UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended December 31, 1997 Commission File No. 0-21113
AFSALA BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1793890
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
161 CHURCH STREET, AMSTERDAM, NY
--------------------------------
12010 (Address of principal executive offices)
Registrant's telephone number, including area code: (518) 842-5700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares outstanding
Class of Common Stock as of February 9, 1998
--------------------- ------------------------------
Common Stock, Par $.10 1,378,440
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
AFSALA BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
December 31, 1997
INDEX
Part I CONSOLIDATED FINANCIAL
INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
(unaudited) and September 30, 1997 ................. 1
Consolidated Statements of Income for the three
months ended December 31, 1997 and 1996 (Unaudited) ............ 2
Consolidated Statements of Cash Flows for the three
months ended December 31, 1997 and 1996 (Unaudited) ............ 3
Notes to unaudited consolidated interim financial statements.... 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................ 6
Part II OTHER INFORMATION
Item 1. Legal
Proceedings................................................................. 17
Item 2. Changes in
Securities.................................................................. 17
Item 3. Defaults Upon Senior
Securities.................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 5. Other
Information................................................................. 17
Item 6. Exhibits and Reports on Form 8-K. .............................. 17
Signatures.................................................................. 18
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
Assets 1997 1997
- ------ -------------- -------------
Cash and due from banks $ 4,774,251 $ 5,127,320
Federal funds sold 10,600,000 2,675,000
------------- -------------
Total cash and cash equivalents 15,374,251 7,802,320
------------- -------------
Securities available for sale, at fair value 37,144,966 37,705,373
Investment securities held to maturity 27,885,715 35,263,826
Federal Home Loan Bank of New York stock, at cost 565,300 565,300
Loans receivable 77,253,519 76,927,350
Less: Allowance for loan losses (1,127,169) (1,108,080)
------------- -------------
Net loans receivable 76,126,350 75,819,270
------------- -------------
Accrued interest receivable 1,456,095 1,405,687
Premises and equipment, net 1,664,515 1,659,444
Other assets 190,518 186,066
------------- -------------
Total assets $ 160,407,710 $ 160,407,286
============= =============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits 136,083,414 135,316,322
Federal Home Loan Bank of New York long term
borrowings 1,811,614 1,415,625
Escrow accounts 506,622 266,656
Accrued expenses and other liabilities 1,919,592 2,789,562
------------- -------------
Total liabilities 140,321,242 139,788,165
------------- -------------
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 3,000,000 shares; -- --
1,454,750 issued 145,475 145,475
Additional paid-in capital 13,525,263 13,465,092
Retained earnings, substantially restricted 9,286,399 9,048,824
Common stock acquired by ESOP (969,325) (1,080,105)
Unearned Restricted Stock Plan (693,916) (733,194)
Treasury stock, at cost (1,285,791) (238,125)
Net unrealized gain on securities available for sale, net of tax 78,363 11,154
------------- -------------
Total stockholders' equity 20,086,468 20,619,121
------------- -------------
Total liabilities and stockholders' equity $ 160,407,710 $ 160,407,286
============= =============
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, 1997 and 1996
(Unaudited)
1997 1996
---------- ----------
Interest and dividend income:
Interest and fees on loans $1,564,629 $1,518,654
Interest on federal funds sold 54,114 110,052
Interest on FHLB term deposits -- 106,888
Interest on securities available for sale 637,370 234,755
Interest on investment securities 518,297 635,758
Dividends on Federal Home Loan Bank of NY stock 10,045 9,393
---------- ----------
Total interest and dividend income 2,784,455 2,615,500
---------- ----------
Interest expense:
Deposits and escrow accounts 1,429,344 1,302,506
Federal Home Loan Bank of New York long term
borrowings 29,425 30,897
---------- ----------
Total interest expense 1,458,769 1,333,403
---------- ----------
Net interest income 1,325,686 1,282,097
Provision for loan losses 35,000 80,000
---------- ----------
Net interest income after provision for loan losses 1,290,686 1,202,097
---------- ----------
Non-interest income:
Service charges on deposit accounts 89,733 110,338
Other 2,803 13,011
---------- ----------
Total non-interest income 92,536 123,349
---------- ----------
Non-interest expenses:
Compensation and benefits 462,536 371,803
Occupancy and equipment 123,562 133,438
FDIC deposit insurance premium 21,428 55,317
Data processing fees 71,206 69,967
Professional services fees 20,481 58,750
Advertising 17,132 14,389
Supplies 28,997 25,838
Other 158,645 179,113
---------- ----------
Total non-interest expenses 903,987 908,615
---------- ----------
Income before income tax expense 479,235 416,831
Income tax expense 168,325 147,231
---------- ----------
Net income $ 310,910 $ 269,600
========== ==========
Earnings per share:
Basic $ 0.25 $ 0.20
========== ==========
Diluted $ 0.24 $ 0.20
========== ==========
See accompanying notes to unaudited consolidated interim financial statements.
