
compliance dates; however, no assurance can be given as to the adequacy of such
plans or to the timeliness of their implementation.
Final versions of Adirondack's Y2K customer evaluation forms and the
associated risk analysis have been completed and the Y2K questionnaires have
been sent to customers. A spreadsheet has been developed that identifies
significant borrowers and their level of risk and will be monitored by
Adirondack's Asset Review Committee. To date, the majority of significant
borrowers contacted have indicated that they are not heavily reliant on computer
systems and are, therefore, evaluated as a low risk to Y2K.
40
Based on Adirondack's current knowledge and investigations, the expense of
the Year 2000 problem, as well as the related potential effect on Adirondack's
earnings, is not expected to have a material effect on Adirondack's financial
position or results of operation. Furthermore, Adirondack expects corrective
measures required to be prepared for the Year 2000 problem to be implemented on
a timely basis.
Financial Condition
Total assets were $70.3 million at December 31, 1998, an increase of
$2.1million or, 3.03%, over total assets of $68.2 million as of September 30,
1998. The increase in total assets was primarily funded by borrowings, which
increased by $2.5 million, partially offset by a $417,000 decline in total
deposits.
Investments available for sale were $13.7 million at December 31, 1998,
$2.5 million or 22.45% more than the $11.2 million balance at September 30,
1998. The increase is primarily attributable to the purchase of $5.5 million in
securities partially offset by $2.6 million received from maturities and
principal paydowns.
Total gross loans decreased by $410,000, or 0.79%, to $51.4 million at
December 31, 1998 as compared to $51.8 million at September 30, 1998.
Multi-family and commercial real estate loans increased by $113,000, or 1.31%,
from $8.6 million at September 30, 1998 to $8.7 million at December 31, 1998.
Commercial loans declined $668,000, or 25.56%, during the same period. The
modest increase in multi-family and commercial real estate loans and the decline
in commercial loans are the result of the Board placing less emphasis on the
growth of these loan portfolios, which are generally subject to higher credit
risks than other types of lending. One-to-four family real estate loans declined
from $35.7 million at September 30, 1998 to $35.5 million at December 31, 1998,
a decline of $185,000 or 0.52%. One-to-four family construction loans increased
$587,000, or 96.86%, from $606,000 at September 30, 1998 to $1.2 million at
December 31, 1998. Home equity loan balances declined during the same period by
$185,000 or 5.89%. The high level of competition for loans secured by
residential properties, which are primarily driven by the rates offered on the
loans, continues to be a significant factor in the changes in Adirondack's
one-to-four family, construction and home equity loan balances.
The Allowance for loan loss decreased by $250,000, or 16.70%, from
September 30, 1998 to December 31, 1998. The decline was the result of net
charge-offs of $254,000 exceeding the provision of $4,000 recorded during the
three months ended December 31, 1998. Charge-offs taken during this period were
primarily on loans secured by commercial properties, either foreclosed upon or
deemed partially uncollectible. At December 31, 1998, the allowance for loan
losses was 2.42% of gross loans receivable as compared to 2.89% at September 30,
1998.
Non-performing assets ("NPAs") decreased by $470,000, or 22.57%, to $1.6
million at December 31, 1998 from $2.1 million at September 30, 1998. The
improvement in NPAs is attributable to nonperforming loans declining by
$764,000, or 41.84%, to $1.1 million at December 31, 1998 from $1.8 million at
September 30, 1998, partially offset by an increase in OREO of $456,000 during
the same period. Nonperforming loans at December 31, 1998 consisted of
one-to-four family mortgages of $756,000, multi-family and commercial real
estate loans of $304,000 and commercial loans of $2,000. OREO at December 31,
1998 consisted of $175,000 in one-to-four family residences and a $375,000
commercial building.
Total deposits decreased by $417,000, or 0.73%, to $56.4 million at
December 31, 1998 from $56.8 million at September 30, 1998. The following table
shows the deposit composition as of the respective balance sheet dates:
At December 31, 1998 At September 30, 1998
-----------------------------------------------------------------------------------------
(In Thousands) % of Deposits (In Thousands) % of Deposits
------------------- ------------------ ---------------- ----------------------
Passbook and statement savings......... $11,619 20.61% $11,297 19.89%
Demand and NOW accounts................ 5,445 9.66 5,742 10.11
Money market accounts.................. 12,865 22.82 12,563 22.12
Time deposits.......................... 26,448 46.91 27,191 47.88
------- ------ -------- -------
$56,377 100.00% $56,793 100.00%
======= ====== ======= ======
Management attributes the increases in passbook and statement savings and
money market accounts primarily to customers choosing to invest their funds in
short-term interest-bearing products due to the relatively low level of interest
rates on time deposits during the quarter ended December 31, 1998. The decline
in time deposits is consistent with Adirondack's efforts to reduce its reliance
on higher rate time deposits for funding.
41
Borrowings increased from $2.0 million at September 30, 1998 by $2.5
million to $4.5 million at December 31, 1998. The increase is attributable to
Adirondack's implementation of a leveraging strategy to increase the return on
equity, whereby securities were purchased with funds borrowed from the FHLB.
During the quarter ended December 31, 1998, Adirondack used $2.5 million in
borrowings from the FHLB to purchase pools of mortgage-backed securities and one
callable agency note.
Total equity increased by $77,000 during the three month period ended
December 31, 1998 and was $9.2 million at both December 31, 1998 and September
30, 1998. The increase was attributable to $10,000 obtained through the issuance
of common stock to 401-K accounts and net income of $104,000 recognized for the
three months ended December 31, 1998, partially offset by a $38,000 decline in
the net after-tax unrealized gain on available for sale securities.
Comparison of Operating Results for the Three-Month Periods Ended December 31,
1998 and 1997
The results of operations of Adirondack's subsidiary savings association
are dependent primarily on net interest income, which is the difference between
the income earned on its loans and securities and its cost of funds, consisting
of the interest paid on deposits and borrowings. Results of operations are also
affected by the Association's provision for loan losses, net expenses on
foreclosed assets and by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the financial condition and results of
operations of Adirondack and the Association.
Unless otherwise noted, discussion of operating results for the three
months ended December 31, 1998, is based on a comparison with the corresponding
period in 1997.
Net income for the three months ended December 31, 1998 was $104,000,
compared to $23,000 in 1997. The $81,000 increase was primarily attributable to
an increase of $116,000 in net interest income and a decrease of $11,000 in the
provision for loan losses less the tax effect of these changes.
Net Interest Income. Net interest income for the three months ended
December 31, 1998 increased by $116,000, or 20.92%, to $673,000 from $557,000 in
1997. The improvement in net interest income was primarily attributable to an
increase in the average volume of net interest-earning assets, which increased
by $5.9 million, or 412.8%, the result of an increase in total average
interest-earning assets of $8.6 million, or 14.87%, partially offset by an
increase in total average interest-bearing liabilities of $2.7 million, or
4.78%. The positive effect derived from the increase in the average volume of
net interest-earning assets was partially offset by a decline of 16 basis points
in Adirondack's average net interest rate spread to 3.56% from 3.72% in 1997.
The average yield earned on interest-earning assets during the three month
period ended December 31, 1998 was 7.90%, a decrease of 24 basis points as
compared to 8.14% in 1997 and the average rate paid on interest-bearing
liabilities was 4.34%, down 9 basis points from 4.43% in 1997.
The decline in the average yield earned on total interest-earning assets
was attributable to a shift in the composition of total average interest-earning
assets to lower yielding securities and interest-earning deposits from higher
yielding loans. The average volume of securities increased by $5.3 million to
$12.3 million or 18.4% of total average interest-earning assets from 12.0% in
1997. In addition, average interest-earning deposits increased by $2.7 million
to $2.9 million or 4.4% of total average interest-earning assets for the three
months ended December 31, 1998 from 0.3% of total average interest-earning
assets in 1997. The combined average yield earned on securities and
interest-earning deposits declined by 46 basis points to 5.67% with the average
rate earned on securities decreasing by 20 basis points to 5.98%, partially
offset by an increase of 10 basis points to 4.36% in the average rate earned on
interest-earning deposits. Average loan balances for the three months ended
December 31, 1998, as compared to the same period in 1997, increased by
$594,000, or 1.17%, to $51.6 million, accompanied by an increase of 13 basis
points in the average loan yield to 8.56%. However, as a percentage of total
average interest-earning assets, average loan volume declined to 77.2% from
87.7% in 1997.
As mentioned above, the average cost of interest-bearing liabilities
decreased from 4.43% for the three months ended December 31, 1997 to 4.34% for
the three months ended December 31, 1998, with all of the component
42
categories of average total interest-bearing liabilities experiencing declines
in average rates paid. The declines in interest rates on interest-bearing
liabilities resulted primarily from the general decline in market interest rates
since December 31, 1997.
Provision for Loan Losses. The provision for loans losses was $4,000 for
the three months ended December 31, 1998, compared to $15,000 in 1997. The
decrease in the provision expense was attributable to management's evaluation of
the adequacy of Adirondack's allowance for loan losses as of December 31,1998
and a decline in the Association's non-performing loans. As of December 31,
1998, non-performing loans were $1.1 million, a decrease of $2.4 million, or
69.92%, from $3.5 million at December 31,1997.
Operating Expenses. Total operating expenses decreased by $4,000, or 0.81%,
to $552,000 for the three months ended December 31, 1998, from $556,000 in 1997.
Compensation and benefits expenses increased by $27,000, or 11.69%, mainly
the result of ESOP expenses and the initial expenses related to Adirondack's
Recognition and Retention Plan ("RRP"). In addition, advertising expenses
increased by $17,000, or 75.07%, to $39,000, the result of management's decision
to implement a branding campaign for the Association's name and the services and
products that it provides in order to increase the public's awareness of the
Association.
Income Tax Expense. Income tax expense increased by $55,000 to $71,000 from
$16,000 in 1997. The increase was the result of a significant increase by
$136,000 in pre-tax income to $175,000 from $39,000 in 1997.
Liquidity and Funding
Liquidity is the ability to generate cash flows to meet present and
expected future funding needs. Management monitors the Association's liquidity
position on a daily basis to evaluate its ability to meet expected and
unexpected depositor withdrawals and to make new loans and/or investments.
The Association's primary sources of funds for operations are deposits from
its market area, principal and interest payments on loans and securities,
proceeds from the maturity and sale of securities available for sale, advances
from the FHLB, and securities sold under agreements to repurchase ("repos").
While maturities and scheduled amortization of loans and securities are
generally predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition.
The primary investing activities of the Association are the origination of
loans and the purchase of securities. During the three months ended December 31,
1998, the Association's loan originations totaled $2.5 million. The Association
purchased $5.5 million of securities available for sale during the same period.
The primary financing activity of the Association is the attraction of
deposits. However, during the three months ended December 31, 1998, the
Association's deposits decreased by $417,000 from September 30, 1998, primarily
time deposits ("CDs"), which decreased by $743,000. Management believes that the
decrease in CDs during the three months ended December 31, 1998 resulted
primarily from the holders of maturing CDs pursuing alternative investments to
obtain better returns.
In the event the attraction of deposits is not sufficient to fund an
expansion in interest-earning assets or when the level of market interest rates
for CDs is higher than the cost of borrowed funds, the Association may utilize
advances from the FHLB and other types of borrowed funds to fund
interest-earning asset growth. During the three months ended December 31, 1998,
the Association increased its borrowed funds by $2.5 million to $4.5 million
through FHLB advances. The FHLB advances were used to purchase securities
available for sale.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied by the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required minimum liquidity ratio is
currently 4%. The Association's average daily liquidity ratio for the month of
December 1998 was 8.20%.
The Association's most liquid assets are cash and cash equivalents, which
include federal funds sold and bank deposits. The level of these assets is
dependent on the Association's operating, financing, and investing activities
43
during any given period. At December 31, 1998, cash and cash equivalents totaled
$4.3 million, compared to $4.7 million at September 30, 1998.
The Association anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1998, the Association had
commitments to originate loans of $1.3 million as well as undrawn commitments of
$1.2 million on home equity and other lines of credit. Time deposits that are
scheduled to mature in one year or less at December 31, 1998, totaled $16.7
million. Management believes that a significant portion of such deposits will
remain with the Association.
Adirondack also has a need for, and sources of, liquidity. Liquidity is
required to fund its operating expenses, as well as for the payment of any
dividends to stockholders. The primary source of Adirondack's liquidity on an
ongoing basis is dividends from the Association. To date no dividends have been
made by the Association to Adirondack.
Capital
Although there are no minimum capital ratio requirements for Adirondack,
the Association is required to maintain minimum regulatory capital ratios. The
following is a summary of the Association's actual capital amounts and ratios at
December 31, 1998, compared to the OTS minimum capital requirements:
Actual Minimum
-----------------------------------------------------------------------------------------
(In Thousands) % (In Thousands) %
---------------------- ----------- ------------------ ---------------
Tangible Capital................ $7,177 10.44% $1,031 1.50%
Core Capital.................... 7,177 10.44 2,749 4.00
Risk Based Capital.............. 9,416 20.01 3,064 8.00
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998
Adirondack was incorporated under Delaware law in December 1997 as a bank
holding company to purchase 100% of the common stock of the Association. On
April 6, 1998, the Association converted from a mutual form to a stock
institution, at which time Adirondack purchased all of the outstanding stock of
the Association, and Adirondack completed its initial public offering, issuing
661,250 shares of $.01 par value common stock at $10.00 per share. Net proceeds
to Adirondack were $6.0 million after conversion and stock offering costs, and
$5.5 million excluding the shares acquired by Adirondack's newly formed "ESOP."
The consolidated financial condition and operating results of Adirondack
are primarily dependent upon its wholly owned subsidiary, the Association, and
all references to Adirondack and its financial data prior to April 6, 1998,
except where otherwise indicated, refer to the Association and its financial
data.
The Association has operated as a community-oriented financial institution,
obtaining deposits from its local community and investing those deposits
principally in residential one-to-four family mortgage loans and, to a lesser
extent, multi-family and commercial real estate, commercial business, home
equity and consumer loans. In addition, the Association invests excess funds not
used for loan originations in securities issued by the United States government
or its agencies, and mortgage backed securities. Deposits are offered at various
interest rates only within the Association's primary market area. There are no
brokered deposits maintained by the Association.
The Association's profitability, like that of many financial institutions,
is dependent to a large extent upon its net interest income, which is the
difference between the interest it receives on interest-earning assets, such as
loans and investments, and the interest it pays on interest-bearing liabilities,
such as deposits and borrowings. In other words, the Association's results of
operations are significantly dependent on its interest rate spread.
