________________________________________________________________________________
1997 ANNUAL REPORT
________________________________________________________________________________
[LOGO]
AMBANC HOLDING CO., INC.
AMSTERDAM, NEW YORK
1997 ANNUAL REPORT
TABLE OF CONTENTS
President's Message to Shareholders ...........................................2
Selected Consolidated Financial Information ...................................3
Management's Discussion and Analysis of Financial Condition and
Results of Operations .........................................................5
Independent Auditors' Report .................................................22
Consolidated Statements of Financial Condition ...............................23
Consolidated Statements of Income ............................................24
Consolidated Statements of Changes in Shareholders' Equity ...................25
Consolidated Statements of Cash Flows ........................................26
Notes to Consolidated Financial Statements ...................................28
Corporate and Shareholder Information ........................................61
Directors and Executive Officers .............................................62
1
MESSAGE FROM THE PRESIDENT
To Our Shareholders:
I am pleased to present the third Annual Report to shareholders of Ambanc
Holding Co., Inc., the parent holding company of Amsterdam Savings Bank, FSB.
During 1997, as part of our ongoing commitment to expand the Company's core
business, we opened our fourth and fifth supermarket branch offices, both
located in Saratoga County, N.Y., and a traditional branch located in
Guilderland, Albany County, N.Y.
The Company continues to focus on enhancing shareholder value. Since the
Company's initial public offering ("IPO") in December 1995, the Company's
outstanding shares of common stock have been reduced to 4,306,418 shares at
December 31, 1997 through stock repurchases of 1,115,832 shares, representing
20.6% of the shares issued in the IPO. In addition to the stock repurchase
programs, the Company paid its first regular quarterly cash dividend in August
1997 of $0.05 per share. Total cash dividends paid in 1997 totaled $0.10 per
share, or 14.3% of 1997 basic earnings per share. The Company's closing stock
price increased to $18.75 at December 31, 1997 from $11.25 at December 31, 1996,
an increase of $7.50 per share, or 67%. The total return on the Company's stock,
including cash dividends, for the year ended December 31, 1997, was in excess of
67%. As we move further into our third year as a public company, your Board of
Directors, officers and staff remain dedicated to maintaining the Company's
financial strength, expanding its core business and enhancing shareholder value.
Your Company's directors, officers and staff are also committed to making a
positive difference in the communities in which they live and work. Many of
these individuals are actively involved in their communities participating in
service clubs and a variety of charitable civic and cultural organizations.
We optimistically look forward to the future and, on behalf of the Board of
Directors, I wish to thank our customers, staff and shareholders for your
continued support of Ambanc Holding Co., Inc.
Sincerely,
Robert J. Brittain
President and Chief Executive Officer
2
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of the
Company. This financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes to the
Consolidated Financial Statements of the Company presented elsewhere in this
Annual Report. All references to the Company, unless otherwise indicated, at or
before December 26, 1995 refer to the Bank.
December 31,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Selected Consolidated (In Thousands)
Financial Condition Data:
Total assets ..................... $ 510,444 $ 472,421 $ 438,944 $ 343,334 $ 332,902
Securities available for sale .... 205,842 200,539 74,422 -- --
Investment securities ............ -- -- -- 53,390 57,797
Loans receivable, net ............ 281,123 248,094 249,991 261,581 220,647
Deposits ......................... 333,265 298,082 311,239 293,152 294,780
Borrowed funds ................... 111,550 108,780 -- 19,000 --
Shareholders' equity ............. 61,202 61,518 76,015 27,414 25,464
Years Ended December 31,
1997 1996 1995 1994 1993
--------- --------- --------- -------- ---------
Selected Consolidated (In Thousands)
Operations Data:
Total interest and dividend income $ 35,566 $ 32,348 $ 25,582 $ 23,806 $ 23,789
Total interest expense ........... 19,654 16,435 12,746 10,192 10,885
--------- --------- --------- --------- ---------
Net interest income .............. 15,912 15,913 12,836 13,614 12,904
Provision for loan losses ........ 1,088 9,450 1,522 1,107 1,689
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ....... 14,824 6,463 11,314 12,507 11,215
Other income ..................... 1,826 920 1,512 905 1,196
Other expenses ................... 12,197 13,148 11,383 11,340 9,659
--------- --------- --------- --------- ---------
Income (loss) before taxes and
cummulative effect of a change
in accounting principle ......... 4,453 (5,765) 1,443 2,072 2,752
Income tax provision (benefit) ... 1,693 (1,929) 586 122 71
Cummulative effect of a change in
accounting principle related to
SFAS No. 109 .................... -- -- -- -- 600
--------- --------- --------- --------- ---------
Net income (loss) ................ $ 2,760 ($ 3,836) $ 857 $ 1,950 $ 2,681
========= ========= ========= ========= =========
Basic earnings (loss) per share* . $ 0.70 ($ 0.81) N/A N/A N/A
========= ========= ========= ========= =========
Diluted earnings (loss) per share* $ 0.69 ($ 0.81) N/A N/A N/A
========= ========= ========= ========= =========
Dividend payout ratio ............ 14.3% N/A N/A N/A N/A
========= ========= ========= ========= =========
*Earnings per share were not calculated for 1995 and prior periods since
the Company had no stock outstanding prior to its initial public offering
completed on December 26, 1995.
3
Years Ended December 31,
1997 1996 1995 1994 1993
------------------------------------------
Selected Consolidated Financial
Ratios and Other Data:
Performance Ratios:
Return (loss) on average assets (1) ....... 0.56% (0.84)% 0.25% 0.59% 0.83%
Return (loss) on average equity (1) ....... 4.52 (5.24) 3.00 7.36 11.00
Interest rate spread information:
Average during period .................. 2.58 2.74 3.36 4.01 3.85
Net interest margin (2) ................ 3.36 3.66 3.87 4.34 4.19
Efficiency ratio (3) ...................... 69.81 62.50 68.18 63.46 61.06
Ratio of other expenses to average
total assets (1) ....................... 2.48 2.86 3.37 3.38 2.97
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................. 118.93 124.26 113.31 110.24 109.53
Asset Quality Ratios:
Non-performing assets to total assets
at end of period (1) .................... 0.67 1.18 2.72 4.15 5.06
Non-performing loans to total loans ....... 1.16 1.94 3.48 3.97 5.07
Allowance for loan losses to
non-performing loans .................... 117.07 70.47 30.10 21.42 28.59
Allowance for loan losses to loans
receivable .............................. 1.34 1.37 1.05 0.85 1.47
Capital Ratios:
Equity to total assets at end of period (1) 11.99 13.02 17.32 7.98 7.65
Average equity to average assets (1) ...... 12.42 15.95 8.30 7.96 7.52
Other Data:
Number of full-service offices ............ 12 9 9 7 6
<FN>
(1) Period end and average asset and equity amounts reflect securities available
for sale at fair value, with net unrealized gains/losses, net of tax, included
as a component of equity.
(2) Net interest income divided by average interest-earning assets.
(3) The efficiency ratio represents other expenses (excluding real estate owned
and repossessed assets expenses, net), divided by the sum of net interest income
and other income (excluding net gains (losses) on securities transactions).
</FN>
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Ambanc Holding Co., Inc. ("Ambanc" or the "Company"), a savings institution
holding company is the parent corporation of Amsterdam Savings Bank, FSB (the
"Bank"). Ambanc was formed as a Delaware Corporation to act as the holding
company for the Bank upon the completion of the Bank's conversion from the
mutual to stock form on December 26, 1995 (the "Conversion"). As such, the
Company had no material results of operations during 1995. Accordingly, the
discussion herein for periods prior to 1996 relates primarily to the Bank's
results of operations.
The Company's primary business, through the Bank, consists of attracting
deposits from the general public and originating real estate loans and other
types of investments. The Bank services a five-county area in upstate New York
through the Bank's main office, eleven other banking offices and its operations
center. The Company also has a wholly-owned subsidiary, ASB Insurance Agency,
Inc., which offers mutual funds, annuity products and brokerage services to the
Bank's customers and the general public.
Like all thrift institutions, the Bank's (and therefore the Company's)
operations are materially affected by general economic conditions, the monetary
and fiscal policies of the federal government and the policies of the various
regulatory authorities, including the Office of Thrift Supervision (the "OTS")
and the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). Its results of operations are largely dependent upon its net interest
income, which is the difference between (i) the interest its receives on its
loan portfolio and its securities portfolio and (ii) the interest it pays on its
deposit accounts and borrowings. The operations of the Company can also be
affected by the economic conditions in its market area, upstate New York.
The Company's main office is located at 11 Division Street, Amsterdam, New
York 12010. The Company's telephone number at this address is (518)842-7200.
Forward Looking Statements
When used in this annual report, 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
5
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 release publicly the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000
The Company has established a committee (the "Y2K Committee") to conduct a
comprehensive review of its computer systems to identify the systems that could
be affected by the "Year 2000" problem. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time sensitive software
may recognize a date using "00" as the year 1900 rather that the year 2000. This
could result in a major system failure or miscalculations. The Company is also
aware of these risks to third parties, including vendors (and to the extent
appropriate, depositors and borrowers), and the potential adverse impact on the
Company resulting from failures by these parties to adequately address the Year
2000 problem. The Company has been communicating with its outside data
processing service bureau, as well as other third party service providers (and
to the extent appropriate, depositors and borrowers), to assess their progress
in evaluating their systems and implementing any corrective measures required by
them to be prepared for the year 2000. To date, the Company has not been advised
by any of its primary vendors that they do not have plans in place to address
and correct the issues associated with the Year 2000 problem; however, no
assurance can be given as to the adequacy of such plans or to the timeliness of
their implementation. The Y2K Committee reports on a quarterly basis to the
Audit Committee of the Board of Directors as to the Company's progress in
resolving any Year 2000 problems.
Based on the Company's current knowledge and investigations, the expense of
the year 2000 problem as well as the related potential effect on the Company's
earnings is not expected to have a material effect on the Company's financial
position or results of operations. Furthermore, the Company expects any
corrective measures required to be prepared for the Year 2000 to be implemented
on a timely basis.
Management Strategy
Management's primary goal is to improve the Company's profitability while
minimizing its risks. To meet these goals, the Company's strategies focus on:
(i) emphasizing lending secured by one- to four- family residential mortgages,
home equity, and consumer products, especially automobile loans; (ii) asset
quality; (iii) increasing the Bank's presence in its market area primarily
through the establishment of low-cost supermarket branches; and (iv) managing
interest rate risk.
6
Emphasizing Lending Secured by One- to Four-Family Residential Mortgages,
---------------------------------------------------------------------------
Home Equity and Consumer Products
---------------------------------
The Bank has emphasized and plans to continue to emphasize originating
traditional one- to four-family residential mortgage, home equity and consumer
loans in its primary market area.
During 1997, 1996, and 1995, the Bank originated $67.5 million, $62.0
million and $16.2 million, respectively, of loans secured by one-to four-family
residences, including home equity loans, and $14.7 million, $7.7 million and
$18.4 million, respectively, of consumer loans. At December 31, 1997, the Bank
had $189.7 million of loans secured by one- to four-family residences, $30.2
million of home equity loans and $27.1 million of consumer loans representing
66.9%, 10.7% and 9.6%, respectively, of the Bank's gross loan portfolio.
Asset Quality
-------------
The Bank's loan portfolio consists primarily of one- to four-family
residential and home equity loans, which are considered to have less risk than
commercial and multi-family real estate or consumer loans. The Bank has
de-emphasized its commercial and multi-family real estate lending, with the
portfolio shrinking as a percentage of the Bank's total loan portfolio to 10.8%
of total loans at December 31, 1997 from 13.8% and 28.0% at December 31, 1996
and 1993, respectively. During the same period, the Bank's portfolio of loans
secured by one- to four-family and home equity mortgage loans has grown as a
percentage of the Bank's total loan portfolio to 77.6% of total loans at
December 31, 1997 from 72.3%, and 59.4% at December 31, 1996 and 1993,
respectively.
The Bank's non-performing assets consist of non-accruing loans, accruing
loans delinquent more than 90-days, troubled debt restructurings and foreclosed
and repossessed assets. Prior to 1997, the Company's performance had been
significantly hampered by the level of its non-performing assets. During 1996,
the Company decided to dispose of certain non-performing and higher credit risk
performing assets in a bulk sale versus continuing to resolve the problems on an
asset specific basis in order to accelerate the reduction in loan portfolio
credit risk, reduce the drag on earnings that resulted from these assets,
enhance overall asset quality and better position the Company to achieve its
strategic goals. The net sales proceeds totaled $20.4 million, resulting in a
pre-tax loss of $6.6 million, which was charged against the allowance for loan
losses (approximately $5.6 million) and to other real estate owned expense
(approximately $1.0 million).
Primarily as a result of the bulk sale in 1996, the ratio of non-performing
assets to total assets declined from 2.72% at December 31, 1995 to 1.18% at
December 31, 1996. This ratio experienced further improvement in 1997, dropping
to 0.67% at December 31, 1997.
In addition, the Bank's ratios of non-performing loans to total loans and
the allowance for loan losses to non-performing loans also improved. The ratio
of non-performing loans to total loans at December 31, 1997 was 1.16% compared
to 1.94% and 3.48% at December 31, 1996 and 1995, respectively. The ratio of the
allowance for loan losses to non-performing loans increased to 117.1% at
December 31, 1997 compared to 70.5% and 30.1% at December 31, 1996 and 1995,
respectively.
7
Increasing the Bank's Presence in its Market Area Primarily through the
---------------------------------------------------------------------------
Establishment of Low-Cost Supermarket Branches
----------------------------------------------
Since November 1994, the Bank has opened five branch offices in
supermarkets, with one located in each of Schenectady, Albany and Montgomery
Counties, and two in Saratoga County, New York. Management believes that these
supermarket branch offices are an effective way to service its customers due to
their size, efficiency and convenient, high traffic locations.
In addition to the two new supermarket branch offices opened in 1997 in
Saratoga County, the Bank also opened a "traditional" branch office in 1997.
With the opening of the three branch offices in 1997, the Bank operates
12 full-service branch locations in its primary market area, all of which
provide customers with 24-hour access to ATMs. Two offsite ATMs were also placed
into service in 1997.
