UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to ______________________
Commission file number: 0-27036
AMBANC HOLDING CO., INC.
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 14-1783770
_____________________________________ _____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 Division Street, Amsterdam, New York 12010-4303
_______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518)842-7200
___________________________
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the closing bid and
asked prices of such stock on the Nasdaq National Market as of April 11, 1997,
was $57,539,688. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
As of April 11, 1997, there were issued and outstanding 4,392,023 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the year ended December 31, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders for the year ended December 31, 1996.
PART I
Item 1. Description of Business
General
Ambanc Holding Co., Inc. (the "Company") was formed as a Delaware
corporation in June 1995 to act as the holding company for Amsterdam Savings
Bank, FSB (the "Bank") upon the completion of the Bank's conversion from mutual
to stock form (the "Conversion"). The Company received approval from the Office
of Thrift Supervision (the "OTS") to acquire all of the common stock of the Bank
to be outstanding upon completion of the Conversion. The Conversion was
completed on December 26, 1995. The Company's Common Stock trades on The Nasdaq
Stock Market under the symbol "AHCI". All references to the Company, unless
otherwise indicated, at or before December 26, 1995 refer to the Bank.
At December 31, 1996, the Company had $ 472.4 million of assets and
stockholders' equity of $61.5 million (or 13.0%) of total assets.
The Bank, organized in 1886, is a federally chartered savings bank
headquartered in Amsterdam, New York. The principal business of the Bank
consists of attracting retail deposits from the general public and using those
funds, together with borrowings and other funds, to originate primarily one- to
four-family residential mortgage loans, home equity loans and consumer loans,
and to a lesser extent, commercial and multi-family real estate, and commercial
business loans in the Bank's primary market area. See "-Market Area." The Bank
also invests in mortgage-backed securities, U.S. Government and agency
obligations and other permissible investments. Revenues are derived primarily
from interest on loans, mortgage-backed and related securities and investments.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank is a member of the Bank Insurance Fund (the
"BIF"), which is administered by the Federal Deposit Insurance Corporation (the
"FDIC"). Its deposits are insured up to applicable limits by the FDIC, which
insurance is backed by the full faith and credit of the United States
Government. The Bank primarily solicits deposits in its primary market area and
currently does not have brokered deposits. The Bank is a member of the Federal
Home Loan Bank (the "FHLB") System.
The Company's and the Bank's executive office is located at 11 Division
Street, Amsterdam, New York, 12010-4303, and its telephone number is (518)
842-7200.
When used in this annual Report on Form 10-K, 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 the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition,
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
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 result 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.
Market Area
The Company's primary market area is comprised of Albany, Fulton,
Montgomery, Saratoga and Schenectady Counties in New York, which are serviced
through the Bank's main office, eight other banking offices and its operations
center. The Company's primary market area consists principally of suburban and
rural communities with manufacturing serving as the basis of the local economy.
Trade, service and government related industries comprise the other major
components of the Company's primary market area economy.
Consistent with the trend throughout the United States, the service sector
has been increasing as a percentage of the total employment in the Bank's
primary market area with State and local government accounting for a large
percentage of such employment. The manufacturing sector of the economy is very
diverse, with a large majority of the manufacturers having fewer than 200
employees. Employers in Montgomery County include St. Mary's Hospital, Amsterdam
Memorial Hospital, Amsterdam Printing and Litho Corp., Hasbro, Inc. and Kasson &
Keller/Keymark.
Montgomery County, where the main office of the Company is located, is the
least populated county in the Company's primary market area with a population of
approximately 52,600. Albany County, where the Bank opened a new branch, is the
most populated county in the Company's market area with a population of
approximately 293,700. The unemployment rate in Montgomery County as of December
1996 was 6.9%, down from 7.0% as of October 1995; the unemployment rate for New
York State was 5.9%, down from 6.0% as of the same dates.
Lending Activities
General
The Company primarily originates fixed- and adjustable rate, one- to
four-family mortgage loans. The Company's general policy is to originate
mortgages with terms between 15 and 30 years for retention in its portfolio. The
Company also originates fixed and adjustable rate consumer loans. Adjustable
rate mortgage ("ARM"), home equity and consumer loans are originated in order to
maintain loans with more frequent terms to repricing or shorter maturities than
fixed-rate, one- to four-family mortgage loans. See "- Loan Portfolio
Composition" and "- One- to Four-Family Residential Real Estate Lending." In
addition, the Company originates commercial and multi-family real estate,
construction and commercial business loans in its primary market area; although,
the originations of these types of loans has recently been de-emphasized by the
Bank. Beginning in 1997 the Company will initiate an FHA loan program primarily
directed at low-to-moderate income borrowers with terms up to 30 years. Loan
originations are generated by the Company's marketing efforts, which include
print and radio advertising, lobby displays and direct contact with local civic
and religious organizations, as well as by the Company's present customers,
walk-in customers and referrals from real estate agents, brokers and builders.
At December 31, 1996, the Company's net loan portfolio totaled $248.1 million.
Loan applications are initially considered and approved at various levels
of authority, depending on the type, amount and loan-to-value ratio of the loan.
Bank employees with lending authority are designated, and their lending limit
authority defined, by the Board of Directors of the Bank. The approval of the
Bank's Board of Directors is required for any loan relationship that includes a
commercial real estate or commercial business loan whose aggregate borrowings
exceed $250,000, and for all other loan relationships whose aggregate borrowings
exceed $500,000. The Bank also has an Officer/Director Loan Committee which has
authority to approve loans between $250,000 and $500,000 and meets as needed to
approve loans between Board meetings.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At
December 31, 1996, the maximum amount which the Bank could have loaned to any
one borrower and the borrower's related entities was approximately $6.9 million.
At such date, the Bank did not have any loans or series of loans to related
borrowers with an outstanding balance in excess of this amount.
At December 31, 1996, the Company's largest lending relationship totaled
$1.9 million (net of $1.7 million charged off in 1996) and consisted of eight
loans secured by various office equipment and the equipment lease contracts
between the borrower and its lessees. These loans were in default as of December
31, 1996 as a result of a bankruptcy filing on March 29, 1996. For further
discussion, see "Asset Quality - Non-Performing Assets" herein, and "Management
Discussion and Analysis of Financial Condition and Results of Operations":
contained in the Company's Annual Report to Stockholders attached hereto as
Exhibit 13 ("Annual Report").
The next three largest lending relationships at December 31, 1996 consisted
of a $1.3 million loan secured by a motel, a $1.2 million loan secured by a
strip shopping center, and a $1.1 million loan secured by a day treatment center
for mentally retarded and developmentally disabled individuals. At December 31,
1996, there were only three other loans or lending relationships equal to or in
excess of $1 million. All of the foregoing loans were current at December 31,
1996.
Loan Portfolio Composition.
The following table presents information concerning the composition of the
Company's loan portfolio in dollar amounts and in percentages (before deductions
for deferred fees and discounts and allowances for losses) as of the dates
indicated.
