U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: December 31, 1996
-----------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to _____________
Commission file number: 0-21113
AFSALA Bancorp, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 14-1793890
- -------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
161 Church Street
Amsterdam, New York 12010
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(Address of Principal Executive Offices)
(518) 842-5700
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each issuer's classes of common equity as of
February 7, 1997: 1,454,750
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
-1-
AFSALA BANCORP, INC.
INDEX
PART I - CONSOLIDATED FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements............................................. 1
Consolidated Balance Sheets as of December 31, 1996
(unaudited) and September 30, 1996............................. 1
Consolidated Statements of Income for the three
months ended December 31, 1996 and 1995 (unaudited)............ 2
Consolidated Statements of Cash Flows for the
three months ended December 31, 1996 and 1995 (unaudited).... 3
Notes to (unaudited) Consolidated Interim Financial Statements. 4
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 5
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................ 16
Item 2 Changes in Securities............................................ 16
Item 3 Defaults upon Senior Securities.................................. 16
Item 4 Submission of Matters to a Vote of Security Holders.............. 16
Item 5 Other Information................................................ 16
Item 6 Exhibits and Reports on Form 8-K................................. 16
SIGNATURES
-i-
AFSALA BANCORP,INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
Assets 1996 1996
------ -------------- --------------
Cash and due from banks $ 4,440,393 $ 4,816,392
Federal funds sold 3,100,000 19,200,000
Term deposits with the Federal Home Loan 7,000,000 3,000,000
Bank
-------------- --------------
Total cash and cash equivalents 14,540,393 27,016,392
-------------- --------------
Securities available for sale, at 15,890,167 17,131,802
approximate fair value
Investment securities held to maturity 43,557,680 34,999,930
Federal Home Loan Bank of New York stock, 565,300 565,300
at cost
Loan receivable, net 72,189,769 70,677,291
Accrued interest receivable 1,262,475 1,156,466
Premises and equipment, net 1,673,626 1,703,491
Other assets 166,688 426,015
-------------- --------------
Total assets $149,846,098 $153,676,687
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits 125,665,596 126,460,081
Federal Home Loan Bank of New York long term
borrowings 1,706,250 1,815,625
Escrow accounts 451,891 365,187
Accrued expenses and other liabilities 1,105,673 4,444,922
-------------- --------------
Total liabilities 128,929,410 133,085,815
Commitments and contingent liabilities
Stockholders' Equity:
Preferred stock, $0.10 par value; authorized
500,000 shares; none issued - -
Common stock, $0.10 par value; authorized
1,454,750 shares issued and
outstanding 145,475 145,475
Additional paid-in capital 13,465,092 13,460,381
Retained earnings, substantially restricted 8,390,464 8,120,864
Common stock acquired by ESOP (1,080,105) (1,107,800)
Net unrealized (loss) on securities
available for sale, net of tax (4,238) (28,048)
-------------- --------------
Total stockholders' equity 20,916,688 20,590,872
-------------- --------------
Total liabilities and stockholders' equity $149,846,098 $153,676,687
============== ==============
See accompanying notes to unaudited consolidated interim financial statements
1
AFSALA BANCORP,INC. AND SUBSIDIARY
Consolidated Statements of Income
For the three months ended December 31, 1996 and 1995
(Unaudited)
1996 1995
----------- ------------
Interest and dividend income:
Interest and fees on loans $1,518,654 $1,396,813
Interest on Federal funds sold 110,052 80,228
Interest on FHLB term deposits 106,888 23,238
Interest on securities available for sale 234,755 31,872
Interest on investment securities 635,758 664,251
Dividends on Federal Home Loan Bank of New York stock 9,393 9,776
----------- ------------
Total interest and dividend income 2,615,500 2,206,178
----------- ------------
Interest expense:
Deposits and escrow accounts 1,302,506 1,283,433
Federal Home Loan Bank of New York long term
borrowings 30,897 39,316
----------- ------------
Total interest expense 1,333,403 1,322,749
----------- ------------
Net interest income 1,282,097 883,429
----------- ------------
Provision for loan losses 80,000 30,000