Managing Interest Rate Risk
---------------------------
The Bank has an asset/liability management committee that meets weekly to
develop, implement and review policies to manage interest rate risk. The Bank
has endeavored to manage its interest rate risk through the pricing and
diversification of its loans, including the introduction of new, first mortgage
loan products with shorter terms to maturity or with different interest rate
adjustment periods, the origination of consumer loans with shorter average lives
or which reprice at shorter intervals than fixed and adjustable-rate, one- to
four-family residential loans and, from time to time, the purchase of short- to
intermediate-term securities available for sale.
Financial Condition
Comparison of Financial Condition at December 31,1997 and December 31,
1996. Total assets at December 31, 1997, were $510.4 million, an increase of
$38.0 million, or 8.1%, compared to total assets of $472.4 million at December
31, 1996. The growth in total assets was primarily attributable to a $33.4
million, or 13.3%, increase in loans receivable, including net deferred costs,
fees and loan discounts. One-to four-family mortgage loans increased by $31.5
million, or 19.9% and home equity loans expanded by $7.4 million, or 32.6%.
Partially offsetting these increases were declines in multi-family,
non-residential and construction loans.
An increase of $1.4 million, or 5.3%, in consumer loans, primarily auto
loans which increased by $3.8 million, or 30.8% also contributed to total
growth. These increases were partially offset by a net decline in all other
consumer loan categories, mainly loans for recreational vehicles which declined
by $2.6 million.
Total deposits at December 31, 1997, were $333.3 million, an increase of
$35.2 million, or 11.8%, compared to $298.1 million at December 31, 1996. The
increase in total deposits was attributable primarily to a $31.4 million, or
20.7%, increase in certificates of deposit. "NOW" accounts increased $3.8
million, or 20.4%, to $22.7 million and demand deposits grew to $22.7 million,
an increase of $2.5 million, or 12.2% increase. These increases were partially
offset by a $2.5 million or 2.4% decline in savings and money market accounts.
8
Results of Operations
Comparison of Fiscal Years Ended December 31, 1997 and 1996
General. The Company recorded net income of $2.8 million for the fiscal
year ended December 31, 1997 compared to a net loss of $3.8 million for the
prior year. Net interest income for 1997 and 1996 was unchanged at $15.9
million. The net loss in 1996 was due primarily to the $9.5 million provision
for loan losses and the $2.6 million of expenses incurred in connection with the
Company's real estate owned and repossessed assets. The large provision was
necessitated to replenish and increase the Company's allowance for loan losses
which was depleted as a result of write-offs associated with the Company's bulk
sale of certain loans in 1996 and the commercial bankruptcy of a large
commercial borrower. See "Management Strategy - Asset Quality" and "Results of
Operations - Provision for Loan Losses."
Interest and Dividend Income. Interest and dividend income increased $3.2
million, or 9.9%, to $35.5 million in 1997 from $32.3 million in 1996. The
increase in interest income resulted from a $38.5 million, or 8.9%, increase in
the Company's average interest-earning assets, primarily securities available
for sale, which increased $38.0 million, or 24.3% in 1997, to $194.1 million
compared to $156.1 million in 1996. The increase in securities available for
sale was primarily funded with increased borrowings.
The average yield earned on interest-earning assets increased by 8 basis
points to 7.52% in 1997 from 7.44% in the prior year. The increase in the
average yield earned was attributable primarily to a change in the composition,
or mix, of the Company's interest-earning assets, mainly average securities
available for sale which increased in 1997 to 41.0% of total interest-earning
assets from 35.9% in 1996. The average yield earned on the Company's securities
also increased by 19 basis points to 7.19% in 1997 compared to 7.00% in 1996.
Interest Expense. Interest expense increased by $3.2 million, or 19.6%, to
$19.6 million in 1997 compared to $16.4 million in 1996. Average
interest-bearing liabilities increased by $48.1 million, or 13.8%, to $397.8
million in 1997 compared to $349.7 million during the prior year. During the
same periods, the average rate paid on interest-bearing liabilities increased by
24 basis points to 4.94% from 4.70%.
The increase in interest expense was attributable primarily to a $31.3
million, or 46.4%, increase in the average balance of borrowed funds to $98.9
million from $67.6 million in 1996 and an increase in average certificates of
deposit which grew by $22.0 million, or 14.7%, to $172.3 million from $150.3
million. The average rates paid on borrowed funds and certificates of deposit
during 1997 also increased over 1996 by 13 basis points on borrowed funds and 8
basis points on certificates of deposit. Borrowings consisted primarily of
securities sold under agreements to repurchase, with an increase in the average
balance of $37.5 million, or 64.9%, to $95.3 million in 1997 from $57.8 million
in 1996, partially offset by a decline in average advances from the Federal Home
Loan Bank ("FHLB") of New York. These borowings were primarily used to fund the
growth in the Company's securities available for sale.
Net Interest Income. Net interest income before provision for loan losses
was $15.9 million for 1997 and 1996. During 1997, the Company's average
interest-earning assets grew by $38.5 million, or 8.9%, to $473.1 million. The
9
average yield on these assets also increased when compared to 1996, improving by
8 basis points to 7.52% from 7.44%. However, the increase in average
interest-bearing liabilities exceeded the growth in average interest-earning
assets, increasing by $48.1 million to $397.8 million. The increase in the
average interest-bearing liabilities was accompanied by a 24 basis point
increase in the average rate paid on these funds to 4.94% for 1997 from 4.70%
for 1996.
Ambanc Holding Co., Inc. operates in an environment of intense competition
for deposits and loans. The competition in today's environment is not limited to
other local banks and thrifts, but also includes a myriad of financial services
providers that are located both within and outside the Company's local market
area. Due to this heightened level of competition to attract and retain
customers, the Company must continue to offer competitive interest rates on
loans and deposits. As a consequence of these competitive pressures, from
time-to-time, the relative spreads between interest rates earned and interest
rates paid will tighten, exerting downward pressure on net interest income, net
interest rate spread and the net interest margin. This is especially true during
periods when the growth in interest-earning assets lags behind the growth in
interest-bearing liabilities, the environment that the Company experienced in
1997. However, management does not want to discourage, by offering
noncompetitive interest rates, the creation of new customer relationships or
jeopardize existing relationships thereby curtailing customer base and loan
growth and the attendant benefits to be derived from them. Management believes
that the longer-term benefits to be derived from this position will outweigh the
shorter term costs associated with attracting, cross-selling and retaining an
expanding customer base. The Company's growing customer base provides Ambanc
with the potential for future, profitable customer relationships, which should
in turn increase the value of the franchise.
Provision for Loan Losses. The provision for loan losses decreased $8.4
million to $1.1 million in 1997 from $9.5 million during 1996. The higher
provision in 1996 resulted primarily from the Company's bulk sale of certain
performing and non-performing loans in the fourth quarter of 1996 and the
aggregate lending relationship with the Bennett Funding Group, a company that
filed for Chapter 11 bankruptcy protection on March 29, 1996. In order to
accelerate its objective of reducing credit risk in the loan portfolio and
better position the Company to achieve its strategic goals, management
considered it to be prudent to complete the bulk sale of certain non-performing
and performing commercial loans and manufactured home loans (which are
considered a higher credit risk consumer product) at a loss, versus continuing
to address these problem assets on an asset specific basis.
The Company's provision for loan losses is based upon its analysis of the
adequacy of the allowance for loan losses. Management determines the adequacy of
the allowance for loan losses based upon its analysis of risk factors in the
loan portfolio. This analysis includes evaluation of concentrations of credit,
historical loss experience, current economic conditions, estimated fair value of
underlying collateral, delinquencies, and other factors.
At December 31, 1997, the Bank's allowance for loan losses totaled $3.8
million, or 1.3% of total loans and 117.1% of non-performing loans, compared to
$3.4 million, or 1.4% of total loans and 70.5% of non-performing loans at
December 31, 1996.
Other Income. Other income increased $906,000, or 98.5%, to $1.8 million
for the year ended December 31, 1997, from $920,000 in 1996. The primary reason
10
for the increase in other income was the net gains on securities transactions of
$775,000, compared to a net loss of $102,000 in 1996. As the general level of
interest rates declined during 1997, management decided that it would be prudent
to sell securities and record the net gains on the transactions. One condition
adhered to in determining the selection and timing of the securities to be sold
was that the yield obtained on the reinvestment of the sale proceeds would not
be significantly lower than the foregone yield. A second condition was that the
credit rating of the replacement securities would be no lower than the quality
of the securities sold.
Other Expenses. Other expenses decreased $951,000, or 7.2%, to $12.2
million for the year ended December 31, 1997 from $13.1 million in the same 1996
period. The primary reason for the improvement was a $2.2 million decline in the
net costs associated with the Company's real estate owned and repossessed
assets. The decrease in these expenses resulted from one-time charges in 1996
related to the bulk sale of certain foreclosed real estate properties.
Excluding the expenses related to real estate owned and repossessed assets,
other expenses increased $1.2 million, or 11.9%, to $11.8 million in 1997 from
$10.6 million in 1996, mainly due to a higher level of salaries, wages and
benefits which increased $989,000, or 19.4%, to $6.1 million from $5.1 million
the prior year. Salaries, wages and benefits increased $250,000 as a result of
the opening of three branch offices in May 1997. Also contributing to the higher
level of salaries, wages and benefits was a $239,000 increase in the
compensation costs related to the Employee Stock Ownership Plan (ESOP) and a
$137,000 expense associated with awards of Company common stock under the
Recognition and Retention Plan (RRP) to officers. The remainder of the increase
was attributable to higher payroll taxes, employee insurance premiums and normal
cost of living and merit increases.
Occupancy and equipment expenses increased $211,000, or 15.9%, to $1.5
million, as a result of the opening of three branch offices in 1997. In
addition, other expenses increased $135,000 in 1997 as a result of awards of
Company Common Stock under the RRP to directors.
Income Tax Expense. Income tax expense increased $3.6 million to $1.7
million in 1997 due to a pre-tax loss of $5.8 million incurred in 1996 as
compared to pre-tax income of $4.5 million in 1997.
Results of Operations
Comparison of Fiscal Years Ended December 31, 1996 and 1995
General. For the fiscal year ended December 31, 1996, the Company recorded
a net loss of $3.8 million compared to net income of $857,000 for the prior
year. The net loss for 1996 was attributable primarily to the provision for loan
losses of $9.5 million; which was primarily related to the bulk sale of certain
performing and non-performing loans and the Company's aggregate lending
relationship with the Bennett Funding Group ("Bennett"). See "--Provision for
Loan Losses."
Interest and Dividend Income. Interest and dividend income increased $6.8
million, or 26.4%, to $32.3 million in 1996 from $25.6 million in 1995. The
11
increase in interest income resulted from a $103.2 million, or 31.2%, increase
in the Company's average interest-earning assets, primarily securities available
for sale, which increased $106.5 million, or 214% in 1996, to $156.1 million at
December 31, 1996, compared to $49.6 million of securities held to maturity in
1995. The average yield earned on the Company's securities increased 89 basis
points to 7.00% in 1996 compared to 6.11% in 1995.
However, overall the average yield earned on interest-earning assets
decreased 28 basis points to 7.44% in 1996 from 7.72% in the prior year. The
decrease in the average yield earned was mainly the result of the change in the
mix of average interest-earning assets with lower yielding securities available
for sale increasing as a percent of the total mix, rising to 36.4% during 1996
from 15.5% in 1995, while the percentage of higher yielding loans to total
interest-earning assets declined to 60.3% from 78.9% for the same periods.
Interest Expense. Interest expense increased by $3.7 million, or 28.9%, to
$16.4 million in 1996 compared to $12.7 million in 1995. Average
interest-bearing liabilities increased $57.3 million, or 19.6%, to $349.7
million in 1996 compared to $292.4 million during the prior year. During the
same periods, the average rate paid on interest-bearing liabilities increased by
34 basis points to 4.70% from 4.36%. The increase in interest expense was due
primarily to a $62.7 million increase in the average outstanding balance of
borrowed funds to $67.6 million from $4.9 million in 1995, mainly resulting from
an increase in securities sold under agreements to repurchase, which grew $56.8
million to $57.8 million in 1996 from $1.0 million in 1995. Average borrowed
funds, with an average rate of 5.94%, increased to 19.3% of total
interest-bearing liabilities for 1996 up from 1.7% in 1995 while average savings
accounts, with an average rate of 3.04% in 1996, declined to 29.5% from 37.2% in
1995 and average certificates of deposit, with an average rate of 5.65% in 1996,
decreased to 43.0% of the funding mix in 1996 from 50.4% the prior year.
Net Interest Income. Net interest income before provision for loan losses
increased $3.1 million, or 24.0%, to $15.9 million for the year ended December
31, 1996, compared to $12.8 million for 1995. As a result of implementing the
Company's strategy to enhance net interest income through the restructuring of
its balance sheet through the use of leveraged reverse repurchase agreements,
net interest income increased approximately $1.4 million. Partially offsetting
the increased net interest income attributable to average net earning asset
growth was a decline in the net yield on average interest-earning assets of 21
basis points to 3.66% in 1996 from 3.87% in 1995, primarily the result of the
changes in the composition of average interest-earning assets and average
interest-bearing liabilities as discussed above. See "Financial
Condition","Interest Income", "Interest Expense" and "Asset Liability
Management" herein.
Provision for Loan Losses. The provision for loan losses increased $8.0
million to $9.5 million in 1996 from $1.5 million during 1995. The increase
resulted primarily from the Company's bulk sale of certain performing and
non-performing loans in the fourth quarter of 1996, (see "Asset Quality"
herein), the aggregate lending relationship with the Bennett Funding Group, a
company that filed for Chapter 11 bankruptcy protection on March 29, 1996, as
well as the Company's continual review of its loan portfolio. In order to
accelerate its objective of reducing credit risk in the loan portfolio and
better position the Company to achieve its strategic goals, management
considered it to be more prudent to complete the bulk sale of certain
non-performing commercial type loans and manufactured home loans (which are
considered a higher credit risk consumer product), versus continuing to address
these assets on an asset specific basis (see "Asset Quality" herein).
12
The Bank records a provision for loan losses based upon its analysis of the
adequacy of the allowance for loan losses. Management determines the adequacy of
the allowance for loan losses based upon its analysis of risk factors in the
loan portfolio. This analysis includes evaluation of concentrations of credit,
historical loss experience, current economic conditions, estimated fair value of
underlying collateral, delinquencies, and other factors.