- 2 -
AFSALA BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the three months ended December 31, 1997 and 1996
(Unaudited)
1997 1996
----------- ------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 310,910 $ 269,600
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 40,160 51,837
Provision for loan losses 35,000 80,000
Allocation of ESOP stock 170,951 32,406
RSP compensation expense 39,278 --
Increase in accrued interest receivable (50,408) (106,009)
(Increase) decrease in other assets (4,452) 259,327
Increase (decrease) in accrued expenses and other liabilities 241,804 (3,351,517)
----------- ------------
Total adjustments 472,333 (3,033,956)
----------- ------------
Net cash provided by (used in) operating activities 783,243 (2,764,356)
----------- ------------
Cash flows from investing activities:
Proceeds from the maturity and call of securities
available for sale 6,262,238 1,777,713
Purchases of securities available for sale (6,600,000) (500,000)
Proceeds from the maturity and call of investment securities 7,378,111 2,439,094
Purchases of investment securities -- (10,996,844)
Net loans made to customers (342,080) (1,592,478)
Capital expenditures (45,231) (21,972)
----------- ------------
Net cash provided by (used in) investing activities 6,653,038 (8,894,487)
----------- ------------
Cash flows from financing activities:
Increase (decrease) in deposits 767,092 (794,485)
Borrowing from the Federal Home Loan Bank 500,000 --
Repayments on long term borrowings from the
Federal Home Loan Bank (104,011) (109,375)
Increase in escrow accounts 239,966 86,704
Purchase of treasury stock (1,194,062) --
Dividends paid (73,335) --
----------- ------------
Net cash provided by (used in) financing activities 135,650 (817,156)
----------- ------------
Net increase (decrease) in cash and cash equivalents 7,571,931 (12,475,999)
Cash and cash equivalents at beginning of period 7,802,320 27,016,392
----------- ------------
Cash and cash equivalents at end of period $ 15,374,251 $ 14,540,393
============ ============
Additional Disclosures Relative to Cash Flows:
Interest paid $ 1,456,018 $ 1,329,364
============ ============
Taxes paid $ 59,260 $ 134,130
============ ============
Supplemental schedule of non-cash investing and financing activities:
Change in unrealized gain on securities available for sale, net of tax $ 67,209 $ 23,810
============ ============
Net decrease in amounts due to broker from purchases of
securities available for sale $ 1,000,000 $ --
============ ============
Decrease in amounts due to broker from purchases of treasury stock $ 146,396 $ --
============ ============
See accompanying notes to unaudited consolidated interim financial statements.