----------- ------------
Net interest income after provision for loan losses 1,202,097 853,429
Non-interest income:
Service charges on deposit accounts 110,338 88,431
Other 13,011 2,907
----------- ------------
Total non-interest income 123,349 91,338
----------- ------------
Non-interest expense:
Compensation and benefits 371,803 325,724
Occupancy and equipment 133,438 111,331
FDIC deposit insurance premium 55,317 63,051
Data processing fees 69,967 65,788
Professional service fees 58,750 32,849
Advertising 14,389 10,354
Supplies 25,838 12,979
Other 179,113 114,263
----------- ------------
Total non-interest expense 908,615 736,339
----------- ------------
Income before income tax expense 416,831 208,428
Income tax expense 147,231 58,100
----------- ------------
Net Income $ 269,600 $ 150,328
=========== ============
Net Income per share $ 0.20 N/A
=========== ============
See accompanying notes to unaudited consolidated interim financial statements
2
AFSALA BANCORP,INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended December 31,
(Unaudited)
1996 1995
----------------- ----------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 269,600 $ 150,328
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 51,837 42,216
Provision for loan losses 80,000 30,000
ESOP Compensation expense 32,406 -
(Increase) decrease in accrued interest receivable (106,009) 57,755
Decrease in other assets 259,327 43,355
(Decrease) increase in accrued expenses and other
liabilities (3,351,517) 91,275
----------- ------------
(3,033,956) 264,601
----------- ------------
(2,764,356) 414,929
----------- ------------
Cash flows from investing activities:
Proceeds from the maturity and call of securities available
for sale 1,777,713 842
Purchase of securities available for sale (500,000) -
Proceeds from the maturity and call of investment securities 2,439,094 3,117,245
Purchase of investment securities (10,996,844) (2,426,899)
Net loans made to customers (1,592,478) (1,492,177)
Capital expenditures (21,972) (49,518)
----------- ------------
(8,894,487) (850,507)
----------- ------------
Cash flows from financing activities:
Net (decrease) increase in deposits (794,485) 3,202,845
Net increase in escrow accounts 86,704 126,327
Repayments on long term borrowings from the Federal
Home Loan Bank (109,375) (109,375)
----------- ------------
(817,156) 3,219,797
----------- ------------
Net increase (decrease) in cash and cash equivalents (12,475,999) 2,784,219
Cash and cash equivalents at beginning of period 27,016,392 9,673,328
----------- ------------
Cash and cash equivalents at end of period $14,540,393 $ 12,457,547
=========== ============
Additional Disclosures Relative to Cash Flows:
Interest paid $ 1,329,364 $ 1,322,365
=========== ============
Taxes paid $ 134,130 $ 40,000
=========== ============
Supplemental schedules of non-cash investing and financing
activities:
Investment securities held to maturity transferred to
securities available for sale $ - $ 16,602,489
=========== ============
Change in net unrealized gain (loss) on securities
available for sale, net of tax $ 23,810 $ 2,734
=========== ============
See accompanying notes to unaudited consolidated interim financial statements
3
AFSALA Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements
include the accounts of AFSALA Bancorp, Inc. and its subsidiary (the
Company) Amsterdam Federal Bank. The accompanying unaudited consolidated
interim financial statements have been prepared in accordance with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The accounting and reporting
policies of the Company conform in all material respects to generally
accepted accounting principles and to general practice within the savings
bank industry. It is the opinion of management that the accompanying
unaudited consolidated interim financial statements reflect all
adjustments which are considered necessary to report fairly the financial
position as of December 31, 1996, the Consolidated Statements of Income
for the three months ended December 31, 1996 and 1995, and the
Consolidated Statements of Cash Flows for the three months ended December
31, 1996 and 1995. The results of operations for the three months ended
December 31, 1996 are not necessarily indicative of results that may be
expected for the entire year ending September 30, 1997. The accompanying
unaudited consolidated interim financial statements should be read in
conjunction with AFSALA Bancorp, Inc.'s September 30, 1996 consolidated
financial statements, including the notes thereto, which are included in
AFSALA Bancorp, Inc.'s 1996 Annual Report on Form 10-KSB.