While the increase in the 1996 provision for loan losses was primarily due
to the Bennett relationship and the result of the bulk loan sale, it was also
due to weaknesses in the economy in the Bank's primary market area, decreases in
the value of real estate (the primary collateral securing many loans) in the
region, as well as increases in charge-offs, even after excluding the effects of
the bulk loan sales and the Bennett relationship.
At December 31, 1996, the Bank's allowance for loan losses totaled $3.4
million, or 1.4% of total loans and 70.5% of non-performing loans, compared to
$2.6 million, or 1.1% of total loans and 30.1% of non-performing loans at
December 31, 1995.
Other Income. Other income decreased by $592,000 to $920,000 for the year
ended December 31, 1996, from $1.5 million in 1995. The primary reasons for the
decline in non-interest income were the receipt by the Bank of a non-recurring
FDIC deposit insurance premium refund of $189,000 in 1995, net losses on the
sale of securities available for sale of $102,000 in 1996 compared to a net gain
in the prior year of $225,000 and the receipt in 1995 of non-recurring insurance
proceeds related to a fire loss on a real estate owned property in the amount of
$76,000. In late 1995, the Bank's securities portfolio was yielding below market
rates. As a result, the Bank decided in early January 1996 to sell $34 million
of its holdings and reinvest the proceeds in then current higher yielding
securities, based on a projection that the losses on the sales would be
recovered in approximately six-months.
Other Expense. Other expense increased $1.8 million to $13.1 million for
the year ended December 31, 1996, an increase of 15.5%, from $11.4 million in
1995. The primary reasons for the increase were a $962,000 increase in the net
costs associated with the Bank's real estate owned and repossessed assets and an
increase in salaries, wages, and benefits of $694,000, or 15.8% over the prior
year.
The increase in the expenses related to real estate owned and repossessed
assets resulted primarily from the bulk sale of certain foreclosed real estate
properties at an amount below book value, which increased expenses by
approximately $1.0 million. Although these assets had been carried at fair
value, the Bank was willing to accept a price lower than book value as part of
this bulk sale in order to reduce the drag on earnings that resulted from
carrying these non-performing assets. This increase was partially offset by a
decline in other write-downs of real estate owned of $377,000 to $877,000 for
1996 compared to $1.3 million during 1995. Also contributing to the increase was
an increase in expenses related to holding these assets.
The increase in salaries, wages, and benefits was primarily attributable to
the Company's Employee Stock Ownership Plan ("ESOP"), that was established at
the time of conversion. The year ended December 31, 1996, was the first year in
which the Company was required to recognize compensation expense related to the
13
ESOP. The amount of the expense recorded for 1996 was $527,000. Excluding the
ESOP expense, salaries, wages, and benefits increased $167,000, or 3.8%, to $4.6
million from $4.4 million in 1995 due mainly to normal cost of living and merit
increases.
All other non-interest expenses increased by $109,000, or 2.0%, to $5.5
million in 1996 from $5.4 million the prior year. Increases related to occupancy
and equipment, data processing, professional fees, and certain other expense
categories totaling $974,000 were offset almost entirely by decreases of
$865,000 in certain other expense categories, primarily FDIC deposit insurance
premiums, which declined by $531,000 from $533,000 in 1995 to $2,000 in 1996 due
to a decrease in the rates charged to well-capitalized, Bank Insurance Fund
(BIF) member institutions such as the Bank, and the recording of non-recurring
expenses of $205,000 in 1995 pertaining to the seizure and liquidation of
Nationar by the Superintendent of Banks of N.Y.S.
Income Tax Expense. Due to the pre-tax loss of $5.8 million incurred in
1996 as compared to pre-tax income of $1.4 million in 1995, the Company recorded
a tax benefit of $1.9 million for 1996 compared to an expense of $586,000 in
1995.
14
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and the
resultant yields, as well as the total dollar amount of interest expense
incurred on average interest-bearing liabilities and the resultant rates. No tax
equivalent adjustments were made. All average balances are daily average
balances. Non-accruing loans have been included in the table as loans with
interest earned on a cash basis only. Securities available for sale are included
at amortized cost.
1997 1996 1995
--------------------------- ------------------------- --------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Inc./Exp. Rate Balance Inc./Exp. Rate Balance Inc./Exp. Rate
------- --------- ------ ------- --------- ------ ------- --------- ------
Interest-Earning Assets (Dollars in Thousands)
Loans receivable ........................... $ 267,726 $ 21,011 7.85% $ 262,193 $20,557 7.84% $261,482 $ 21,385 8.18%
Securities available for sale .............. 194,111 13,957 7.19% 156,093 10,921 7.00% -- -- --
Investment securities ...................... -- -- -- -- -- -- 49,598 3,028 6.11%
Federal Home Loan Bank Stock ............... 3,066 204 6.65% 2,013 130 6.46% 1,867 143 7.66%
Federal funds sold and interest-
bearing deposits ......................... 8,162 394 4.76% 14,218 740 5.12% 18,352 1,026 5.59%
------- ------ ------- ------ ------- ------
Total interest-earning assets .......... 473,065 35,566 7.52% 434,517 32,348 7.44% 331,299 25,582 7.72%
------- ------ ------- ------ ------- ------
Allowance for Loan Losses .................... (3,846) (3,686) (2,598)
Due from Brokers ............................. 7,121 14,221 --
Unrealized Gain/(Loss)-AFS Securities ........ (884) (1,475) --
Other Assets ................................. 16,150 15,616 13,620
--------- --------- -----------
Total Average Assets ......................... $ 491,606 $ 459,193 $ 345,021
========= ========= ===========
Interest-Bearing Liabilities
Savings deposits ........................... $ 99,389 $ 3,016 3.03% $103,931 $ 3,162 3.04% $108,747 $ 3,300 3.03%
NOW deposits .............................. 19,990 543 2.72% 19,124 527 2.76% 18,640 511 2.74%
Certificates of deposit .................... 172,319 9,882 5.73% 150,300 8,492 5.65% 147,348 8,272 5.61%
Money Market Accounts ...................... 7,159 204 2.85% 8,765 243 2.77% 10,362 285 2.75%
Borrowed Funds ............................. 98,927 6,009 6.07% 67,572 4,011 5.94% 4,880 299 6.13%
Advances from borrowers for taxes and
insurance, and stock subscription proceeds -- -- -- -- -- -- 2,402 79 3.28%
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities ..... 397,784 19,654 4.94% 349,692 16,435 4.70% 292,379 12,746 4.36%
------- ------ ------- ------ ------- ------
Other Liabilities ............................ 32,757 36,255 24,017
------ ------ ------
Total Liabilities ............................ 430,541 385,947 316,369
Shareholders' Equity ......................... 61,065 73,246 28,625
------ ------ ------
Total Average Liabilities & Equity ........... $ 491,606 $ 459,193 $ 345,021
========= ========= ==========
Net interest income ...................... $ 15,912 $ 15,913 $ 12,836
======== ======== ========
Net interest rate spread ................. 2.58% 2.74% 3.36%
====== ====== =====
Net earning assets ....................... $ 75,281 $ 84,825 $ 38,920
========= ========= ==========
Net yield on average
interest-earning assets ................. 3.36% 3.66% 3.87%
====== ====== =====
Average interest-earning assets/
Average interest/bearing liabilities ... 118.93% 124.26% 113.31%
========== ========== ==========
15
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and the changes due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
----------------------------------------------------------------------------
1997 vs. 1996 1996 v. 1995
--------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ------------------ Increase
Volume Rate Decrease Volume Rate Decrease
---------- ------- --------- -------- --------- -----------
Interest-Earning Assets (Dollars in thousands)
Loans receivable (1) ................. $ 434 $ 20 $ 454 $ 58 ($ 886) ($ 828)
Securities available for sale (2) .... 2,726 310 3,036 10,921 -- 10,921
Investment securities ................ -- -- -- (3,028) -- (3,028)
Federal Home Loan Bank Stock ......... 70 4 74 13 (26) (13)
Federal funds sold and interest-
bearing deposits ................... (298) (48) (346) (219) (67) (286)
-------- -------- -------- -------- -------- --------
Total interest-earning assets .... 2,932 286 3,218 7,745 (979) 6,766
-------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities
Savings deposits ..................... (138) (9) (147) (145) 7 (138)
NOW deposits ........................ 23 (6) 17 13 3 16
Certificates of deposit .............. 1,261 129 1,390 167 53 220
Money Market Accounts ................ (46) 7 (39) (44) 2 (42)
Borrowed Funds ....................... 1,902 96 1,998 3,720 (8) 3,712
Advances from borrowers for
taxes and insurance, and stock
subscription proceeds .............. -- -- -- (45) (34) (79)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 3,003 $ 216 $ 3,219 $ 3,666 $ 23 $ 3,689
-------- -------- -------- -------- -------- --------
Net interest income ................ ($ 1) $ 3,077
======== ========
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
(2) Net of securities available for sale pending settlement and net unrealized
gains/(losses).
16
Market Risk
Interest rate risk ("IRR") is the most significant market risk affecting
the Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The Company does not currently engage in trading activities or use
derivative instruments, such as caps, collars or floors, to control interest
rate risk. Even though such activities may be permitted with the approval of the
Board of Directors, the Company does not intend to engage in such activities in
the immediate future.
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a different
basis or at a different pace from its interest-earning assets. Management of the
Bank believes it is important to manage the effect interest rates have on the
Bank's net portfolio value ("NPV") and net interest income. NPV helps measure
interest rate risk by calculating the difference between the present value of
expected cash flows from assets and the present value of expected cash flows
from liabilities, as well as cash flows from off-balance sheet contracts.
Presented below, as of December 31, 1997, is an analysis of the Bank's
interest rate risk as calculated by the OTS, measured by changes in the Bank's
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis points increments, up and down 400 basis points.
Net Portfolio Value
Change in
Interest Rate $ Amount $ Change % Change
------------- --------- -------- --------
(Basis Points) (Dollars in Thousands)
+400 $ 9,223 $(46,322) (83)%
+300 20,659 (34,887) (63)
+200 32,638 (22,908) (41)
+100 44,675 (10,871) (20)
---- 55,546 ---- --
-100 63,988 8,443 15
-200 70,552 15,007 27
-300 77,133 21,588 39
-400 85,695 30,150 54
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings institutions were employed in preparing the foregoing table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, a change in Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
significantly different changes to the NPV than indicated above. In evaluating
the Bank's exposure to interest rate risk, certain shortcomings inherent in the
method of analysis presented in the foregoing table must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
17
interest rates on other types may lag behind changes in market rates. Further,
in the event of a change in interest rates, prepayments and early withdrawal
levels would likely deviate significantly from those assumed in calculating the
table. Finally, the ability of many borrowers to service their debt may decrease
in the event of an interest rate increase. As a result, the actual effect of
changing interest rates may differ from that presented in the foregoing table.
The Bank maintains an asset/liability committee which meets weekly to
review interest rate risk management strategy and to review the Bank's
investment strategy for loans and securities, monitor investment performance and
to take any actions necessary for adjusting future investment direction. In
managing its asset/liability mix, and depending on the relationship between
long- and short-term interest rates, market conditions and consumer preference,
the Bank may place more emphasis on limiting interest rate risk than on
enhancing its net interest income. Management believes that the stability which
can be obtained by limiting interest rate risk can more than offset the benefits
which can be derived from seeking to enhance the net interest margin on a
short-term basis.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place greater emphasis on maximizing its net interest
margin than on matching the interest rate sensitivity of its assets and
liabilities, in an effort to improve or maintain its spread. Management believes
that the increased net income resulting from a mismatch in the maturity of its
asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased
vulnerability to sudden and unexpected increases in interest rates which can
result from such a mismatch. As a result, the Bank may at certain times be more
vulnerable to rapid increases in interest rates than some other institutions
which concentrate principally on matching the maturities of their assets and
liabilities.
The Bank also utilizes the FHLB's Interest Rate Risk Service in managing
its IRR. In most cases, the FHLB has followed OTS methodology, however, because
of differences in modeling techniques and assumptions, the FHLB results may
differ from the estimates generated by the OTS for changes in NPV. The FHLB
simulation model, in addition to estimating NPV changes, also estimates the
effect on net interest income ("NII") and net interest margin ("NIM") from the
assumed changes in interest rates and compares the Bank's changes to those of a
similar asset size peer group.
Management believes that the strategy related to the purchase of securities
with borrowed funds and the simultaneous pledging of those securities as
securities sold under agreements to repurchase does not expose the Company's NII
and its NIM to an unacceptable level of sensitivity to changes, either up or
down, in interest rates. See "Financial Condition" and "Net Interest Income"
herein. Management is aware, however, that by pursuing the balance sheet
strategy it followed during 1997, that the Bank's NPV would be more sensitive to
18
changes in interest rates. Based on the FHLB's Peer Group Report for December
31, 1997, if rates increased 200 basis points, the Bank's NPV would decline
31.5% from its base NPV (compared to the OTS calculated 41.0% in the table
above) while the median decline for its peers would be 20.5%.
When the Bank is compared to its peers by the FHLB in regard to changes in
NII, the Bank is less interest rate sensitive than its peer group. With a 200
basis point increase in interest rates, the Bank's NII would decline by an
estimated 8.2% compared to its peer group's average decline of 8.9%. If rates
increased 400 basis points, the Bank's NII would decline by 18.2% compared to an
average decline of 20.4% for its peer group.
Given a 200 basis point increase in interest rates as of December 31, 1997,
the Bank's NIM would decline 22 basis points from its base margin rate of 2.78%
to 2.56%, compared to a peer group decline from 2.79% to 2.64%, a decline of 15
basis points. If interest rates increased 400 basis points, the Bank's NIM would
decline 50 basis points to 2.28% from the base margin rate of 2.78% while the
peer group's NIM would decline by 39 basis points to 2.40% from 2.79%.
Liquidity and Capital Resources
The Bank's primary sources of funds for operations are deposits from its
market area, principal and interest payments on loans and securities available
for sale, proceeds from the maturity of securities available for sale, advances
from the FHLB of New York and proceeds from the sale of securities sold under
agreements to repurchase ("reverse repo"). While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition.
The primary investing activities of the Company are the origination of
loans and purchase of securities. During 1997, 1996 and 1995 the Bank's loan
originations totaled $91.5 million, $81.4 million and $50.2 million,
respectively. During 1995, the Bank purchased $47.0 million of securities and
classified such securities, consistent with the reclassification of all
investment and mortgage-backed securities at December 31, 1995, as available for
sale. In 1996, the Company purchased $192.6 million of securities and classified
such securities as available for sale. For the year 1997, the Company purchased
$247.4 million of securities, all of which were classified as available for
sale.