December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family $158,182 63.15% $133,468 53.20% $140,418 53.63% $116,441 52.18% $136,554 55.22%
Home Equity 22,817 9.11 17,519 6.98 16,715 6.39 16,135 7.23 15,777 6.38
Multi Family 4,724 1.88 8,176 3.26 8,718 3.33 10,978 4.92 10,499 4.25
Commercial 29,947 11.96 41,929 16.71 46,736 17.85 51,528 23.09 58,674 23.72
Construction 2,234 0.89 1,073 0.43 4,809 1.84 812 0.36 2,280 0.92
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Real Estate 217,904 86.99 202,165 80.58 217,396 83.04 195,894 87.78 223,784 90.49
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Other Loans:
Consumer Loans
Auto Loans 12,417 4.96 9,337 3.72 4,765 1.82 1,147 0.52 1,362 0.55
Recreational Vehicles 9,416 3.76 12,881 5.13 12,352 4.72 7,908 3.54 6,949 2.81
Manufactured Homes 620 0.25 13,484 5.37 15,161 5.79 5,751 2.58 1,616 0.66
Other Secured 1,866 0.74 2,020 0.81 2,065 0.79 3,867 1.73 3,793 1.53
Unsecured 1,445 0.58 1,299 0.52 1,398 0.53 1,499 0.67 1,564 0.63
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Consumer Loans 25,764 10.29 39,021 15.55 35,741 13.65 20,172 9.04 15,284 6.18
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Commercial Business Loans:
Secured 6,199 2.47 9,346 3.73 8,332 3.18 6,810 3.05 7,857 3.18
Unsecured 620 0.25 350 0.14 339 0.13 279 0.13 379 0.15
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Commercial
Business Loans 6,819 2.72 9,696 3.87 8,671 3.31 7,089 3.18 8,236 3.33
-------- ------ -------- ------ -------- ------ ------- ------- ------- ------
Total Loan Portfolio, Gross 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00% 247,304 100.00%
====== ====== ====== ====== ======
Less:
Unamortized discount and
deferred loan fees (1,045) (1,756) (2,008) (741) (222)
Allowance for Loan Losses 3,438 2,647 2,235 3,249 3,089
-------- -------- -------- -------- --------
Total Loans Receivable, Net $248,094 $249,991 $261,581 $220,647 $244,437
======== ======== ======== ======== ========
The following table shows the composition of the Company's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Fixed Rate Loans:
Real Estate:
One- to Four-Family $111,841 44.65% $ 91,528 36.48% $ 91,299 34.87% $ 68,377 30.64% $ 86,529 34.99%
Home Equity 15,234 6.08% 8,405 3.35% 6,689 2.56% 5,586 2.50% 5,133 2.08%
Commercial and Multi Family 2,590 1.03% 2,633 1.05% 13,144 5.02% 17,918 8.03% 17,268 6.98%
Construction 1,840 0.73% 633 0.25% 4,809 1.84% 812 0.36% 2,280 0.92%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Real Estate 131,505 52.49% 103,199 41.13% 115,941 44.29% 92,693 41.53% 111,210 44.97%
Consumer 25,110 10.03% 33,343 13.29% 28,027 10.70% 15,644 7.01% 15,284 6.18%
Commercial Business 3,124 1.24% 4,476 1.79% 3,480 1.33% 2,387 1.07% 8,236 3.33%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total fixed-rate loans 159,739 63.76% 141,018 56.21% 147,448 56.32% 110,724 49.61% 134,730 54.48%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Adjustable Rate Loans:
Real Estate:
One- to Four-Family 46,341 18.50% 41,940 16.72% 49,119 18.76% 48,064 21.54% 50,025 20.23%
Home Equity 7,583 3.03% 9,114 3.63% 10,026 3.83% 10,549 4.73% 10,644 4.30%
Commercial and Multi Family 32,081 12.81% 47,472 18.92% 42,310 16.16% 44,588 19.98% 51,905 20.99%
Construction 394 0.16% 440 0.18% --- ----% --- ----% --- ----%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Real Estate 86,399 34.50% 98,966 39.45% 101,455 38.75% 103,201 46.25% 112,574 45.52%
Consumer 654 0.26% 5,678 2.26% 7,714 2.95% 4,528 2.03% --- ----%
Commercial Business 3,695 1.48% 5,220 2.08% 5,191 1.98% 4,702 2.11% --- ----%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total adjustable-rate loans 90,748 36.24% 109,864 43.79% 114,360 43.68% 112,431 50.39% 112,574 45.52%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Loan Portfolio, Gross 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00% 247,304 100.00%
====== ====== ====== ====== ======
Less:
Unamortized discount and
deferred loan fees (1,045) (1,756) (2,008) (741) (222)
Allowance for Loan Loss 3,438 2,647 2,235 3,249 3,089
-------- -------- -------- -------- --------
Total Loans Receivable, Net $248,094 $249,991 $261,581 $220,647 $244,437
======== ======== ======== ======== ========
The following table illustrates the contractual maturity of the Company's
loan portfolio at December 31, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
--------------------------------------------------
One- to Multi-
Four-Family Family and Commercial
and Home Equity Commercial Construction(2) Consumer Business Total
-------------- -------------- -------------- -------------- -------------- --------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
Due During ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Periods Ending
December 31,
1997 (1) $1,711 9.34% $1,443 9.49% $ ----- ----% $2,088 9.64% $1,574 9.92% $6,816 9.60%
1998 1,277 8.60 2,288 8.36 ------ ---- 1,681 9.16 1,541 8.86 6,787 8.72
1999 2,300 8.40 3,839 9.75 ------ ---- 4,970 8.37 1,638 9.20 12,747 8.90
2000 and 2001 6,740 8.40 12,012 7.07 ------ ---- 8,376 8.35 1,331 7.53 28,459 7.78
2002 to 2006 19,748 8.13 7,282 9.38 ------ ---- 4,185 11.15 91 9.13 31,306 8.82
2007 to 2011 65,389 7.76 1,012 9.10 924 7.59 4,419 10.56 255 10.98 71,999 7.96
2012 and following 83,834 7.53 6,795 9.15 1,310 6.78 45 8.39 389 10.37 92,373 7.65
<FN>
- ---------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Construction loan terms are generally less than one year, however, upon
completion of the construction phase, the loans are generally converted to a
permanent mortgage with a term not to exceed thirty years, thereby extending the
contractual maturity. Accordingly, the maturity on these loans are shown at the
final expected maturity of the permanent financing.
</FN>
As of December 31, 1996, the total amount of loans due after December 31,
1997 which have fixed interest rates was $ 158.0 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
was $85.6 million.
One- to Four-Family Residential Real Estate Lending
The Company's residential first mortgage loans consist primarily of one- to
four-family, owner-occupied mortgage loans. At December 31, 1996, $158.2
million, or 63.2%,of the Company's gross loans consisted of one- to four-family
residential first mortgage loans. Approximately 70.7% of the Company's one- to
four-family residential first mortgage loans provide for fixed rates of interest
and for repayment of principal over a fixed period not to exceed 30 years. The
Company's fixed-rate one- to four-family residential mortgage loans are priced
competitively with the market. Accordingly, the Company attempts to distinguish
itself from its competitors based on quality of service.
The Company generally underwrites its fixed-rate, one- to four-family,
residential, first mortgage loans using Federal National Mortgage Association
("FNMA") secondary market standards. The Company generally holds for investment
all one- to four-family residential first mortgage loans it originates. In
underwriting one- to four-family residential first mortgage loans, the Company
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Properties securing real estate loans made by
the Company are appraised by independent fee appraisers approved by the Board of
Directors. The Company requires borrowers to obtain title insurance, and fire
and property insurance (including flood insurance, if necessary) in an amount
not less than the amount of the loan.
The Company currently offers one, three, five and seven year residential
ARM loans with an interest rate that adjusts annually in the case of a one-year
ARM loan, and every three, five or seven years in the case of a three, five or
seven year ARM loan, respectively, based on the change in the relevant Treasury
constant maturity index. These loans provide for up to a 2.0% periodic cap and a
lifetime cap of 6.0% over the initial rate. As a consequence of using caps, the
interest rates on these loans may not be as rate sensitive as is the Company's
cost of funds. Borrowers of one-year residential ARM loans are generally
qualified at a rate 2.0% above the initial interest rate. The Company's
residential ARM loans may be modified into fixed-rate loans. ARM loans generally
pose greater credit risks than fixed-rate loans, primarily because as interest
rates rise, the required periodic payment by the borrower rises, increasing the
potential for default. However, as of December 31, 1996, the Company had not
experienced higher default rates on these loans. See "Asset Quality -
Non-Performing Assets."
The Company's one- to four-family mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property. The Company has waived the due on sale
clause on loans held in its portfolio from time to time to permit assumptions of
the loans by qualified borrowers.
The Company does not currently originate residential mortgage loans if the
ratio of the loan amount to the value of the property securing the loan (i.e.,
the "loan-to-value" ratio) exceeds 95%, with the exception of FHA loans, which
are fully insured by the Federal Government. If the loan-to-value ratio exceeds
80%, the Company requires that borrowers obtain private mortgage insurance in
amounts intended to reduce the Company's exposure to 80% or less of the lower of
the appraised value or the purchase price of the real estate security. See "Loan
Originations and Sales."
The Company makes construction loans to individuals for the construction
of their residences. The Company has occasionally made loans to builders for the
construction of residential homes, provided the builder has a sales contract to
sell the home upon completion. No construction loan is approved unless there is
evidence of a commitment for permanent financing upon completion of the
residence, whether through the Company or another financial institution.
Construction loans generally will require construction stage inspections before
funds may be released to the borrower. Such inspections are generally performed
by outside fee appraisers.
At December 31, 1996, the Company's construction loan portfolio totaled
$2.2 million, or 0.9% of its gross loan portfolio. Substantially all of these
construction loans were to individuals intending to occupy such residences and
were secured by property located within the Company's primary market area.
Although no construction loans were classified as non-performing as of December
31, 1996, these loans do involve a higher level of risk than conventional one-
to four-family residential mortgage loans. For example, if a project is not
completed and the borrower defaults, the Company may have to hire another
contractor to complete the project at a higher cost.
Home Equity Lending
The Company's home equity loans and lines of credit are secured by a lien
on the borrower's residence and generally do not exceed $200,000. The Company
uses the same underwriting standards for home equity loans as it uses for one-
to four-family residential mortgage loans. Home equity loans are generally
originated in amounts which, together with all prior liens on such residence, do
not exceed 90% of the appraised value of the property securing the loan. The
interest rates for home equity loans and lines of credit adjust at a stated
margin over the prime rate or, in the case of loans (but not lines of credit),
have fixed interest rates. Home equity lines of credit generally require
interest only payments on the outstanding balance for the first five years of
the loan, after which the outstanding balance is converted into a fully
amortizing, adjustable-rate loan with a term not in excess of 15 years. As of
December 31, 1996, the Company had $22.8 million in home equity loans and lines
of credit outstanding, with an additional $4.0 million of unused home equity
lines of credit.