2. Earnings Per Share
Earnings per share for the quarter ended December 31, 1996 has been
determined by dividing net income by the weighted average number of shares
of common stock outstanding for the quarter. Shares of common stock
outstanding are reduced by the Company's Employee Stock Ownership Plan
(ESOP) shares that have not been committed to be released in accordance
with SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans".
Earnings per share for the quarter ended December 31, 1995 are not
applicable as there were no shares outstanding during this time period.
3. Employee Stock Ownership Plan
On December 31, 1996, the Company was committed to release 2,770 shares of
its common stock owned by the Company's ESOP. The commitment resulted in
approximately $32 thousand of additional compensation cost.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
AFSALA Bancorp, Inc. (the Company) is a Delaware corporation organized in
June 1996 at the direction of Amsterdam Federal Bank (the Bank) to acquire all
of the capital stock that the Bank issued upon the Bank's conversion from the
mutual to stock form of ownership. On September 30, 1996, the Company completed
its initial public stock offering, issuing 1,454,750 shares of $.10 par value
common stock at $10.00 per share. Net proceeds to the Company were $13.6 million
after conversion costs. Approximately $1.1 million of the proceeds were utilized
to fund a loan by the Company to the Company's Employee Stock Ownership Plan
(ESOP) which purchased 110,780 shares of the Company's common stock during the
offering. The Company is not an operating company and has not engaged in any
significant business to date. As such, references herein to the Bank subsequent
to September 30, 1996 include the Company unless the context otherwise
indicates.
The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest income earned on
its assets, primarily loans and investments, and the interest expense on its
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly those with respect to market
interest rates. The results of operations are also significantly influenced by
the level of non-interest expenses, such as employee salaries and benefits,
other income, such as loan-related fees and fees on deposit-related services,
and the Bank's provision for loan losses.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. Management's
strategy has been to try to achieve a high loan to asset ratio and a high
proportion of lower-costing, non-time deposit accounts in the deposit portfolio.
At December 31, 1996, the Bank's loans receivable, net, to assets ratio was
48.2% up from 46.0% at September 30, 1996. At December 31, 1996 and September
30, 1996, $62.3 million or 49.6% and $62.6 million or 49.5%, respectively of
total deposits were in non-time deposit accounts.
Financial Condition
Total assets decreased by $3.8 million or 2.5% to $149.8 million at
December 31, 1996 from $153.7 million at September 30, 1996, primarily due to
the payment of cashier checks which were issued and outstanding on September 30,
1996 to refund the over-subscriptions related to the Company's initial public
offering. Cashier checks are drawn upon deposit accounts at the Bank and are
classified as accrued expenses and other liabilities until ultimately paid
through the Bank's Federal Reserve correspondent account. The payment of these
cashier checks resulted in the decrease of accrued expenses and other
liabilities from $4.4 million at September 30, 1996 to $1.1 million at December
31, 1996, a decrease of $3.3 million or 75.1%.
5
The Company's deposits remained stable at $125.7 million at December 31,
1996 as compared to $126.5 million at September 30,1996. The change was
primarily due to checking acount activity during the quarter.
The Company's securities available for sale decreased $1.2 million or 7.2%
to $15.9 million at December 31, 1996 from $17.1 million at September 30, 1996,
primarily due to scheduled maturities or called securities. The Company's
investment securities held to maturity increased by $8.6 million or 24.5% to
$43.6 million at December 31, 1996, up from $35.0 million at September 30, 1996,
primarily because of the investment of the proceeds of the offering into higher
yielding instruments.