The primary financing activity of the Bank is the attraction of deposits.
During the years ended December 31, 1997 and 1995, the Bank experienced net
deposit inflows of $35.2 million and $18.1 million, respectively. However for
the year ended December 31, 1996, the Bank had net deposit outflows of $13.2
million. Management believes that the decrease in deposits in 1996 was the
result, in part, of some of the Bank's depositors deciding to pursue alternative
investment opportunities, such as stock mutual funds, with a portion of their
investable funds. The increase in deposits during 1997 management believes was a
reversal of the 1996 situation as depositors shifted investable funds back into
certificates of deposit to take advantage of the higher interest rates that
prevailed in the Bank's market area during 1997. During the year ended December
31, 1997, the Bank's certificates of deposit increased by $31.4 million, or
20.7%. The net increase of $18.1 million in 1995 resulted from an increase of
$41.2 million in certificates of deposit which was the result of the Bank's
aggressive 1995 marketing campaigns related, in part, to the three supermarket
branches that the Bank opened since November 1994.
19
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied by the OTS depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits. The required minimum liquidity ratio is currently 4%. The Bank's
average daily liquidity ratio for the month of December 1997 was 37.05%.
The Bank's most liquid assets are cash and cash equivalents, which consist
of federal funds sold and bank deposits. The level of these assets is dependent
on the Bank's operating, financing and investing activities during any given
period. At December 31, 1997, 1996 and 1995 cash and cash equivalents totaled
$10.2 million, $10.9 million and $84.6 million, respectively.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At December 31, 1997, the Bank had commitments to
originate loans of $4.2 million as well as undrawn commitments of $5.4 million
on home equity and other lines of credit. Certificates of deposit which are
scheduled to mature in one year or less at December 31, 1997, totaled $139.1
million. Management believes that a significant portion of such deposits will
remain with the Bank. However, if the Bank is not able to maintain its
historical retention rate on maturing certificates of deposit, it may consider
employing the following strategies: (i) increase its borrowed funds position to
compensate for the deposit outflows; (ii) increase the rates it offers on these
deposits in order to increase the retention rate on maturing certificates of
deposit and/or to attract new deposits; or (iii) attempt to increase
certificates of deposit through the use of deposit brokers. Depending on the
level of market interest rates on the renewal dates of the certificates of
deposit, the employment of one or a combination of these strategies could result
in higher or lower levels of NII and net income.
The Company also has a need for, and sources of, liquidity. Liquidity is
required to fund its operating expenses, as well as for the payment of any
dividends to shareholders. The Company currently has no significant liquidity
commitments as operating costs are modest and dividends to shareholders are
discretionary. At December 31, 1997, the Holding Company had $9.4 in liquid
assets on hand, however, the primary source of liquidity on an ongoing basis is
dividends from the Bank. To date, no dividends have been paid from the Bank to
the Company; however, it is anticipated that the Bank will pay a dividend to the
Company in 1998.
Federally insured savings institutions are required to maintain a minimum
level of regulatory capital. The OTS has established 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 of 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. See Note 15 of the Notes to Consolidated Financial
Statements for information on the Bank's regulatory capital requirements.
20
Unaudited Consolidated Interim Financial Information
1997 1996
----------------------------------------- ------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Interest Income .................... $8,675 $8,773 $8,827 $9,291 $6,915 $7,562 $8,825 $9,046
Net Interest Income ................ 4,020 4,008 3,881 4,003 3,653 3,881 4,231 4,147
Provision for Loan Losses .......... 363 275 225 225 1,628 433 549 6,840
Income/(Loss) Before Income Taxes .. 1,076 889 1,188 1,300 (535) 802 897 (6,929)
Net Income/(Loss) .................. 652 572 736 800 (314) 510 572 (4,604)
Earnings/(Loss)per share - Basic ... 0.16 0.14 0.19 0.21 (0.06) 0.10 0.12 (1.05)
Earnings/(Loss)per share - Diluted . 0.16 0.14 0.19 0.20 (0.06) 0.10 0.12 (1.05)
Average Shares Outstanding - Basic . 4,011,349 4,024,536 3,897,492 3,832,531 4,988,828 4,999,672 4,675,401 4,404,735
Incremental Shares:
Options ....................... -- 3,233 36,300 57,608 -- -- -- --
Unvested RRP Shares ........... -- 2,244 23,642 39,608 -- -- -- --
Average Shares Outstanding - Diluted 4,011,349 4,030,013 3,957,434 3,929,747 4,988,828 4,999,672 4,675,401 4,404,735
21
AMBANC HOLDING CO., INC.
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1997 and 1996
and for the three year period ended December 31, 1997
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
Ambanc Holding Co., Inc.:
We have audited the accompanying consolidated statements of financial condition
of Ambanc Holding Co., Inc. and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ambanc Holding Co.,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Albany, N.Y.
February 13, 1998
22
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31,
Assets 1997 1996
---- ----
(In thousands)
Cash and due from banks ............................. $ 10,225 6,387
Federal funds sold .................................. -- 4,500
-------- --------
Cash and cash equivalents ................. 10,225 10,887
Securities available for sale, at fair value (note 4) 205,842 200,539
Loans receivable, net (note 5) ...................... 281,123 248,094
Accrued interest receivable (note 6) ................ 3,734 3,201
Premises and equipment, net (note 7) ................ 3,121 2,784
Federal Home Loan Bank of New York stock, at cost ... 3,291 2,029
Real estate owned and repossessed assets ............ 143 715
Other assets ........................................ 2,965 4,172
-------- --------
Total assets .............................. $510,444 472,421
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 8) .............................. $333,265 298,082
Advances from borrowers for taxes
and insurance 1,902 1,703
Borrowed funds (note 9) ........................ 111,550 108,780
Accrued interest payable ....................... 819 1,077
Accrued expenses and other liabilities ......... 1,706 1,261
-------- --------
Total liabilities ......................... 449,242 410,903
-------- --------
Commitments and contingent liabilities (notes 10, 11 and 13)
Shareholders' equity:
Preferred stock $.01 par value. Authorized
5,000,000 shares; none outstanding at
December 31, 1997 and 1996 ................... - -
Common stock $.01 par value. Authorized
15,000,000; 5,422,250 shares issued at
December 31, 1997 and 1996 ................... 54 54
Additional paid-in capital ..................... 52,385 52,128
Retained earnings, substantially restricted .... 26,458 24,436
Treasury stock, at cost, (1,115,832 shares
at December 31, 1997 and 1,030,227 at
December 31, 1996) ........................... (12,585) (11,208)
Common stock acquired by ESOP .................. (3,303) (3,812)
Unearned RRP shares issued ..................... (1,533) --
Net unrealized loss on securities available
for sale, net of tax ......................... (274) (80)
--------- ---------
Total shareholder's equity ................ 61,202 61,518
--------- ---------
Total liabilities and shareholders' equity $ 510,444 472,421
========= =========
See accompanying notes to consolidated financial statements.
23
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
1997 1996 1995
---- ---- ----
(In thousands,
except per share amounts)
Interest and dividend income:
Loans ................................... $21,011 20,557 21,385
Securities available for sale ........... 13,957 10,921 --
Investment securities ................... -- -- 3,028
Federal funds sold ...................... 394 740 1,026
Federal Home Loan Bank stock ............ 204 130 143
------- ------- -------
Total interest and dividend income .... 35,566 32,348 25,582
------- ------- -------
Interest expense:
Deposits (note 8) ....................... 13,645 12,424 12,447
Borrowings .............................. 6,009 4,011 299
------- ------- -------
Total interest expense ......... 19,654 16,435 12,746
------- ------- -------
Net interest income ............ 15,912 15,913 12,836
Provision for loan losses (note 5) ........... 1,088 9,450 1,522
------- ------- -------
Net interest income after
provision for loan losses .............. 14,824 6,463 11,314
------- ------- -------
Other income:
Service charges on deposit accounts ..... 786 764 783
Net gains (losses) on securities
transactions ........................... 775 (102) 225
Other ................................... 265 258 504
------- ------- -------
Total other income ............. 1,826 920 1,512
------- ------- -------
Other expenses:
Salaries, wages and benefits ............ 6,086 5,097 4,403
Occupancy and equipment ................. 1,539 1,328 1,219
Data processing ......................... 923 843 728
Federal deposit insurance premium ....... 39 2 533
Correspondent bank processing fees ...... 126 116 245
Provision for losses on Nationar
related receivable .................... -- -- 205
Real estate owned and repossessed
assets expenses, net .................. 355 2,563 1,601
Professional fees ....................... 429 540 358
Other ................................... 2,700 2,659 2,091
------- ------- -------
Total other expenses ........... 12,197 13,148 11,383
------- ------- -------
Income (loss) before taxes ................... 4,453 (5,765) 1,443
Income tax expense (benefit) (note 10) ....... 1,693 (1,929) 586
------- ------- -------
Net income (loss) .............. $ 2,760 (3,836) 857
======= ======= =======
Basic earnings (loss) per share .............. $ 0.70 $ (0.81) N/A
======= ======= =======
Diluted earnings (loss) per share ............ $ 0.69 $ (0.81) N/A
======= ======= =======
See accompanying notes to consolidated financial statements.
24
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
(in thousands, except share data)
Net unrealized
gain (loss) on
Common Unearned securities
Additional stock RRP available
Common paid-in Retained Treasury acquired shares for sale,
stock capital earnings stock by ESOP issued net of tax Total
----- ------- --------- ----- ------- ------ ---------- -----
Balance at December 31, 1994 .......... $ -- -- 27,415 -- -- -- -- 27,415
Net income ............................ -- -- 857 -- -- -- -- 857
Common stock issued (5,422,250 shares) 54 52,127 -- -- -- -- -- 52,181
Purchase of ESOP shares (433,780) ..... -- -- -- -- (4,338) -- -- (4,338)
Change in net unrealized loss on
securities available for sale,
net of tax .......................... -- -- -- -- -- -- (100) (100)
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1995 .......... 54 52,127 28,272 -- (4,338) -- (100) 76,015
Net loss .............................. -- -- (3,836) -- -- -- -- (3,836)
Purchase of treasury shares (1,030,227) -- -- -- (11,208) -- -- -- (11,208)
Release of ESOP shares (52,964) ....... -- 1 -- -- 526 -- -- 527
Change in net unrealized loss on
securities available for sale, net of
tax ................................. -- -- -- -- -- -- 20 20
Balance at December 31, 1996 .......... 54 52,128 24,436 (11,208) (3,812) -- (80) 61,518
------- ------- ------- ------- ------- ------- ------- -------
Net income ............................ -- -- 2,760 -- -- -- -- 2,760
Release of ESOP shares (50,561) ....... -- 257 -- -- 509 -- -- 766
Purchase of treasury shares (216,890) . -- -- -- (3,488) -- -- -- (3,488)
Issuance of RRP shares (131,285) ...... -- -- (306) 2,111 -- (1,805) -- --
RRP shares earned ..................... -- -- -- -- -- 272 -- 272
Change in net unrealized loss on
securities available for sale, net of
tax ................................. -- -- -- -- -- -- (194) (194)
Cash dividends $0.10 per share ........ -- -- (432) -- -- -- -- (432)
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997 .......... $ 54 52,385 26,458 (12,585) (3,303) (1,533) (274) 61,202
======= ======= ======= ======== ======= ======== ======= ========
See accompanying notes to consolidated financial statements.
25
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) ................................ $ 2,760 (3,836) 857
Adjustments to reconcile net income (loss)
to net cash provided (used)
by operating activities:
Depreciation and amortization .................. 652 558 496
Provision for loan losses ...................... 1,088 9,450 1,522
Provision for losses and writedowns on
real estate owned and repossessed assets ...... 171 877 1,254
Provisions for losses on Nationar
related receivables ........................... -- -- 205
Loss on sale of fixed assets ................... -- 64 --
ESOP compensation expense ...................... 766 527 --
RRP expense .................................... 272 -- --
Net loss (gains) on sale and redemptions
of securities available for sale .............. (775) 102 (225)
Net loss on sale of other real estate owned .... 38 1,260 74
Net amortization on securities ................. 320 475 19
(Increase) decrease in accrued interest
receivable and other assets ................... 831 (3,316) (560)
Decrease (increase) in due from broker ......... -- 18,128 (18,128)
Increase (decrease) in accrued expenses
and other liabilities ......................... 187 (1,201) 2,225
Increase (decrease) in due to broker ........... -- (46,880) 46,880
Increase (decrease) in advances from
borrowers for taxes and insurance ............. 199 11 (762)
----- -------- -------
Net cash provided (used) by operating
activities ................................... 6,509 (23,781) 33,857
----- -------- -------
Cash flows from investing activities:
Proceeds from sales and redemptions of
securities available for sale .................... 194,210 34,469 18,372
Purchases of securities available for sale ........(247,424) (192,647) --
Proceeds from principal paydowns and
maturities of securities available for sale ...... 48,029 31,508 --
Proceeds from principal paydowns and
maturities of investment securities .............. -- -- 7,530
Purchase of investment securities ................. -- -- (46,980)
Purchase of FHLB stock ............................ (1,262) (137) (237)
Proceeds from sale of loans ....................... -- 18,929 --
Net (increase) decrease in loans made
to customers ..................................... (34,384) (28,685) 8,205
Capital expenditures .............................. (1,004) (341) (692)
Proceeds from sales of other real estate .......... 631 2,519 1,340
Proceeds from the sale of fixed assets ............ -- 25 --
-------- --------- --------
Net cash used by investing activities ......... (41,204) (134,360) (12,462)
-------- --------- --------
(Continued)
26
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
Purchase of ESOP shares ......................... $ -- -- (4,338)
Net proceeds from common stock issued
in stock conversion ........................... -- -- 52,181
Purchase of treasury shares ..................... (3,488) (11,208) --
Dividends paid .................................. (432) -- --
Net increase (decrease) in deposits ............. 35,183 (13,157) 18,087
Advances from (repayments on) FHLB
borrowings, net ............................... 6,300 6,000 (19,000)
Increase (decrease) in other borrowed funds ..... (3,530) 102,780 --
-------- -------- --------
Net cash provided by financing activities 34,033 84,415 46,930
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .. (662) (73,726) 68,325
Cash and cash equivalents at beginning of year ........ 10,887 84,613 16,288
-------- -------- --------
Cash and cash equivalents at end of year .............. $ 10,225 10,887 84,613
======== ======== ========
Supplemental disclosures of cash flow
information - cash paid during the year for:
Interest ..................................... $ 19,912 15,360 12,447
======== ======== ========
Income taxes ................................. $ 1,770 306 1,000
======== ======== ========
Noncash investing activities:
Net reduction in loans receivable resulting
from the transfer to real estate owned ......... $ 268 2,203 1,864
======== ======== ========
Transfer of investment securities to
securities available for sale .................. $ -- -- 45,736
======== ======== ========
Noncash financing activities:
Issuance of RRP shares ........................... $ 2,111 -- --
======== ======== ========
See accompanying notes to consolidated financial statements.