Results of operations are also affected by the Association's provision for
loan losses, noninterest expenses such as salaries and employee benefits and, to
a lesser extent, noninterest income such as service charges on deposit accounts.
44
Financial institutions in general, including Adirondack, are significantly
affected by economic conditions, competition and the monetary and fiscal policy
of the federal government. Lending activities are influenced by the demand for
and the supply of housing, competition among lenders, the interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preference and the levels of personal income and savings in the Association's
primary market area.
Financial Condition
Total assets were $68.2 million at September 30, 1998, an increase of $7.2
million or 11.8% from $61.0 million at September 30, 1997. The asset increase
resulted principally from the receipt of net investable proceeds of $5.5 million
from Adirondack's stock offering consummated April 6, 1998, with the balance
funded by an increase of $677,000 or 1.2% in total deposits from $56.1 million
at September 30, 1997 to $56.8 million at September 30, 1998, an increase in
borrowings of $700,000 or 53.8% from $1.3 million to $2.0 million during the
same period and retention of Adirondack's net income of $234,000 for the fiscal
year ended September 30, 1998.
Cash and cash equivalents increased to $4.7 million at September 30, 1998,
an increase of $2.8 million or 146.9%. Cash and cash equivalents had been much
higher during the year, first as Adirondack held the proceeds of stock
subscriptions prior to consummation of the stock offering and later as
Adirondack gradually deployed the offering proceeds. The balance of cash and
cash equivalents held at September 30, 1998 includes $1.5 million invested in a
short-term reverse repurchase agreement by Adirondack. There were no balances
outstanding for reverse repurchase agreements at September 30, 1997.
Investments available for sale were $11.2 million at September 30, 1998 as
compared to $7.0 million at September 30, 1997, an increase of $4.2 million or
59.21%. Investments now represent 16.4% of total assets as compared to 11.5% at
September 30, 1997. The net increase in investments held represents the
investment of the net public offering proceeds principally in U.S. government
agency callable securities which increased by $3.3 million or 110.5% from $3.0
million at September 30, 1997 to $6.3 million at September 30, 1998. To a lesser
extent, offering proceeds were also invested in mortgage-backed securities which
increased $397,000 or 11.2% during the same period from $3.6 million to $3.9
million. Prior to the offering, $700,000 was invested in short-term certificates
of deposit in order to obtain higher yields than term deposits offered through
the FHLB. At September 30, 1998, there were $400,000 of these certificates of
deposit held as investments, maturing within 9 months. There were no
certificates of deposit held as investments at September 30, 1997. During fiscal
1998, the market value of the investment portfolio increased $108,000.
Net loans receivable increased $675,000 or 1.4% from $49.5 million at
September 30, 1997 to $50.2 million at September 30, 1998. One-to-four family
residential mortgages declined from $36.9 million at September 30, 1997 by $1.2
million or 3.2% to $35.7 million at September 30, 1998 and now represent 68.9%
of gross loans outstanding as compared to 71.9% at September 30, 1997. The
decline is the result of increased competition in the residential mortgage
market driven by declining interest rates and to the Association's increased
emphasis during the year, on multi-family and commercial real estate and
commercial business loans. Reflecting the increased emphasis, multi-family and
commercial real estate loan balances were $8.6 million at September 30, 1998, an
increase of $664,000 or 8.4% from the September 30, 1997 balance of $8.0
million, and commercial business loan balances increased $1.2 million or 84.5%
from $1.4 million at September 30, 1997 to $2.6 million at September 30, 1998.
Home equity loans declined $236,000 or 7.0% from $3.4 million at September 30,
1997 to $3.1 million at September 30, 1998. The decline in home equity loans was
the result of the lower interest rate environment which encouraged customers to
refinance their underlying first mortgages and repay their home equity loans.
The Association's construction and consumer loan portfolios did not change
significantly during fiscal 1998.
Total deposits increased $677,000 or 1.2% from $56.1 million at September
30, 1997 to $56.8 million at September 30, 1998. The increases in demand and NOW
accounts, which increased $594,000 or 11.5% during fiscal 1998, and money market
accounts, which increased $1.6 million or 14.7% during fiscal 1998, were offset
somewhat by savings accounts decreasing $707,000 or 5.9% and time deposits
decreasing $824,000 or 2.9% during the same period. The increase in checking
accounts is the result of increased market penetration in the commercial sector
and due to increased balances of official check accounts. The growth noted in
money market accounts is consistent with the trend begun in fiscal 1995 when the
Association began to focus its marketing efforts on these accounts. The decrease
in savings is a continuing of a trend over the past several years, as the
45
general level of interest rates paid on savings deposits has become less
attractive, and depositors either switched into higher yield products such as
money market accounts or withdrew their accounts. The decline in time deposits
is primarily due to the maturing of higher yielding time deposits which were not
renewed as the Association has been less aggressive in its pricing of time
deposits.
Borrowings at September 30, 1998 were $2.0 million, $700,000 or 53.8%
greater than the $1.3 million outstanding at September 30, 1997. The Association
replaced matured time deposits that were not maintained with shorter term FHLB
borrowings.
Stockholders' equity at September 30, 1998 was $9.2 million, an increase of
$5.9 million from the Association's net worth at September 30, 1997. The
increase represents the receipt of net proceeds of $5.5 million from
Adirondack's initial public offering, plus retained earnings of $234,000 for the
fiscal year ended September 30, 1998 and an increase in the fair value of
investments available for sale, net of taxes, of $61,000. Stockholders' equity
as a percent of total assets was 13.42% at September 30, 1998 as compared to
5.38% at September 30, 1997. Book value per common share at September 30, 1998
was $13.80, or $14.87 excluding the remaining unallocated ESOP shares.
Asset/Liability Management
The Association's net interest income is sensitive to changes in interest
rates, as the rates paid on its interest-bearing liabilities generally change
faster than the rates earned on its interest-earning assets. As a result, net
interest income will frequently decline in periods of rising interest rates.
In managing its asset/liability mix, the Association, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing short-term net
interest margin than on better matching interest rate sensitivity of its assets
and liabilities. Management believes that the increased net interest income
resulting from a mismatch in the maturity of its asset and liability portfolios
can, during periods of declining or stable interest rates, provide high enough
returns to justify the increased exposure to sudden and unexpected increases in
interest rates.
The Board has taken a number of steps to manage the Association's
vulnerability to changes in interest rates. First, in connection with the
Association's decision to increase the Association's multi-family and commercial
real estate and commercial business lending as well as its increased emphasis in
home equity lending, the Association has increased its interest rate sensitive
lending (which includes all loans which reprice in five years or less). The
Association's interest rate sensitive loans represent $15.7 million or 30.3% of
the portfolio at September 30, 1998 as compared to $15.4 million or 30% at
September 30, 1997. Second, the Association has used community outreach,
customer service and marketing efforts to acquire the proportion of its deposit
consisting of money market and other transaction accounts. These deposits are
believed to be less interest rate sensitive than other types of deposit
accounts. The Association's money market and transaction accounts represent
$29.6 million or 52.1% of deposits at September 30, 1998 as compared to $28.1
million or 50.1% at September 30, 1997. Finally, the Association has focused a
significant portion of its investment activities on securities with adjustable
interest rates or average lives of seven years or less. At September 30, 1998,
$3.9 million or 100.0% of the Association's mortgage-backed securities had
adjustable interest rates or average lives of seven years or less based on their
amortized cost. In addition, $400,000 in certificates of deposit were held at
September 30, 1998 maturing in eight months or less. Also, the Association held
$6.3 million in U.S. Government callable agency notes at September 30, 1998
which were all callable within one year.
The asset and liability strategies are implemented by the Association's
asset/liability management committee that meets at least quarterly to determine
the rates of interest for loans and deposits and consists of the President,
Executive Vice President and Vice President - Commercial Loans. Interest rates
on loans in the short-term are primarily based on the interest rates offered by
other financial institutions in the Association's market area as well as on the
availability of funds. Rates on deposits in the short-term are primarily based
on the Association's need for funds and on a review of rates offered by other
financial institutions in the Association's market area. Ultimately, the
customer plays a significant role in the establishment of both loan and deposit
rates, as it is necessary to remain competitive in both loan and deposit markets
in order to maintain or further expand the customer base.
46
The Committee develops longer-term pricing strategies based on review of
interest rate sensitivity reports produced quarterly. The Committee also
monitors the impact of the interest rate risk and earnings consequences of such
strategies for consistency with the Association's liquidity needs, growth and
capital adequacy. The Board of Directors receives and reviews the Association's
estimated interest rate sensitivity report every quarter. In order to encourage
savings associations to reduce their interest rate risk, the OTS measures the
sensitivity of the net portfolio value ("NPV") to changes in interest rates. NPV
is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. The following table
presents the Association's NPV at September 30, 1998, as calculated by the OTS,
based on quarterly information provided to the OTS by the Association:
Assumed Basis Estimated NPV
Points Change in Amount NPV to PV of Change in NPV % Change in
Interest Rates (In Thousands) Total Assets (In Thousands) NPV
- --------------------- ------------------ ------------------ --------------------- ---------------
+400 $6,127 9.43% $(2,974) (32.68%)
+300 7,049 10.66 (2,052) (22.55)
+200 7,887 11.74 (1,214) (13.34)
+100 8,535 12.54 (566) (6.22)
0 9,101 13.21 --- ---
-100 9,612 13.80 511 5.61
-200 10,223 14.49 1,122 12.33
-300 11,019 15.38 1,918 21.07
-400 11,826 16.26 2,725 29.94
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Association's assets and liabilities would perform
as set forth above.
Comparison of Operating Results for the Years Ended September 30, 1998 and 1997
Net income. The Association's fiscal 1998 net income of $234,000 was
$817,000 or 140.1% greater than the net loss from fiscal year 1997 of $583,000.
The increased net income between the two periods is primarily attributable to an
increase of $22,000 in net interest income, a reduction of $672,000 in the
provision for loan losses, an additional $20,000 in non-interest income and a
$106,000 net reduction in operating expenses.
Interest income. Interest income for the year ended September 30, 1998 was
$5.0 million as compared to $4.9 million for the year ended September 30, 1997,
an increase of $101,000 or 2.1%. Average earning assets were $61.7 million, an
increase of $1.9 million or 3.2% over fiscal 1997. The net yield earned on
average earning assets was 8.12% for the year ended September 30, 1998, down
slightly from 8.21% in fiscal 1997. The increase in interest income was
primarily the result of a higher level of interest-earning assets related to
Adirondack's initial public offering which provided net investable proceeds of
$5.5 million, the effects of which were somewhat offset by a lower net yield on
the average earning assets as those proceeds could not immediately be invested
prudently in loans, Adirondack's highest yielding asset category. In addition,
net interest income and average earning assets were favorably impacted by the
approximately $19.3 million of common stock subscriptions held by the
Association pending consummation of Adirondack's stock offering.
Interest expense. Interest expense for the year ended September 30, 1998
was $2.5 million as compared to $2.4 million for the year ended September 30,
1997, an increase of $79,000 or 3.2%. Average interest-bearing liabilities
increased from $57.6 million for fiscal 1997 by $1.8 million or 3.1% to $59.4
million for fiscal 1998. The average cost of interest-bearing liabilities was
4.25% for fiscal 1998 and 1997. Savings deposit average balances declined
$707,000 or 5.7% during fiscal 1998 which is consistent with decreases noted in
prior years. The cost of savings accounts remained fairly constant in fiscal
1998 as compared to fiscal 1997; however, the increased average balance of
Demand and NOW accounts was primarily the result of the common stock
subscriptions held by the Association that were included in this category which
averaged approximately $2.5 million. The Association paid interest on those
subscriptions at its savings deposit rate of 3.00%, the effects of which were
offset by increased commercial demand deposits on which interest is not paid.
The average balance of money market accounts increased $1.0 million or 9.4%
during fiscal 1998 while the cost of money market
47
accounts increased 10 basis points from 4.09% in fiscal 1997 to 4.19% in fiscal
1998. The increased money market average balance is consistent with the
successes in gaining market share of this product, and the higher cost of money
market accounts is due to the higher individual balances maintained for which a
higher rate is paid by the Association. The average balance of time deposits
declined by $2.6 million or 9.2% from $28.7 million in fiscal 1997 to $26.1
million in fiscal 1998 with a corresponding increase of 23 basis points in the
cost of time deposits during the same period. The decline in the average balance
of time deposits is the result of maturing time deposits that have not been
renewed. The increased time deposit cost is due to maturing time deposits being
renewed at higher rates. Borrowings were used by the Association to meet
short-term funding needs and provided a lower marginal cost to the Association
as compared to other funding sources. The average balance of borrowings for
fiscal 1998 was $2.2 million as compared to $391,000 for fiscal 1997. The
average cost of borrowings for fiscal 1998 was 5.8% as compared to 5.6% for
fiscal 1997.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Non-accrual loans have been included in the table as loans receivable with
interest earned recognized on a cash basis only. All average balances are
monthly average balances.