-3 -
AFSALA BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 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, 1997, the Consolidated Statements of Income for the
three months ended December 31, 1997 and 1996, and the Consolidated Statements
of Cash Flows for the three months ended December 31, 1997 and 1996. The results
of operations for the three months ended December 31, 1997, are not necessarily
indicative of results that may be expected for the entire year ending September
30, 1998. The accompanying unaudited consolidated interim financial statements
should be read in conjunction with AFSALA Bancorp, Inc.'s September 30, 1997
consolidated financial statements, including the notes thereto, which are
included in AFSALA Bancorp, Inc's 1997 Annual Report on Form 10-KSB.
NOTE 2. Earnings Per Share
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share (ESP).
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 EPS on the face of the income statement for all entities
with complex capital structures and specifies additional disclosure
requirements.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for 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 EPS 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 the Company's stock options).
All prior period EPS data has been restated to conform to the provisions of this
Statement. The adoption of this Statement did not have a material effect on the
Company's financial position or results of operations.
-4 -
The following table provides the calculation of basic and diluted EPS:
For the Three Months Ended December 31,
-----------------------------------------------------------------------------------
1997 1996
--------------------------------------------- -----------------------------------
Weighted Per- Share Weighted Per- Share
Income Avg. Shares Amount Income Avg. Shares Amount
------ ----------- ------ ------ ----------- ------
Basic EPS
Net income available to
common stockholders $ 310,910 1,233,920 $ 0.25 $ 269,600 1,344,920 $ 0.20
========== ==========
Effect of Dilutive Securities
Stock options 34,247 -
Unvested restricted stock awards 14,346 -
Diluted EPS $ 310,910 1,282,513 $ 0.24 $ 269,600 1,344,000 $ 0.20
============ =========== ========== ========= =========== ==========
NOTE 3. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (`FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130), which establishes standards for reporting and display of
comprehensive income and its compenents in financial statements. Statement 130
states that comprehensive income includes reported net income of a company,
adjusted for items that are currently accounted for as direct entries to equity,
such as the net unrealized gain or loss on securities available for sale,
foreign currency items, and minimum pension liability adjustments. This
statement is effective for both interim and annual periods beginning after
December 15, 1997. As required, the Company will adopt Statement 130 in the
second quarter of fiscal 1998, and will report and display comprehensive income
in accordance with the new statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(Statement 131), which establishes standards for reporting by public companies
about operating segments of their business. Statement 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 anticipate that the adoption of this
statement will have a material effect on the Company's consolidated financial
statements.
-5 -
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 aquire 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 and dividend 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 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 loans to assets ratio and a high proportion of
lower-costing, non-time deposit accounts in the deposit portfolio. At December
31, 1997, the Bank's net loans receivable to assets ratio was 47.5%, up from
47.3% at September 30, 1997. At December 31, 1997, $66.7 million, or 49.0%, of
total deposits were in non-time deposits accounts, as compared to $65.6 million,
or 48.5%, at September 30, 1997.
- 6 -
Consolidated Financial Condition
Total assets remained consistent at $160.4 million at both December 31, 1997 and
September 30, 1997. Cash and cash equivalents increased $7.6 million or 97.0% to
$15.4 million at December 31, 1997 from $7.8 million at September 30, 1997.
Conversely, investment securities held to maturity decreased $7.4 million or
20.9% to $27.9 million at December 31, 1997 from $35.3 million at September 30,
1997. Likewise, the Company's securities available for sale decreased $560
thousand or 1.5% to $37.1 million at December 31, 1997 from $37.7 million at
September 30, 1997. These shifts were primarily the result of the re-investment
of funds from maturities and calls of securities into federal fund sold. The
Company's net loans receivable increased by $307 thousand to $76.1 million at
December 31, 1997 up from $75.8 million at September 30, 1997. The increase in
net loans receivable was primarily in residential mortgage and home equity
loans.