27
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Ambanc Holding Co. Inc. (the Holding Company) was incorporated under
Delaware law in June 1995 as a Holding Company to purchase 100% of the
common stock of Amsterdam Savings Bank, FSB (the Bank). The Bank
converted from a mutual form to a stock institution in December 1995, and
the Holding Company completed its initial public offering on December 26,
1995, at which time the Holding Company purchased all the outstanding
stock of the Bank.
The following is a description of the more significant policies which
Ambanc Holding Co., Inc. follows in preparing and presenting its
consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Ambanc Holding Co., Inc., and its wholly owned
subsidiaries, Amsterdam Savings Bank FSB, and A.S.B. Insurance
Agency, Inc., collectively referred to as the Company. All
significant intercompany accounts have been eliminated in
consolidation. The accounting and reporting policies of the
Company conform in all material respects to generally accepted
accounting principles and to general practice within the thrift
industry.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for loan losses and the valuation of real estate
owned and repossessed assets acquired in connection with
foreclosures or in satisfactions of loans. In connection with the
determination of the allowance for loan losses, the valuation of
real estate owned, and estimates of fair value for repossessed
assets, management obtained appraisals for significant assets.
(b) Business
A substantial portion of the Company's assets are loans secured by
real estate in the upstate New York area. In addition, all real
estate owned is located in those same markets. Accordingly, the
ultimate collectibility of a considerable portion of the Company's
loan portfolio and the recovery of a substantial portion of the
carrying amount of real estate owned are dependent upon market
conditions in the upstate New York region.
28
(1) Summary of Significant Accounting Policies, Continued
Management believes that the allowance for loan losses is adequate
and that other real estate owned and repossessed assets are
properly valued. While management uses available information to
recognize losses on loans and other real estate owned and
repossessed assets, future additions to the allowance or
writedowns of other real estate and repossessed assets may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
loan losses and valuation of other real estate owned and
repossessed assets. Such agencies may require the Bank to
recognize additions to the allowance or write downs of other real
estate and repossessed assets based on their judgments about
information available to them at the time of their examination
which may not be currently available to management.
(c) Securities Available for Sale, Investment Securities and FHLB of
New York Stock
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity they are classified as
held to maturity and are stated at amortized cost. All other debt
and marketable equity securities are classified as securities
available for sale and are reported at fair value, with net
unrealized gains and losses reported as a separate component of
shareholders' equity, net of estimated income taxes. The Company
does not maintain a trading portfolio, and at December 31, 1997
and 1996 the Company had no securities classified as securities
held to maturity.
Unrealized losses on securities that reflect a decline in value
that is other than temporary are charged to income.
Non- marketable equity securities, such as Federal Home Loan Bank
(FHLB) of New York stock, is stated at cost. The investment in
FHLB of New York stock is required for membership.
Mortgage backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Corporation ("FNMA"), represent participation interests in direct
pass-through pools of long-term first mortgage loans originated
and serviced by the issuers of the securities.
Gains and losses on the sale and redemption of securities
available for sale are based on the amortized cost of the specific
security sold. The cost of securities is adjusted for amortization
of premium and accretion of discounts, which is calculated on an
effective interest method.
Purchases and sales are recorded on a trade date basis.
Receivables and payables from unsettled transactions are shown as
due from brokers or due to brokers in the consolidated financial
statements.
29
(1) Summary of Significant Accounting Policies, Continued
(d) Reclassification of Investment Securities
In November 1995, the Financial Accounting Standards Board (FASB)
released its Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities." The Special Report contained, among other
things, a unique provision that allowed entities to, as of one
date either concurrent with the initial adoption of the Special
Report (November 15, 1995), but no later than December 31, 1995,
reassess the appropriateness of the classifications of all
securities held at that time. In accordance with the FASB's
Special Report, as of December 31, 1995, the Company reclassified
all investment securities held to maturity, with an amortized cost
of $45,735,971, to securities available for sale.
(e) Loans Receivable and Loan Fees
Loans receivable are stated at unpaid principal amount, net of
unearned discount, deferred loan costs, net, and allowance for
loan losses. Discounts are amortized to income over the
contractual loan life using the level-yield method. Loan fees
received and the related direct cost of originations have been
deferred and are being recorded as yield adjustments over the life
of the related loans using the interest method of amortization.
Non-performing loans include non-accrual loans, restructured loans
and loans which are 90 days or more past due and still accruing
interest. Loans considered doubtful of collection by management
are placed on a nonaccrual status for the recording of interest.
Generally loans past due 90 days or more as to principal or
interest are placed on nonaccrual status except for certain loans
which, in management's judgment, are adequately secured and for
which collection is probable. Previously accrued income that has
not been collected is reversed from current income. Thereafter,
the application of payments received (principal or interest) on
non-accrual loans is dependent on the expectation of ultimate
repayment of the loan. If ultimate repayment of the loan is
expected, any payments received are applied in accordance with
contractual terms. If ultimate repayment of principal is not
expected or management judges it to be prudent, any payment
received on a non-accrual or an impaired loan is applied to
principal until ultimate repayment becomes expected. Loans are
removed from non-accrual status when they are estimated to be
fully collectible as to principal and interest. Amortization of
related deferred fees is suspended when a loan is placed on
non-accrual status.
The allowance for loan losses is maintained at a level deemed
appropriate by management based on an evaluation of the known and
inherent risks in the present portfolio, the level of
non-performing loans, past loan loss experience, estimated value
of underlying collateral, and current and prospective economic
conditions. The allowance is increased by provisions for loan
losses charged to operations.
30
(1) Summary of Significant Accounting Policies, Continued
(f) Loan Impairment
Management considers a loan to be impaired if, based on current
information, it is probable that the Company will be unable to
collect all scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. When a
loan is considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the
fair value of collateral if the loan is collateral dependent.
Except for loans restructured in a troubled debt restructuring
subsequent to January 1, 1995, management excludes large groups of
smaller balance homogeneous loans such as residential mortgages
and consumer loans which are collectively evaluated. Impairment
losses, if any, are recorded through a charge to the provision for
loan losses.
(g) Real Estate Owned and Repossessed Assets
Real estate owned and repossessed assets include assets received
from foreclosures and in-substance foreclosures. A loan is
classified as an insubstance foreclosure when the Company has
taken possession of the collateral regardless of whether formal
foreclosure proceedings have taken place.
Real estate owned and repossessed assets, including in-substance
foreclosures, are recorded on an individual asset basis at net
realizable value which is the lower of fair value minus estimated
costs to sell or "cost" (defined as the fair value at initial
foreclosure). When a property is acquired or identified as
in-substance foreclosure, the excess of the loan balance over fair
value is charged to the allowance for loan losses. Subsequent
write-downs to carry the property at fair value less costs to sell
are included in noninterest expense. Costs incurred to develop or
improve properties are capitalized, while holding costs are
charged to expense.
At December 31, 1997 and 1996, real estate owned and repossessed
assets consisted of primarily residential one to four family
properties, recreational vehicles and boats. The Company had no
in-substance foreclosures at December 31, 1997 and 1996.
(h) Premises and Equipment, Net
Premises and equipment are carried at cost, less accumulated
depreciation applied on a straight-line basis over the estimated
useful lives of the assets. Leasehold improvements are amortized
on a straight-line basis over the respective original lease terms
without regard to lease renewal options.
31
(1) Summary of Significant Accounting Policies, Continued
(i) Income Taxes
Income taxes are recorded on income reported in the consolidated
statements of income regardless of when such taxes are payable.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The
Company's policy is that deferred tax assets are reduced by a
valuation reserve if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax
assets will not be recognized. In considering if it is more likely
than not that some or all of the deferred tax assets will not be
realized, the Company considers temporary taxable differences,
historical taxes and estimates of future taxable income.
(j) Pension Plan
The Company has a defined benefit pension plan covering
substantially all employees. The Company's actuarially determined
annual contribution to the pension plan meets or exceeds the
minimum funding requirements set forth in the Employees Retirement
Income Security Act of 1974.
(k) Off-Balance Sheet Risk
The Company is a party to certain financial instruments with
off-balance sheet risk such as commitments to extend credit,
unused lines of credit and standby letters of credit. The
Company's policy is to record such instruments when funded.
(l) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
32
(1) Summary of Significant Accounting Policies, Continued
(m) Stock Based Compensation Plans
The Company accounts for its stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly,
compensation expense is recognized only if the exercise price of
the option is less than the fair value of the underlying stock at
the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of
all stock-based awards on the date of grant as compensation
expense over the vesting period. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma disclosures of net income and
earnings per share as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
The Company's Recognition and Retention Plan (RRP) is also
accounted for in accordance with APB Opinion No. 25. The fair
value of the shares awarded, measured as of the grant date, is
recognized as unearned compensation (a deduction from
shareholders' equity) and amortized to compensation expense as the
shares become vested.
(n) Earnings per share
On December 31, 1997, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share". The statement supersedes Accounting
Principles Board Opinion No. 15, "Earnings Per Share" and related
interpretations. SFAS No. 128 requires dual presentation of "Basic
EPS" and Diluted EPS" on the face of the income statement for all
entities with complex capital structures and specifies additional
disclosure requirements. Basic earnings per share excludes
dilution and is calculated by dividing net income available to
common shareholders by the weighted average number of shares
outstanding during the period. Unvested restricted stock awards
are considered outstanding common shares and included in the
computation of basic EPS as of the date that they are fully
vested. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised into common stock or resulted in the issuance of common
stock. All prior period EPS data has been restated to conform to
the provisions of this Statement. The adoption of this Statement
did not have a material effect on the Company's financial position
or results of operations.
(o) Official Bank Checks
The Company's treasurer checks (including expense checks) are
drawn upon the Bank and are ultimately paid through the Bank's
Federal Reserve Bank of New York correspondent account and are
included in accrued expenses and other liabilities in the
consolidated statements of financial condition.
33
(1) Summary of Significant Accounting Policies, Continued
(p) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board (FASB)
issued SFAS No. 125 which provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of
a financial components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Certain aspects of SFAS No.
125 were amended by SFAS No. 127, "Deferral of the Effective Date
of Certain Provision of FAS Statement No. 125." The adoption of
SFAS No. 125 did not have a material impact on the Company's
consolidated financial statements.
(q) Reclassifications
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform to current periods
presentations.
(r) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income. Comprehensive
income includes the reported net income of the company adjusted
for items that are currently accounted for as equity transactions,
such as market value adjustment for securities available for sale,
foreign currency transactions, and minimum pension liability
adjustments. This statement is effective for fiscal years
beginning after December 15, 1997. Management believes that the
adoption of SFAS No. 130 will not have a material impact on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting by public companies of
operating segments within the company, disclosures about products
and services, geographic areas and major customers. This statement
is effective for periods beginning after December 15, 1997.
Management believes that the adoption of SFAS No. 131 will not
have a material impact on the Company's consolidated financial
statements.
(2) Conversion to Stock Ownership
On December 26, 1995, the Holding Company sold 5,422,250 shares of common
stock at $10.00 per share to depositors and employees of the Bank. Net
proceeds from the sale of stock of the Holding Company, after deducting
conversion expenses of approximately $2.0 million, were $52.2 million and
are reflected as common stock and additional paid-in capital in the
accompanying December 31, 1997 and 1996 consolidated statements of
financial condition. The Company utilized $26.0 million of the net
proceeds to acquire all of the capital stock of the Bank.
34
(2) Conversion to Stock Ownership, Continued
As part of the conversion, the Bank established a liquidation account for
the benefit of eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation
account, in the proportionate amount of the then current adjusted balance
for deposit accounts held, before distribution may be made with respect
to the Bank's capital stock. The Bank may not declare or pay a cash
dividend to the Holding Company on, or repurchase any of, its capital
stock if the effect thereof would cause the retained earnings of the Bank
to be reduced below the amount required for the liquidation account.
Except for such restrictions, the existence of the liquidation account
does not restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision (OTS) regulations provide
that an institution that exceeds all fully phased-in capital requirements
before and after a proposed capital distribution could, after prior
notice but without the approval by the OTS, make capital distributions
during the calendar year of up to 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in
capital requirements) at the beginning of the calendar year. Any
additional capital distributions would require prior regulatory approval.
At December 31, 1997, the maximum amount that could have been paid by the
Bank to the Holding Company was approximately $17.5 million.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Reserves and Investments Required by Law
The Company is required to maintain certain reserves of cash and or
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately
$1,123,000 and $1,069,000 at December 31, 1997 and 1996, respectively.
The Company is required to maintain certain levels of stock in the
Federal Home Loan Bank. The Company has pledged its investment in this
stock, as well as a blanket pledge of qualifying residential real estate
loans, to secure its advances from the Federal Home Loan Bank of New
York.
35
(4) Securities Available for Sale
The amortized cost, gross unrealized gains and losses and estimated fair
values of securities available for sale at December 31, 1997 and 1996 are
as follows:
1997
(in thousands)
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
U.S. Government and agency securities $ 63,198 60 (113) 63,145
Mortgage-backed securities .......... 142,312 100 (515) 141,897
State and political subdivisions .... 755 11 -- 766
-------- -------- -------- --------
Total debt securities ............... 206,265 171 (628) 205,808
-------- -------- -------- --------
Equity securities ................... 34 -- -- 34
-------- -------- -------- --------
Total ............................... $206,299 171 (628) 205,842
======== ======== ======== ========
1996
(in thousands)
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
U.S. Government and agency securities $ 43,968 69 (264) 43,773
Mortgage-backed securities .......... 156,191 705 (635) 156,261
State and political subdivisions .... 500 5 -- 505
-------- -------- -------- --------
Total ............................... $200,659 779 (899) 200,539
======== ======== ======== ========
The amortized cost and estimated fair value of debt securities available
for sale at December 31, 1997, by contractual maturity, are shown below
(mortgage backed securities are included by final contractual maturity).