At September 30,
-------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- --------------------------------- ----------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- ----------- ------------ --------- ----------- --------- --------- ----------- -----------
(Dollars In Thousands)
Interest-earning assets:
Loans receivable, net of deferred
loan fees................. $50,675 $4,356 8.60% $51,303 $4,409 8.59% $49,222 $4,132 8.39%
Securities at amortized cost 7,466 467 6.26 7,337 459 6.26 7,764 467 6.01
Interest-earning deposits. 3,546 183 5.16 1,113 37 3.32 2,298 134 5.83
-------- ------ ------- ------- -------- ------
Total earning assets...... 61,687 5,006 8.12% 59,753 4,905 8.21% 59,284 4,733 7.98%
-------- ------ -------
Non-interest earning assets 2,635 1,954 1,866
-------- ------- --------
Total assets.............. $64,322 $61,707 $61,150
====== ====== ======
Interest-bearing liabilities:
Savings deposits.......... $11,796 $ 374 3.17% $12,503 $401 3.21% $13,724 $ 433 3.16%
Demand and N.O.W.......... 7,686 95 1.24 5,316 65 1.22 4,805 69 1.44
MMDA...................... 11,676 489 4.19 10,676 437 4.09 7,287 247 3.39
Time deposits............. 26,075 1,442 5.53 28,704 1,522 5.30 30,358 1,667 5.49
Borrowings................ 2,157 125 5.80 391 22 5.63 6 --- 5.56
------- ------ ------- -------- ---------- -------
Total interest bearing liabilitie 59,390 2,525 4.25% 57,590 2,447 4.25% 56,180 2,416 4.30%
------ ------ ------
Non-interest bearing liabilities 376 541 306
------- -------- ---------
Total liabilities......... 59,766 58,131 56,486
Total equity.............. 4,556 3,576 4,664
--------- --------- ---------
Total liabilities and equity $64,322 $61,707 $61,150
====== ====== ======
Net interest/spread....... $2,481 3.87% $2,458 3.96% $2,317 3.68%
===== ==== ===== ==== ===== ====
Margin.................... 4.02% 4.11% 3.91%
==== ==== ====
Assets to liabilities..... 103.87% 103.76% 105.53%
====== ====== ======
48
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) change in rate (i.e., changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended September 30, 1998 vs. 1997 Year Ended September 30, 1997 vs. 1996
------------------------------------------------------------------------------------------------
Total Total
Increase (Decrease) Due to Increase Increase (Decrease) Due to Increase
------------------------------ ----------- ------------------------------- ------------
Volume Rate (Decrease) Volume Rate (Decrease)
-------------- --------------- ------------- ------------ ------------- ------------
(Dollars In Thousands)
Interest-earning assets:
Loans receivable, net of deferred
fees............................. (54) 1 (53) 178 99 277
Securities at amortized cost..... 8 --- 8 (27) 19 (98)
Interest-bearing deposits........ 117 29 146 (44) (53) (97)
--- -- --- ---- ---- -----
Total interest-earning assets.... 71 30 101 107 65 172
---- -- --- --- --- ---
Interest-earning liabilities:
Savings deposits................. (22) (5) (27) (39) 7 (32)
Demand and NOW................... 29 1 30 7 (11) (4)
MMDA............................. 42 10 52 132 58 190
Time Deposits.................... (143) 63 (80) (89) (56) (145)
Borrowings....................... 102 1 103 22 --- 22
--- --- --- --- --- -----
Total interest-bearing liabilities 8 70 78 33 (2) 31
----- -- ---- -- ---- ----
Net interest income.............. 63 (40) 23 74 67 141
== ==== == == == ===
Provision for loan losses. The Association continually monitors and adjusts
its allowance for loan losses based upon its analysis of the loan portfolio. The
allowance is increased by the recording of a provision for loan losses, the
amount of which depends on an analysis of the risks inherent in the
Association's loan portfolio. The provision for loan losses decreased $672,000
or 84.9% for fiscal 1998 to $120,000 from $792,000 for fiscal 1997. The decrease
in the amount of the provision for fiscal 1998 was based on management's
evaluation of the improved inherent risk in the Association's loan portfolio as
evidenced by a $2.0 million or 51.9% decrease in nonperforming loans to $1.8
million at September 30, 1998 as compared to $3.8 million at September 30, 1997;
significantly decreased net loan charge offs amounting to $237,000 in fiscal
1998, $193,000 or 44.9% less than in 1997; and improved delinquency statistics
on the loan portfolio.
While the Association believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination. Management believes
its allowance for loan losses is adequate at September 30, 1998; however, future
adjustments could be necessary and net income could be adversely affected if
circumstances differ substantially from the assumptions used in the
determination of the allowance for loan losses.
Other Income. Other income increased $20,000 or 13.17% to $176,000 during
fiscal 1998 from $155,000 for fiscal 1997. This increase was primarily due to
new fees introduced during fiscal 1998.
Operating expenses. Operating expenses for the year ended September 30,
1998 was $2.2 million, a decrease of $106,000 or 4.6% from $2.3 million for the
year ended September 30, 1997. Increases in compensation and benefits partially
offset decreases in all other operating expenses.
Compensation and benefits increased from $892,000 for fiscal 1997 to
$940,000, an increase of $48,000 or 5.3%. The additional expenses are due to
increased salaries paid to employees, additional cost incurred for the ESOP and
higher costs incurred for health and medical benefits. The average increase
given employees in July 1998 was 3.6% or additional expense of approximately
$13,000. The Association incurred $85,000 in retirement expenses, approximately
$28,000 greater than fiscal 1997. The retirement expense included $17,000 which
represented 401(k) matching contributions and $68,000 which represented expenses
related to the ESOP. The
49
Association did not make any matching contributions to the 401(k) plan after
December 31, 1997 and does not plan to make any during fiscal 1999. In April
1998, as part of the Association's conversion to the stock form of ownership,
Adirondack established an ESOP which purchased 8% of the initial public offering
with funds borrowed from Adirondack. Compensation expense related to the ESOP's
initial stock purchase will be recognized over a period of 10 years as the loan
is repaid. Shares of stock will be released from the lien of the loan on a pro
rata basis as the loan is repaid, and expense will be calculated based upon the
average market value during the respective service period on the shares
released. It is expected that the 1999 ESOP expense will be higher if the
average price of Adirondack's stock increases. In addition, management also
expects additional personnel costs in fiscal 1999 of $50,000 related to the
implementation of the stockholder approved Management Recognition Program
("MRP").
Directors' fees and expenses declined $15,000 or 14.6% during fiscal 1998
from $103,000 in fiscal 1997 to $88,000 which is attributable to a reduction in
the number of directors. Advertising expense was $102,000 for fiscal 1998, a
decrease of $9,000 or 8.0% from fiscal 1997, reflecting a reduction in the types
of advertising used during fiscal 1997. The decreased expenses for occupancy and
equipment of $12,000 or 5.3% and $21,000 or 6.5%, respectively, for the year
ended September 30, 1998 are the result of continued improvements in efficiency
and a reduction in repairs and maintenance costs. OREO costs were $30,000 for
fiscal year 1998, a reduction of $43,000 or 59.3% from fiscal 1997. The decrease
is primarily attributable to a reduction in the period OREO was held and to
fewer foreclosed properties being held. Other expenses were reduced by $52,000
or 9.7% from $539,000 to $487,000 primarily through reductions of discretionary
items such as contributions and meals and entertainment expenses.
Income Tax Expense. Income tax expense for fiscal 1998 was $89,000 as
compared to $85,000 in fiscal 1997, an increase of $4,000 or 5.2%. The effective
tax rate for fiscal 1998 was 28% which was principally the result of a $50,000
reduction in Adirondack's deferred tax valuation reserve primarily as a result
of increased taxable income, amounting to approximately $173,000, the reversal
of temporary taxable items and reliance on future taxable income, amounting to
approximately $225,000.
Comparison of Operating Results for the Years Ended September 30, 1997 and 1996
Net Loss. The Association's fiscal 1997 net loss of $583,000 was $453,000
or 43.8% less than the fiscal 1996 net loss of $1.0 million. The net loss for
fiscal 1997 was reduced from fiscal 1996 primarily as a result of an increase of
$141,000 or 6.1% in net-interest income, and a $652,000 or 21.9% reduction in
other expenses consisting primarily of $415,000 related to the one-time SAIF
assessment and $318,000 expense related to past due property taxes on certain
non-performing one-to-four family residential loans, partially offset by a
decrease in income tax benefit of $307,000 or 138%. Interest income. Interest
and fees on loans increased by approximately $277,000 or 6.7% to $4.4 million
for fiscal 1997, from $4.1 million for fiscal 1996. The increase for fiscal 1997
was largely the result of an increase of $2.1 million or 4.2% in the average
balance of loans outstanding during fiscal 1997, to $51.3 million, as compared
to $49.2 million in fiscal 1996. This increase was primarily in the area of
multi-family and commercial real estate, home equity and commercial business
loans offset by decreases in the average balance of residential one-to-four
family loans. At September 30, 1997, multi-family and commercial real estate,
home equity and commercial business loans totaled $12.8 million as compared to
$8.7 million at September 30, 1996. This increase reflects management's plan to
diversify the loan portfolio, increase portfolio yield, and increase the amount
of adjustable rate loans. Originated with various terms and repricing schedules,
these loans generally provide certain benefits compared to longer term, fixed
rate, residential one-to-four family loans. However, multi-family and commercial
real estate and commercial business loans generally have higher outstanding loan
balances and increased credit risk relative to residential one-to-four family
loans. In addition to the increase in the average balance of loans, the yield
earned on the average balance of loans receivable increased by 20 basis points
to 8.59% in fiscal 1997 as compared to 1996 due in part to the higher yielding
nature of multi-family and commercial real estate and commercial business loans.
Interest income on securities available for sale decreased by $8,000 or
1.7%. There were no investment purchases or sales during fiscal 1997.
Accordingly, the reduction in interest income on securities available for sale
is solely attributable to reduced average balances as a result of principal
repayments. The average balance decreased $427,000 or 5.5% during fiscal 1997.
50
Interest income on interest-bearing time deposits decreased $98,000 or
72.7% as a result of reduced average balances, coupled with lower contracted
rates. Periodically in fiscal 1996, interest-bearing time deposits were
contracted on a longer term basis, resulting in a higher yielding investment in
1996 as compared to 1997. Interest-bearing time deposits were primarily invested
on an overnight basis in fiscal 1997.
The yield on the average balance of interest-earning assets was 8.21% and
7.98% for fiscal 1997 and 1996, respectively.
Interest Expense. Interest expense of $2.4 million remained relatively
consistent for the years ended September 30, 1997 and 1996, increasing only
$30,000 or 1.3%. While total interest expense did not change dramatically from
year to year, the components of interest expense reflected management's progress
in increasing the level of lower costing money market accounts. While the amount
of year-end deposits only increased $401,000 or 1.0%, the average balance of
money market accounts increased $3.4 million or 46.5% to $10.7 million while the
average balance of time deposits decreased $1.7 million or 5.4% to $28.7
million. The average cost on money market accounts was 4.09% in 1997 as compared
to 3.39% in fiscal 1996, and the average cost of time deposits was 5.30% in
fiscal 1997 versus 5.49% in fiscal 1996. Overall money market rates increased
due to the introduction in 1996 of a tiered money market account with checking
which proved popular with consumers but carried a somewhat higher cost than the
Association's other money market products. The changes in the average balances
of savings, demand, and NOW accounts and the related rates paid were not
significant from fiscal 1996 to 1997.
Interest expense on borrowings increased to $22,000 in fiscal 1997, as the
average amount of borrowed funds increased from $6,000 for fiscal 1996 to
$391,000 in fiscal 1997. Fiscal 1996 interest expense on borrowed funds was less
than $1,000.
The yield on the average balance of interest-bearing liabilities was 4.25%
and 4.30% for fiscal 1997 and 1996, respectively.
Net Interest Income. Net interest income increased by approximately
$141,000 or 6.1% to $2.5 million for fiscal 1997 from $2.3 million for fiscal
1996. The average interest rate spread increased to 3.96% for fiscal 1997 from
3.68% for fiscal 1996. The increase in interest rate spread is primarily the
result of an increase in higher yielding multi-family and commercial real estate
loans and the repricing of home equity loans.
Provision for Loan Losses. The provision for loan losses increased $78,000
or 10.9% to $792,000 for fiscal year 1997 from $714,000 for fiscal year 1996.
The increase in the amount of the provision for fiscal 1997 was based on
management's evaluation of the inherent risk in the Association's loan
portfolio; a $1.6 million or 71.4% increase in non-performing loans to $3.8
million at September 30, 1997 as compared to $2.2 million at September 30, 1996;
significantly increased net loan charge offs amounting to $430,000 in fiscal
1997, $187,000 or 77.0% greater than in 1996; continued expansion of commercial
business and multi-family and commercial real estate lending; the continued
economic weakness in the Association's market area; declining real estate values
collateralizing much of the Association's loan portfolio as well as management's
evaluation of the prospects in the Association's market areas.
Other Income. Other income increased by $46,000 or 42.0% to $155,000 during
fiscal year 1997 from $109,000 for fiscal year 1996. This increase was primarily
due to increases in fees and service charges of $22,000 or 18.4% as well as
fiscal 1996 other income including a $15,000 loss on the writedown of premises
and equipment.
Operating Expense. Operating expenses decreased $652,000 or 21.9% to $2.3
million in fiscal year 1997 from $3.0 million in fiscal year 1996. Compensation
and benefits expenses increased by $66,000 or 8.0% to $892,000 for fiscal year
1997 from $826,000 for fiscal year 1996. The increase in compensation and
benefits expenses in fiscal year 1997 was primarily the result of the general
cost of living and merit raises to Association employees, coupled with increased
pension and health insurance expenses. Director's fees increased by $27,000 or
34.9% from $76,000 in fiscal year 1996 to $103,000 in fiscal year 1997,
reflecting increased meeting frequency and an increase in per meeting fees.
Other real estate expenses increased $46,000 or 170% to $73,000 reflecting
increased costs associated with foreclosures and disposition of other real
estate.
51
More than offsetting these increases were reductions in the special
one-time FDIC assessment, federal deposit insurance premiums, advertising
expenses and other operating expenses. In fiscal 1996, the Association accrued a
special assessment to recapitalize the SAIF in the amount of $415,000. As a
result of the recapitalization, the Federal deposit insurance premiums decreased
in fiscal 1997 by $74,000 or 56.6% to $57,000. Advertising expenses decreased in
fiscal 1997 by $29,000 or 21.0% to $111,000. This decrease is due to the
inclusion in fiscal 1996 of significant costs associated with the implementation
of a new logo and brochures and initial use of television advertising which was
not repeated in fiscal 1997. Occupancy expenses and equipment and data
processing expenses were slightly greater in fiscal 1997 as compared to fiscal
1996 with increases of $13,000 or 5.9% and $9,000 or 2.9%, respectively.
Income Tax Expense. The provision for income taxes increased $307,000 from
a fiscal year 1996 benefit of $222,000 to a fiscal year 1997 expense of $85,000.
The increase in tax expense for fiscal year 1997 as compared to fiscal year 1996
was primarily the result of a $760,000 decrease in the loss before income taxes,
coupled with a $25,000 increase in the change in the valuation allowance for
deferred tax assets. In assessing whether the deferred tax assets will more
likely than not be realized, the Association considers the historical level of
taxable income, the time period over which the temporary differences are
expected to reverse, as well as estimates of future taxable income. In 1997, as
a result of the Association experiencing a second year of significant losses
before taxes (loss before taxes of $498,000 and $1,259,000 in fiscal 1997 and
1996, respectively), continued economic weakness in the Association's market
area, including declining real estate values collateralizing much of the
Association's loan portfolio, and reduced expectations of earnings in the
future, as well as a reduction in the amount of historical taxes available for
carryback in 1997, the Association increased its deferred tax valuation
allowance by $274,000 to $625,000 at September 30, 1997. As of September 30,
1997, the net deferred tax asset is considered to be more likely than not
realizable based upon the remaining amount of historical taxes available for
carryback, amounting to approximately $50,000, the reversal of temporary taxable
items and reliance on future taxable income amounting to approximately $175,000.