The Company's net loans receivable increased by $1.5 million or 2.1% to
$72.2 million at December 31,1996 up from $70.7 million at September 30, 1996
due to increased loan activity primarily in residential mortgage and home equity
loans.
Stockholders' equity increased by $326 thousand or 1.6% to $20.9 million
at December 31, 1996 from $20.6 million at September 30, 1996. The increase was
primarily the result of earnings for the period ended December 31, 1996. Equity
at December 31, 1996 was also effected by 2,770 common stock shares committed to
be released by the Company's ESOP.
Asset/Liability Management
The Bank'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 and increase
in periods of decreasing interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Bank manages its interest rate sensitivity and asset/liability
products through its asset/liability management committee. The asset/liability
management committee meets weekly to determine the rates of interest for loans
and deposits and consists of the President and Chief Executive Officer, the Vice
President and Chief Lending Officer, and the Treasurer and Chief Financial
Officer. Rates on deposits are primarily based on the Bank's need for funds and
on a review of rates offered by other financial institutions in the Bank's
market areas. Interest rates on loans are primarily based on the interest rates
offered by other financial institutions in the Bank's primary market areas as
well as the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including (i)
originating, for its portfolio, a large base of adjustable-rate residential
mortgage loans, and (ii) maintaining substantial levels of interest bearing term
deposits, federal funds, and securities with one to five year terms to maturity.
6
The Committee manages the interest rate sensitivity of the Bank through
the determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of its interest earning assets and to
match, as closely as possible, the maturities of interest earning assets with
interest bearing liabilities.
The experience of the Bank has been that net interest income declines with
increases in interest rates and that net interest income increases with
decreases in interest rates. Generally, during periods of increasing interest
rates, the Bank's interest rate sensitive liabilities would reprice faster than
its interest rate sensitive assets causing a decline in the Bank's interest rate
spread and margin. This would result from an increase in the Bank's cost of
funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield on earning assets would tend to reduce net interest income. The
Bank's net interest rate spread increased for the three months ended December
31, 1996 from the three months ended December 31, 1995 from 2.52% to 2.82%.
In times of decreasing interest rates, fixed rate assets could increase in
value and the lag in repricing of interest rate sensitive assets could be
expected to have a positive effect on the Bank's net interest income.
7
Average Balance Sheet, Interest Rates, and Yield
For the Three Months Ended December 31,
------------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(1) (1)
(Dollars in Thousands)
Interest-earning assets:
Federal funds $ 8,271 $ 110 5.28 % $ 6,045 $ 80 5.26 %
sold
Term deposits with Federal Home Loan Bank 7,803 107 5.44 1,600 23 5.72
of New York
Securities available for sale 16,802 235 5.55 2,313 32 5.50
Investment securities held to maturity 38,771 636 6.51 45,825 664 5.76
Federal Home Loan Bank of New York stock, 565 9 6.32 566 10 7.03
at cost
Loans 71,459 1,518 8.43 66,457 1,397 8.36
receivable, net
(2)
Total interest-earning assets 143,671 2,615 7.22 122,806 2,206 7.15
Non-interest 6,584 5,811
earning assets
---------- ---------
Total assets $ 150,255 $ 128,617
========== =========
Interest-bearing
liabilities:
Savings accounts $ 35,674 269 3.00 $ 33,938 257 3.00
NOW accounts 10,863 63 2.30 9,149 52 2.26
Money market 8,158 80 3.89 5,812 51 3.49
accounts
Time deposit 63,292 888 5.57 61,932 921 5.92
accounts
Escrow accounts 335 2 2.37 513 3 2.33
Federal Home Loan Bank of New York long 1,749 31 7.03 2,233 39 6.95
term borrowings
---------- --------- --------- --------- -------- ---------
Total interest-bearing liabilities 120,071 1,333 4.40 113,577 1,323 4.63
--------- --------- -------- ---------
Non-interest bearing deposits 7,732 6,212
Other non-interest bearing liabilities 1,714 839
Equity 20,738 7,989
---------- ---------
Total liabilities and equity $ 150,255 $ 128,617
========== =========
Net interest income $ 1,282 $ 883
========= ========
Interest rate 2.82 % 2.52 %
spread
========= =========
Net interest margin 3.54 % 2.86 %
========= =========
Ratio of average interest-earning assets to
average interest-bearing liabilities 119.66 108.13 %
========== =========
- ------------------------
(1) Annualized.