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
cost fair value
(In thousands)
Due within one year ................... $ 3,998 3,998
Due after one year through five years . 13,755 13,712
Due after five years through ten years 36,633 36,591
Due after ten years ................... 151,879 151,507
-------- --------
Totals ...................... $206,265 205,808
======== ========
36
(4) Securities Available for Sale, Continued
The following table sets forth information with regard to sales
transactions of securities available for sale:
1997 1996 1995
---- ---- ----
(In thousands)
Proceeds from sale of securities .... $174,010 34,469 18,372
Gross realized gains from sale
of securities ...................... 1,017 14 319
Gross realized losses from sale
of securities ...................... 242 116 94
Securities available for sale carried at $111,153,000 on December 31,
1997 and at $113,828,000 on December 31, 1996 were pledged to secure
repurchase agreements and other purposes.
(5) Loans Receivable, Net
Loans receivable consist of the following at December 31, 1997 and 1996:
December 31,
1997 1996
(In thousands)
Loans secured by real estate:
1 - 4 Family ................................ $ 189,666 158,182
Home equity ................................. 30,246 22,817
Multi family ................................ 4,152 4,724
Non-residential ............................. 26,585 29,947
Construction ................................ 2,081 2,234
--------- ---------
Total loans secured by real estate .. 252,730 217,904
--------- ---------
Other Loans:
Consumer loans:
Recreational vehicles ..................... 6,775 9,416
Auto loans ................................ 16,237 12,417
Other secured ............................. 1,781 1,866
Unsecured ................................. 1,847 1,445
Manufactured homes ........................ 494 620
--------- ---------
Total consumer loans .................. 27,134 25,764
--------- ---------
Commercial loans:
Secured ................................... 3,233 6,199
Unsecured ................................. 471 620
--------- ---------
Total commercial loans ................ 3,704 6,819
--------- ---------
283,568 250,487
--------- ---------
Allowance for loan losses ................... (3,807) (3,438)
Deferred costs, net of deferred fees and
discounts ................................... 1,362 1,045
--------- ---------
Total loans receivable, net $ 281,123 248,094
========= =========
37
(5) Loans Receivable, Net, Continued
A summary of the allowance for loan losses is as follows:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Balance at beginning of year .......... $ 3,438 2,647 2,235
Provision charged to operations ....... 1,088 9,450 1,522
Charge-offs ........................... (1,214) (8,718) (1,216)
Recoveries ............................ 495 59 106
------- ------- -------
Balance at end of year ................ $ 3,807 3,438 2,647
======= ======= =======
The following table sets forth the information with regard to
non-performing loans:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Loans in a non-accrual status ......... $1,876 3,123 4,499
Loans contractually past due 90 days
or more and still accruing interest .. 451 725 261
Restructured loans .................... 931 1,031 4,035
------ ------ ------
Total non-performing loans ............ $3,258 4,879 8,795
====== ====== ======
Accumulated interest on the above non-performing loans of $276,848,
$375,459 and $876,524 was not recognized as income in 1997, 1996 and
1995, respectively. Approximately $192,000, $229,000 and $482,000 of
interest on restructured and non-accrual loans was collected and
recognized as income in 1997, 1996 and 1995, respectively.
At December 31, 1997, the recorded investment in loans that are
considered to be impaired totaled $769,095 for which the related
allowance for loan losses is $337,865. At December 31, 1996 the recorded
investment in loans that were considered to be impaired was $2,638,780
for which the related allowance for loan losses was $1,182,838. As of
December 31, 1997 and 1996, there were no impaired loans which did not
have an allowance for loan losses. The average recorded investment in
impaired loans during the years ended December 31, 1997, 1996 and 1995
was approximately $1,445,000, $6,918,000, and $4,106,000, respectively.
For the years ended December 31, 1997, 1996, and 1995, the Company
recognized interest income on those impaired loans of $14,768, $110,470
and $61,278, respectively, which included $0, $13,633 and $2,787,
respectively, of interest income recognized using the cash basis method
of income recognition.
Certain directors and executive officers of the Company were customers of
and had other transactions with the Company in the ordinary course of
business. Loans to these parties were made in the ordinary course of
business at the Company's normal credit terms, including interest rate
and collateralization. The aggregate of such loans totaled approximately
$1,021,308 and $887,696 at December 31, 1997 and 1996, respectively.
There were $182,750 in advances to the directors and executive officers
during the year ended December 31, 1997. Total payments made on these
loans were $49,138 during the year ended December 31, 1997.
38
(6) Accrued Interest Receivable
Accrued interest receivable consists of the following:
December 31,
1997 1996
(In thousands)
Loans .................................... $1,347 1,260
Securities available for sale ............ 2,387 1,941
------ ------
$3,734 3,201
====== ======
(7) Premises and Equipment
A summary of premises and equipment is as follows:
December 31,
1997 1996
(In thousands)
Banking house and land ................... $2,362 2,362
Leasehold improvements ................... 1,100 700
Furniture, fixtures and equipment ........ 3,737 3,114
Construction in progress ................. -- 80
------ ------
7,199 6,256
Less accumulated depreciation and
amortization ........................... (4,078) (3,472)
------- ------
$3,121 2,784
======= ======
Amounts charged to depreciation expense were $605,933, $500,833 and
$438,057 for the years ended December 31, 1997, 1996 and 1995.
(8) Deposits
Deposits are summarized as follows:
December 31,
1997 1996
(In thousands)
Regular savings accounts (3.00% at
December 31, 1997 and 1996) ...... $ 97,591 99,569
Certificates of deposit:
3.01 to 4.00% ................... 1,011 994
4.01 to 5.00% ................... 6,688 42,824
5.01 to 6.00% ................... 154,377 88,042
6.01 to 7.00% ................... 10,801 11,330
7.01 to 8.00% ................... 10,455 8,742
-------- --------
183,332 151,932
-------- --------
Money market accounts (2.96% at
December 31, 1997 and 2.86% at
December 31, 1996) .............. 6,877 7,433
NOW accounts (2.75% at December
31, 1997 and 1996) .............. 22,718 18,875
Demand accounts .................. 22,747 20,273
-------- --------
Total deposits................... $333,265 298,082
======== ========
39
(8) Deposits, Continued
The approximate amount of contractual maturities of certificates of
deposit for the years subsequent to December 31, 1997 are as follows:
(In thousands)
Years ended December 31,
1998 $ 139,103
1999 22,019
2000 16,163
2001 3,688
2002 2,359
---------
$ 183,332
=========
The aggregate amount of certificates of deposits with a balance of
$100,000 or more were approximately $17.9 million and $11.2 million at
December 31, 1997 and 1996, respectively.
Interest expense on deposits for the years ended December 31, 1997, 1996
and 1995, is summarized as follows:
1997 1996 1995
(In thousands)
Regular savings accounts ........ $ 3,016 3,162 3,300
Certificate of deposits ......... 9,882 8,492 8,272
NOW accounts .................... 543 527 511
Money market accounts ........... 204 243 285
Common stock subscriptions escrow -- -- 79
------- ------- -------
Total interest expense .......... $13,645 12,424 12,447
======= ======= =======
(9) Borrowed Funds
At December 31, 1997, the Company had a $24.2 million overnight line of
credit and a $24.2 million 30 day line of credit with the FHLB of New
York. As of December 31, 1997 the Company had taken $12.3 million in
advances on these lines of credit. At December 31, 1996, the Company had
a $22.4 million overnight line of credit and a $22.4 million 30 day line
of credit with the FHLB. As of December 31, 1996 the Company had taken
$6.0 million in advances on these lines of credit. Under the terms of a
blanket collateral agreement with the FHLB, these outstanding balances
are collateralized by certain qualifying assets not otherwise pledged
(primarily first mortgage loans).
The Company enters into sales of securities under repurchase agreements.
Such agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as liabilities on the Company's
consolidated statements of financial condition. During the period of such
agreements, the underlying securities are transferred to a third party
custodian's account that explicitly recognizes the Company's interest in
the securities.
40
(9) Borrowed Funds, Continued
The following sets forth certain information related to the Company's
borrowings, consisting of FHLB advances and securities sold under
agreements to repurchase:
December 31,
1997 1996
(In thousands)
FHLB advances ...................... $ 12,300 6,000
Securities sold under agreements to
repurchase ........................ 99,250 102,780
------- --------
Total borrowings ................... $111,550 108,780
======== ========
Weighted average interest rate of
FHLB advances ...................... 6.38% 6.88%
======== ========
Weighted average interest rate of
securities sold under agreements to
repurchase ........................ 6.04% 5.96%
======== ========
The following table sets forth the maturities of securities sold under
agreements to repurchase, including the weighted average interest rates,
and the fair value of the securities sold under the repurchase agreements
as of December 31, 1997:
Weighted Fair Value
Repurchase Average of Securities
Liability Interest Rate Sold
(In thousands)
Due after 30 days up to 90 days $ 2,600 5.91% $ 5,402
Due after 91 days up to 365 days 53,650 6.21% 58,370
Due after 365 days ............. 43,000 5.84% 47,381
-------- ---- --------
$ 99,250 6.04% $111,153
======== ==== ========
The following table sets forth the maximum month-end balances and average
balances of FHLB advances and securities sold under agreements to
repurchase for the periods indicated.
Years Ended December 31,
1997 1996 1995
(In thousands)
Maximum Month-end Balance:
FHLB advances ..................... $ 14,400 28,000 15,000
========== ======= ======
Securities sold under agreements
to repurchase .................... 99,410 102,780 4,000
========== ======= ======
Average Balance:
FHLB advances ..................... 3,667 9,757 3,922
========== ======= ======
Securities sold under agreements
to repurchase .................... 95,261 57,815 958
========== ======= ======
Weighted average interest rate of
FHLB advances .................... 5.43% 5.35% 6.06%
========== ======= ======
Weighted average interest rate of
securities sold under agreement to
repurchase ....................... 6.01% 5.94% 6.30%
========== ======= ======
41
(10) Income Taxes
The components of income tax expense (benefit) are as follows:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Current tax (benefit) expense:
Federal .......................... $ 1,735 (1,421) 955
State ............................ 270 1 208
------- ------- -------
2,005 (1,420) 1,163
Deferred tax benefit .............. (312) (509) (577)
------- ------- -------
Total income tax expense (benefit) $ 1,693 (1,929) 586
======= ======= =======
Actual tax expense (benefit) for the years ended December 31, 1997, 1996
and 1995 differs from expected tax expense (benefit), computed by
applying the Federal corporate tax rate of 34% to income before taxes as
follows:
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Expected tax expense (benefit) ... $ 1,514 (1,960) $ 491
State taxes, net of Federal income
tax benefit ..................... 178 1 103
Other items ...................... 1 30 (8)
------- ------- -------
$ 1,693 (1,929) $ 586
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 are presented below:
Temporary Temporary
Deductible Taxable
Differences Differences
(In thousands)
Reserves for loan losses .................. $1,508 216
Nonqualified deferred compensation ........ 227 --
Loan accounting differences ............... 409 --
Property and equipment .................... -- 113
Prepaid expenses .......................... -- 243
Other items ............................... 113 --
------ ------
2,257 572
===== ======
Deferred tax liability .................... 572
------
Net deferred tax asset at December 31, 1997 1,685
Net deferred tax asset at January 1, 1997 . 1,373
------
Deferred tax benefit for the year ended
December 31, 1997 ........................ $ 312
======
42
(10) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 are presented below:
Temporary Temporary
Deductible Taxable
Differences Differences
(In thousands)
Reserves for loan losses .................. $1,358 65
Nonqualified deferred compensation ........ 233 --
Loan accounting differences ............... 236 --
Property and equipment .................... -- 113
Prepaid expenses .......................... -- 330
Other items ............................... 54 --
------ ------
1,881 508
===== ======
Deferred tax liability .................... 508
------
Net deferred tax asset at December 31, 1996 1,373
Net deferred tax asset at January 1, 1996 . 864
------
Deferred tax benefit for the year ended
December 31, 1996 ........................ $ 509
======
In addition to the deferred tax items described in the preceding table,
the Company also has a deferred tax asset of approximately $183,000 and
$40,000 at December 31, 1997 and 1996, respectively, relating to the
unrealized loss on securities available for sale.
There was no valuation allowance or change in the valuation allowance for
deferred tax assets as of and for the years ended December 31, 1997 and
1996. Management believes that the realization of the recognized net
deferred tax asset at December 31, 1997 and 1996 is more likely than not,
based on historical taxable income, available tax planning strategies,
and expectations as to future taxable income.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience
or a percentage of taxable income. Tax bad debt reserves are maintained
equal to the excess of allowable deductions over actual bad debt losses
and other reserve reductions. These reserves consist of a defined
base-year amount, plus additional amounts ("excess reserves") accumulated
after the base year. Deferred tax liabilities are recognized with respect
to such excess reserves, as well as any portion of the base-year amount
which is expected to become taxable (or "recaptured") in the foreseeable
future.
43
(10) Income Taxes, Continued
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in July and August 1996. The Federal
amendments include elimination of the percentage of taxable income method
for tax years beginning after December 31, 1995, and imposition of a
requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the base-year
amounts. The Bank previously established, and will continue to maintain,
a deferred tax liability with respect to such excess Federal reserves.
The New York State amendments redesignate the Bank's state bad debt
reserves at December 31, 1995 as the base-year amount and also provide
for future additions to the base-year reserve using the percentage of
taxable income method.
Deferred tax liabilities have not been recognized with respect to the
Federal base-year reserve of approximately $3.3 million at December 31,
1997 and the state base-year reserve of approximately $5.9 million at
December 31, 1997, since the Bank does not expect that these amounts will
become taxable in the foreseeable future. Under New York State tax law,
as amended, events that would result in taxation of these reserves
include the failure of the Bank to maintain a specified qualifying assets
ratio or meet other thrift definition tests for tax purposes. The
unrecognized deferred tax liability at December 31, 1997 with respect to
the Federal base-year reserve was approximately $1.1 million. The
unrecognized deferred tax liability at December 31, 1997 with respect to
the state base-year reserve was approximately $350 thousand (net of
Federal benefit).