Commercial and Multi-Family Real Estate Lending
The Company has engaged in commercial and multi-family real estate lending
secured primarily by apartment buildings, small office buildings, motels,
warehouses, nursing homes, strip shopping centers and churches located in the
Company's primary market area, although the origination of these types of loans
has recently been de-emphasized by the Bank. At December 31, 1996, the Company
had $29.9 million and $4.7 million of commercial real estate and multi-family
real estate loans, respectively, which represented 12.0% and 1.9%, respectively,
of the Company's gross loan portfolio at that date. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management
Strategy - Asset Quality" and "Provision for Loan Losses" in the Annual Report
for a discussion of the Bank's bulk sale of certain multi-family and commercial
loans.
The Bank's commercial and multi-family real estate loans generally have
adjustable rates and terms to maturity that do not exceed 20 years. The
Company's current lending guidelines generally require that the multi-family or
commercial income-producing property securing a loan generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and a loan-to-value ratio not exceeding 65%. Prior to
September 1990, the Company originated commercial and multi-family loans with
loan-to-value ratios of up to 75%. Due to declines in the value of some
properties as a result of the economic conditions in the Company's primary
market area, however, the current loan-to-value ratio of some commercial and
multi-family real estate loans in the Company's portfolio may exceed the initial
loan-to-value ratio. Adjustable rate commercial and multi-family real estate
loans provide for interest at a margin over a designated index, with periodic
adjustments at frequencies of up to five-years. The Company generally analyzes
the financial condition of the borrower, the borrower's credit history, the
reliability and predictability of the cash flows generated by the property
securing the loan and the value of the property itself. The Company generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing
commercial and multi-family real estate loans originated by the Company are
performed by independent fee appraisers approved by the Board of Directors.
At December 31, 1996, the Company's largest multi-family or commercial real
estate lending relationship consisted of a $1.3 million loan secured by a motel.
The next largest multi-family or commercial lending relationships at December
31, 1996 were a $1.2 million loan secured by a strip shopping center, and a $1.1
million loan secured by a day treatment center for mentally retarded and
developmentally disabled individuals, all of which were current as of December
31, 1996. At December 31, 1996, $1,726,000 , or 4.98% of the Company's
multi-family and commercial real estate loan portfolio was non-performing. See
"Asset Quality - Non-Performing Assets".
Multi-family and commercial real estate loans generally 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 effect 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 typically 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, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be impaired
and the value of the property may be reduced. The balances of these types of
loans have declined over the past five years with a significant decrease from
$50.1 million at December 31, 1995 to $34.7 million at December 31, 1996, due
primarily to the bulk sale of certain performing and non-performing loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management Strategy Asset Quality" in the Annual Report. The
Company currently plans to continue to de-emphasize the origination of
commercial and multi-family real estate loans, thereby reducing its credit risk
exposure associated with these types of loans.
Consumer Lending
The Company offers a variety of secured consumer loans, including loans
secured by automobiles and recreational vehicles ("RV's"). In addition, the
Company offers other secured and unsecured consumer loans. The Company currently
originates substantially all of its consumer loans in its primary market area.
The Company originates consumer loans on a direct basis only, where the Company
extends credit directly to the borrower. At December 31, 1996 the Company's
consumer loan portfolio totaled $25.8 million, or 10.3% of the gross loan
portfolio. At December 31, 1996, 97.5% of the Company's consumer loans were
fixed-rate loans and 2.5% were adjustable-rate loans.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Terms to maturity range
up to 15 years for manufactured homes and certain RV's and up to 60 months for
other secured and unsecured consumer loans. The Company offers both open- and
closed-end credit. Open-end credit is extended through lines of credit that are
generally tied to a checking account. These credit lines currently bear interest
up to 18% and are generally limited to $10,000. The Company no longer originates
manufactured home loans.
The underwriting standards employed by the Company for consumer loans
include, a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
At December 31, 1996, automobile loans and RV loans (such as motor homes,
boats, motorcycles, snowmobiles and other types of recreational vehicles)
totaled $12.4 million and $9.4 million or 48.2% and 36.5% of the Company's total
consumer loan portfolio, and 5.0% and 3.8% of its gross loan portfolio,
respectively.
During 1996, the Company placed more emphasis on originating automobile
loans secured by both new and used automobiles, thereby experiencing
approximately $3 million in net growth. In the past, originations were generated
primarily through advertising and lobby displays. The Company, over the past
year, has increased the number of relationships with local automobile
dealerships in order to further enhance automobile originations through their
referrals. The Company's maximum loan-to-value ratio on new automobiles is 100%
of the borrower's cost including sales tax, and on used automobiles up to 5
years old, 100% of the vehicle average retail value, based on NADA (National
Auto Dealers Association) valuation. Non-performing automobile loans as of
December 31, 1996 totaled $39,000 or .2% of the Company's consumer loan
portfolio.
Of the RV loan balance, approximately $6.5 and $2.9 million were secured by
new and used RVs, respectively. Approximately 75% of the RV portfolio consists
of loans that were originated through the Company's relationship with Alpin
Haus, Inc., a retail RV dealer formerly owned by one of the Company's directors.
The Company's maximum loan-to-value ratio on new and used RV loans is the lesser
of (i) 85% of the borrower's cost, which includes such items as sales tax and
dealer options or (ii) 115% of either the factory invoice for a new RV or the
wholesale value, plus sales tax, for a used RV. In the case of used RV's, the
wholesale value is determined using published guide books. At December 31, 1996,
RV loans totaling $175,000 or 1.9% of the total RV portfolio, were
non-performing.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, RVs and 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 high initial
loan-to-value ratios, repossession, rehabilitation and carrying costs, and the
greater likelihood of damage, loss or depreciation of the underlying collateral.
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 these loans. In the case of RV loans, which tend to
have loan balances in excess of the resale value of the collateral, borrowers
may abandon the collateral property making repossession by the Company and
subsequent losses more likely.
During 1996, the Company sold certain performing and non-performing loans
as part of a bulk sale, including a majority of its manufactured home loan
portfolio, as well as certain RV loans, thereby significantly reducing its
credit risk exposure on these types of loans (see "Loan Originations and
Sales"). However, management expects that delinquencies in its consumer loan
portfolio may increase as RV loans continue to season. At December 31, 1996,
$318,000, or 1.2%, of the Company's consumer loan portfolio was non-performing
and $56,000 or 0.2% of such loans were restructured. There can be no assurances
that additional delinquencies will not occur in the future.
Commercial Business Lending
The Company also originates commercial business loans, although the
origination of these types of loans has recently been de-emphasized by the Bank.
At December 31, 1996, commercial business loans comprised $6.8 million, or 2.7%
of the Company's gross loan portfolio. Most of the Company's commercial business
loans have been extended to finance local businesses and include primarily short
term loans to finance machinery and equipment purchases and, to a lesser extent,
inventory and accounts receivable. Loans made to finance inventory and accounts
receivable will only be made if the borrower secures such loans with the
inventory and/or receivables plus additional collateral acceptable to the
Company, generally real estate. Commercial loans also involve the extension of
revolving credit for a combination of equipment acquisitions and working capital
in expanding companies. At December 31, 1996, the largest commercial business
lending relationship consisted of eight loans to the Bennett Funding Group,
aggregating $3.6 million secured by various office equipment and the equipment
contracts between the borrower and its lessees. These loans were in default as
of December 31, 1996 as a result of a bankruptcy filing on March 29, 1996, and
the Bank reduced its recorded value to $1.9 million for such loans as of
December 31, 1996. For further discussion, see "Asset Quality - Non-Performing
Assets" herein, and "Management Discussion and Analysis of Financial Condition
and Results of Operations" contained in the Company's Annual Report.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Secured, non-mortgage lines of credit are available to borrowers
provided that the outstanding balance is paid in full (i.e.,the credit line has
a zero balance) for at least 30 days every year. In the event the borrower does
not meet this 30 day requirement, the line of credit is generally terminated and
the outstanding balance is converted into an amortizing loan.
Unlike residential mortgage loans, which generally are 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, the value of which tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of 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, is often dependent upon the general economic
environment). The Company's commercial business loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. As part of its commercial business
lending policy, the Company generally requires all borrowers with commercial
business loans to submit annual financial statements to the Company.
The Company's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Consideration of the borrower's
cash flows is also an important aspect of the Company's current credit analysis.
The Company generally obtains personal guarantees on its commercial business
loans. Nonetheless, such loans are believed to carry higher credit risk than
more traditional thrift institution investments.
The balances of these types of loans have declined from $9.7 million in
1995 to $6.8 million in 1996, due primarily to the bulk sale of certain
performing and non-performing loans, the partial charge-off of the Bennett
Funding Group loan relationship, as well as the general de-emphasis of this loan
type. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management Strategy - Asset Quality" in the Annual
Report. The Company plans to continue to de-emphasize the origination of
commercial business loans, thereby reducing its credit risk exposure associated
with this type of lending.
Loan Originations and Sales
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, dealerships and mortgage brokers, as well as
walk-in customers. Loans are originated by the Company's staff of salaried loan
officers.
While the Company originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon demand for loans in its market.