Asset Quality
Nonperforming assets include non-accrual loans, troubled debt
restructurings and other real estate properties. Loans are placed on non-accrual
status when the loan is more than 90 days delinquent or when the collection of
principal and/or interest in full becomes doubtful. When loans are designated as
non-accrual, all accrued but unpaid interest is reversed against current period
income and subsequent cash receipts generally are applied to reduce the unpaid
principal balance. As of September 30, 1998 and 1997, there were no loans past
due greater than 90 days and accruing interest or restructured loans accruing
interest. Foreclosed assets include assets acquired in settlement of loans.
Nonperforming assets at September 30, 1998 were $2.1 million or 3.05% of
total assets, compared to $4.1 million or 6.73% of total assets at September 30,
1997. Nonperforming loans were $1.8 million or 3.52% of gross loans outstanding
at September 30, 1998, a decrease of $2.0 million from $3.8 million or 7.39% of
gross loans outstanding at September 30, 1997.
In fiscal 1997, $2.7 million in one-to-four family residential loans were
either restructured or rewritten, generally at market interest rates, as to
which real estate taxes were previously delinquent and were classified as
nonaccruing at September 30, 1997. During fiscal 1998, $2.4 million of these
loans were reclassified as performing loans as the borrowers had performed under
the terms of the restructured or rewritten loan for twelve consecutive months.
Four one-to-four family residential loans were restructured at market interest
rates during fiscal 1998 totaling $247,000 which were classified as nonaccrual
at September 30, 1998. The total restructured one-to-four family residential
mortgages at September 30, 1998 was $535,000. The restructured loans will be
reclassified as performing loans only after the borrowers perform according to
the new loan terms for twelve consecutive months.
In addition, $359,000 and $1.0 million in one-to-four family residential
loans were classified as nonaccrual at September 30, 1998 and 1997,
respectively, due to delinquency.
At September 30, 1998 there were three commercial real estate loans
classified as nonaccrual. One loan is $411,000 and is secured by a warehouse and
office building located in Saratoga County. The property was obtained by a
deed-in-lieu of foreclosure in November 1998, and both properties are being
marketed. Another
52
loan is $389,000 and is secured by a take-out restaurant located in Saratoga
County. Foreclosure process was begun on this property in December 1998. The
remaining loan is $96,000 and is secured by an office building located in Fulton
County. The borrower continues to make payments on the loan. Management is
actively monitoring the borrower's progress to increase rental income on the
property.
All OREO held at September 30, 1998 and 1997 were one-to-four family
residential properties.
Additionally, at September 30, 1998, Adirondack has identified
approximately $659,000 in loans having more than normal credit risk. Adirondack
believes that if economic and/or business conditions change in its lending area,
some of these loans could become nonperforming in the future.
Liquidity
Liquidity is the ability to generate cash flows to meet present, as well as
expected, future funding commitments. Management monitors Adirondack's liquidity
position on a daily basis and evaluates its ability to meet expected and
unexpected depositor withdrawals and to make new loans and investments.
Adirondack has historically maintained high levels of liquidity, and manages its
balance sheet so there has been no need for unanticipated sales of Company
assets.
Adirondack's primary sources of funds for operations are deposits,
principal and interest payments on loans and securities, and to a lesser extent,
borrowings. Net cash provided by operating activities was $728,000 in fiscal
1998, an increase of $998,000 over fiscal 1997. The decrease was primarily
attributable to less of a decrease in accrued expenses in fiscal 1998 as
compared to fiscal 1997, as there were significant non-recurring expenses
accrued in fiscal 1996 paid in fiscal 1997. $4.8 million was used for investing
activities in fiscal 1998, an increase of $4.4 million from fiscal 1997. The
increase was primarily attributable to Adirondack investing the net proceeds
from the stock offering. Financing activities provided $6.9 million,
representing $5.5 million in net proceeds from Adirondack's initial public
offering, net of common shares acquired by Adirondack ESOP, an increase of
$676,000 in deposits and borrowings increasing $700,000 during fiscal 1998.
An important source of Adirondack's funds is the Association's core
deposits. Management believes that a substantial portion of the Association's
deposits are core deposits. Core deposits are generally considered to be a
dependable source of funds due to long term customer relationships. Adirondack
does not currently use brokered deposits as a source of funds, and time deposit
accounts having balances equal to or in excess of $100,000 totaled $2.3 million
or 4.0% of total deposits at September 30, 1998. The Association is required to
maintain minimum levels of liquid assets as defined by regulations. The
requirement, which may be varied by OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The OTS required minimum liquidity ratio is currently 4% and for the quarter
ended September 30, 1998, the Association reported average liquidity of 15.51%.
The Association may borrow funds from the FHLB of New York subject to
certain limitations. Based on the level of qualifying collateral available to
secure advances at September 30, 1998, the Association's borrowing limit from
the FHLB of New York was approximately $28.9 million, with $2.0 million
outstanding at that date. Management considers FHLB borrowings a reliable source
of funding that will likely be used in the next year to meet short-term funding
needs. In addition, in order to improve return on equity and increase the return
provided stockholders, FHLB borrowings will be used to fund investment purchases
during fiscal 1999.
Adirondack is required to maintain a compensating balance of $500,000 at
one of its correspondent banks at September 30, 1998 which is consistent with
the prior year.
At September 30, 1998, Adirondack had outstanding loan origination
commitments, undisbursed construction loans in process and unadvanced lines of
credit of $2.8 million. Adirondack anticipates that it will have sufficient
funds available to meet its current loan origination and other commitments. Time
deposits scheduled to mature in one year or less from September 30, 1998 totaled
$20.8 million. Based on Adirondack's most recent experience and pricing
strategy, management believes that a significant portion of such deposits will
remain with Adirondack.
53
Adirondack Financial is a unitary savings and loan holding company which is
regulated by the OTS, and although there are no minimum requirements for
Adirondack itself, the Association is required to maintain a minimum level of
regulatory capital. The following is a summary of the Association's actual
capital amounts and ratios as of September 30, 1998, compared to the OTS minimum
capital requirements.
At September 30, 1998
-----------------------------------------------------
(Dollars In Thousands)
Tangible Capital:
Capital level.................... $7,055 10.59%
Requirement...................... 999 1.50
------- -----
Excess........................... $6,056 9.09%
===== ====
Core Capital:
Capital level.................... $7,055 10.59%
Requirement...................... 1,999 3.00(1)
------ ----
Excess........................... $5,056 7.59%
===== ====
Total Risk-Based Capital:
Capital level.................... $7,546 19.62%
Requirement...................... 5,330 8.00
------ ------
Excess........................... $2,216 11.62%
===== =====
- -----------------
(1) Increased to 4.00% as of April 1, 1999.
Impact of Inflation and Changing Prices
Adirondack's consolidated financial statements are 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 increasing costs of
operations. Unlike most industrial companies, nearly all assets and liabilities
of Adirondack are monetary. As a result, changes in interest rates have a
greater impact on Adirondack's performance than do the effects of general levels
of inflation, since interest rates do not necessarily move in the direction, or
to the same extent as, the price of goods and services.
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
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 does not believe that the impact of adopting
this Statement will be material to Adirondack's consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 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 does not believe that the
impact of adopting this Statement will be material to Adirondack's consolidated
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosure of SFAS No. 87 and No. 106 to the extent practical
and recommends a parallel format for presenting information about pensions and
other postretirement benefits. This Statement is applicable to all entities and
addresses disclosure only. The Statement does not change
54
any of the measurement or recognition provision provided for in SFAS No. 87, No.
88 or No. 106. The Statement is effective for fiscal years beginning after
December 15, 1997. Management anticipates providing the required disclosures in
the September 30, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on Adirondack's
consolidated financial statements.
Year 2000 Issues
Year 2000 issues are the result of computer programs having been written
using two digits rather than four to define the applicable year. Any of
Adirondack's programs that have time sensitive software may recognize a date
using "00" as the year 1900 rather than year 2000. This could result in a major
system failure or miscalculations. Adirondack is also aware of these risks to
third parties, including vendors (and to the extent appropriate, depositors and
borrowers), and the potential adverse impact on Adirondack that could result
from failures by these parties to adequately address the Year 2000 issues.
Adirondack processes all customer information on an in-house data
processing system utilizing computer programs from several vendors. Most of the
ancillary programs have a direct interface to the core processing system. In the
event of widespread system failure, a worst case scenario, it will be necessary
to process customer information manually. To mitigate the Y2K risk, Adirondack
has developed a Y2K Action Plan that was approved by the Board in July 1998. As
part of the Plan, a Y2K Committee was formed to conduct a review of its computer
systems to identify the systems that could be affected by the Y2K problem. The
Y2K Committee reports on a quarterly basis to the Board of Directors as to
Adirondack's status in resolving any Year 2000 issues.
Adirondack's Y2K Action Plan identifies seven phases which are as follows:
Phase Description and Company Progress
- ----------------------------------------------------------------------------------------------------
Awareness Informing Company employees at all levels of the potential
issues relative to Year 2000. Adirondack has completed
this phase of the program.
Inventory Identify the areas within the organization that are
subject to potential Year 2000 problems. Adirondack has
completed this phase of the program.
Assessment Review the areas identified during the inventory phase to
determine the potential impact on Adirondack's operations
and financial standing and classify each area on a scale
from highest potential impact to lowest. Adirondack has
completed this phase of the program.
Analysis Develop procedures necessary to test compliance.
Adirondack is in the process of testing programs used in
areas with the highest potential impact. It is anticipated
that testing will be completed by December 31, 1998. For
programs with the lowest potential impact, contingency
plans will be developed by March 31, 1999.
Conversion For each program identified as non-compliant, develop a
strategy for upgrading the program or converting to a Y2K
compliant program. In addition, develop contingency and
disaster recovery plans to be used in lieu of testing or
in the event of widespread system failure. Based on the
results of the testing completed, it is not anticipated
that any program conversions will be necessary.
Contingency and disaster recovery plans will be completed
by March 31, 1999.
55
Implementation Migrate from the testing environment to the production
environment any new program versions being tested for Y2K
compliance. Based on the results of the testing completed,
it is not anticipated that there will be any migration of
new program versions required.
Post-implementation Review contingency plans and disaster recovery plans with
employees. Employee training will commence after March 31,
1999 and be completed by November 30, 1999.
To date, the Y2K Committee has received Year 2000 compliance
certifications/progress forms from all of Adirondack's vendors. Of the responses
received, 85% of the vendors have certified that they are Y2K compliant, with
the remaining 15% informing Adirondack of their progress and anticipated
compliance dates; however, no assurance can be given as to the adequacy of such
plans or to the timeliness of their implementation.
Final versions of Adirondack's Y2K customer evaluation forms and the
associated risk analysis have been completed and Y2K questionnaires have been
sent to customers. A spreadsheet has been developed that identifies significant
borrowers and their level of risk and will be monitored by Adirondack's Asset
Review Committee. To date, the majority of significant borrowers contacted have
indicated that they are not heavily reliant on computer systems and are,
therefore, evaluated as a low risk pertaining to Y2K.
In fiscal 1997, Adirondack converted from a third-party core processing
servicer to an in-house system. In addition, Adirondack also purchased new
general ledger and mortgage origination software during approximately the same
time period. The implementation of the new systems were completed in part to
provide a Y2K compliant operating atmosphere and cost approximately $500,000 to
complete which includes both hardware and software costs. As indicated
previously, the results of the testing performed on the software and hardware
indicates that further renovation is not necessary. To complete the final phases
of the Y2K Plan, it will be necessary to document contingency and disaster
recovery plans which will be completed by Association employees.
Based on Adirondack's current knowledge and investigations, the expense of
the year 2000 problem as well as the related potential effect on Adirondack's
earnings is not expected to have a material effect on Adirondack's financial
position or results of operations. Furthermore, Adirondack expects corrective
measures required to be prepared for the Year 2000 to be implemented on a timely
basis.
INDEPENDENT ACCOUNTANTS
Representatives of KPMG, LLP, Adirondack's independent accountants, are
expected to be present at the Adirondack special meeting. They will be afforded
the opportunity to make a statement if they desire to do so and are expected to
be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If the merger is completed there will be no more Adirondack stockholder
meetings. If the merger is not completed stockholder proposals for the next
annual meeting, in order to be eligible for inclusion in Adirondack's proxy
materials, must be received at Adirondack's executive office at 52 North Main
Street, Gloversville, New York 12078-3084 no later than October 15, 1999. Any
such proposal shall be subject to the requirements of the proxy rules adopted
under the Securities Exchange Act. Otherwise, any stockholder proposal to take
action at such meeting must be received at Adirondack's executive office at 52
North Main Street, Gloversville, New York 12078-3084 by December 24, 1999;
provided, however, that in the event that the date of the annual meeting is held
before February 12, 2000 or after May 3, 2000, the stockholder proposal must be
received not later than the close of business on the later of the 70th day prior
to such annual meeting or the tenth day following the day on which notice of the
date of the annual meeting was mailed or public announcement of the date of such
meeting was first made. All stockholder proposals must also comply with
Adirondack's by-laws and Delaware law.
56
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
In addition to solicitation by mail, directors, officers and employees of
Adirondack, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Adirondack, personally or by telephone,
telegram or other forms of communication. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for their reasonable
expenses incurred in sending proxy material to beneficial owners. In addition,
Adirondack has engaged Regan & Associates, Inc. to assist Adirondack in
distributing proxy materials and contacting record and beneficial owners of
Adirondack common stock. Adirondack has agreed to pay Regan & Associates, Inc.
approximately $3,000 plus out-of-pocket expenses for its services to be rendered
on behalf of Adirondack. Adirondack will bear its own expenses in connection
with the solicitation of proxies for the special meeting.