The Company's deposits increased by $767 thousand to $136.1 million at December
31, 1997 from $135.3 million at September 30, 1997. In addition, Federal Home
Loan Bank of New York long term borrowings increased $396 thousand or 28.0% to
$1.8 million at December 31, 1997 from $1.4 million at September 30, 1997,
primarily due to additional borrowings in the amount of $500 thousand made from
the Federal Home Loan Bank. Offsetting these increases was a decrease in accrued
expenses and other liabilities of $870 thousand or 31.2% to $1.9 million at
December 31, 1997 from $2.8 million at September 30, 1997 resulting primarily
from the payment of amounts due to brokers from purchases of securities
outstanding on September 30, 1997.
Stockholders' equity decreased by $533 thousand or 2.6% to $20.1 million at
December 31, 1997 from $20.6 million at September 30, 1997. The decrease was
primarily the result of the purchases of treasury stock, offset by net income
for the three months ended December 31, 1997. In addition, 11,078 shares of
common stock were committed to be released by the Company's ESOP as of December
31, 1997, which increased equity by $171 thousand.
- 7 -
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 needs 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 federal funds and securities with one to
five year terms to maturity.
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 interest rate spread decreased for the three months ended December
31,1997 from the three months ended December 31, 1996 from 2.82% to 2.80%.
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.
- 8-
AFSALA BANCORP, INC. AND SUBSIDIARY
Average Balance Sheet, Interest Rates and Yield
(Unaudited)
For the Three Months Ended December 31,
--------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- --------------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Cost(1) Balance Paid Cost(1)
------- ---- ------- ------- ---- -------
(Dollars in Thousands)
Interest-earning assets:
Federal funds sold $ 4,216 54 5.08% $ 8,271 110 5.28%
Term deposits FHLB of NY - - - 7,803 107 5.44
Securities available for sale (2) 38,936 637 6.49 16,802 235 5.55
Investment securities held to maturity 32,034 518 6.42 38,771 636 6.51
FHLB of NY stock 565 10 7.02 565 9 6.32
Net loans receivable (3) 75,672 1,565 8.21 71,459 1,518 8.43
-------------- ------ -------- ---------- ------- -------
Total interest-earning assets 151,423 2,784 7.29 143,671 2,615 7.22
----- -------- ------- -------
Non-interest earning assets 7,177 6,584
-------------- ----------
Total assets $ 158,600 $ 150,255
============== ==========
Interest-bearing liabilities:
Savings accounts $ 35,738 270 3.00 $ 35,674 269 3.00
NOW accounts 11,952 69 2.29 10,863 63 2.30
Money market accounts 10,438 110 4.18 8,158 80 3.89
Time deposit accounts 68,770 978 5.64 63,292 888 5.57
Escrow accounts 340 2 2.33 335 2 2.37
FHLB of NY
long term borrowings 1,697 29 6.78 1,749 31 7.03
-------------- ---------- -------- ---------- ------- ------
Total interest-bearing liabilities 128,935 1,458 4.49 120,071 1,333 4.40
---------- ------- ------- ------
Non-interest bearing deposits 8,316 7,732
Other non-interest bearing liabilities 1,266 1,714
Equity 20 083 20,738
-------------- -----------
Total liabilities and equity $ 158,600 $ 150,255
============== ===========
Net interest income $ 1,326 $ 1,282
========== =======
Interest rate spread 2.80% 2.82%
======= ======
Net interest margin 3.47% 3.54%
======= ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities 117.44% 119.66%
============== ===========
(1) Annualized
(2) Average securities available for sale are included at approximate fair
value. The adjustment to approximate fair value is not considered
significant.
(3) Calculated net of allowance for loan losses. Includes non-accrual loans.