(11) Employee Benefit Plans
(a) Pension Plan
The Bank maintains a non-contributory pension plan with the RSI
Retirement Trust, covering substantially all employees aged 21 and
over with 1 year of service with the exception of hourly paid
employees. Benefits are computed as two percent of the highest
three year average annual earnings multiplied by credited service
up to a maximum of 35 years.
The amounts contributed to the plan are determined annually on the
basis of (a) the maximum amount that can be deducted for Federal
income tax purposes or (b) the amount certified by a consulting
actuary as necessary to avoid an accumulated funding deficiency as
defined by the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be
earned in the future. Assets of the plan are primarily invested in
pooled equity funds and fixed income funds.
44
(11) Employee Benefit Plans, Continued
The following table sets forth the plan's funded status and
amounts recognized in the Company's consolidated statements of
financial condition at December 31, 1997 and 1996:
1997 1996
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3.7 million in 1997 and $3.1
million in 1996 ....................................... $(3,805) (3,324)
======= =======
Projected benefit obligation ........................... (4,508) (4,060)
Plan assets at fair value .............................. 5,994 5,130
------- -------
Projected plan assets in excess of benefit obligation .. 1,486 1,070
Unrecognized net gain .................................. (806) (301)
Unrecognized prior service cost ........................ 12 15
Unrecognized net asset being recognized over 10.71 years (85) (132)
------- -------
Prepaid pension cost ................................... $ 607 652
======= =======
Net pension costs recognized in the consolidated statements of
income for the years ended December 31, 1997, 1996 and 1995 are
Summarized as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Components of net pension cost:
Service cost - benefits earned during the period ...... $ 183 187 141
Interest cost on estimated projected benefit obligation 304 288 268
Actual return on plan assets ........................... (1,104) (627) (783)
Net amortization and deferral .......................... 663 222 437
------- ------- -------
Net pension cost ....................................... $ 46 70 63
======= ======= =======
Significant assumptions used in determining the actuarial present
value of the projected benefit obligation are as follows:
1997 1996 1995
---- ---- ----
Weighted average discount rate .... 7.25% 7.50% 7.50%
Increase in future compensation ... 5.00% 5.50% 5.50%
Expected long term rate of return . 8.00% 8.00% 8.00%
45
(11) Employee Benefit Plans, Continued
(b) 401(k) Savings Plan
The Bank maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of employment. The Bank had matched 50% of
employee contributions that were less than or equal to 3% of the
employee's salary. As of March 1, 1997, the Bank no longer matched
employee contributions. Total expense recorded during 1997, 1996
and 1995 was $5,321, $37,671 and $33,181, respectively.
(c) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee stock
ownership plan (ESOP) was established to provide substantially all
employees of the Company the opportunity to become shareholders.
The ESOP borrowed $4.3 million from the Company and used the funds
to purchase 433,780 shares of the common stock of the Company
issued in the conversion. The loan will be repaid principally from
the Company's discretionary contributions to the ESOP over a
period of ten years. At December 31, 1997 and 1996, the loan had
an outstanding balance of $3.5 million and $3.9 million,
respectively. The loan obligation is reduced by the amount of loan
repayments made by the ESOP. Shares are released for allocation
and unearned compensation is amortized over the loan repayment
period based on the amount of principal and interest paid on the
loan as a percentage of the total principal and interest to be
paid on the loan over its entire term. Shares purchased with the
loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. Contributions to the ESOP and
shares released from the suspense account are allocated among
participants on the basis of compensation in the year of
allocation.
The Company accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position
No. 93-6 "Employees' Accounting For Stock Ownership Plans" (SOP
93-6). Accordingly, the shares pledged as collateral are reported
as unallocated ESOP shares in shareholders' equity. As shares are
released from collateral, the Company reports compensation expense
equal to the average market price of the shares (during the
applicable service period), and the shares become outstanding for
earnings per share computations. Unallocated ESOP shares are not
included in the earnings per share computations. The Company
recorded approximately $766,000 of compensation expense under the
ESOP during the year ended December 31, 1997 and recorded $527,000
of compensation expense for the year ended December 31, 1996.
The ESOP shares as of December 31, 1997 were as follows:
Allocated shares ............. 52,964
Shares released for allocation 50,561
Unallocated shares ........... 330,255
-------
433,780
=======
Market value of unallocated
shares at December 31, 1997 $6,192,281
==========
46
(11) Employee Benefit Plans, Continued
(d) Stock Option Plan
On May 23, 1997, the Company's shareholders approved the 1997
Stock Option and Incentive Plan ("Stock Option Plan"). The primary
objective of the Stock Option Plan is to provide officers and
directors with a proprietary interest in the Company as an
incentive to encourage such persons to remain with the Company.
The Stock Option Plan provides for awards in the form of stock
options, stock appreciation rights, and limited stock appreciation
rights. Under the Stock Option Plan, 542,225 authorized but
unissued shares are reserved for issuance upon option exercises.
The Company also has the alternative to fund the Stock Option Plan
with treasury stock. Options under the plan may be either
non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock
at an exercise price equal to the fair value on the date of grant.
Options expire no later than ten years following the date of
grant.
Upon shareholder ratification of the Stock Option Plan, options to
purchase 373,974 shares were awarded at an exercise price of
$13.75 per share. These shares have a ten-year term and vest at a
rate of 25% per year from their respective grant dates. No options
were exercised, cancelled or forfeited during the year ended
December 31, 1997. As of December 31, 1997 no options were vested
and the weighted average remaining contractual life of the options
was approximately 9.6 years.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its Stock Option Plan. Accordingly, no
compensation cost has been recognized for the Stock Option Plan.
SFAS No. 123 requires companies not using a fair value based
method of accounting for employee stock options or similar plans,
to provide pro forma disclosures of net income and earnings per
share as if that method of accounting had been applied. The fair
value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: dividend
yield of 1.32%; expected volatility of 40.90%; risk free interest
rate of 5.48% and expected lives of 5 years. The estimated fair
value of the options granted in 1997 was $5.30.
Pro-forma disclosures for the Company for the year ended December
31, 1997 are as follows:
(in thousands, except per share data)
Net Income:
As reported $ 2,760
Pro-forma 2,578
Earnings per Share:
Basic EPS as reported $ 0.70
Pro-forma 0.65
Diluted EPS as reported 0.69
Pro-forma 0.65
47
(11) Employee Benefit Plans, Continued
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro-forma net income
amounts presented above because compensation cost is reflected
over the options' vesting period of four years.
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, the existing models, in management's opinion, do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
(e) Recognition and Retention Plan
On May 23, 1997, the Company's shareholders approved the Ambanc
Holding Co., Inc. Recognition and Retention Plan (RRP). The
purpose of the plan is to promote the long-term interests of the
Company and its shareholders by providing a stock based
compensation program to attract and retain officers and directors.
Under the RRP, 216,890 shares of authorized but unissued shares,
are reserved for issuance under the plan. The Company also has the
alternative to fund the RRP with Treasury stock.
On May 23, 1997, 131,285 shares were awarded under the RRP. The
shares vest in four equal installments commencing one year from
the date of grant. The fair market value of the shares awarded
under the plan was $1.8 million at the grant date and is being
amortized to compensation expense on a straight line basis over
the four year vesting period. Compensation expense of $272,000 was
recorded during 1997 with the remaining unearned compensation cost
of $1.5 million shown as a reduction of shareholder's equity at
December 31, 1997.
(f) Post Retirement Benefits
Certain postretirement health insurance benefits have been
committed to a closed group of eleven retired employees. The
Company has formally adopted measures to not offer these benefits
to any additional employees. The annual health insurance increase
and discount rate used to calculate the transition obligation were
6% and 8.5%, respectively. There are no plan assets. The estimated
transition obligation at January 1, 1995 was $260,000. The net
periodic post retirement benefit costs in both 1997 and 1996 were
approximately $26,000.
(g) Directors' Deferred Compensation Agreements
Under the Directors' Deferred Compensation Agreements, the
Company's directors were eligible to elect to defer fees for
services that were otherwise currently payable. Fees were deferred
over a period of five years. The Company utilized the deferred
fees to purchase life insurance policies to fund the benefits on
each director with the Bank listed as the beneficiary. Each
director participating in such agreements deferred their fees over
a five year period with a set amount established as an annual
payout over a ten year period after five years from the date of
the agreement or upon reaching the age of 65, whichever is later.
The present value of the remaining installments due under these
agreements is included in other liabilities in the consolidated
balance sheets. The cash surrender value of the life insurance
policies is included in other assets in the consolidated balance
sheets.
48
(12) Earnings Per Share
Calculation of basic earnings per share (basic EPS) and diluted earnings
per share (diluted EPS) is as follows:
Weighted
Net Average Per Share
Income (loss) Shares Amount
(In thousands, except share and per share data)
For Year Ended December 31, 1997
Basic EPS
Income available to common shareholders $ 2,760 3,940,867 0.70
Effect of Dilutive Securities
Stock Options ......................... 24,285
RRP shares ............................ 16,374
Diluted EPS
Income available to common shareholders
plus assumed conversions ............. 2,760 3,981,526 0.69
========= ========= ====
For Year Ended December 31, 1996
Basic EPS
Income available to common shareholders $ (3,836) 4,761,393 (0.81)
Effect of Dilutive Securities
No dilutive securities during 1996
Diluted EPS
Income available to common shareholders (3,836) 4,761,393 (0.81)
========= ========= ====
The Bank converted from a mutual form to a stock institution in December
1995, and the Holding Company completed its initial public offering on
December 26, 1995, at which time the Holding Company purchased all of the
outstanding stock of the Bank. The Company did not report EPS for 1995
and therefore it is excluded from this footnote.
(13) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Company and its subsidiaries may, from time to time, be
defendants in legal proceedings relating to the conduct of their
business. In the best judgments of management, the consolidated
financial position of the Company and its subsidiaries will not be
affected materially by the outcome of any pending legal
proceedings.
49
(13) Commitments and Contingent Liabilities, Continued
The Bank was a defendant in an action by the current owners
of F. H. Doherty Associates, Inc. (the Bank sold F. H. Doherty
Associates, Inc. to the current owners), seeking to rescind the
sale of stock, recover any additional capital contributions made
by the plaintiffs, punitive damages in the amount of $1,000,000,
and indemnification on a potential claim in the amount of $67,500
resulting from a subsequent transfer of a portion of the stock by
plaintiffs to a third party. During 1996, the Bank stipulated to
a settlement and agreed to pay $262,500 to the plaintiffs. The
Bank charged $175,000 against the allowance for probable loss
which was established for this matter in 1995. The remaining
$87,500 was charged to 1996 operations.
(b) Nationar Receivables
On February 6, 1995, the Superintendent of Banks for the State of
New York ("Superintendent") seized Nationar, a check-clearing and
trust company, freezing all of Nationar's assets. On that date,
the Bank had: a demand account balance of $233,000, and a Nationar
debenture of $100,000 collateralized by a $1,000,000 investment
security. On September 26, 1995, the Company entered into a
standby letter of credit with the superintendent for $1,086,250
which replaced the $1,000,000 security that was pledged as
collateral for the capital debenture bonds. As of December 31,
1995, the Company charged off the Nationar debenture of $100,000
and established an additional reserve of $105,000 for potential
losses of the demand account and potential losses related to the
stand by letter of credit.
During 1996 the Company received a cash payment of $233,000 from
the Superintendent relating to its Nationar claim. In addition, on
June 10, 1996 the Company issued a new standby letter of credit
for $150,000 to the Superintendent, and the initial standby letter
of credit was canceled. Concurrent with the new standby letter of
credit, the Company was required to pay $58,000 under the original
standby letter of credit agreement. This amount was charged
against the reserve the Company had previously established.
Subsequently, the Company was informed by the Superintendent's
Office that the $150,000 standby letter of credit was canceled and
that the Company will have no further liability in connection with
its agreement with the Superintendent. During 1997, the Bank
received approximately $45,000 from the Superintendent of Banks as
a partial recovery of the amounts previously charged off and is
included in Other Income.
(c) Lease Commitments
The Company leases office space and equipment under noncancelable
operating leases. Minimum rental commitments under these leases
are as follows:
Years ended December 31,
(In thousands)
1998 $ 330
1999 266
2000 212
2001 182
2002 128
2003 and thereafter 1,010
-------
$ 2,128
=======
50
(13) Commitments and Contingent Liabilities, Continued
Amounts charged to rent expense were approximately $315,000,
$225,000 and $203,000 for the years ended December 31, 1997, 1996
and 1995.
(d) Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit, unused lines of credit and
standby letters of credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized on the consolidated statement of financial condition.
The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend
credit, unused lines of credit and standby letters of credit is
represented by the contractual notional amount of these
instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Unless otherwise noted, the Company does not require collateral or
other security to support off-balance sheet financial instruments
with credit risk.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being fully
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral, if any, required by the Company upon the extension of
credit is based on management's credit evaluation of the customer.
Mortgage commitments are secured by a first lien on real estate.
Collateral on extensions of credit for commercial loans varies but
may include property, plant and equipment, and income producing
commercial property.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support borrowing
arrangements. The credit risk involved in issuing standby letters
of credit is essentially the same as that involved in extending
loan facilities to customers.
51
(13) Commitments and Contingent Liabilities, Continued
Contract amounts of financial instruments that represent the
future extension of credit as of December 31, 1997 and 1996 at
fixed and variable interest rates are as follows:
1997
Fixed Variable Total
(In thousands)
Financial instruments whose
contract amounts represent
Credit risk:
Commitments to extend credit $3,797 393 4,190
Unused lines of credit ..... 1,025 4,336 5,361
Standby letters of credit .. -- 100 100
------ ------ ------
$4,822 4,829 9,651
====== ====== ======
1996
Fixed Variable Total
(In thousands)
Financial instruments whose
contract amounts represent
Credit risk:
Commitments to extend credit $1,076 826 1,902
Unused lines of credit ..... 914 4,981 5,895
Standby letters of credit .. -- 100 100
------ ------ ------
$1,990 5,907 7,897
====== ====== ======
The range of interest on fixed rate commitments was 5.50% to 8.75%
at December 31, 1997 and 7.0% to 8.5% at December 31, 1996. The
range of interest on adjustable rate commitments was 6.75% to
7.25% and 5.5% to 9.75% at December 31, 1997 and 1996,
respectively.