Demand is affected by the local economy and interest rate environment. The
Company currently retains fixed-rate and adjustable-rate real estate loans it
originates in its portfolio. As a regular part of its business, the Company does
not sell loans and has not purchased any loans since 1989, except for one
$200,000 residential ARM loan it purchased from a mortgage banker in 1994.
During 1996, the Company completed the bulk sale of certain performing and
nonperforming loans in order to improve the credit quality of its loan
portfolio. See "Management Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Company's Annual Report.
For the year ended December 31, 1996, the Company originated $81.4 million
of loans compared to $50.2 million and $91.2 million in 1995 and 1994,
respectively. Management attributes the high level of originations during 1994
to the sustained low interest rate environment prevalent during 1993 and the
first half of 1994, which caused many individuals to refinance their loans.
Similarly, management attributes the decrease in or the "leveling off" of loan
originations for 1995 to the sharp decline in refinancing as a result of a
generally rising interest rate environment since mid 1994. During 1996, the
Company increased its originations of one- to four-family mortgages through the
referrals of several local brokers. Primarily, these originations reflected a
resurgence of refinancings, which comprised approximately 67% of the Bank's
total
originations of one- to four family mortgages. Of the one- to four-family and
home equity originations, approximately $26.5 million were adjustable rate, and
$35.5 million were fixed rate loans.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of real estate loans with acceptable underwriting
characteristics may be substantially reduced or restricted with a resultant
decrease in operating earnings.
The following table shows the loan origination, loan sale and repayment
activities of the Company for the periods indicated.
Years Ended December 31,
--------------------------
1996 1995 1994
--------------------------
Origination by Type: (In Thousands)
Real estate-one- to four-family $47,691 $ 8,269 $56,014
-home equity 14,291 7,921 7,876
-multi-family 190 134 510
-non-residential 2,838 2,014 3,437
Non-real estate-consumer 7,735 18,359 17,207
-commercial business 8,681 13,472 6,174
------ ------ ------
Total loans originated 81,426 50,169 91,218
Repayments:
Principal repayments 52,741 58,374 48,504
Proceeds from sale of loans 18,929 --- ---
Other decreases, net (1) 11,653 3,385 1,780
------ ------ ------
Net increase (decrease) ($ 1,897) ($11,590) $40,934
======= ======= ======
- -----------------------------------
(1) Includes net charge-offs, transfers to real estate owned, and additions to
loan loss allowances.
Asset Quality
Generally, when a borrower fails to make a required payment on a loan
secured by residential real estate or consumer products, the Company initiates
collection procedures by mailing a delinquency notice after the account is 15
days delinquent. At 30 days delinquent, a personal letter is generally sent to
the customer requesting him or her to make arrangements to bring the loan
current. If the delinquency is not cured by the 45th day, the customer is
generally contacted by telephone and another personal letter is sent, with the
same procedure being repeated if the loan becomes 60 days delinquent. At 90 days
past due, a demand letter is generally sent. If there is no response, a final
demand letter for payment in full is sent, and unless satisfactory repayment
arrangements are made subsequent to the final demand letter, immediate
repossession or foreclosure procedures are commenced.
Similar collection procedures are employed for loans secured by commercial
real estate and commercial business collateral, except when such loans are 60
days delinquent, a letter is generally sent requesting rectification of the
delinquency within seven days, otherwise foreclosure or repossession procedures,
as applicable, are commenced.
The following table sets forth the Company's loan delinquencies by type,
by amount and by percentage of type at December 31, 1996.
--------------------------------------------------------------- Total Loans Delinquent
60-89 Days 90 Days and Over 60 Days or More
--------------------------------------------------------------- ------------------------------
% of Loan % of Loan % of Loan
Number Amount Category Number Amount Category Number Amount Category
-------- ------- --------- -------- ------- -------- -------- -------- ---------
(Dollars in Thousands)
Real Estate:
One-to four-family --- $ --- ----% 16 $ 410 0.26% 16 $ 410 0.26%
Home Equity 1 21 0.09% --- --- ----% 1 21 0.09%
Multi-family --- --- ----% --- --- ----% --- --- ----%
Commercial 2 108 0.36% 7 907 3.03% 9 1,015 3.39%
Consumer 21 184 0.71% 33 262 1.02% 54 446 1.73%
Commercial Business 5 85 1.25% 15 2,269 33.27% 20 2,354 34.52%
-------- ------- --------- -------- ------- -------- -------- -------- ---------
Total 29 $398 0.16% 71 $3,848 1.54% 100 $4,246 1.70%
======== ======= ========= ======== ======= ======== ======== ======== =========
Non-Performing Assets
The table below sets forth the amounts and categories of non-performing
assets in the Company's total assets at the dates indicated. Loans are generally
placed on non-accrual status when the loan is more than 90 days delinquent
(except for FHA insured and VA guaranteed loans) 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, as long as the loan remains on non-accrual status interest is
recognized only when received. Foreclosed assets include assets acquired in
settlement of loans. For further discussion of non-performing assets, and the
bulk sale of certain non-performing assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset Quality"
contained in the Annual Report.
December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(In thousands)
Non-accruing loans:
One- to four-family (1) $259 $1,525 $1,130 $1,705 $448
Multi-family --- 77 563 1,354 ---
Commercial real estate 339 1,549 4,096 2,937 2,669
Consumer 256 605 111 286 331
Commercial Business 2,269 743 404 684 1,563
---------- ---------- ---------- ---------- ----------
Total 3,123 4,499 6,304 6,966 5,011
---------- ---------- ---------- ---------- ----------
Accruing loans delinquent more
than 90 days:
One- to four-family (1) 151 261 480 396 803
Multi-family --- --- --- 54 ---
Commercial real estate 568 --- --- 67 1,230
Consumer 6 --- --- --- 2
Commercial Business --- --- --- --- ---
---------- ---------- ---------- ---------- ----------
Total 725 261 480 517 2,035
---------- ---------- ---------- ---------- ----------
Troubled debt restructured loans:
One- to four-family (1) 88 89 90 91 0
Multi-family 38 1,626 1,645 1,709 1,169
Commercial real estate 781 2,185 1,758 1,547 1,890
Consumer 56 84 62 3 23
Commercial Business 68 51 95 527 336
---------- ---------- ---------- ---------- ----------
Total 1,031 4,035 3,650 3,877 3,418
---------- ---------- ---------- ---------- ----------
Total non-performing loans: 4,879 8,795 10,434 11,360 10,464
---------- ---------- ---------- ---------- ----------
Foreclosed assets:
One- to four-family (1) 194 459 102 346 373
Multi-family 282 926 1,792 2,405 502
Commercial real estate --- 1,503 1,799 2,707 3,983
Consumer 239 281 111 42 64
Commercial Business --- --- --- --- ---
---------- ---------- ---------- ---------- ----------
Total 715 3,169 3,804 5,500 4,922
---------- ---------- ---------- ---------- ----------
Total non-performing assets $5,594 $11,964 $14,238 $16,860 $15,386
========== ========== ========== ========== ==========
Total as a percentage of total assets 1.18% 2.72% 4.15% 5.06% 4.76%
<FN>
- --------------------------------------
(1) Includes home equity loans
</FN>
For the year ended December 31, 1996, gross interest income which would
have been recorded had the year end non-accruing loans been current in
accordance with their original terms amounted to $477,000. The amount that was
included in interest income on such loans was $149,000, which represented actual
receipts.
Similarly, for the year ended December 31, 1996, gross interest income
which would have been recorded had the year end restructured loans paid in
accordance with their original terms amounted to $127,000. The amount that was
included in interest income for the year ended December 31, 1996 was $80,000.
Non-Accruing Assets
At December 31, 1996, the Company had $3.1 million in non-accruing loans,
which constituted 1.2% of the Company's gross loan portfolio. Except as
discussed immediately below, there were no non-accruing loans or aggregate
non-accruing loans-to-one-borrower in excess of $500,000.
The largest non-accruing loan or aggregate lending relationship at December
31, 1996, consisted of eight loans secured by various office equipment and the
equipment lease contracts between the borrower and its lessees. On March 29,
1996, the borrower, Bennett Funding Group, filed Chapter 11 bankruptcy. At that
time, the loan balances aggregated $3.6 million. During 1996, the Company
established reserves totaling $2.8 million. In the fourth quarter, $1.7 million
was charged against this reserve, reducing the recorded amount of these loans to
$1.9 million. Negotiations with the Bennett bankruptcy trustee related to the
Bank's total Bennett relationship are in process, and based upon discussions to
date, management believes that the remaining $1.1 million reserve is adequate.
Accruing Loans Delinquent More than 90 Days
As of December 31, 1996, the Company had $725,000 of accruing loans
delinquent more than 90 days. Of these loans, $151,000 were FHA insured or VA
guaranteed one- to four-family residential loans. The remaining $568,000
represented three commercial real estate loans for which management believes
that all contractual payments are collectible. Subsequent to December 31, 1996
these three loans were brought current.
Restructured Loans
As of December 31, 1996, the Company had restructured loans of $1.0 million
with one loan or aggregate lending relationship over $500,000 as discussed
below. The balance of the Company's restructured loans at that date consisted of
one one- to four-family residential mortgage loan, one multi-family real estate
loan, four commercial real estate loans, two consumer loans and three commercial
business loans.
