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,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Selected Consolidated (In Thousands)
Financial Condition Data:
Total assets ..................... $ 735,472 $ 510,444 $ 472,421 $ 438,944 $ 343,334
Securities available for sale .... 244,241 205,808 200,539 74,422 --
Investment securities ............ -- -- -- -- 53,390
Loans receivable, net ............ 420,933 281,123 248,094 249,991 261,581
Deposits ......................... 461,413 333,265 298,082 311,239 293,152
Borrowed funds ................... 173,810 111,550 108,780 -- 19,000
Shareholders' equity ............. 85,893 61,202 61,518 76,015 27,414
Years Ended December 31,
1998 1997 1996 1995 1994
--------- --------- --------- -------- -----------
Selected Consolidated (Dollars in thousands, except per share data)
Operations Data:
Total interest and dividend income $38,973 $ 35,566 $ 32,348 $ 25,582 $ 23,806
Total interest expense ........... 22,441 19,654 16,435 12,746 10,192
------- --------- --------- --------- ---------
Net interest income .............. 16,532 15,912 15,913 12,836 13,614
Provision for loan losses ........ 900 1,088 9,450 1,522 1,107
------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ....... 15,632 14,824 6,463 11,314 12,507
Other income ..................... 1,144 1,819 908 1,512 905
Other expenses ................... 15,075 12,190 13,136 11,383 11,340
------- --------- --------- --------- ---------
Income (loss) before taxes ....... 1,701 4,453 (5,765) 1,443 2,072
Income tax expense (benefit) ..... 670 1,693 (1,929) 586 122
------- --------- --------- --------- ---------
Net income (loss) ................ $ 1,031 $ 2,760 ($ 3,836) $ 857 $ 1,950
======= ========= ========= ========= =========
Basic earnings (loss) per share* . $ 0.26 $ 0.70 ($ 0.81) N/A N/A
======= ========= ========= ========= =========
Diluted earnings (loss) per share* $ 0.26 $ 0.69 ($ 0.81) N/A N/A
======= ========= ========= ========= =========
Dividend payout ratio ............ 96.1% 14.3% 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.
At or for the years ended December 31,
1998 1997 1996 1995 1994
------------------------------------------
Selected Consolidated Financial
Ratios and Other Data:
Performance Ratios:
Return (loss) on average assets (1) ....... 0.18% 0.56% (0.84)% 0.25% 0.59%
Return (loss) on average equity (1) ....... 1.64 4.52 (5.24) 3.00 7.36
Interest rate information:
Average interest rate spread during year 2.32 2.58 2.74 3.36 4.01
Average net interest margin during year (2) 3.04 3.36 3.66 3.87 4.34
Efficiency ratio (3) ...................... 74.44 69.81 62.50 68.18 63.46
Ratio of average earning assets to
average interest-bearing liabilities ... 117.28 118.93 124.26 113.31 110.24
Asset Quality Ratios:
Non-performing assets to total assets (1) . 0.45 0.67 1.18 2.72 4.15
Non-performing loans to total loans ....... 0.68 1.16 1.94 3.48 3.97
Allowance for loan losses to
non-performing loans .................... 168.42 117.07 70.47 30.10 21.42
Allowance for loan losses to total loans .. 1.15 1.34 1.37 1.05 0.85
Capital Ratios:
Equity to total assets at end of period (1) 11.68 11.99 13.02 17.32 7.98
Average equity to average assets (1) ...... 11.18 12.42 15.95 8.30 7.96
Other Data:
Number of full-service offices ............ 18 12 9 9 7
<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 earning assets.
(3) The efficiency ratio represents other expenses (excluding real estate owned
and repossessed assets expenses, net, the amortization of goodwill, and certain
non-recurring expenses in 1998 totaling approximately $1.7 million, primarily
related to costs associated with the merger, costs asociated with the
termination and consulting agreements entered into with the former President and
CEO, costs incurred to defend against and settle legal actions initiated by a
shareholder, and costs associated with the core system conversion) divided by
the sum of net interest income and other income (excluding net gains (losses) on
securities transactions).