57
INDEX TO FINANCIAL STATEMENTS
OF ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Page
Independent Auditor's Report...............................................F-1
Statements of Financial Condition For the
Years Ended September 30, 1998 and 1997....................................F-2
Statements of Operations For the Years
Ended September 30, 1998, 1997 and 1996....................................F-3
Statements of Changes in Equity For the Years
Ended September 30, 1998, 1997 and 1996....................................F-4
Statements of Cash Flows For the Years
Ended September 30, 1998, 1997 and 1996....................................F-5
Notes to Consolidated Financial Statements For
the Years Ended September 30, 1998 and 1997................................F-7
Consolidated Interim Statements of Financial
Condition (Unaudited) For the Three Months
Ended December 31 and September 30, 1998 ................................F-30
Consolidated Interim Statements of
Income (Unaudited) For the Three Months
Ended December 31, 1998 and 1997..........................................F-31
Consolidated Interim Statements of Cash
Flows (Unaudited) For the Three Months
Ended December 31, 1998 and 1997..........................................F-32
Summarized Notes to Unaudited Interim
Consolidated Financial Statements.........................................F-33
58
Independent Auditors' Report
The Board of Directors
Adirondack Financial Services Bancorp, Inc.
Gloversville, New York
We have audited the accompanying consolidated statements of financial condition
of Adirondack Financial Services Bancorp, Inc. and subsidiary (the Company) as
of September 30, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholder's equity and cash flows for each of the years
in the three year period ended September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Adirondack Financial
Services Bancorp, Inc. and subsidiary as of September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
/s KPMG PEAT MARWICK, LLP
October 30, 1998
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Financial Condition
September 30,
1998 1997
------------ -----------
Assets
Cash and due from banks $ 2,635,158 1,922,386
Interest bearing deposits 2,109,873 --
------------ -----------
Total cash and cash equivalents 4,745,031 1,922,386
Securities available for sale 11,172,412 7,017,111
Net loans receivable 50,200,660 49,526,290
Accrued interest receivable 297,959 332,122
Other real estate owned 256,125 312,892
Premises and equipment, net 1,278,383 1,538,364
Prepaid expenses and other assets 290,843 372,642
------------ -----------
Total assets $ 68,241,413 61,021,807
============ ===========
Liabilities and Shareholders Equity
Liabilities:
Deposits:
Demand and N.O.W. accounts 5,741,821 5,147,684
Savings and money market accounts 23,860,849 22,954,408
Time deposit accounts 27,190,796 28,014,594
------------ -----------
Total deposits 56,793,466 56,116,686
Accrued expenses and other liabilities 292,982 325,152
Borrowings and securities sold under agreements to repurchase 2,000,000 1,300,000
------------ -----------
Total liabilities 59,086,448 57,741,838
------------ -----------
Commitments and contingent liabilities (note 11)
Shareholder's equity:
Preferred stock, $.01 par value; 500,000 shares authorized;
none outstanding at September 30, 1998 and 1997 -- --
Common stock, $.01 par value; 5,000,000 shares authorized;
663,243 shares issued and outstanding at September 30, 1998
and none at September 30, 1997 6,632 --
Additional paid-in capital 6,049,293 --
Retained earnings, substantially restricted 3,535,134 3,301,370
Unearned ESOP shares (476,100) --
Net unrealized gain (loss) on securities available for sale,
net of tax 40,006 (21,401)
------------ -----------
Total shareholders' equity 9,154,965 3,279,969
------------ -----------
Total liabilities and shareholders' equity $ 68,241,413 61,021,807
============ ===========
See accompanying notes to consolidated financial statements.
F-2
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Operations
For the Years Ended September 30,
1998 1997 1996
----------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $ 4,356,239 4,409,006 4,131,580
Securities available for sale 466,780 458,932 466,898
Interest bearing deposits 182,576 36,714 134,345
----------- ---------- ----------
Total interest and dividend
income 5,005,595 4,904,652 4,732,823
----------- ---------- ----------
Interest expense:
N.O.W. accounts 95,245 64,841 69,251
Savings and money market accounts 863,097 837,803 679,589
Time deposit accounts 1,441,963 1,522,058 1,667,030
Borrowings 124,827 21,777 178
----------- ---------- ----------
Total interest expense 2,525,132 2,446,479 2,416,048
----------- ---------- ----------
Net interest income 2,480,463 2,458,173 2,316,775
Provision for loan losses 120,000 792,266 714,276
----------- ---------- ----------
Net interest income after provision
for loan losses 2,360,463 1,665,907 1,602,499
----------- ---------- ----------
Other income:
Fees and service charges 160,097 140,309 118,499
Net loss on sale or writedown
of premises and equipment -- -- (15,322)
Other 15,457 14,810 6,091
----------- ---------- ----------
Total other income 175,554 155,119 109,268
----------- ---------- ----------
Other expenses:
Compensation and employee benefits 940,038 892,434 826,360
Occupancy 212,785 224,598 212,054
Federal deposit insurance premiums 55,054 56,665 130,387
Special one-time FDIC assessment -- -- 414,835
Advertising 101,968 110,796 140,291
Directors' fees and expenses 87,853 102,912 76,298
Equipment and data processing 298,407 319,110 310,218
Other real estate expenses 29,715 73,030 27,039
Professional fees 173,689 149,383 90,572
Utilities and postage 60,656 61,280 39,242
Other operating expenses 252,667 328,588 703,001
----------- ---------- ----------
Total other expenses 2,212,832 2,318,796 2,970,297
----------- ---------- ----------
Income (loss) before taxes 323,185 (497,770) (1,258,530)
Income tax expense (benefit) 89,421 85,008 (222,324)
----------- ---------- ----------
Net income (loss) $ 233,764 (582,778) (1,036,206)
=========== ========== ==========
Basic and diluted earnings per share 0.19 N/A N/A
=========== ========== ==========
For fiscal 1998, earnings per share is calculated using estimated
post-conversion net income (note 1)
See accompanying notes to consolidated financial statements.
F-3
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended September 30, 1998, 1997 and 1996
Net unrealized
gain (loss) on
Unearned securities
Common Additional Retained ESOP available for
Stock Paid-In-Capital Earnings Shares sale, net of tax Total
----- --------------- -------- ------ ---------------- -----
Balance at October 1, 1995 $ -- -- 4,920,354 -- (66,334) 4,854,020
Net loss -- -- (1,036,206) -- -- (1,036,206)
Change in net unrealized loss on securities
available for sale, net of tax -- -- -- -- (27,858) (27,858)
--------- ---------- ---------- -------- ---------- ----------
Balance at September 30, 1996 -- -- 3,884,148 -- (94,192) 3,789,956
Net loss -- -- (582,778) -- -- (582,778)
Change in net unrealized loss on securities
available for sale, net of tax -- -- -- -- 72,791 72,791
--------- ---------- ---------- -------- ---------- ----------
Balance at September 30, 1997 -- -- 3,301,370 -- (21,401) 3,279,969
Net income -- -- 233,764 -- -- 233,764
Common stock issued (663,243 shares) 6,632 6,035,380 -- -- -- 6,042,012
Acquisition of common shares by ESOP (52,900 shares) -- -- -- (529,000) -- (529,000)
Allocation of ESOP shares (5,290 shares) -- 13,913 -- 52,900 -- 66,813
Change in net unrealized loss on securities
available for sale, net of tax -- -- -- -- 61,407 61,407
--------- ---------- ---------- -------- ---------- ----------
Balance at September 30, 1998 $ 6,632 6,049,293 3,535,134 (476,100) 40,006 9,154,965
========= ========== ========== ======== ========== ==========
F-4
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Cash Flows
For the Years Ended September 30,
1998 1997 1996
----------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 233,764 (582,778) (1,036,206)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation expense 292,884 291,086 227,646
Provision for loan losses 120,000 792,266 714,276
ESOP compensation expense 66,813 -- --
Deferred tax (benefit) expense (40,000) 125,000 (55,651)
Writedown of other real estate owned 3,850 33,032 24,300
Net gain on sale of other real estate owned (30,247) (38,881) (76,847)
Net loss on sale or writedown of
premises and equipment -- -- 15,322
Decrease (increase) in accrued interest
receivable 34,163 (2,131) 49,528
Decrease (increase) in prepaid expenses and
other assets 78,760 (12,947) (4,536)
(Decrease) increase in accrued expenses and
other liabilities (32,171) (875,172) 846,553
----------- ---------- ----------
Total adjustments 494,052 312,253 1,740,591
Net cash provided by (used in)
operating activities 727,816 (270,525) 704,385
----------- ---------- ----------
Cash flows from investing activities:
Purchase of securities available for sale (6,729,128) -- (4,601,592)
Proceeds from principal repayment of securities
available for sale 1,678,272 549,575 430,569
Proceeds from maturity and redemption of
securities available for sale 1,000,000 -- 3,700,000
Proceeds from maturity and redemption of
securities held to maturity -- -- 2,500,000
Net increase in loans receivable (1,119,345) (1,193,317) (2,409,148)
Proceeds from sale of other real estate owned 408,139 273,397 462,684
Capital expenditures (32,903) (35,711) (920,326)
----------- ---------- ----------
Net cash used in investing activities (4,794,965) (406,056) (837,813)
----------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 676,781 400,886 (2,149,816)
Net increase in borrowings 700,000 1,000,000 300,000
Net proceeds from issuance of common stock 6,042,013 -- --
Acquisition of common stock by ESOP (529,000) -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities 6,889,794 1,400,886 (1,849,816)
Net increase (decrease) in cash and cash equivalents 2,822,645 724,305 (1,983,244)
Cash and cash equivalents at beginning of year 1,922,386 1,198,081 3,181,325
----------- ---------- ----------
Cash and cash equivalents at end of year $ 4,745,031 1,922,386 1,198,081
=========== ========== ==========
F-5
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Cash Flows
For the Years Ended September 30,
1998 1997 1996
----------- ---------- ----------
Additional disclosures relative to cash flows:
Interest paid $ 2,515,796 2,446,479 2,416,048
============== ========= ==========
Taxes paid (Refunds Received) $ 14,371 (165,891) (83,587)
============== ========= ==========
Supplemental schedule of non-cash investing
and financing activities:
Transfers from loans to other real estate
owned $ 324,975 510,892 297,909
============== ========= ==========
Securities held to maturity transferred to
securities available for sale under the
provisions of the FASBs Special
Report $ -- -- 2,000,000
============== ========= ==========
Change in valuation of securities available
for sale, net of $46,322,
$54,913 and ($21,015) tax effect at
September 30, 1998, 1997
and 1996, respectively $ 61,407 72,791 (27,858)
============== ========= ==========
See accompanying notes to consolidated financial statements.
F-6
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) Summary of Significant Accounting Policies
Adirondack Financial Services Bancorp, Inc. (the Holding Company) was
incorporated under Delaware law in December 1997 as a Holding Company to
purchase 100% of the common stock of Gloversville Federal Savings and Loan
Association (the Association). The Association converted from a mutual form to a
stock institution in April 1998, and the Holding Company completed its initial
public offering on April 6, 1998, at which time the Holding Company purchased
all the outstanding stock of the Association.
The following is a description of the more significant policies which Adirondack
Financial Services Bancorp, Inc. follows in preparing and presenting its
consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Adirondack Financial Services Bancorp, Inc. and its wholly owned
subsidiary, Gloversville Federal Savings and Loan Association
collectively referred to as the Company. All significant intercompany
accounts have been eliminated in consolidation. The accounting and
reporting policies of the Company conform in all material respects to
generally accepted accounting principles and to general practice within
the thrift industry.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
A substantial portion of the Association's loans are secured by real
estate in the Upstate New York area, primarily in Fulton, Montgomery
and Saratoga counties. In addition, the other real estate owned is
located in the same market area. Accordingly, the ultimate
collectibility of a substantial portion of the Association's loan
portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in these areas.
The determination of the allowance for loan losses and the valuation of
real estate acquired in connection with foreclosures in satisfaction of
loans are based on material estimates that are susceptible to change
based on such factors as economic conditions in the market area
serviced by the Company, financial conditions of individual borrowers,
and changes in underlying collateral values. In connection with the
determination of the allowance for loan losses and the valuation of
other real estate owned, management obtains independent appraisals for
significant properties.
F-7
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Management believes that the allowance for loan losses and the
valuation of other real estate owned are adequate. While management
uses available information to recognize losses on loans and other real
estate owned, future additions to valuation allowances may be necessary
based on changes in economic conditions, particularly in the Company's
market area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses and other real estate owned. Such agencies
may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of
their examination which may not be currently available to management.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash
and due from bank balances, interest bearing deposits and similar
investments with maturities of less than three months to be cash and
cash equivalents.
(d) Securities
The Company accounts for securities in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
SFAS No. 115 requires classification of securities into three
categories: trading, available for sale, or held to maturity. The
Company classifies its debt securities, including mortgage backed
securities, as either available for sale or held to maturity, as the
Company does not hold any securities for trading purposes. As of
September 30, 1998 and 1997 all securities were classified as available
for sale.
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums and accretion of discounts. Unrealized holding
gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported as a separate
component of equity until realized. Federal Home Loan Bank of New York
stock, a non-marketable equity security, is included in securities
available for sale at cost since there is no readily available fair
value. This investment is required for membership.
A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost basis
for the security.
Interest income includes interest earned on the securities and the
amortization of premiums and accretion of discounts. Amortization and
accretion is recorded using a method that approximates the level-yield
method. Realized gains or losses on securities sold are recognized on
the trade date using the specific identification method.
(e) Reclassification of Investment Securities
In November 1995, the staff of the Financial Accounting Standards Board
released a Special Report, "A Guide to Implementation of Statement 115
on Accounting for Certain Investments
F-8
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
in Debt and Equity Securities." The Special Report contained a unique
provision that allowed entities to, as of one date between November 15,
1995 and December 31, 1995, reassess the appropriateness of the
classifications of all securities held at that time. In conjunction
with the provisions of the Special Report, dated December 31, 1995, the
Company transferred securities with an amortized cost of $2,000,000 and
an estimated fair value of $1,985,000 from securities held to maturity
to securities available for sale.
(f) Loans Receivable
Loans are carried at the principal amount outstanding less net deferred
loan fees and the allowance for loan losses. Loan fees received and
certain direct loan origination costs are deferred, and the net fee or
cost is amortized into income so as to provide for a level-yield of
interest on the underlying loans. Amortization of related net deferred
fees is suspended when a loan is placed on nonaccrual status.
Interest on loans is recognized on an accrual basis. Loans are
generally placed on nonaccrual status when principal or interest
becomes 90 days or more past due or sooner if management believes it is
prudent to do so. Unpaid interest previously recognized is reversed
when a loan is placed on nonaccrual status. Loans generally remain on
nonaccrual status until past due principal and interest payments are
brought current through cash collections or when, in the opinion of
management, the loans are estimated to be fully collectible as to
principal and interest. The application of payments received (principal
or interest) on non-accrual loans is dependent on the expectation of
ultimate repayment of the loan. If ultimate repayment of the loan is
expected, any payments received are applied in accordance with
contractual terms. If ultimate repayment of princpal is not expected or
management judges it to be prudent, any payment received on a
non-accrual or an impaired loan is applied to principal until ultimate
repayment becomes expected.