The Company's largest restructured loan or lending relationship at December
31, 1996, was a 58% loan participation interest, secured by a mixed use
office/apartment complex located in Syracuse, New York, on which the Company is
the lead lender. The loan participation was originated for $1.1 million in
February 1986 with a loan to value ratio of 67.0%. The loan had been
experiencing delinquencies since June 1993 due to cash flow problems caused by
high vacancy rates. In December 1993, the Company, based on an October 1993
appraisal, wrote-down the loan balance to $609,000 and in July 1994 restructured
the loan to reduce the principal balance outstanding and interest rate charged.
At December 31, 1996, the outstanding balance on the Company's participation
interest was $593,000. The office and apartment portions of the property at
December 31, 1996 were approximately 50% occupied. The rooms are rented on a
daily basis and the gross income from room rental increased 1% in 1996. The
loan, since being restructured, has performed according to the terms of the
restructuring.
Foreclosed Assets
As of December 31, 1996, the Company had $715,000 in carrying value of
foreclosed assets. Multi-family and commercial real estate represented 39.4% of
the Company's foreclosed property, which consisted solely of a three story,
54-unit, student housing project located in Morrisville, New York. Repossessed
consumer assets represented 33.4% of the Company's foreclosed properties,
consisting primarily of 18 manufactured homes and 13 recreational vehicles.
The student housing project loan referred to above was originated as a loan
to facilitate the sale of foreclosed property in 1985 for $1.4 million at a 100%
loan-to-value ratio. The Company reacquired this property through foreclosure in
April 1994. The apartment complex began experiencing vacancy problems when the
State University of New York at Morrisville stopped referring students to
off-campus housing and began requiring students to live on campus. The occupancy
rate of the housing project was approximately 28% during the 1995-1996 academic
year. Subsequent to December 31, 1996, the Company received a contract for sale
on this property, and expects a closing to take place in April 1997. This
property is being carried at a value equal to the estimated net sales proceeds.
Other Loans of Concern
As of December 31, 1996, there were $7.4 million of other loans not
included in the table or discussed above where known information about the
possible credit problems of borrowers caused management to have doubts as to the
ability of the borrower to comply with present loan repayment terms. Set forth
below is a description of the largest other loans of concern.
The largest other loan of concern at December 31, 1996, consisted of a
commercial real estate loan secured by a one-story light industrial facility in
Gates, New York. This loan was originated in May 1988 for $930,000 with a
loan-to-value ratio of 74.4%. The property has recently experienced tenant
vacancies and based on recent financial information submitted by the borrower,
the cash flow generated by this property has deteriorated. However, the borrower
has been able to keep the loan current by utilizing other sources of funds. As a
result, the Bank has requested additional financial information from the
guarantors on this loan, to assess their financial position, as the secondary
source of repayment on this lending relationship. At December 31, 1996, the
principal balance was $886,000.
The second largest loan of concern at December 31, 1996, consisted of a
commercial real estate loan secured by an office building in Atlanta, Ga. This
loan was originated in 1987 with a loan-to-value ratio of 74%. Based on
financial information submitted by the borrower, the cash flow generated by this
property is insufficient to cover the debt service on this loan. At December 31,
1996, the principal balance was $848,000. Subsequent to this date, this loan has
been paid in full.
The third largest loan of concern at December 31, 1996, consisted of a
single use commercial property (a bowling facility and adjacent used car lot)
located in Schenectady, New York. This loan was originated in 1992 with a
loan-to-value ratio of 50%. Although the most recent financial information
received indicates that cash flow is adequate to service the debt on this loan,
the borrower's financial position has shown deterioration over the last few
years. The Bank has requested more recent financial statements from the borrower
and will continue to monitor the cash flow trends on this property. The
principal balance as of December 31, 1996 was $667,000.
The fourth largest loan of concern at December 31, 1996, consisted of a
multi-family real estate loan secured by a 32-unit apartment building located in
LeRoy, New York. This loan was originated in December 1989 with a loan-to-value
ratio of 72.2%. Although the property was 97% occupied based on a 1996 rent
roll, the cash flow generated by the property has deteriorated. However, the
borrower has been able to keep the loan current by utilizing other sources of
funds. As a result, the Bank has requested additional financial information from
the guarantors on this loan, to assess their financial position, as the
secondary source of repayment on this lending relationship. A recent property
inspection also noted the existence of deferred maintenance. At December 31,
1996, the principal balance was $645,000.
The fifth largest loan of concern at December 31, 1996, consisted of a
commercial real estate loan secured by a retail store/warehouse in Douglasville,
Georgia. This loan was originated in 1987 with a loan-to-value ratio of 78%. The
Bank has been unable to obtain current financial information from the borrower,
and therefore, cannot make any assumptions regarding the borrowers ability to
continue to service this debt in the future. The Bank continues to request
current financial information from the borrower. Also, a property inspection has
been completed subsequent to December 31, 1996 which indicates that the property
is in excellent condition and the value has remained stable, providing a
loan-to-value ratio at December 31, 1996 of 62%. At December 31, 1996, the
principal balance was $549,000.
All of the above mentioned loans were current at December 31, 1996.
There were no other loans with a balance in excess of $500,000 being
specially monitored by the Company as of December 31, 1996. The balance of other
loans of concern at that date consisted of 15 commercial and multi-family real
estate loans totaling $3.1 million, nine commercial business loans totaling
$484,000 and six one- to four-family mortgages totaling $193,000. These loans
have been considered by management in conjunction with the analysis of the
adequacy of the allowance for loan losses.
Classified Assets
Federal regulations provide for the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as "substandard," "doubtful" or "loss." An asset is considered "substandard" if
it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may increase general allowances for loan losses in an amount
deemed prudent by management to address the increased risk of loss on such
assets. General allowances represent loss allowances which have been established
to recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review and adjustment by the
OTS and the FDIC, which may order increases in general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Company regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at December 31, 1996, the Company had
classified $10.9 million as substandard, none as doubtful or loss.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and changes in the nature and volume of its loan activity, including
those loans which are being specifically monitored by management. Such
evaluation, which includes a review of loans for which full collectibility may
not be reasonably assured, considers among other matters, the loan
classifications discussed above, the estimated fair value, less estimated
disposal costs, of the underlying collateral, economic conditions, historical
loan loss experience, and other factors that warrant recognition in providing
for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at fair
value, less estimated disposal costs. If fair value at the date of foreclosure
is lower than the book balance of the related loan, the difference will be
charged to the allowance for loan losses at the time of transfer. Valuations of
the property are periodically updated by management and if the value declines, a
specific provision for losses on such property is established by a charge to
operations and the asset's recorded value is written down accordingly.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Company's allowances will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination. At December 31, 1996, the Company had a total
allowance for loan losses of $3.4 million, representing 70.5% of total
non-performing loans. See Note 5 of the Notes to Consolidated Financial
Statements.
The following table sets forth an analysis of the Company's allowance for
loan losses.
For the year
ended December 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(In thousands)
Balance at beginning of period $2,647 $2,235 $3,248 $3,089 $3,294
Charge-offs:
One- to four-family (1) (530) (31) (28) (24) ---
Multi Family (1,174) (171) (668) (257) ---
Commercial Real Estate (2,564) (568) (1,336) (641) (593)
Consumer (1,834) (400) (196) (409) (181)
Commercial Business (2,616) (46) (232) (399) (3)
----------- ----------- ----------- ----------- -----------
Total Charge offs (8,718) (1,216) (2,460) (1,730) (777)
Recoveries:
One- to four-family (1) 10 --- 27 13 ---
Multi Family --- 64 --- 1 ---
Commercial Real Estate --- 1 193 --- ---
Consumer 49 41 110 128 78
Commercial Business --- --- 10 58 4
----------- ----------- ----------- ----------- -----------
Total Recoveries 59 106 340 200 82
Net Charge-offs (8,659) (1,110) (2,120) (1,530) (695)
Provisions charged to operations 9,450 1,522 1,107 1,689 490
----------- ----------- ----------- ----------- -----------
Balance at end of period 3,438 2,647 2,235 3,248 3,089
=========== =========== =========== =========== ===========
Ratio of net charge-offs during
the period to average loans
outstanding during period 3.30% 0.42% 0.88% 0.65% 0.29%
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average
non-performing assets 55.57% 8.45% 13.43% 9.92% 4.81%
====== ====== ====== ====== ======
<FN>
- -------------------------------------
(1) Includes home equity loans.
</FN>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of loans Amount of loans Amount of loans Amount of loans Amount of loans
of in each of in each of in each of in each of in each
Loan category Loan category Loan category Loan category Loan category
Loss to total Loss to total Loss to total Loss to total Loss to total
Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans
--------------------------------------------------------------------------------------------------------
One- to four-family (1) $157 72.26% $268 60.18% $207 60.02% $175 59.41% $181 61.60%
Multi family and
commercial real
estate 1,599 13.84% 1,097 19.97% 1,260 21.18% 2,607 28.01% 2,123 27.97%
Construction and
development --- 0.89% --- 0.43% --- 1.84% --- 0.36% --- 0.92%
Consumer 355 10.29% 718 15.55% 454 13.65% 330 9.04% 294 6.18%
Commercial Business 1,327 2.72% 268 3.87% 114 3.31% 127 3.18% 491 3.33%
Unallocated --- ----% 296 ----% 200 ----% 9 ----% --- ----%
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total $3,438 100.00% $2,647 100.00% $2,235 100.00% $3,248 100.00% $3,089 100.00%
====== ======= ====== ======= ====== ======= ====== ======= ====== =======
<FN>
- -------------------------------
(1) Includes home equity loans.