- 9 -
AFSALA BANCORP, INC. AND SUBSIDIARY
RATE/ VOLUME ANALYSIS
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,1997
COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1996
------------------------------------
INCREASE (DECREASE)
------------------------------------
DUE TO
------------------------
VOLUME RATE NET
------ ---- ---
Interest and dividend income:
Federal funds sold $ (51,926) (4,012) (55,938)
Term deposits with FHLB of NY (106,888) -- (106,888)
Securities available for sale 356,747 45,868 402,615
Investment securities held to maturity (108,804) (8,657) (117,461)
FHLB of NY stock -- 652 652
Net loans receivable 86,805 (40,830) 45,975
--------- --------- ---------
Total interest and dividend income 175,934 (6,979) 168,955
--------- --------- ---------
Interest expense:
Savings accounts 1,214 -- 1,214
NOW accounts 6,300 (274) 6,026
Money market accounts 23,842 6,360 30,202
Time deposit accounts 79,438 9,869 89,307
Escrow accounts 123 (34) 89
FHLB of NY long term borrowings (688) (804) (1,472)
--------- --------- ---------
Total interest expense 110,249 15,117 125,366
--------- --------- ---------
Net change in net interest income $ 65,685 $ (22,096) $ 43,589
========= ========= =========
- 10 -
Comparison of Operating Results for the Three Months Ended December 31, 1997 and
1996.
Net Income. Net income increased by $41 thousand or 15.3% for the three months
ended December 31, 1997 to $311 thousand from $270 thousand for the three months
ended December 31, 1996. Net income for the three months ended December 31, 1997
increased primarily as a result of increased net interest income and decreased
non-interest expenses and provision for loan losses offset in part by decreased
non-interest income and increased income tax expense. Net interest income
increased by $44 thousand or 3.4% to $1.3 million for the three months ended
December 31, 1997. Non-interest expenses and provision for loan losses decreased
$5 thousand and $45 thousand to $904 thousand and $35 thousand, respectively,
for the three months ended December 31, 1997. In addition, non-interest income
decreased $31 thousand or 25.0% to $93 thousand and income tax expense increased
$21 thousand or 14.3% to $168 thousand for the quarter ended December 31, 1997.
Net Interest Income. Net interest income increased by approximately $44 thousand
or 3.4% to $1.3 million for the three months ended December 31, 1997. The
increase was primarily due to an increase of $7.8 million or 5.4% in the average
balance of interest-earning assets, offset in part by an increase in the average
balance of total interest-bearing liabilities of $8.9 million or 7.4% and a
decrease in the interest rate spread from 2.82% for the three months ended
December 31, 1996 to 2.80% for the three months ended December 31, 1997.
Interest-earning assets primarily consist of loans receivable, federal funds
sold, and securities (securities available for sale combined with investment
securities held to maturity). 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 cost of average interest-bearing liabilities,
decreased to 2.80% for the three months ended December 31, 1997 from 2.82% for
the three months ended December 31, 1996. The decrease in the interest rate
spread is primarily the result of increases in the cost of interest- bearing
liabilities being greater than the increases in the yields on interest earning
assets during these periods.
Interest and Dividend Income. Interest and dividend income increased by
approximately $169 thousand or 6.5% to $2.8 million for the three months ended
December 31, 1997 from $2.6 million for the three months ended December 31,
1996. The increase was largely the result of an increase of $7.8 million or 5.4%
in the average balance of interest earning assets to $151.4 million for the
three months ended December 31, 1997 as compared to $143.7 million for the three
months ended December 31, 1996. The increase in the average balance of interest
earning assets consisted primarily of an increase in the average balance of
total securities (both securities available for sale and investment securities
held to maturity) of $15.4 million or 27.7%, and an increase in the average
balance of net loans receivable of $4.2 million or 5.9%. These increases were
partially offset by decreases in the average balance of federal funds sold of
$4.1 million, or 49.0%, and Term deposits with the FHLB of NY of $7.8 million,
or 100.0%. 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.