An allowance for loan losses is established through a provision charged
to operations. Losses on loans are charged to the allowance for loan
losses when all or a portion of a loan is deemed to be uncollectible.
Recoveries of loans previously charged off are credited to the
allowance when realized. Management's periodic evaluation of the
adequacy of the allowance for loan losses considers known and inherent
risks in the portfolio, adverse situations which may affect the
borrowers' ability to repay, estimated value of underlying collateral,
results of reviews performed on specific problem loans, and current and
prospective economic conditions in the Association's lending area.
Impaired loans are identified and measured in accordance with 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 Disclosures." These Statements prescribe recognition
criteria for loan impairment, and measurement methods for impaired
loans and loans whose terms are modified in troubled-debt
restructurings subsequent to the adoption of these Statements. The
adoption of these Statements on October 1, 1995 did not have a material
effect on the Company's financial statements.
F-9
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(g) Other Real Estate Owned
Other real estate owned is recorded at the lower of cost (defined as
fair value at initial foreclosure) or fair value of the asset acquired,
less estimated costs to dispose of the property. Costs of developing
and improving such properties are capitalized, where appropriate.
Subsequent declines in the value of other real estate owned and
expenses relating to holding such real estate are charged to operations
as incurred. Other real estate owned consists primarily of residential
properties.
(h) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the related assets.
(i) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets are recognized
subject to management's judgment that those assets will more likely
than not be realized. A valuation allowance is recognized if, based on
an analysis of available evidence, management believes that all or a
portion of deferred tax assets will not be realized. Adjustments to
increase or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Financial Instruments
In the normal course of business, the Company is a party to certain
financial instruments with off-balance-sheet risk, such as commitments
to extend credit, unused lines of credit, and standby letters of
credit. The Company's policy is to record such instruments when funded.
(k) Transfers of Financial Assets and Extinguishment 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 extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS No. 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
Certain aspects of SFAS No. 125 were amended by SFAS No. 127 "Deferral
of the Effective Date of Certain
F-10
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Provisions of FASB Statement No. 125." The adoption of SFAS No. 125, as
amended, did not have a material impact on the Company's consolidated
financial statements.
(l) Earnings Per Share
On June 30, 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share," which establishes standards for computing and
presenting earnings per share. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15, "Earnings per Share" and related
interpretations. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with a complex capital structure and specifies additional
disclosure requirements. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity, such as
restricted stock and stock options. Unallocated ESOP shares are not
included in the weighted average number of common shares outstanding
for either the basic or diluted earnings per share calculations.
Earnings per share are presented for estimated earnings from the date
of conversion, April 6, 1998, through September 30, 1998, and are based
on the weighted average number of shares outstanding during this
period, less unallocated ESOP shares. Earnings per share are not
presented for periods prior to the initial stock offering as the
Company was a mutual savings and loan at the time and no stock was
outstanding. For the year ended September 30, 1998, the weighted
average number of shares outstanding was 608,559. There were no
restricted stock plans or stock options that would have had a dilutive
effect on the earnings per share calculation for the year ended
September 30, 1998. The basic and diluted earnings per common share was
$0.19 for the year ended September 30, 1998, based on post conversion
net income of approximately $114,000 for the period from April 6, 1998
through September 30, 1998.
(m) Reclassification
Amounts in the prior periods' consolidated financial statements are
reclassified whenever necessary to conform with the current period's
presentation.
(n) Recent Accounting Pronouncements
In June 1997, the FASB issued "SFAS No. 130", "Reporting 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 does not
believe that the impact of adopting this Statement will be material to
the Company's consolidated financial statements.
F-11
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes
standards for reporting by public companies of operating segments
wilthin the company, disclosures about products and services,
geographic areas and major customers. This statement is effective for
periods beginning after December 15, 1997. Management believes that the
adoption of SFAS No. 131 will not have a material impact on the
Company's consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 132 standardizes the disclosure
of SFAS No. 87 and No. 106 to the extent practical and recommends a
parallel format for presenting information about pensions and other
postretirement benefits. This Statement is applicable to all entities
and addresses disclosure only. The Statement does not change any of the
measurement or recognition provisions provided for in SFAS No. 87, No.
88 or No. 106. The Statement is effective for fiscal years beginning
after December 15, 1997. Management anticipates providing the required
disclosures in the September 30, 1999 consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this Statement on the Company's consolidated
financial statements.
(2) Conversion to Stock Ownership
On April 6, 1998, the Holding Company sold 661,250 shares of common
stock at $10.00 per share to depositors, employees of the Association,
and employee benefit plan of the Association. Net proceeds from the
sale of stock of the Holding Company, after deducting conversion
expenses of approximately $594,000, were approximately $6.0 million and
are reflected as common stock and additional paid-in-capital in the
accompanying consolidated statements of financial condition. The
Company utilized approximately $4.0 million of the net proceeds to
acquire all of the capital stock of the Association.
As part of the conversion, the Association established a liquidation
account for the benefit of eligible depositors who continue to maintain
their deposit accounts in the Association after the conversion. In the
unlikely event of a complete liquidation of the Association, 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 for deposit accounts held, before
distribution may be made with respect to the Association's capital
stock. The Association 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 the Association to be
reduced below the
F-12
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
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 Association's capital exceeds all of the fully phased-in regulatory
capital requirements. The Office of Thrift Supervision ("OTS")
regulations provide that an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital
distribution could, after prior notice but without the approval of the
OTS, make capital distributions during the calendar year of up to 100%
of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning
of the calendar year. Any additional capital distributions would
require prior regulatory approval.
Unlike the Association, the Holding Company is not subject to these
regulatory restrictions on the payment of dividends to its
stockholders.
(3) Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated
fair values of securities available for sale at September 30, 1998 and
1997 are summarized as follows:
September 30, 1998
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------- ------- ----------
Debt securities:
- - ----------------
Certificates of deposit $ 400,000 -- -- 400,000
U.S. Government agency obligations 6,252,461 49,489 -- 6,301,950
Mortgage backed securities 3,938,665 51,231 (30,534) 3,959,362
----------- ------- ------- ----------
Total debt securities 10,591,126 100,720 (30,534) 10,661,312
Non-marketable equity securities:
- - ---------------------------------
Equity securities 50,000 -- -- 50,000
Stock in FHLB 461,100 -- -- 461,100
----------- ------- ------- ----------
Total securities
available for sale $11,102,226 100,720 (30,534) 11,172,412
=========== ======= ======= ==========
F-13
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
September 30, 1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------- ------- ---------
Debt securities:
- - ----------------
U.S. Government agency obligations $2,998,160 1,867 (6,020) 2,994,007
Mortgage backed securities 3,595,397 14,059 (47,452) 3,562,004
---------- ------ ------- ---------
Total debt securities 6,593,557 15,926 (53,472) 6,556,011
Non-marketable equity securities:
- - ---------------------------------
Stock in FHLB 461,100 -- -- 461,100
---------- ------ ------- ---------
Total securities
available for sale $7,054,657 15,926 (53,472) 7,017,111
========== ====== ======= =========
At September 30, 1998 and 1997, mortgage backed securities consisted of Federal
Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association
(GNMA) and Federal National Mortgage Association (FNMA) securities.
The following sets forth information with regard to remaining contractual
maturities of debt securities available for sale as of September 30, 1998
(mortgage backed securities are included based on the final contractual maturity
date):
Estimated
Amortized Fair
Cost Value
----------- ----------
Within one year $ 2,900,000 2,900,315
From one to five years 749,484 758,733
From five to ten years 3,002,461 3,046,715
After ten years 3,939,181 3,955,549
----------- ----------
$10,591,126 10,661,312
=========== ==========
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
There were no security sales for the years ended September 30, 1998, 1997 and
1996.
F-14
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(4) Net Loans Receivable
Net loans receivable at September 30, 1998 and 1997 are summarized as
follows:
1998 1997
------------ ----------
Loans secured by real estate:
Residential one-to-four family $ 35,705,911 36,890,541
Multi-family and commercial 8,614,288 7,949,702
Residential one-to-four family construction 606,420 539,284
------------ ----------
Total loans secured by real estate 44,926,619 45,379,527
------------ ----------
Other loans:
Commercial business 2,623,429 1,421,581
Home equity 3,143,015 3,379,775
Other consumer 1,122,087 1,111,559
------------ ----------
Total other loans 6,888,531 5,912,915
------------ ----------
Gross loans receivable 51,815,150 51,292,442
Less:
Net deferred loan fees (118,734) (153,171)
Allowance for loan losses (1,495,756) (1,612,981)
------------ ----------
Net loans receivable $ 50,200,660 49,526,290
============ ==========
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30, 1998, 1997 and 1996:
1998 1997 1996
----------- --------- ---------
Balance at beginning of year $ 1,612,981 1,250,610 779,417
Charge-offs (315,960) (466,182) (254,364)
Recoveries 78,735 36,287 11,281
Provision charged to operations 120,000 792,266 714,276
----------- --------- ---------
Balance at end of year $ 1,495,756 1,612,981 1,250,610
=========== ========= =========
Non-performing loans consist of loans on nonaccrual status at September
30, 1998, 1997 and 1996 amounting to $1.8 million, $3.8 million and
$2.2 million, respectively. There were no loans past due as to
principal or interest greater than 90 days and still accruing interest
or accruing loans in a trouble debt restructuring as of September 30,
1998, 1997 or 1996. Included in nonaccrual loans at September 30, 1998
and 1997 are approximately $550,000 and $1.6 million of loans
restructured in trouble debt restructurings, respectively.
During 1998 and 1997, certain loans with past due property taxes were
either rewritten to provide the borrowers with amounts necessary to pay
past due property taxes or the loans were restructured in trouble debt
restructuring (but generally at market rates) to provide the borrowers
with amounts necessary to pay past due property taxes. Loans
restructured due to past due property taxes and included in
non-accruing loans at September 30, 1998 totaled $550,000. Loans
rewritten and loans restructured due to past due property taxes at
September 30, 1997 totaled $1.1 million and $1.6 million, respectively.
F-15
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Interest income which would have been recorded under the original terms
of the above nonaccrual loans for the years ended September 30, 1998,
1997 and 1996 was approximately $174,000, $343,000 and $230,000,
respectively. Interest income recognized on the above nonaccrual loans
for the years ended September 30, 1998, 1997 and 1996 was
approximately, $143,000, $304,000 and $84,000. There are no commitments
to extend further credit on nonaccrual loans.
Under SFAS No. 114, a loan (generally commercial-type loans) is
considered impaired when it is probable that the borrower will be
unable to repay the loan according to the original contractual terms of
the loan agreement or when a loan (of any loan type) is restructured in
a trouble debt restructuring. The allowance for loan losses related to
impaired loans is based on discounted cash flows using the loans
initial effective interest rate or the fair value of the collateral for
loans where repayment of the loan is expected to be provided solely by
the underlying collateral (collateral dependent loans).
As of September 30, 1998 and 1997, the recorded investment in loans
that were considered to be impaired under SFAS No. 114 totaled
approximately $1.5 million and $1.6 million, respectively, for which
the related allowance for loan losses was approximately $517,000 and
$334,700, respectively. During the years ended September 30, 1998, 1997
and 1996, the average balance of impaired loans was approximately $1.3
million, $799,000 and $0, respectively. Interest income collected on
the impaired loans during the years ended September 30, 1998, 1997 and
1996, was approximately $129,000, $153,000 and $0, respectively. There
were no impaired loans at September 30, 1996.
Certain directors and executive officers of the Company have had loan
transactions with the Company in the ordinary course of business on
substantially the same terms, including interest rates and collateral,
as comparable loans made to others. Total loans to directors and
executive officers amounted to approximately $394,000 and $381,000 at
September 30, 1998 and 1997, respectively. During the year ended
September 30, 1998, new loans of approximately $57,000 were made to
directors or executive officers, and repayments totaled approximately
$44,000.
(5) Accrued Interest Receivable
A summary of accrued interest receivable at September 30, 1998 and 1997
is as follows:
1998 1997
-------- -------
Loans $214,920 271,986
Securities available for sale 81,577 60,136
Interest bearing deposits 1,462 --
-------- -------
Total $297,959 332,122
======== =======
F-16
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(6) Premises and Equipment
Premises and equipment at September 30, 1998 and 1997 are summarized by
major classifications as follows:
1998 1997
----------- ---------
Land $ 140,215 140,215
Buildings 1,244,728 1,278,156
Furniture and fixtures 1,135,962 1,124,289
----------- ---------
Total 2,520,905 2,542,660
Less accumulated depreciation (1,242,522) (1,004,296)
----------- ---------
Premises and equipment, net $ 1,278,383 1,538,364
=========== =========
Amounts charged to non-interest expense for depreciation of premises
and equipment amounted to $292,884, $291,086 and $227,646 in 1998, 1997
and 1996, respectively.
(7) Deposits
Deposit account balances at September 30, 1998 and 1997 are summarized
as follows:
1998 1997
----------- ----------
Demand accounts (non-interest bearing) $ 1,089,001 1,021,123
----------- ----------
N.O.W. accounts (1.75%) 4,652,820 4,126,561
----------- ----------
Passbook and statement savings accounts (up
to 4.00%) 11,297,213 12,004,406
Money market accounts (up to 4.88%) 12,563,636 10,950,002
----------- ----------
23,860,849 22,954,408
----------- ----------
Time deposit accounts:
Under 4.00% 85 2,624
4.00 - 4.99% 2,721,099 3,993,984
5.00 - 5.99% 23,256,541 21,942,237
6.00 - 6.99% 1,180,806 2,045,965
7.00 and over 32,265 29,784
----------- ----------
27,190,796 28,014,594
----------- ----------
$56,793,466 56,116,686
=========== ==========
At September 30, 1998 and 1997, the aggregate amount of time deposit
accounts with a balance equal to or in excess of $100,000 was
$2,283,536 and $2,492,469, respectively. At September 30, 1998 and
1997, the aggregate amount of escrow deposits was not significant, and
are included in savings and money market accounts.
F-17
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Contractual maturities of time deposit accounts at September 30, 1998
are as follows:
Years ending September 30,
1999 $ 20,750,534
2000 3,878,707
2001 1,066,517
2002 829,817
2003 591,002
Thereafter 74,219
--------------
$ 27,190,796
==============
Certain executive officers and directors of the Company, as well as
certain affiliates of these officers and directors, were customers of
and had deposit balances with the Association in the ordinary course of
business. The aggregate of such deposits was approximately $490,000 and
$681,000 as of September 30, 1998 and 1997, respectively.