(2) Calculated net of allowance for loan losses. Includes non-accrual loans.
8
Rate/Volume Analysis
Three Months Ended December
31,
------------------------------
1996
vs.
1995
------------------------------
Increase
(Decrease)
Due to
-------------------
Total
Increase
Volume Rate (Decrease)
Interest income:
Federal funds sold $ 29,303 521 29,824
Term deposits with Federal Home Loan Bank of New York 84,769 (1,119) 83,650
Securities available for sale 202,500 383 202,883
Investment securities held to maturity (110,070) 81,577 (28,493)
Federal Home Loan Bank of New York stock, at cost (6) (377) (383)
Loans receivable, net 106,140 15,701 121,841
--------- -------- ---------
Total interest income 312,636 96,686 409,322
--------- -------- ---------
Interest expense:
Savings accounts 11,918 638 12,556
NOW accounts 9,665 1,057 10,722
Money market accounts 22,191 6,468 28,659
Time deposit accounts 20,068 (52,535) (32,467)
Escrow accounts (489) 92 (397)
Federal Home Loan Bank of New York long term (8,944) 525 (8,419)
borrowings
--------- -------- ---------
Total interest expense 54,409 (43,755) 10,654
--------- -------- ---------
Net change in net interest income $ 258,227 140,441 398,668
========= ======== =========
9
Comparison of Operating Results for the Three Months Ended December 31, 1996 and
1995.
Net Income. Net income increased by $119 thousand or 79.3% for the three
months ended December 31, 1996 to $270 thousand from $150 thousand for the three
months ended December 31, 1995. Net income for the three months ended December
31, 1996 increased primarily as a result of increased net interest income and
non-interest income, offset in part by an increase in non-interest expense and
provision for loan losses. Net interest income increased by $399 thousand or
45.1% to $1.3 million for the three months ended December 31, 1996 as compared
to $883 thousand for the three months ended December 31, 1995. Non-interest
income increased $32 thousand or 35.0% to $123 thousand for the three months
ended December 31, 1996 as compared to $91 thousand for the three months ended
December 31,1995. This increase was primarily the result of increases in
transaction account activity. Non-interest expense increased by $172 thousand or
23.4% to $909 thousand for the three months ended December 31, 1996 from $736
thousand for the three months ended December 31, 1995. This increase was
primarily due to increased compensation and benefit expenses as a result of
costs related to the Company's new ESOP plan, in addition to increased
professional fees as a result of being a public company, as well as additional
expenses associated with the opening of a new Operations Center. The provision
for loan losses increased $50 thousand to $80 thousand for the three months
ended December 31, 1996, primarily due to the loan growth noted above, and local
economic trends.
Net Interest Income. Net interest income increased by approximately $399
thousand or 45.1% to $1.3 million for the three months ended December 31, 1996.
The increase was primarily due to an increase of $20.9 million or 17% in the
average balance of interest earning assets, in addition to an increase in
interest rate spread from 2.52% for the three months ended December 31, 1995 to
2.82% for the three months ended December 31, 1996, offset by an increase in the
average balance of total interest-bearing liabilities of $6.5 million or 5.7%.