-11 -
Interest income on securities available for sale increased $403 thousand or
171.5% to $637 thousand for the three months ended December 31, 1997 from $235
thousand for the same period of the previous year. This increase is primarily
the result of an increase in the average balance of securities available for
sale of $22.1 million combined with a 94 basis point increase in the average
yield on these securities. Interest income on investment securities held to
maturity decreased $117 thousand or 18.5% to $518 thousand for the three months
ended December 31, 1997 from $636 thousand for three months ended December 31,
1996. This decrease is primarily the result of a decrease in the average balance
of investment securities held to maturity of $6.7 million combined with a 9
basis point decrease in the average yield on these securities.
Interest and fees on loans increased $46 thousand or 3.0% to $1.6 million for
the three months ended December 31, 1997 from $1.5 million for the three months
ended December 31, 1996. This increase was primarily the result of an increase
in the average balance of net loans receivable of $4.2 million, offset by a 22
basis point decrease in the average yield.
The yield on the average balance of interest earning assets was 7.29% and 7.22%
for the three months ended December 31, 1997 and 1996, respectively.
Interest Expense. Interest on deposits and escrow accounts increased by $127
thousand for the three months ended December 31, 1997 compared to the three
months ended December 31, 1996. This increase in interest on deposits and escrow
accounts was primarily due to the increase in interest expense related to NOW,
money market, and time deposit accounts. Interest expense on NOW accounts was
$69 thousand for the three months ended December 31, 1997, compared to $63
thousand for the three months December 31, 1996. Likewise, interest expense on
money market and time deposit accounts was $110 thousand and $978 thousand,
respectively, for the three months ended December 31, 1997, compared to $80
thousand and $888 thousand, respectively, for the three months December 31,
1996. These increases were due primarily to increases in the average balances of
the respective deposit types.
Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased approximately $1 thousand or 4.8% to $29 thousand
for the three months ended December 31, 1997. This decrease was primarily due to
a decrease of 25 basis points in the average cost of borrowings offset by a $52
thousand or 3.0% decrease in the average amount of borrowings outstanding during
the comparable periods. 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.
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 loans was 0.57% and
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0.61% at December 31, 1997 and September 30, 1997, respectively. The provision
for loan losses for the three months ended December 31, 1997 decreased to $35
thousand from $80 thousand for the three months ended December 31, 1996.
Non-Interest Income. Total non-interest income decreased during the three months
ended December 31, 1997 to $93 thousand compared with $123 thousand for the
three months ended December 31, 1996. Decreases in service charges on deposit
accounts of $21 thousand and other non-interest income of $10 thousand comprised
the decrease from the previous period.
Non-Interest Expenses. Total non-interest expenses decreased $5 thousand to $904
thousand for the three months ended December 31, 1997 from $909 thousand for the
three months ended December 31, 1996.
Compensation and benefits expense increased by $91 thousand or 24.4% due
primarily to costs related to the Company's ESOP, the establishment of the
Restricted Stock Plan in May 1997, the opening of a new branch in May 1997, as
well as general cost of living and merit raises to employees. Management
believes that compensation and benefits expenses will increase in future periods
as a result of the costs related to the Company's ESOP as well as the Restricted
Stock Plan.
FDIC deposit insurance premiums decreased by $34 thousand or 61.3% due primarily
to reduced deposit insurance premium rates for the quarter ended December 31,
1997.
Professional service fees for the three months ended December 31, 1997,
decreased by $38 thousand or 65.1% from $59 thousand for the three months ended
December 31, 1996, as a result of additional legal and accounting costs incurred
during the three months ended December 31, 1996 associated with being a
newly-formed company.
Other non-interest expenses decreased $20 thousand or 11.4% from the quarter
ended December 31, 1996 to the quarter ended December 31, 1997, primarily as a
result of the write off of certain items deemed uncollectible by management
during the previous quarter.
Income Tax Expense. Income tax expense increased by $21 thousand or 14.3% to
$168 thousand for the three months ended December 31, 1997 from $147 thousand
for the three months ended December 31, 1996. The increase was primarily the
result of the increase in income before income tax expense.