(8) Borrowings
The Company had approximately $28.9 million and $9.2 million of
available lines of credit with the FHLB as of September 30, 1998 and
1997, respectively. Substantially all of the assets of the Company have
been pledged as collateral related to this line of credit.
Information concerning FHLB borrowings in 1998 and 1997 follows:
1998 1997
---------- ----------
Amount outstanding at September 30 $2,000,000 --
Maximum amount outstanding at any month end 2,000,000 850,000
Average amount outstanding 1,344,384 272,726
Weighted average interest rate:
For the year 5.68% 5.56%
As of year end 5.68% --
Information concerning securities sold under agreements to repurchase
in 1998 and 1997 follows:
1998 1997
---------- ----------
Amount outstanding at September 30, $ -- 1,300,000
Maximum outstanding at any month end 1,500,000 1,300,000
Average amount outstanding 127,397 118,274
Weighted average interest rate:
For the year 5.80% 5.78%
As of year end -- 5.80%
Securities underlying the repurchase agreements remain under the
control of the Company. Repurchase agreements are typically entered
into for one to three day periods.
F-18
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(9) Income Taxes
The components of the income tax expense (benefit) for the years ended
September 30, 1998, 1997 and 1996 are as follows:
1998 1997 1996
--------- -------- --------
Current tax (benefit) expense:
Federal $ 102,494 (40,248) (166,929)
State 26,927 256 256
Deferred tax (benefit) expense (40,000) 125,000 (55,651)
--------- ------ --------
$ 89,421 85,008 (222,324)
========= ====== ========
The actual tax expense (benefit) for the years ended September 30,
1998, 1997 and 1996 differs from expected tax expense (benefit),
computed by applying the Federal corporate tax rate of 34% to income
(loss) before taxes as follows:
1998 1997 1996
--------- -------- --------
Expected tax expense (benefit) $ 109,883 (169,242) (427,900)
Change in valuation allowance for deferred tax asset (49,338) 273,510 248,426
New York State tax 19,159 (22,107) (45,443)
Other items 9,717 2,847 2,593
--------- ------ --------
$ 89,421 85,008 (222,324)
========= ====== ========
The tax effects of temporary differences that give rise to the
Association's deferred tax assets and liabilities at September 30, 1998
and 1997 are presented below:
1998 1997
--------- -------
Deferred tax assets:
Differences in reporting the provision for
loan losses and the tax bad debt
deduction $ 581,902 628,792
Deferred net loan origination fees 47,494 61,268
Differences in reporting accrued expenses 90,126 73,393
Other 60,732 14,010
--------- -------
Total gross deferred tax assets 780,254 777,463
Valuation allowance (575,714) (625,052)
--------- -------
Deferred tax assets, net of valuation
allowance 204,540 152,411
--------- -------
Deferred tax liabilities:
Depreciation (23,080) (9,540)
Net effect of other real estate owned transactions (21,460) (22,871)
--------- -------
Total gross deferred tax liabilities (44,540) (32,411)
--------- -------
Net deferred tax asset at end of year 160,000 120,000
Net deferred tax asset at beginning of year 120,000 245,000
--------- -------
Deferred tax expense (benefit) for the year $ (40,000) 125,000
========= =======
F-19
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
In addition to the deferred tax assets described above, the Association
had a deferred tax (liability) asset of $(30,180) and $16,145 at
September 30, 1998 and 1997, respectively, related to the net
unrealized gain/loss on securities available for sale, at September 30,
1998 and 1997, respectively.
During fiscal 1998, the deferred tax asset valuation allowance was
reduced by $49,338 from $625,052 to $575,714. This reduction was based
on the Company's fiscal 1998 increased pre-tax income and the Company's
increased future taxable income projections. As a result of the
Association experiencing a second year of significant losses before
taxes, continued economic weakness in the Association's market area,
including declining real estate values collateralizing much of the
Association's loan portfolio, reduced expectations of earnings in the
future, as well as a reduction in the amount of historical taxes
available for carryback in 1997, the Association increased the deferred
tax valuation allowance in 1997 by $273,510 to $625,052. In assessing
whether deferred tax assets will more likely than not be realized,
management considers the historical level of taxable income, the time
period over which the temporary differences are expected to reverse, as
well as estimates of future taxable income. As of September 30, 1998,
the net deferred tax asset is considered to be more likely then not
realizable based upon the historical level of taxable income available
for carryback, amounting to approximately $173 thousand, the reversal
of temporary taxable items and reliance on future taxable income
amounting to approximately $225 thousand.
As a thrift institution, the Association is subject to special
provisions in the Federal and New York State tax laws regarding its
allowable tax bad debt deductions and related tax bad debt reserves.
These deductions historically have been determined using methods based
on loss experience or a percentage of taxable income. Tax bad debt
reserves are maintained equal to the excess of allowable deductions
over actual bad debt losses and other reserve reductions. These
reserves consist of a defined base-year amount, plus additional amounts
("excess reserves") accumulated after the base year. SFAS No. 109
requires recognition of deferred tax liabilities with respect to such
excess reserves, as well as any portion of the base-year amount which
is expected to become taxable (or "recaptured") in the foreseeable
future.
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in July and August 1996. The Federal
amendments include elimination of the percentage of taxable income
method for tax years beginning after December 31, 1995, and imposition
of a requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the
base-year amounts. The Association previously established, and will
continue to maintain, a deferred tax liability with respect to such
excess Federal reserves. The New York State amendments redesignate the
Association's state bad debt reserves at December 31, 1995 as the
base-year amount and also provide for future additions to the base-year
reserve using the percentage of taxable income method.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal and state base-year reserves
since the Association does not expect that these reserves will become
taxable in the foreseeable future. At September 30, 1998, the Federal
base year reserve was approximately $1.3 million and the state
base-year reserve was not significant. Under New York State tax law, as
amended, events that would result in taxation of the state reserves
include the failure of the Association to maintain a specified
qualifying assets ratio or meet other
F-20
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
thrift definition tests for tax purposes. The unrecognized tax
liability at September 30, 1998 with respect to the Federal base-year
reserve was approximately $440 thousand.
(10) Employee Benefits
(a) 401(k) Savings Plan
Effective January 1, 1995, the Association established a
defined contribution plan ("the Plan") that is intended to
qualify under section 401(k) of the Internal Revenue Code. The
Plan covers all employees with at least six months of service.
The Association's contributions to the Plan are discretionary
and determined annually by the Board of Directors. Employee
contributions are voluntary. Employees vest immediately in
their own contributions, and vest in the Company's
contributions based on years of service. For the years ended
September 30, 1998, 1997 and 1996, the Association's
contributions to the Plan were approximately $17,000, $57,000
and $45,000, respectively.
(b) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee
stock ownership plan (ESOP) was established to provide
substantially all employees of the Company the opportunity to
also become stockholders. The ESOP borrowed $529,000 from the
Company and used the funds to purchase 52,900 shares of common
stock of the Company issued in the conversion. The loan will
be repaid principally from the Company's discretionary
contributions to the ESOP over a period of ten years. At
September 30, 1998, the loan had an outstanding balance of
$529,000 and an interest rate of 5.98%. Both the loan
obligation and the unearned compensation are reduced by the
amount of loan repayments made by the ESOP. Shares purchased
with the loan proceeds are held in a suspense for allocation
among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation in
the year of allocation.
The Company accounts for the ESOP in accordance with the
American Institute of Certified Public Accountants Statement
of Position No. 93-6 "Employees' Accounting For Stock
Ownership Plans" (SOP 93-6). Accordingly, the shares pledged
as collateral are reported as unearned ESOP shares in
shareholders' equity. As shares are released or committed to
be released from collateral, the Company reports compensation
expense equal to the average market price of the shares
(during the applicable service period), and the shares become
outstanding for earnings per share computations. Unallocated
ESOP shares are not included in the earnings per share
computations. The Company recorded approximately $67,000 of
compensation expense under the ESOP during the year ended
September 30, 1998.
The ESOP shares as of September 30, 1998 were as follows:
Allocated shares --
Shares committed to be allocated 5,290
Unallocated shares 47,610
---------
52,900
=========
Approximate fair value of
unallocated shares at
September 30, 1998 $ 595,125
=========
F-21
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(11) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Company is, from time to time, a defendant in legal
proceedings relating to the conduct of its business. In the
best judgment of management, the financial position of the
Company will not be affected materially by the outcome of any
pending legal proceedings.
(b) Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include the Association's commitments to extend
credit and commercial lines of credit. Financial instruments
involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated statements of
financial condition. The contract amounts of these instruments
reflect the extent of involvement the Association has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend
credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies
in making commitments as it does for on-balance sheet
instruments.
Commitments to extend credit may be written on a fixed rate
basis exposing the Company to interest rate risk given the
possibility that market rates may change between commitment
and actual extension of credit.
Unless otherwise noted, the Company does not require
collateral or other security to support off-balance-sheet
financial instruments with credit risk.
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 Association evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral, if any,
required by the Association upon the extension of credit is
based on management's credit evaluation of the customer.
Mortgage commitments are secured by a first lien on real
estate. Collateral on extensions of credit for commercial
loans varies but may include property, plant and equipment,
and income producing commercial property.
F-22
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Contract amounts of financial instruments that represent the
future extension of credit as of September 30, 1998 and 1997
at fixed and variable interest rates are as follows:
1998
------------------------------------------
Fixed Variable Total
---------- --------- ---------
Financial instruments whose contract
amounts represent credit risk:
Residential (one-to-four-
family) $ 582,151 -- 582,151
Multi-family and commercial 155,000 35,000 190,000
Construction 695,930 -- 695,930
Commercial business -- 338,397 338,397
Home equity 80,000 924,993 1,004,993
---------- --------- ---------
$1,513,081 1,298,390 2,811,471
========== ========= =========
1997
------------------------------------------
Fixed Variable Total
---------- --------- ---------
Financial instruments whose contract
amounts represent credit risk:
Residential (one-to-four-
family) $ 387,400 -- 387,400
Multi-family and commercial -- 1,008,939 1,008,939
Construction 306,260 3,006 309,266
Commercial business -- 375,604 375,604
Home equity -- 942,202 942,202
Other consumer 114,527 -- 114,527
---------- --------- ---------
$ 808,187 2,329,751 3,137,938
========== ========= =========
The range of interest on fixed rate commitments was 7.00% to
10.00% at September 30, 1998 and 7.625% to 10.250% at
September 30, 1997. The range of interest on adjustable rate
commitments was 8.00% to 11.00% at September 30, 1998 and
7.00% to 11.00% at September 30, 1997, respectively.
At September 30, 1998 and 1997, the Association was required
to maintain a $500,000 compensating balance with a
correspondent bank.
(c) Interest Rate Risk
The principal assets of the Company are long-term, fixed rate
first mortgage loans which have been primarily funded by
deposits. Accordingly, increases in interest rates paid on
deposit accounts will have an adverse effect on the Company's
overall interest margins. In response to this situation, the
Company has begun programs offering one year adjustable rate
mortgages, three to five year adjustable rate multi-family and
commercial loans, commercial business loans, home equity
loans, and variable rate line of credit accounts to loan
customers in order to more closely match the pricing of
earning assets with their sources of funds on a prospective
basis.
F-23
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(12) Savings Association Insurance Fund - Special Assessment
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
Act) was enacted into law. The Act included, among other things,
provisions to recapitalize the Savings Association Insurance Fund
(SAIF) through a special assessment, as well as provisions calling for
a future merger of the SAIF with the Bank Insurance Fund.
As a result of the Act, SAIF members were required to pay a special
assessment to recapitalize the SAIF based on insured deposits held on
March 31, 1995. The amount of the special SAIF assessment as determined
by the FDIC was 65.7 basis points. Based upon the Association's insured
deposits on March 31, 1995, the special assessment amounted to
$414,835.
(13) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values for certain
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.
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 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 the deferred tax asset and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
In addition there are intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Association's
branch network and other items generally referred to as "goodwill."
Securities Available for Sale
Securities available for sale are financial instruments which are
usually traded in broad markets. Fair values are based upon bid
quotations received from either quotation services or securities
dealers. The estimated fair value of stock in the Federal Home Loan
Bank of New York is assumed to be its cost given the lack of a public
market available for this investment.
F-24
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as single
family loans, consumer loans 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 taking into consideration
certain prepayment assumptions.
Fair value for significant non-performing loans may be based on recent
external appraisals or 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.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest bearing demand deposit, savings accounts, NOW
accounts, and money market accounts, must be stated at the amount
payable on demand as of September 30, 1998 and 1997. The fair value of
time deposits 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.
Other Items
The following items are considered to have a fair value equal to
carrying value due to the nature of the financial instrument and the
period within which it will be settled: cash and cash equivalents,
accrued interest receivable, accrued interest payable, and borrowings.
F-25
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as of
September 30, 1998 and 1997 are as follows:
September 30, 1998 September 30, 1997
------------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- ---------
Financial assets:
Cash and cash equivalents $ 4,745,031 4,745,031 1,922,386 1,922,386
Securities available for sale 11,172,412 11,172,412 7,017,111 7,017,111
Net Loans 50,200,660 51,005,253 49,526,290 49,959,626
Accrued interest receivable 297,959 297,959 332,122 332,122
Financial liabilities:
Deposits:
Demand, savings, money market, and NOW accounts 29,602,670 29,602,670 28,102,092 28,102,092
Time deposits 27,190,796 27,190,796 28,014,594 28,014,594
Borrowings and securities sold under agreements to repurchase 2,000,000 2,000,000 1,300,000 1,300,000
Commitments to Extend 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. Fees, such as these are not a major part
of the Company's business and in the Company's business territory are
not a "normal business practice." Therefore, based upon the above facts
the Company believes that book value equals fair value and the amounts
are not significant.
(14) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain
minimum levels of regulatory capital. Under the regulations in effect
at September 30, 1998 and 1997, the Association was required to
maintain a minimum ratio of tangible capital to tangible assets of
1.5%; a minimum leverage ratio of core (Tier I) capital to total
adjusted tangible assets of 4.0% for 1998 and 3.0% for 1997; and a
minimum ratio of total capital (core capital and supplementary capital)
to risk weighted assets of 8.0%, of which 4.0% must be core (Tier I)
capital.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could
F-26
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
have a direct material effect on an institution's financial
statements. The regulations establish a framework for the
classification of savings institutions into five categories: well
capitalized, adequately capitalized, under capitalized, significantly
under capitalized, and critically under capitalized. Generally an
institution is considered well capitalized if it has a core (Tier I)
capital ratio of at least 5.0% (based on quarterly average total
assets); a core (Tier I) risk based capital ratio of at least 6.0%;
and a total risk based capital ratio of at least 10.0%.