Interest earning assets primarily consist of loans receivable, federal
funds sold, securities (securities available for sale combined with investment
securities held to maturity), and interest bearing deposits in the FHLB of New
York. Interest bearing liabilities primarily consist of interest bearing
deposits and long term borrowings from the FHLB of New York.
The interest rate spread, which is the difference between the yield on
average interest earning assets and the percentage cost of average interest
bearing liabilities, increased to 2.82% for the three months ended December 31,
1996 from 2.52% for the three months ended December 31, 1995. The increase in
the interest rate spread is primarily the result of increases in the yields of
interest earning assets coupled with decreases in the cost of interest bearing
liabilities during this period.
Interest and Dividend Income. Interest and dividend income increased by
approximately $409 thousand or 18.6% to $2.6 million for the three months ended
December 31, 1996 from $2.2 million for the three months ended December 31,
1995. The increase was largely the result of an increase of $20.9 million or 17%
in the average balance of interest earning assets to $143.7 million for the
three months ended December 31, 1996 as compared to $122.8 million for the three
months ended December 31, 1995. The increase in the average balance of interest
earning assets consisted primarily of an increase in the average balance of
loans outstanding of approximately $5.0 million or 7.5%, an increase in the
average balance of total securities (both securities available for sale and
investment securities held to maturity) of $7.4 million or 15.4%, and an
increase in the average balance of federal funds sold of $2.2 million or 36.8%.
Also adding to the increase in interest and dividend income was a 7 basis point
increase in the average yield on all interest earning assets.
10
Interest income on total securities increased by $174 thousand or 25.1% to
$871 thousand for the three months ended December 31, 1996 from $696 thousand
for the three months ended December 31, 1995. The decrease in interest income on
investment securities held to maturity is primarily due to a decrease of $7.1
million or 15.4% in the average balance of investment securities held to
maturity for the three months ended December 31, 1996 reflecting the
reclassification of approximately $16.6 million of investment securities held to
maturity to securities available for sale in December 1995 in accordance with
the FASB's "Special Report", partially offset by a 75 basis point increase in
the average yield on investment securities held to maturity. Interest income on
securities available for sale increased $203 thousand to $235 thousand for the
three months ended December 31, 1996 from $32 thousand for the three months
ended December 31, 1995. This increase is primarily the result of an increase in
the average balance of securities available for sale of $14.5 million due to the
December 1995 reclassification, combined with a 5 basis point increase in the
average yield on these securities.
Interest and fees on loans increased $122 thousand or 8.7% to $1.5 million
for the three months ended December 31, 1996 from $1.4 million for the three
months ended December 31, 1995. This increase was primarily the result of an
increase in the average balance of loans receivable of $5.0 million combined
with a 7 basis point increase in the average yield on loans receivable.
The yield on the average balance of interest earning assets was 7.22% and
7.15% for the three months ended December 31, 1996 and 1995, respectively.
Interest Expense. Interest on deposits and escrow accounts increased by
approximately $19 thousand or 1.5% to $1.3 million for the three months ended
December 31, 1996 when compared to the three months ended December 31, 1995. The
increase in interest on deposit accounts and escrow accounts was substantially
due to the increase in interest expense related to savings, now, and money
market accounts offset by the decrease in interest expense related to time
deposit accounts. The interest expense on savings accounts was $269 thousand for
the three months ended December 31, 1996, compared to $257 thousand for the
three months December 31, 1995. The interest expense on now accounts was $63
thousand for the three months ended December 31, 1996, compared to $52 thousand
for the three months December 31, 1995. Likewise, interest expense on money
market accounts was $80 thousand for the three months ended December 31, 1996,
compared to $51 thousand for the three months December 31, 1995. However,
interest expense on time deposits was $888 thousand for the three months ended
December 31, 1996, compared to $921 thousand for the three months December 31,
1995. This decrease was due primarily to a decrease in the average cost for the
current period as compared to the prior period, 5.57% and 5.92%, respectively.