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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 46.74% and 45.18% at
December 31, 1997 and September 30, 1997, 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,
1997 and 1996, the primary source of funds was cash flows from deposit inflows.
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 influenced 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 inflows, from time to time the Company borrows funds from
the FHLB of New York to supplement its cash flows. At December 31, 1997 and
September 30, 1997, the Company had outstanding borrowings from the FHLB of $1.8
million and $1.4 million, respectively.
As of December 31, 1997 and September 30, 1997, the Company had $37.1 million
and $37.7 million of securities, respectively, classified as available for sale
and $27.9 million and $35.3 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 outflows.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the saving 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.
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The Bank is subject to federal regulations that impose certain minimum capital
requirements. At December 31, 1997, the Bank's capital exceeded each of the
regulatory capital requirements of the OTS. The Bank is "well capitalized" at
December 31, 1997 according to regulatory definition. At December 31, 1997, the
Company's consolidated tangible and core capital levels were both $20.0 million
(12.48% of total adjusted assets) and its total risk-based capital level was
$20.1 million (29.70% 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 total risk-based capital.
During fiscal 1997, the stockholders approved the Restricted Stock Plan, which
allows for a stock repurchase of 4% of the Company's outstanding common stock.
Under this plan, 58,190 shares were repurchased by the Company in open-market
transactions at a total cost of $939 thousand or $16.14 per share. In addition,
the Company as been approved by the OTS to repurchase up to 10% of its common
stock to be used for general corporate purposes. As of December 31, 1997, 71,310
shares had been repurchased by the Company in open-market transactions at a
total cost of $1.3 million or $18.03 per share.
Impact of the Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Currently
management does not expect a significant impact on the Company's earnings.
Effect of Inflation and Changing Prices
The Company's unaudited consolidated interim 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.
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AFSALA BANCORP, INC. AND SUBSIDIARY
Key Operating Ratios
(Unaudited)
The table below sets forth certain performance and financial ratios of the
Company for the periods indicated:
At or for the three At or for the
months ended year ended
December 31,1997 September 30, 1997
Performance Ratios:
Earnings per share:
Basic $ 0.25 $ 0.89
Diluted 0.24 0.88
Return on average assets (annualized) 0.78% 0.77%
Return on average stockholders' equity (annualized) 6.14% 5.65%
Interest rate spread 2.80% 2.89%
Net interest margin 3.47% 3.57%
Efficiency ratio (annualized) (1) 63.56% 63.21%
Expense ratio (annualized) (2) 2.25% 2.32%
Asset Quality Ratios:
Non-performing loans to total loans 0.57% 0.61%
Allowance for loan losses to non-performing loans 254.04% 236.09%
Allowance for loan losses to total loans receivable 1.46% 1.44%
Non-performing assets to total assets 0.30% 0.31%
Capital Ratios (3):
Stockholders' equity to total assets at period end 12.52% 12.85%
Average stockholders' equity to average total assets 12.66% 13.68%
Tangible capital 12.48% 13.00%
Core (Tier I) capital 12.48% 13.00%
Total risk-based capital 29.70% 30.90%
Book value per share (4) $ 16.35 $ 16.19
(1) Total non-interest expenses, excluding other real estate owned expense, as
a percentage of net interest income and total non-interest income,
excluding net securities transactions.
(2) Total non-interest expenses, excluding other real estate owned expense, as
a percentage average total assets.
(3) Capital ratios are presented for the consolidated Company.
(4) Excludes unallocated ESOP shares and unvested Restricted Stock Plan shares.
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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
None
(b) Reports on Form 8-K
A form 8-K (item 5&7) dated November 28, 1997 was filed
during the quarter.
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SIGNATURES
- ----------
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 9, 1998 BY: /s/ John M. Lisicki
-------------------
John M. Lisicki
President (principal executive officer)
DATE: February 9, 1998 BY: /s/ James J. Alescio
--------------------
James J Alescio
Treasurer (principal financial officer)
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