</FN>
Investment Activities
The Bank must maintain minimum levels of investments 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. Historically, the Bank has maintained liquid assets at
levels above the minimum requirements imposed by the OTS regulations and above
levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. At December 31, 1996, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 7.51%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Annual Report
and "Regulation - Liquidity" contained herein.
In December 1995 the Company reclassified its entire portfolio of
investment and mortgage-backed securities to the available for sale category.
This reclassification was made in response to a one time transfer allowed by the
Financial Accounting Standards Board and the various federal banking regulators.
See Note 1(d) of the Notes to Consolidated Financial Statements contained in the
Annual Report.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, to provide collateral for borrowings and to fulfill the
Company's asset/liability management policies. To date, the Company's investment
strategy has been directed toward high-quality mortgage-backed securities.
Substantially all of the mortgage-backed securities owned by the Company are
issued, insured or guaranteed either directly or indirectly by a federal agency.
At December 31, 1996, all of the Company's securities were classified as
available for sale. The fair market value (excluding FHLB stock) and amortized
cost of the Company's securities at December 31, 1996 was $200.5 million and
$200.7 million, respectively. For additional information on the Company's
securities, see Note 4 of the Notes to Consolidated Financial Statements in the
Annual Report.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them. Such securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. At December 31, 1996, $113.8
million or 72.8% of the Company's mortgage-backed securities were pledged to
secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities. The prepayment risk associated with mortgage-backed securities is
monitored periodically, and prepayment rate assumptions adjusted as appropriate
to update the Company's mortgage-backed securities accounting and
asset/liability reports. Classification of the Company's mortgage-backed
securities portfolio as available for sale is designed to minimize that risk.
At December 31, 1996, the contractual maturity of 88.8% of all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of the mortgage-backed security is typically less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
different than anticipated will affect the yield to maturity. The yield is based
upon the interest income and the amortization of any premium or discount related
to the mortgage-backed security. In accordance with generally accepted
accounting principles, premiums and discounts are amortized/accreted over the
estimated lives of the securities, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the
amortization/accretion period for premiums and discounts can significantly
affect the yield of the mortgage-backed security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because to the extent that the Company's
mortgage-backed securities amortize or prepay faster than anticipated, the
Company may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
The following table sets forth the composition of the Company's securities
at the dates indicated.
December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------------------
Carrying Carrying Carrying
Value (1) %of Total Value (1) %of Total Value (1) %of Total
------------ -------- ------------ -------- ----------- --------
Securities:
Federal Agency Obligations $ 43,773 21.65% $ 9,967 13.06% $ 10,000 18.17%
Municipal Bonds 505 0.25% --- ----% 239 0.43%
Other investment securities (2) --- ----% 11,422 14.97% 16,635 30.22%
Mortgage-backed securities 156,261 77.10% 53,033 69.49% 26,516 48.17%
----------- -------- ---------- -------- --------- --------
Total securities 200,539 99.00% 74,422 97.52% 53,390 96.99%
FHLB stock 2,029 1.00% 1,892 2.48% 1,656 3.01%
----------- -------- ---------- -------- --------- --------
Total securities, and $ 202,568 100.00% $ 76,314 100.00% $ 55,046 100.00%
FHLB stock ========== ======== ========== ======== ========= ========
Other interest-earning assets:
Interest-bearing deposits with banks $ 2,051 31.31% $ 5,259 6.39% $ 470 6.65%
Federal Funds Sold 4,500 68.69% 77,100 93.61% 6,600 93.35%
----------- -------- ---------- -------- ---------- --------
Total $ 6,551 100.00% $ 82,359 100.00% $ 7,070 100.00%
========== ======== ========== ======== ========= ========
<FN>
-------------------------------------
(1)At December 31, 1996 and 1995 debt security are classified as available for
sale and are carried at fair value, and at December 31, 1994 debt securities are
classified as held to maturity and are carried at amortized cost. The FHLB stock
is non-marketable and accordingly is carried at cost.
(2)Primarily comprised of debt securities of Fortune 500 companies initially
rated A or better. These securities generally contain greater risk than U.S.
Government securities and Federal agency obligations.
</FN>
The composition and contractual maturities of the securities portfolio (all
of which are categorized as available for sale), excluding FHLB stock, are
indicated in the following table. The Company's securities portfolio at December
31, 1996, contained no securities of any issuer with an aggregate book value in
excess of 10% of the Company's equity, excluding those issued by the United
States Government or its agencies. Securities are stated at their contractual
maturity date and does not reflect the effects of possible prepayments.
December 31, 1996
---------------------------------------------------------------------------------------
Over One Over Five
One Year Year through Years through Over
or less Five Years Ten Years 10 Years Total Investment Securities
---------------------------------------------------------------------------------------
Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value
---------------------------------------------------------------------------------------
(Dollars in Thousands)
Federal agency obligations $ --- $ 18,000 $ 13,000 $ 12,968 $ 43,968 $ 43,773
Other investment securities --- 250 250 --- 500 505
Mortgage-backed securities --- 11,044 6,403 138,744 156,191 156,261
------- ------- ------- ------- ------- -------
Total investment securities $ --- $ 29,294 $ 19,653 $151,712 $200,659 $200,539
======= ======= ======= ======= ======= =======
Weighted average yield .... ----% 5.99% 6.99% 7.72% 7.40% 7.40%
Sources of Funds
General
The Company's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan and mortgage-backed security principal,
maturities of investment securities, short-term investments, and funds provided
from operations.
Deposit
The Company offers a variety of deposit accounts having a range of interest
rates and terms. The Company's deposits consist of savings accounts, money
market accounts, transaction accounts, and certificate accounts currently
ranging in terms from 91 days to 60 months. The Company primarily solicits
deposits from its primary market area and at December 31, 1996, did not have
brokered deposits. The Company relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits. The
Company has utilized premiums and promotional gifts for new accounts in
connection with the opening of new branches or with club accounts. At times the
Company also uses small advertising give-aways in the aisles of the supermarkets
where it maintains branches. For information regarding average balances and rate
information on deposit accounts, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report and for
information on the dollar amount of deposits in the various deposit types
offered by the Company, see Note 8 of the Notes to Consolidated Financial
Statements in the Annual Report.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Company has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management, liquidity and profitability objectives. Based on
its experience, the Company believes that its savings accounts, and transaction
accounts are relatively stable sources of deposits. However, the ability of the
Company to attract and maintain money market accounts, and certificates of
deposit and the rates paid on these deposits have been and will continue to be
significantly affected by market conditions.
The following table sets forth the savings flows at the Company during the
periods indicated. The net increase in deposits for the year ended December 31,
1995, was primarily the result of the Company's having opened two new branches
in November 1994 and May 1995 and the Company's decision to raise the interest
rates offered on six month certificates of deposit in order to replace borrowed
funds. Management believes that the decrease in deposits during 1996 was the
result, in part, to some of the Bank's depositors deciding to pursue alternative
opportunities, such as stock mutual funds, with a portion of their investable
funds.
Years Ended December 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(Dollars in thousands)
Opening balance $311,238 $293,152 $294,780
Deposits 860,011 841,042 807,373
Withdrawals 885,591 835,404 818,885
Interest credited 12,424 12,448 9,884
========== ========= =========
Ending balance $298,082 $311,238 $293,152
========== ========= =========
Net increase (decrease) ($13,156) $18,086 ($1,628)
=========== ======== =========
Percent increase (decrease) (4.23%) 6.17% (0.55%)
=========== ======== =========
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1996.
Certificate Accounts 0.00- 4.01 - 6.01 - 8.01 - Percent
Maturing in Quarter Ending: 4.00% 6.00% 8.00 or greater Total of Total
- ----------------------------------------------------------------------------------------
March 31, 1997 $ 979 $ 33,387 $ 1,035 $ --- $ 35,401 23.30%
June 30, 1997 9 22,256 573 --- 22,838 15.03%
September 30, 1997 --- 17,006 1,625 --- 18,631 12.26%
December 31, 1997 6 13,251 931 --- 14,188 9.34%
March 31, 1998 --- 19,332 991 --- 20,323 13.38%
June 30, 1998 --- 9,384 2,668 --- 12,052 7.93%
September 30, 1998 --- 3,220 372 --- 3,592 2.36%
December 31, 1998 --- 2,407 23 --- 2,430 1.60%
March 31, 1999 --- 1,879 894 --- 2,773 1.83%
June 30, 1999 --- 1,758 880 --- 2,638 1.74%
September 30, 1999 --- 2,326 167 --- 2,493 1.64%
December 31, 1999 --- 1,287 1,132 --- 2,419 1.59%
Thereafter --- 3,373 8,781 --- 12,154 8.00%
Total $ 994 $130,866 $ 20,072 $ --- $151,932 100.00%
======== ======== ======== ======== ======== =======
Percent of Total 0.65% 86.13% 13.21% ----% 100.00%
======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1996.