(14) Fair Values
A financial instrument is defined as cash, evidence of ownership interest
in an entity, or a contract that imposes on one entity a contractual
obligation to deliver cash or another financial instrument to a second
entity or to exchange other financial instruments on potentially
unfavorable terms with a second entity and conveys to that second entity
a contractual right to receive cash or another financial instrument from
the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected net cash
flows, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
52
(14) Fair Values, Continued
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax asset and property, plant, and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value. In
addition there are significant intangible assets that the fair value
estimates do not recognize, such as the value of "core deposits," the
Company's branch network and other items generally referred to as
"goodwill."
The specific estimation methods and assumptions used can have a
substantial impact on the resulting fair values ascribed to financial
instruments. The following is a brief summary of the significant methods
and assumptions used:
Securities Available for Sale
The carrying amounts for short-term investments approximate fair
value because they mature in 90 days or less and do not present
unanticipated credit concerns. The fair value of longer-term
investments and mortgage-backed securities, except certain state and
municipal securities, is estimated based on bid prices published in
financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is
not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices
of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued. See note 4 for detail
disclosure of securities available for sale.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
single family loans, consumer loans and commercial loans. Each loan
category is further segmented into fixed and adjustable rate interest
terms and by performing and nonperforming categories.
The fair value of performing loans, is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the
contractual term of the loans to maturity taking into consideration
certain prepayment assumptions.
Fair value for significant non-performing loans is based on recent
external appraisals and discounting of cash flows. Estimated cash
flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower
information.
53
(14) Fair Values, Continued
Deposit Liabilities
The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, passbook accounts, NOW accounts
and money market accounts must be stated at the amount payable on
demand. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities.
The fair value estimates above do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market.
Borrowed Funds
The fair value of borrowed funds due in 90 days or less, or that
reprice in 90 days or less is estimated to approximate the carrying
amounts. The fair value of longer term borrowed funds is estimated by
discounting scheduled cash flows based on current rates available to
the Company for similar types of borrowing arrangements.
Other Items
The following items are considered to have a fair value equal to book
value due to the nature of the financial instrument and the period
within which it will be settled or repriced: cash and due from banks,
federal funds sold, accrued interest receivable, investments required
by law, due to broker, advances from borrowers for taxes and
insurance, and accrued interest payable.
54
(14) Fair Values, Continued
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of December 31, 1997 and 1996 were as follows:
December 31, 1997 December 31, 1996
----------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands)
Financial assets:
Cash and cash equivalents ..... $ 10,225 10,225 10,887 10,887
Securities available for sale . 205,842 205,842 200,539 200,539
Federal Home Loan Bank of
New York stock ............... 3,291 3,291 2,029 2,029
Loans ......................... 284,930 280,765 251,532 249,665
Less: Allowance for loan losses (3,807) -- (3,438) --
--------- --------- --------- ---------
Net loans ............. 281,123 280,765 248,094 249,665
Accrued interest receivable ... 3,734 3,734 3,201 3,201
Financial liabilities:
Deposits:
Demand, passbook, money
market, and NOW accounts . 149,933 149,933 146,150 146,150
Certificates of deposit ... 183,332 184,208 151,932 152,797
Borrowed funds ................ 111,550 111,006 108,780 108,806
Accrued interest payable ...... 819 819 1,077 1,077
Advances from borrowers
for tax and insurance ........ 1,902 1,902 1,703 1,703
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of standby letters of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the obligations
with the counterparties. Fees, such as these are not a major part of the
Company's business and in the Company's business territory are not a
"normal business practice." Therefore, based upon the above facts the
Company believes that book value equals fair value and the amounts are
not significant.
55
(15) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at December
31, 1997, the Bank was required to maintain a minimum ratio of tangible
capital to total tangible assets of 1.5%; a minimum leverage ratio of
core (Tier 1) capital to total adjusted tangible assets of 3.0% to 4.0%;
and a minimum ratio of total capital (core capital and supplementary
capital) to risk-weighted assets of 8.0%, of which 4.0% must be core
(Tier 1) capital.
Under the prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a core (Tier 1) capital ratio of at least 5.0%
(based on average total assets); a core (Tier 1) risk-based capital ratio
of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1997 and 1996, the Bank
meets all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
56
(15) Capital Requirements, Continued
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1997 and 1996. Although the OTS capital
regulations apply at the Bank level only, the Company's consolidated
capital amounts and ratios are also presented. The OTS does not have a
holding company capital requirement.
December 31, 1997 December 31, 1996
Actual Actual
Amount Ratio Amount Ratio
Bank
Tangible capital $ 49,722 9.88% 46,225 10.08%
Tier 1 (core) capital 49,722 9.88 46,225 10.08
Risk-based capital:
Tier 1 49,722 23.42 46,225 23.35
Total 52,390 24.68 48,712 24.61
Actual Actual
Amount Ratio Amount Ratio
Consolidated
Tangible capital $ 61,476 11.99% 61,598 13.04%
Tier 1 (core) capital 61,476 11.99 61,598 13.04
Risk-based capital:
Tier 1 61,476 28.79 61,598 30.66
Total 64,159 30.04 64,098 31.90
57
(16) Holding Company Financial Information
The Holding Company began operations on December 26, 1995 in conjunction
with the Bank's mutual-to-stock conversion and the Company's initial
public offering of its common stock. The Holding Company's statements of
financial condition as of December 31, 1997 and 1996 and related
statements of income and cash flows for the years ended December 31,
1997, 1996 and for the period from inception (December 26, 1995) to
December 31, 1995 are as follows (the Holding Company did not have any
income or expenses for the period from December 26, 1995 to December 31,
1995):
Statements of Financial Condition
At December 31,
1997 1996
(in thousands)
Assets
Cash and cash equivalents ...................... $ 1,046 469
Securities available for sale* ................. 9,400 13,956
Loan receivable from subsidiary ................ 3,470 3,904
Accrued interest receivable .................... 115 163
Investment in subsidiary ....................... 49,467 46,312
Other assets ................................... 335 85
Total assets .......................... $63,833 64,889
======= =======
Liabilities and Shareholders' Equity
Liabilities:
Security sold under agreement to
repurchase**............................. $ 2,600 3,000
Other liabilities ........................ 30 371
------- -------
Shareholders' Equity .......................... 61,203 61,518
------- -------
Total liabilities and
shareholders' equity .................. $63,833 64,889
======= =======
* The Holding Company's securities available for sale consist of U.S.
Government Agency and mortgage backed securities with a weighted
average maturity of 3.0 years and 5.0 years at December 31, 1997 and
1996, respectively.
** Weighted average rate at December 31, 1997 and 1996 is 5.91% and
5.60% with a maturity date of February 20, 1998 and March 26, 1997,
respectively.
58
(16) Holding Company Financial Information, Continued
Statements of Income
Years ended December 31,
1997 1996 1995
(in thousands)
Interest income ........................ $ 868 1,128 --
Interest expense ....................... 170 2 --
------ ------ ------
Net interest income ............... 698 1,126 --
Non interest expense ................... 646 309 --
------ ------ ------
Income before income taxes and
equity in undistributed earnings (loss)
of subsidiary ......................... 52 817 --
------ ------ ------
Income tax expense ..................... 21 328 --
------ ------ ------
Income before equity in undistributed
earnings (loss) of subsidiary ......... 31 489 --
Equity in undistributed (loss) earnings
of subsidiary ......................... 2,729 (4,325) 857
------ ------ ------
Net income (loss) ...................... $2,760 (3,836) 857
====== ====== ======
59
(16) Holding Company Financial Information, Continued
Statements of Cash Flows
Years ended December 31,
1997 1996 1995
(in thousands)
Cash flows from operating activities:
Net income (loss) ............................. $ 2,760 (3,836) 857
Adjustment to reconcile net income
(loss) to net cash (used by) provided
by operating activities:
Equity in undistributed loss
(earnings) of subsidiary ................. (2,729) 4,325 (857)
Net loss on sale and redemptions
of securities available for sale ......... 153 -- --
RRP expense ............................... 272 -- --
(Decrease) increase in other
liabilities .............................. (341) 371 --
Increase in accrued interest
receivable and other assets .............. (274) (163) --
-------- -------- --------
Net cash (used by) provided by
operating activities .............. (159) 697 --
-------- -------- --------
Cash flows from investing activities:
Decrease (increase) in loans receivable
from subsidiary .............................. 434 434 (4,338)
Investment in common stock of subsidiary ...... -- -- (26,090)
Purchases of securities available for sale .... (11,052) (19,985) --
Proceeds from principal paydowns and
maturities of securities available for sale .. 8,159 3,984 --
Proceeds from sales of available for sale
securities ................................... 7,515 1,795 --
-------- -------- --------
Net cash provided by (used in)
investing activities .............. 5,056 (13,772) (30,428)
-------- -------- --------
Cash flows from financing activities:
Net (decrease) increase in borrowed funds ..... (400) 3,000 --
Net proceeds from issuance of common stock .... -- -- 52,180
Dividends paid ................................ (432) -- --
Purchase of treasury shares ................... (3,488) (11,208) --
-------- -------- --------
Net cash provided by (used in)
financing activities .............. (4,320) (8,208) 52,180
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 577 (21,283) 21,752
Cash and cash equivalents:
Beginning of period ........................... 469 21,752 --
-------- -------- --------
End of period ................................. $ 1,046 469 21,752
======== ======== ========
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
60
CORPORATE AND SHAREHOLDER INFORMATION
Company and Bank Address
11 Division Street
Amsterdam, New York 12010-4303
Telephone: (518) 842-7200
Fax: (518) 842-7500
Stock Price Information
The Company's stock is traded on The Nasdaq National Market System under
the symbol "AHCI". The table below shows the range of high and low bid prices of
the Company's Common Stock during 1996 and 1997. The information set forth in
the table below was provided by The Nasdaq Stock Market. Such information
reflects interdealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
High Low High Low
1996 First Quarter 10.500 9.375 1997 First Quarter 14.875 11.125
1996 Second Quarter 10.000 9.375 1997 Second Quarter 10.000 12.500
1996 Third Quarter 10.625 9.500 1997 Third Quarter 16.625 15.125
1996 Fourth Quarter 11.750 10.000 1997 Fourth Quarter 19.750 15.375
For information regarding restriction on dividends, see Note 2 to the Notes to
Consolidated Financial Statements.
As of March 27, 1998, the Company had approximately 1,119 shareholders of record
and 4,258,148 outstanding shares of Common Stock.
Special Counsel
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
Telephone: (202) 414-6100
61(a)
Investor Relations
Shareholders, investors and analysts interested in additional information may
contact:
Harold A. Baylor, Jr., CFO
Ambanc Holding Co., Inc.
11 Division Street
Amsterdam, New York 12010-4303
Telephone: (518) 842-7200
Fax: (518) 842-1688
Annual Report on Form 10-K
Copies of Ambanc Holding Co., Inc.'s Annual Report for year ended December
31, 1997 on Form 10-K filed with the Securities and Exchange Commission are
available without charge to shareholders upon written request to:
Investor Relations
Ambanc Holding Co., Inc.
11 Division Street
Amsterdam, New York 12010-4303
Annual Meeting
The annual meeting of shareholders will be held at 10:00 a.m., New York
time, on Friday, May 22, 1998 at the Best Western, located at 10 Market Street,
Amsterdam, New York.
Stock Transfer Agent and Registrar
Ambanc Holding Co., Inc.'s transfer agent, American Stock Transfer & Trust,
maintains all shareholder records and can assist with stock transfer and
registration address changes, changes or corrections in social security or tax
identification numbers and 1099 tax reporting questions. If you have questions,
please contact the stock transfer agent at the address below:
American Stock Transfer & Trust
40 Wall Street, 46th Floor
New York, New York 10005
Telephone: (718) 921-8290
61(b)
Amsterdam Savings Bank, FSB Offices
Corporate 11 Division Street
Amsterdam, N.Y. 12010
(518) 842-7200
Amsterdam Route 30N
Amsterdam, N.Y. 12010
Price Chopper Supermarket
Sanford Farms Plaza
Amsterdam, N.Y. 12010
Ballston Spa Grand Union Plaza, Rte. 50
Ballston Spa, N.Y. 12020
Clifton Park Village Plaza
Clifton Park, N.Y. 12065
Fort Plain 19 River Street
Fort Plain, N.Y. 13339
Gloversville Arterial at Fifth Avenue
Gloversville, N.Y. 12078
Latham Price Chopper Supermarket
873 New Loudon Road
Latham, N.Y. 12110
Schenectady Price Chopper Supermarket
1640 Eastern Parkway
Schenectady, N.Y. 12309
Saratoga Price Chopper Supermarket
115 Ballston Avenue
Saratoga Springs, N.Y. 12866
Guilderland 5 New Karner Road
Guilderland, N.Y. 12084
Wilton Price Chopper Supermarket
Route 50
Saratoga Springs, N.Y. 12866
Operations Center 35 East Main Street
Amsterdam, N.Y. 12010
62(a)
DIRECTORS AND OFFICERS
Board of Directors
- ------------------
(Ambanc Holding Co., Inc. and Year appointed
Amsterdam Savings Bank, FSB) to Bank Board
Paul W. Baker, Chairman of the Board 1963
Robert J. Brittain, President and Chief Executive Officer 1988
Lauren T. Barnett, Barnett Agency, Inc. 1966
John J. Daly, Alpin Haus 1988
Robert J. Dunning D.D.S., Dentist 1972
Lionel H. Fallows, Retired, Lieutenant Colonel 1981
Marvin R. LeRoy, Jr., Alzheimers Association, Northeastern NY Chapter 1996
Charles S. Pedersen, Independent Manufacturers' Representative 1977
Carl A. Schmidt, Jr., Sofco, Inc. 1974
William A. Wilde, Jr., Amsterdam Printing and Litho Corp. 1966
Executive Officers of Ambanc Holding Co., Inc.
- ----------------------------------------------
Robert J. Brittain President/Chief Executive Officer
Harold A. Baylor, Jr. Vice President/Treasurer/Chief Financial Officer
Robert Kelly Vice President/General Counsel/Secretary
Executive Officers of Amsterdam Savings Bank, FSB
- -------------------------------------------------
Robert J. Brittain President/Chief Executive Officer
Harold A. Baylor, Jr. Vice President/Treasurer/Chief Financial Officer
Robert Kelly Vice President/General Counsel/Secretary
Nancy S. Virkler Vice President of Operations
Richard C. Edel Vice President
Cynthia M. Proper Vice President/Director of Lending
62(b)