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 OTS
about capital components, risk weightings and other factors.
Management believes that, as of September 30, 1998 and 1997, the
Association meets all capital adequacy requirements to which it is
subject. Further, the most recent OTS notification categorized the
Association as a well-capitalized institution under the prompt
corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the
Association's capital classification.
The following is a summary of the Association's actual capital amounts
and ratios as of September 30, 1998 and 1997. Although the OTS capital
regulations apply at the Association level only, the Company's
consolidated capital amounts and ratios are also presented. The OTS
does not have a holding company capital requirement.
September 30, 1998 September 30, 1997
Actual Actual
------------------ ------------------
Amount Ratio Amount Ratio
--------- ----- --------- -----
Association
-----------
Tangible capital $7,055,274 10.59% 3,301,370 5.41%
Tier I (core) capital 7,055,274 10.59% 3,301,370 5.41%
Risk-based capital:
Tier I 7,055,274 18.34% 3,301,370 8.48%
Total 7,546,487 19.62% 3,787,762 10.01%
September 30, 1998
Actual
----------------------
Amount Ratio
---------- -----
Consolidated
------------
Tangible capital $9,114,959 13.36%
Core (Tier I) capital 9,114,959 13.36%
Core (Tier I) risk-based capital 9,114,959 23.54%
Total risk-based capital 9,609,947 24.82%
The OTS may reduce an institution's regulatory capital for interest
rate risk exposure (as determined by the OTS) if the institution's
risk-based capital ratio is less than 12% and the OTS notifies the
institution of such reduction. The Association has not been notified by
the OTS of any reduction to its regulatory capital for interest rate
risk exposure.
F-27
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(15) Holding Company Financial Information
The following information presents the financial position of Adirondack
Financial Services Bancorp, Inc. (Holding Company) as of September 30,
1998, and the results of its operations and cash flows for the period
from April 6, 1998 to September 30, 1998. The Holding Company began
operations on April 6, 1998 in conjunction with the Association's
mutual-to-stock conversion and the Company's initial public offering of
its common stock.
Statement of Financial Condition
September 30, 1998
Assets
------
Cash and cash equivalents $1,533,585
Securities available for sale 50,000
Loan receivable from subsidiary 529,000
Equity in net assets of subsidiary 7,042,380
----------
Total assets $9,154,965
==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities --
Shareholders' equity 9,154,965
----------
Total liabilities and shareholders' equity $9,154,965
==========
Statement of Income
For the period from April 6, 1998 to September 30, 1998
Interest income $ 66,368
Interest expense 24,634
----------
Net interest income 41,734
Non-interest expense 12,281
----------
Income before income tax expense and
equity in undistributed earnings of
subsidiary 29,453
Income tax expense 11,781
----------
Income before equity in undistributed earnings of subsidiary 17,672
Equity in undistributed earnings of subsidiary 216,092
----------
Net income $ 233,764
==========
F-28
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Statement of Cash Flows
For the period from April 6, 1998 to September 30, 1998
Cash flows from operating activities:
Net income $ 233,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiary (216,092)
----------
Net cash provided by operating activities 17,672
----------
Cash flows from investing activities:
Net increase in loans from subsidiary (529,000)
Purchase of subsidiary common stock (3,947,100)
Purchase of securities available for sale (50,000)
----------
Net cash used by investing activities (4,526,100)
----------
Cash flows from financing activities:
Net proceeds from common stock issued 6,042,013
----------
Net cash provided by financing
activities 6,042,013
----------
Net increase in cash and cash equivalents 1,533,585
Cash and cash equivalents at beginning of period --
----------
Cash and cash equivalents at end of period $ 1,533,585
==========
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
(16) Subsequent Event
On October 7, 1998, at a special meeting of shareholders, the
shareholders approved a recognition and retention plan ("RRP") and a
stock option plan for the benefit of employees, officers and directors
of the Company.
Under the RRP 26,450 shares of the Company's common stock (4%) of the
number of shares issued in the conversion will be available for award
to employees, officers and directors of the Company in a manner
designed to encourage such persons to remain with the Company. With the
approval of the plan, 25,123 common shares were awarded and will vest
on the anniversary of the date of shareholder approval at an annual
rate of 20%. The Company funded the RRP from authorized but unissued
shares.
Under the stock option plan, 66,125 stock options (10% of the number of
shares issued in the conversion) will be available for award to
employees, officers and directors of the Company. With the approval of
the plan, 62,820 stock options were granted and will vest on the
anniversary of the date of shareholder approval at an annual rate of
20%. The Company has not made a final determination whether the common
stock required by the stock option plan will be purchased in the market
or issued from authorized and unissued.
F-29
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Financial Condition
December 31, 1998 September 30, 1998
----------------- ------------------
(unaudited)
Assets
Cash and due from banks $ 3,247,224 $ 2,635,158
Interest bearing deposits 615,036 2,109,873
---------- ----------
Total cash and cash
equivalents 3,862,260 4,745,031
Securities available for sale 14,081,162 11,172,412
Net loans receivable 50,049,806 50,200,660
Accrued interest receivable 333,480 297,959
Other real estate owned 550,475 256,125
Net premises and equipment 1,204,376 1,278,383
Prepaid expenses and other
assets 224,269 290,843
----------- -----------
Total Assets $70,305,828 $68,241,413
=========== ===========
Liabilities and Shareholders'
Equity
Liabilities:
Deposits:
Demand and N.O.W. accounts $ 5,445,140 $ 5,741,821
Savings and money market
accounts 24,483,948 23,860,849
Time deposit accounts 26,447,560 27,190,796
----------- -----------
Total deposits 56,376,648 56,793,466
Borrowings 4,463,225 2,000,000
Accrued expenses and other
liabilities 234,326 292,982
----------- -----------
Total liabilities 61,074,199 59,086,448
----------- -----------
Shareholders' equity:
Preferred Stock, $.01 par
value, 100,000 shares
authorized, none
outstanding - -
Common Stock, $.01 par
value, 1,200,000 shares
authorized, 689,055
outstanding at
December 31,1998 and
663,243 outstanding at
September 30, 1998 6,639 6,632
Additional Paid-in Capital 6,058,823 6,049,293
Retained earnings,
substantially restricted 3,639,613 3,535,134
Unearned ESOP shares (476,100) (476,100)
Accumulated Other
Comprehensive Income 2,392 40,006
---------- -----------
Total shareholders' equity 9,231,629 9,154,965
---------- -----------
Total liabilities and
shareholders' equity $70,305,828 $68,241,413
=========== ===========
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
F-30
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Income (Unaudited)
Three Months Ended
---------------------------------------------
December 31, 1998 December 31, 1997
----------------- ------------------
Interest and dividend income:
Interest and fees on loans $ 1,102,802 $ 1,074,077
Securities available
for sale 184,057 108,247
Interest-bearing deposits 31,918 1,731
----------- -----------
Total interest and
dividend income 1,318,776 1,184,055
----------- -----------
Interest expense:
N.O.W. accounts 15,671 15,637
Savings and money
market accounts 220,814 216,631
Time deposit accounts 363,508 371,806
Borrowings 45,492 23,168
----------- -----------
Total interest expense 645,485 627,242
----------- -----------
Net interest income 673,291 556,813
Provision for loan losses 4,000 15,000
----------- -----------
Net interest income after
provision for loan losses 669,291 541,813
----------- -----------
Other income:
Fees and service charges 44,454 40,307
Other 13,581 13,455
----------- -----------
Total other income 58,035 53,762
----------- -----------
Operating expenses:
Compensation and employee
benefits 261,822 234,415
Occupancy expense 48,893 54,905
Federal deposit insurance
premiums 16,450 13,397
Advertising expenses 39,217 22,401
Directors' fees and expenses 24,446 24,485
Equipment and data processing
expenses 70,491 75,308
Other real estate owned
expenses (29,347) 7,816
Other operating expenses 119,976 123,737
----------- ---------
Total operating expenses 551,948 556,464
----------- ---------
Income (loss) before income
tax expense 175,379 39,111
Income tax expense 70,900 15,800
----------- ---------
Net income (loss) $ 104,479 23,311
=========== =========
Basic earnings per common share $0.17 N/A
Diluted earnings per common share $0.16 N/A
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
F-31
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Cash Flows (Unaudited)
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 104,479 $ 23,311
Adjustments to reconcile net income (loss)
to net cash provided by (used by) operating activities
Depreciation expense 71,032 74,168
Provision for loan losses 4,000 15,000
Loss on disposal of equipment 4,687 -
Net gain on sale of other real estate owned (34,350) (23,215)
(Increase) decrease in accrued interest receivable (35,521) 18,156
Decrease (increase) in prepaid expenses and other assets 98,878 (179,208)
(Decrease) increase in accrued expenses
and other liabilities (58,656) 5,283
------------ ---------
Net cash provided by (used by) operating activities 154,549 (66,505)
Cash flows from investing activities:
Proceeds from principal repayment and maturity of securities
available for sale 2,561,040 179,760
Purchase of securities available for sale (5,539,708) -
Net (decrease) increase in loans receivable (228,146) 565,856
Proceeds from sale of other real estate owned 115,000 293,890
Capital expenditures (1,712) (14,680)
------------ ----------
Net cash (used by) provided by investing activities (3,093,526) 1,024,826
------------ ----------
Cash flows from financing activities:
Net proceeds from issuance of stock 9,799 -
Net decrease in deposits (416,818) (1,845,769)
Net increase in borrowings 2,463,225 400,000
------------ ----------
Net cash provided by (used by) financing activities 2,056,206 (1,445,769)
------------ ----------
Net decrease in cash and cash equivalents (882,771) (487,448)
Cash and cash equivalents at beginning of period 4,745,031 1,922,386
------------ ----------
Cash and cash equivalents at end of period $ 3,862,260 $1,434,938
============ ==========
Cash paid during the period for:
Interest $ 637,127 $ 604,075
Taxes $ - $ 5,471
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
F-32
Summarized Notes to Unaudited Interim Consolidated Financial Statements
Note 1
In management's opinion, the financial information, which is unaudited as of and
for the three months ended December 31, 1998 and 1997, reflects all adjustments,
consisting solely of normal recurring adjustments, necessary for a fair
presentation of the financial information for the three month periods ended
December 31, 1998 and December 31, 1997 in conformity with generally accepted
accounting principles. These consolidated financial statements should be read in
conjunction with Adirondack Financial Services Bancorp, Inc.'s ( the "Company"
herein) 1998 Annual Report on Form 10-K. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the full fiscal year that ends September 30, 1999.
Note 2
Amounts in the prior periods' consolidated interim financial statements are
reclassified whenever necessary to conform to the current period presentation.
Note 3 - Common Stock Shares Outstanding
As of December 31,1998, common stock shares outstanding totaled 689,055, which
included 25,123 shares granted to directors, officers, and non-officer employees
of the Company and the Association on October 7, 1998 under the Company's 1998
Recognition and Retention Plan ("RRP"). The 1998 RRP was approved by the
Company's shareholders at a Special Meeting of Stockholders held on October 7,
1998.
Note 4 - Earnings Per Share
On June 30, 1998, the Company adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share" and
related interpretations. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with a complex capital structure and specifies additional disclosure
requirements. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Unvested restricted stock awards
are considered outstanding common shares and included in the computation of
basic EPS as of the date that they are fully vested. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity, such as restricted stock and stock options. Unallocated ESOP shares are
not included in the weighted average number of common shares outstanding for
either the basic or diluted earnings per share calculations.
For the three month period ended December 31, 1998, the basic earnings per share
was $0.17, calculated using 615,846 weighted average common shares outstanding.
The diluted earnings per share was $0.16, calculated using 642,663 weighted
average common shares outstanding. Earnings per share are not presented for
periods prior to the Company's initial stock offering since the Company was a
mutual savings association and no stock was outstanding.
Note 5 - Comprehensive Income
On October 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components. 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. At the Company, comprehensive income represents
net income plus other comprehensive income, which consists of the net change in
unrealized gains or losses on securities available for sale, net of tax, for the
period.
F-33
Accumulated other comprehensive income represents the net unrealized gains or
losses on securities available for sale as of the balance sheet dates.
Comprehensive income (loss) for the three month periods ended December 31, 1998
and 1997 was $66,865 and $41,769, respectively. The following summarizes the
components of other comprehensive income:
The three months ended
December 31,
1998 1997
---------------------------
Unrealized gains (losses) on securities:
Unrealized net holding gains (losses) arising during the three months ended
December 31, 1998 and 1997, respectively, net of tax (pre-tax amount of
$62,690 and $30,763, respectively) $(37,614) $18,458
Reclassification adjustment for net (gains) losses realized in net income during
the three months ended December 31, 1998 and 1997, respectively, net of
tax (pre-tax amount of $- and $-, respectively) - -
--------- -------
Other comprehensive income (loss) during the three months ended December 31,
1998 and 1997,
respectively $(37,614) $18,458
--------- -------
Note 6 - SFAS 131
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting by public companies of operating segments within the company,
disclosures about products and services, geographic areas and major customers.
This statement is effective for periods beginning after December 15, 1997.
Management believes that the adoption of SFAS No. 131 will not have a material
impact on the Company's consolidated financial statements.
Note 7 - SFAS 132
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosures of SFAS No. 87 and No. 106 to the extent practical
and recommends a parallel format for presenting information about pensions and
other postretirement benefits. This Statement is applicable to all entities and
addresses disclosure only. The Statement does not change any of the measurement
or recognition provisions provided for in SFAS No. 87, No. 88 or No. 106. The
Statement is effective for fiscal years beginning after December 15, 1997.
Management anticipates providing the required disclosures in the September 30,
1999 consolidated financial statements.
Note 8 - SFAS 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
F-34
Note 9 - Acquisition
On January 23, 1999, the Company entered into a merger agreement with CNB
Bancorp, Inc. ("CNB"), Gloversville, New York. CNB is the parent company of City
National Bank and Trust Co. Under the terms of the agreement, the acquisition of
AFSB and its subsidiary savings association will provide AFSB shareholders with
a cash payment of approximately $15 million and will be accounted for as a
purchase transaction. The transaction is expected to close on or about June 30,
1999, subject to the Company's shareholders' and regulatory approvals.
F-35