Interest on long term borrowings, which is a less significant portion of
interest expense, decreased by $8 thousand or 21.4% to $31 thousand for the
three months ended December 31, 1996 when compared to the three months ended
December 31, 1995, as the average amount of borrowing outstanding decreased by
$484 thousand or 21.7% partially offset by an increase in the rate paid by the
Company of 8 basis points. The Company uses FHLB advances as a funding source
and generally uses long term borrowings to supplement deposits which are the
Company's primary source of funds.
11
Provision for Loan Losses. The Company's management monitors and adjusts
its allowance for loan losses based upon its analysis of the loan portfolio. The
allowance is increased by a charge to the provision for loan losses, the amount
of which depends upon an analysis of the changing risks inherent in the Bank's
loan portfolio. The Bank has historically experienced a limited amount of loan
charge-offs. However, there can be no assurance that additions to the allowance
for loan losses will not be required in future periods or that actual losses
will not exceed estimated amounts. The Company's ratio of non-performing loans
to total assets was 0.42% and 0.51% at December 31, 1996 and September 30, 1996,
respectively. The provision for loan losses for the three months ended December
31, 1996 increased $50 thousand to $80 thousand from $30 thousand for the three
months ended December 31, 1995. The increase was primarily due to the growth in
the loan portfolio discussed above, as well as local economic trends.
Non-Interest Income. Non-interest income increased to $123 thousand during
the three months ended December 31, 1996 from $91 thousand for the three months
ended December 31, 1995. The increase in non-interest income is primarily
attributable to increased service charges on deposit accounts of $22 thousand
for the three months ended December 31, 1996 when compared to the three months
ended December 31, 1995. The increase in service charges on deposit accounts is
primarily the result of increased activity in transaction accounts during the
quarter.
Non-Interest Expense. Non-interest expense increased $172 thousand or
23.4% to $909 thousand for the three months ended December 31, 1996 from $736
thousand for the three months ended December 31, 1995. The increase in
compensation and benefits expense of $46 thousand or 14.1% was primarily the
result of costs related to the Company's new ESOP, as well as general cost of
living and merit raises to employees. Occupancy and equipment expenses also
increased by $22 thousand or 19.9% due primarily to the new operations center.
FDIC deposit insurance premiums also decreased by $8 thousand or 12.3% due
primarily to reduced deposit insurance premium rates for the quarter ended
December 31, 1996. The reduced rates are the result of the capitalization of the
SAIF through a one-time special assessment during September 1996. Management
expects that the premiums paid for FDIC deposit insurance will be reduced
further in future quarters.
Other expenses increased $64.9 thousand to $179.1 thousand for the quarter
ended December 31, 1996 when compared the the same quarter of 1995. The increase
is primarily attributed to Delaware franchise taxes, write off of certain items
deemed by management to be uncollectible, and general expenses related to being
a public company.
Management believes that compensation and benefits expenses will increase
in future periods as a result of the costs related to the Company's new ESOP.
Furthermore, the Company expects that certain operating expenses will increase
as a result of the costs associated with being a public company, as noted above.
12
Provision for Income Taxes. Provision for income taxes increased by
approximately $89 thousand or 153.4% to $147 thousand for the three months ended
December 31, 1996 from $58,000 for the three months ended December 31, 1995. The
increase was primarily the result of the increase in income before income tax
expense.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain, for each calendar
month, a daily average balance of cash and eligible liquid investments of not
less than 5% of the average daily balance of its net withdrawable savings and
borrowings (due in one year or less) during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Bank's average liquidity ratio was 45.18% and
47.02% at December 31, 1996 and September 30, 1996, respectively.
The Company's sources of liquidity include cash flows from operations,
principal and interest payments on loans, maturities of securities, deposit
inflows, and borrowings from the FHLB of New York. During the quarters ended
December 31, 1996 and 1995, the primary source of funds was cash flows from
deposit growth. On September 30, 1996, the Company also had significant cash
flows from its initial public offering on that date which provided investable
cash flows for the quarter ended December 31, 1996.