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
--------- -------- -------- -------- --------
(In thousands)
Certificates of deposit
less than $100,000 $34,114 $21,591 $29,918 $55,109 $140,732
Certificates of deposit
of $100,000 or more 1,287 1,247 2,901 5,765 11,200
--------- -------- -------- -------- --------
Total certificates of deposit $35,401 $22,838 $32,819 $60,874 $151,932
========= ======== ======== ======== ========
Borrowings
Although deposits are the Company's primary source of funds, the Company's
policy generally has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Company needs additional funds to satisfy loan demand.
The Company's borrowings historically have consisted of advances from the
FHLB of New York. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
December 31, 1996, the Company had $6 million in FHLB advances. During 1996, the
Company significantly increased its other borrowings by $102.8 million. See Note
9 of the Notes to Consolidate Financial Statements contained in the Annual
Report. These borrowings were used to purchase various investments including
Federal agency obligations and mortgage-backed securities which were
simultaneously pledged as securities sold under agreements to repurchase. At
December 31, 1996, pledged securities totaled $113.8 million. The positive
interest rate spread between these volumes of investments and borrowings has
produced an increase of approximately $1.4 million in net interest income with a
narrowing in the Company's overall net interest margin from 3.87% for the year
ended December 31, 1995 to 3.66% for the year ended December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Operating Results" contained in the Annual Report.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings for the periods indicated.
Years Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Maximum Balance:
FHLB Advances $ 28,000 $15,000 $15,000
Securities sold under agreements to repurchase 102,780 4,000 4,000
Average Balance:
FHLB Advances 9,757 3,922 4,068
Securities sold under agreements to repurchase 57,815 958 1,403
The following table sets forth certain information as to the Company's
borrowings at the dates indicated:
December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
FHLB advances $ 6,000 $ --- $ 15,000
Securities sold under agreements to repurchase 102,780 --- 4,000
--------- -------- --------
Total borrowings $108,780 $ --- $ 19,000
========= ======== ========
Weighted average interest rate of FHLB advances 5.30% ----% 5.65%
Weighted average interest rate of securities sold
under agreements to repurchase 5.96% ----% 5.50%
Subsidiary and Other Activities
General
As a federally chartered savings association, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or $9.2 million at December 31,
1996, in the stock of, or loans to, service corporation subsidiaries. As of such
date, the Bank had no investments in service corporation subsidiaries. The Bank
may invest an additional 1% of its assets in service corporations where such
additional funds are used for inner-city or community development purposes and
up to 50% of its total capital in conforming loans to service corporations in
which it owns more than 10% of the capital stock. Federal associations also are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
The Bank organized a single service corporation in 1984, which is known as
ASB Insurance Agency, Inc. ("ASB Insurance"). In November 1996, the Company
purchased the service corporation from the Bank for $1,000. ASB Insurance offers
mutual funds, annuity and brokerage services through a registered broker-dealer
to the Company's customers and members of the general public. ASB Insurance
recognized gross revenues of $67,500 for the year ended December 31, 1996.
Regulation
General
The Bank, organized in 1886, is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of New York and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the savings and loan holding company of the Bank, the Company also is subject
to federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Bank Insurance Fund, which is
administered by the FDIC. Its deposits are insured up to applicable limits by
the FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Association.
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS, its
primary federal banking regulator, and the FDIC. The last regular OTS
examination of the Bank was as of December 31, 1996. When these examinations
are conducted by the OTS and the FDIC, the examiners, if they deem appropriate,
may require the Bank to provide for higher general or specific loan loss
reserves. All 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 Bank's OTS assessment for the fiscal year ended December 31, 1996, was
$89,600.
The OTS also has extensive enforcement authority over all federal savings
institutions and their holding companies, including the Bank and the Company.
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 unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including the filing of misleading or untimely reports 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 authority of the Bank 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 Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1996, the Bank's lending limit under this restriction was $6.9
million. Loans fully secured by certain readily marketable collateral may be
made for up to 25% of unimpaired capital and surplus, or $11.6 million. The Bank
is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The OTS and the other federal banking agencies have also proposed
additional guidelines on asset quality and earnings standards. No assurance can
be given as to whether or in what form the proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines, by regulation or order, to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
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 (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium, while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF, such as Amsterdam
Savings Bank, in order to maintain the reserve ratio of the BIF at 1.25% of BIF
insured deposits. As a result of the BIF reaching its statutory reserve ratio,
the FDIC revised the premium schedule for BIF insured institutions to provide a
range of 0.04% to 0.31% of deposits effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to 0.27% with a minimum annual assessment of $2,000. The insurance
premiums paid by institutions insured by the Savings Association Insurance Fund
(the "SAIF") were not adjusted, however, and remained at the range previously
applicable to both BIF and SAIF insured institutions which was .23% to .31% of
deposits. In addition, BIF insured institutions are required to contribute to
the cost if financial bonds were issued to finance the cost of resolving thrift
failures in the 1980s. Until the earlier of the year 2000 or when the BIF and
SAIF are merged, BIF deposits will only be assessed at a rate of 20% of the rate
for SAIF deposits. The rate currently set for BIF and SAIF deposits is 1.3 basis
points and 6.5 basis points, respectively.
On September 30, 1996 federal legislation was enacted that required the
SAIF to be recapitalized with a one-time assessment on virtually all SAIF
insured institutions, equal to 65.7 basis points on SAIF insured deposits
maintained by those institutions as of March 31, 1995. All of the Bank's
deposits are BIF insured, and therefore, this one-time assessment had no impact
on the Bank.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, 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 capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common shareholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1996, the Bank did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At December 31, 1996, the Bank had no subsidiaries.
At December 31, 1996, the Bank had tangible capital of $46.2 million, or
10.0% of adjusted total assets, which is approximately $39.3 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1996, the
Bank had no intangibles which were subject to these tests.
At December 31, 1996, the Bank had core capital equal to $46.2 million, or
10.0% of adjusted total assets, which is $32.4 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital, plus general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
$2.5 million of general loss reserves included in risk-based capital, which
excludes $951,000 of general loss reserves which was in excess of the maximum of
1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
rule will not become effective until the OTS evaluates the process by which
savings associations may appeal an interest rate risk deduction determination.
It is uncertain as to when this evaluation may be completed. Any savings
association with less than $300 million in assets and a total capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
On December 31, 1996, the Bank had total capital of $48.7 million
(including $46.2 million in core capital and $2.5 million in qualifying
supplementary capital) and risk-weighted assets of $198.0 million (including
$3.0 million in converted off-balance sheet assets); or total capital of 24.6%
of risk-weighted assets. This amount was $32.9 million above the 8% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
or the Company may have a substantial adverse effect on the Company's operations
and profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution of a
shareholder's percentage ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. For a discussion of what the Bank includes in
liquid assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources" in the Annual Report.
This liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 7.51% and a short-term
liquid assets ratio of 1.61%.
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and accounting for
loans and securities (i.e., whether held for investment, sale or trading) with
appropriate documentation. OTS accounting regulations, which may be made more
stringent than GAAP by the OTS, require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
and that financial reports must incorporate any other accounting regulations or
orders prescribed by the OTS. The Bank is in compliance with these amended
rules.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified under Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1996, the Bank met the test and has always met
the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was last examined for CRA
compliance in June 1996 and received a rating of "satisfactory".
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates; however, the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, which authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any savings association) would become
subject to activity restrictions unless such other associations each qualify as
a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any savings association. Such acquisitions are generally prohibited if they
result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal shareholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions set
forth under Rule 144 of the Securities Act. If the Company meets specified
current public information requirements, each affiliate of the Company is able
to sell in the public market, without registration, a limited number of shares
in any three-month period.
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). At December
31, 1996, the Bank was in compliance with these reserve requirements. 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. See "Liquidity."
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.
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to be used to provide funds for residential
home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At December 31, 1996, the Bank had $2.0 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 8.0% and were $130,000 or 6.4% for 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal Taxation
Savings associations such as the Bank that meet certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction is computed under the experience method. Under the experience method,
the bad debt reserve deduction is an amount determined under a formula based
generally upon the bad debts actually sustained by the savings association over
a period of years.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent prior years earnings appropriated to a savings association's
bad debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, the Bank's Excess for tax purposes totaled
approximately $162,000.
The Bank and its subsidiaries file consolidated federal income tax returns
on a fiscal year basis using the accrual method of accounting. The Company
intends to file consolidated federal income tax returns with the Bank and its
subsidiaries.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1988. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
New York Taxation
The Bank and its subsidiaries that operate in New York are subject to New
York state taxation. The Bank is subject to the New York State Franchise Tax on
Banking Corporations in an annual amount equal to the greater of (i) 9% of the
Bank's "entire net income" allocable to New York State during the taxable year,
or (ii) the applicable alternative minimum tax. The alternative minimum tax is
generally the greater of (a) 0.01% of the value of the Bank's assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State, or (c) $250. In addition, New
York also imposes a surtax of approximately 3% on the applicable tax described
above. The surtax is scheduled to expire in 1996. Entire net income is similar
to federal taxable income, subject to certain modifications (including the fact
that net operating losses cannot be carried back or carried forward) and
alternative entire net income is equal to entire net income without certain
modifications. The Bank and its consolidated subsidiaries have been audited by
the New York State Department of Taxation and Finance through December 31, 1994.
Delaware Taxation
As a Delaware holding company, the Company 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. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.
Competition
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks, credit
unions and mortgage brokers making loans secured by real estate located in the
Company's primary market area. Other savings institutions, commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending.
The Company attracts substantially all of its deposits through its branch
offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from mutual
funds and other savings institutions, commercial banks and credit unions located
in the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges.
Automated teller machine facilities are also available.
Employees
At December 31, 1996, the Company had a total of 172 employees, including
28 part-time employees. The Company's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
Executive Officers of the Company and the Bank Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company and
the Bank who do not serve on the Company's or the Bank's Board of Directors.
There are no arrangements or understandings between such persons named and any
persons pursuant to which such officers were selected.
Harold A. Baylor, Jr. Mr. Baylor, age 54, is Vice President and the
Treasurer of the Company and the Bank, positions he has held with the Company
since June 1995 and with the Bank since 1990 and 1987, respectively.
Robert Kelly. Mr. Kelly, age 50, is Vice President, Secretary and General
Counsel to the Company, positions he has held with the Company since its
incorporation in June 1995. Mr. Kelly has been Vice President and General
Counsel to the Bank since July 1994. In January 1995 he was appointed Secretary
of the Bank. Prior to joining the Bank in 1994, Mr. Kelly was self-employed in
the general practice of law in the State of New York.
Nancy S. Virkler. Ms. Virkler, age 47, is Vice President of Operations at
the Bank. She was appointed Vice President in June 1994. Ms. Virkler has served
the Bank in various capacities since she began as a management trainee in 1977.
Richard C. Edel. Mr. Edel, age 47, is a Vice President of the Bank, a
position he has held since 1987. Mr. Edel is also currently serving as the
Community Reinvestment Act Officer of the Bank.
Cynthia M. Proper. Ms. Proper, age 34, was appointed Vice President and
Director of Lending of the Bank in July 1995. Prior to such appointment, Ms.
Proper was the Director of Internal Audit. She also served the Bank in various
other capacities, primarily in the lending and savings areas. Ms. Proper has
been employed at the Bank since 1985.
Michelle G. Brown. Ms. Brown, age 29, is Vice President and the Director of
Human Resources of the Bank, positions she has held since June 1994. Ms. Brown
joined the Bank in June 1992 as the Director of Internal Audit. Prior to joining
the Bank, Ms. Brown was a District Financial Examiner with the National Credit
Union Administration.
Item 2. Description of Property
The Company conducts its business at its main office, eight other banking
offices and an operations office in its primary market area. The following table
sets forth information relating to each of the Company's offices as of December
31, 1996. The Company also owns a parking lot located at 18-22 Division Street,
Amsterdam, New York, which is used to service the main office. The net book
value of the Company's premises and equipment (including land, building and
leasehold improvements and furniture, fixtures and equipment) at December 31,
1996 was $2.8 million. See Note 7 of Notes to Consolidated Financial Statements
in the Annual Report. The Company believes that its current facilities are
adequate to meet the present and foreseeable needs of the Bank and the Company,
subject to possible future expansion.
Total
Owned Lease Approximate
Date or Expiration Square Net Book
Acquired Leased Date Footage Value
-------- ------ -------- -------- -------
Location
Main Office:
11 Division Street 1914 Owned -- 18,600 $ 418,965
Amsterdam, New York
Branch Offices:
19 River Street 1972 Leased 1997 2,000 19,554
Fort Plain, New York
Arterial at Fifth Avenue 1979 Owned -- 2,200 272,200
Gloversville, New York
Route 30N 1972 Owned -- 2,700 249,828
Amsterdam, New York
Village Plaza 1987 Leased 1997 4,000 46,643
Clifton Park, New York
Grand Union Plaza 1988 Leased 2008 3,000 134,473
Route 50
Balston Spa, New York
Price Chopper Supermarket (1) 1994 Leased 1999 362 154,923
1640 Eastern Parkway
Schenectady, New York
Price Chopper Supermarket (1) 1995 Leased 2000 384 179,526
873 New Loudon Road
Latham, New York
Price Chopper Supermarket (1) 1995 Leased 2000 326 159,905
Sanford Farms Shopping Center
Amsterdam, New York
Operations Center:
35 East Main Street 1993 Owned -- 10,800 1,148,050
Amsterdam, New York
<FN>
- --------------------
(1) Banking operations are located inside of the supermarkets. Each of these
leases contains two 5 year renewal options.
</FN>
The Company maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Company at December 31, 1996, was $292,473.
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Company in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Company's results of operations. For more information, see Note
13(a) of the Notes to Consolidated Financial Statements contained in the Annual
Report.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Page 58 of the Annual Report is herein incorporated by reference.
Item 6. Selected Financial Data
Pages 2 and 3 of the Annual Report is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 4 through 21 of the Annual Report are herein incorporated by
reference.
Item 8. Financial Statements and Supplementary Data
Pages 22 through 57 of the Annual Report are herein incorporated by
reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated herein
by reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 23, 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 23, 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Corporation's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
May 23, 1997, except for information contained under the heading "Compensation
Committee Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Shareholders scheduled to be held on May 23,
1997, except for information contained under the heading "Compensation Committee
Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report to
Shareholders for the year ended December 31, 1996, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- --------
Independent Auditors' Report ........................................ 22
Consolidated Statements of Financial Condition at
December 31, 1996 and 1995 ..................................... 23
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ............................... 24
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994 ............... 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ............................... 26-27
Notes to Consolidated Financial Statements .......................... 28-57
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
(a) (3) Exhibits:
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3 Certificate of Incorporation and Bylaws *
4 Instruments defining the rights of security *
holders, including indentures
9 Voting trust agreement None
10.1 Employment Agreements of Robert J. Brittain, *
Harold A. Baylor, Jr., Richard C. Edel, Nancy
S. Virkler, Cynthia M. Proper and Robert Kelly
10.2 Employee Stock Ownership Plan *
11 Statement re: computation of per share earnings **
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consent of experts and counsel None
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional exhibits None
<FN>
- -------------------
*Filed on September 7, 1995, as exhibits to the Registrant's Form S-1
registration statement (Registration No. 33-96654), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
**See Notes to Consolidated Financial Statements, Note 1(n) contained in
the Company's Annual Report.
</FN>
(b) Reports on Form 8-K:
Current reports on form 8-K were filed on November 4, 1996 for:
(i) October 25, 1996 press release regarding Ambanc Holding Co., Inc.
earnings for the three and nine months ended September 30, 1996.
Current reports on from 8-K were filed on January 15, 1997 for:
(ii) December 13, 1996 press release announcing its intentions to
commence a 10% stock repurchase program; and approval to open a
new branch.
(iii) December 23, 1996 press release announcing the sale of loans and
foreclosed real estate and increased provisions for loan losses.
(iv) January 13, 1997 press release announcing the completion of the
10% stock repurchase.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMBANC HOLDING CO., INC.
Date: April 15, 1997 By: /s/ Robert J. Brittain
------------------------------ ----------------------
Robert J. Brittain, President
and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Robert J. Brittain /s/ Paul W. Baker
- ----------------------------------- -------------------------------------
Robert J. Brittain , President Paul W. Baker, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: April 15, 1997 Date: April 15, 1997
----------------------------- --------------------------------
/s/ William A. Wilde, Jr. /s/ Lauren T. Barnett
- ----------------------------------- -------------------------------------
William A. Wilde, Jr., Director Lauren T. Barnett, Director
Date: April 15, 1997 Date: April 15, 1997
----------------------------- --------------------------------
/s/ Robert J. Dunning /s/ Carl A. Schmidt, Jr.
- ----------------------------------- -------------------------------------
Robert J. Dunning, DDS, Director Carl A. Schmidt, Jr., Director
Date: April 15, 1997 Date: April 15, 1997
----------------------------- --------------------------------
/s/ Charles S. Pedersen /s/ Lionel H. Fallows
- ----------------------------------- -------------------------------------
Charles S. Pedersen, Director Lionel H. Fallows, Director
Date: April 15, 1997 Date: April 15, 1997
----------------------------- --------------------------------
/s/ John J. Daly /s/ Harold A. Baylor, Jr.
- ----------------------------------- -------------------------------------
John J. Daly, Director Harold A. Baylor, Jr., Vice
President and Treasurer (Principal
Financial and Accounting Officer)
Date: April 15, 1997 Date: April 15, 1997
----------------------------- --------------------------------
Index to Exhibits
Exhibit
Number
- -------
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
27 Financial Data Schedule