While maturities and scheduled amortization of loans and securities are,
in general, a predictable source of funds, deposit flows and prepayments on
loans and securities are greatly infuenced by general interest rates, economic
conditions and competition. In addition, the Bank invests excess funds in
overnight deposits which provide liquidity to meet lending requirements.
In addition to deposit growth, from time-to-time the Company borrows funds
from the FHLB of New York to supplement its cash flows. At December 31, 1996 and
September 30, 1996, the Company had outstanding borrowings from the FHLB of $1.7
million and $1.8 million, respectively.
As of December 31, 1996 and September 30, 1996, the Company had $15.9
million and $17.1 million of securities, respectively, classified as available
for sale and $43.6 million and $35.0 million of investment securities,
respectively, classified as held to maturity. The liquidity of the securities
available for sale portfolio provides the Bank with additional potential cash
flows to meet loan growth and deposit flows.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Management monitors projected
liquidity needs and determines the level desirable, based in part on the
Company's commitments to make loans and management's assessment of the Company's
ability to generate funds.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At December 31, 1996, the Bank's capital exceeded each of
the regulatory capital requirements of the OTS. The Bank is "well capitalized"
at December 31, 1996 according to regulatory definition. At December 31, 1996,
the Company's consolidated tangible and core capital levels were both $20.9
million (13.96% of total adjusted assets) and its total risk-based capital level
was $21.7 million (34.06% of total risk-weighted assets). The minimum regulatory
capital ratio requirements of the Bank are 1.5% for tangible capital, 3.0% for
core capital, and 8.0% for risk based capital.
13
Effect of Inflation and Changing Prices
The Company's consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
14
Key Operating Ratios
The table below sets forth certain performance and financial ratios of the
Company for the periods indicated:
At or for the At or for the
three months ended year ended
December 31, 1996 September 30, 1996
Performance Ratios (1):
Earnings per share $ 0.20 N/A
Return on average assets (annualized) 0.71% 0.16%
Return on average shareholders' equity 5.16% 2.55%
(annualized)
Net interest rate spread 2.82% 2.69%
Net interest margin 3.54% 3.02%
Efficiency ratio (2) 64.63% 88.03%
Expense ratio (3) 2.40% 2.79%
Asset Quality Ratios
Non-performing loans to total assets 0.42% 0.51%
Non-performing loans to total loans 0.86% 1.09%
Allowance for loan losses to 152.02% 112.40%
non-performing loans
Allowance for loan losses to total loans 1.31% 1.23%
receivable
Non-performing assets to total assets 0.42% 0.51%
Capital Ratios (4):
Equity to total assets at period end 13.96% 13.40%
Average equity to average total assets 13.80% 6.21%
Tangible capital 13.96% 13.41%
Core (Tier I) capital 13.96% 13.41%
Total risk-based capital 34.06% 33.54%
Book value per share (5) $ 15.53 $ 15.32
(1) Performance ratios for the year ended September 30, 1996 were significantly
effected by the SAIF one-time special assessment which amounted to approximately
$702 thousand before applicable taxes.
(2) Total non-interest expense, excluding other real estate owned expense, as a
percentage of net interest income and total non-interest income, excluding net
securities transactions.
(3) Total non-interest expense, excluding other real estate expense, as a
percentage of average total assets.
(4) Capital ratios are presented for the consolidated Company.
(5) Does not include the effect of 108,010 ESOP shares and 110,780 ESOP shares
at December 31, 1996 and September 30, 1996, respectively.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Exhibit
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27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AFSALA BANCORP, INC.
Date: February 11, 1997 By: /s/ John M. Lisicki
-------------------
John M. Lisicki
President (principal executive officer)
Date: February 11, 1997 /s/ James J. Alescio
--------------------
James J. Alescio
Treasurer (principal financial officer)