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Ambanc Holding Co., Inc. ("Ambanc" or the "Company") is a savings and loan
holding company. Ambanc was formed as a Delaware corporation to act as the
holding company for the former Amsterdam Savings Bank, FSB (now known as Mohawk
Community Bank) upon the completion of Amsterdam Savings 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, any
discussion herein for periods prior to 1996 relates primarily to the Bank's
results of operations.
On November 16, 1998, the Company acquired AFSALA Bancorp, Inc. ("AFSALA")
and its wholly owned subsidiary, Amsterdam Federal Bank. Pursuant to the merger
agreement, AFSALA was merged with and into Ambanc Holding Co., Inc., and
Amsterdam Federal Bank was merged with and into the former Amsterdam Savings
Bank, FSB. The combined bank now operates as one institution under the name
"Mohawk Community Bank" (the "Bank"). See "Acquisition of AFSALA Bancorp, Inc."
The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest and dividend
income earned on its assets, primarily loans and securities, and the interest
expense on its liabilities, primarily deposits and borrowings. Net interest
income may be affected significantly by general economic and competitive
conditions and policies of regulatory agencies, particularly those with respect
to market interest rates. The results of operations are also significantly
influenced by the level of non-interest expenses, such as employee salaries and
benefits, other income, such as fees on deposit-related services, and the Bank's
provision for loan losses.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. Management's
strategy has been to try to achieve a high loan to asset ratio with emphasis on
originating traditional one- to four-family residential mortgage and home equity
loans in its primary market area. At December 31, 1998, the Bank's loan
receivable, net, to assets ratio was 57.2%, up from 55.1% at December 31, 1997.
In addition, the Bank's portfolio of loans secured by one- to four-family
residential mortgage and home equity loans has grown as a percentage of the
Bank's total loan portfolio to 84.3% of total loans at December 31, 1998 from
77.6% at December 31, 1997.
Forward-Looking Statements
When used in this Annual Report on Form 10-K, in future filings by the
Company with the Securities and Exchange Commision, in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, 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 that could cause actual results to differ materially from
historical results and those presently anticipated or projected, including, but
not limited to, 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, the possibility
that expected cost savings from the merger with AFSALA cannot be fully realized
or realized within the expected time frame, the possiblity that costs or
difficulties related to the integration of the businesses of the Company and
AFSALA may be greater than expected and the possibility that revenues following
the merger with AFSALA may be lower than expected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
The Company does not undertake - and specifically disclaims any obligation
- - - to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Acquisition of AFSALA Bancorp, Inc.
On November 16, 1998, the Company acquired AFSALA Bancorp, Inc. and its
wholly owned subsidiary, Amsterdam Federal Bank. At the date of the merger,
AFSALA had approximately $167.1 million in assets, $144.1 million in deposits,
and $19.2 million in shareholders' equity. Pursuant to the merger agreement,
AFSALA was merged with and into Ambanc Holding Co., Inc., and Amsterdam Federal
Bank was merged with and into the former Amsterdam Savings Bank, FSB. The
combined bank now operates as one institution under the name "Mohawk Community
Bank" .
Upon consummation of the merger, each share of AFSALA common stock was
converted into the right to receive 1.07 shares of Ambanc common stock. Based on
the 1,249,727 shares of AFSALA common stock issued and outstanding immediately
prior to the merger, the Company issued 1,337,207 shares of common stock in the
merger. Of the 1,337,207 shares issued in the merger, 1,327,086 were issued from
the Company's treasury stock and 10,121 were newly-issued shares. In addition,
under the merger agreement, the Company assumed unexercised, fully-vested
options to purchase 144,118 shares of AFSALA common stock which converted into
fully-vested options to purchase 154,206 shares of Ambanc common stock.
The acquisition was accounted for using purchase accounting in accordance
with APB Opinion No. 16, "Business Combinations" (APB No. 16). Under purchase
accounting, the purchase price is allocated to the respective assets acquired
and liabilities assumed based on their estimated fair values. The acquisition of
AFSALA resulted in approximately $8.0 million in excess of cost over net assets
acquired ("goodwill"). Goodwill is being amortized to expense over a period of
fifteen years using the straight-line method. The results of operations of
AFSALA have been included in the Company's 1998 consolidated statement of
operations from the date of acquisition. See Note 2 to the Consolidated
Financial Statements for further information regarding the acquisition of
AFSALA.
Financial Condition
Comparison of Financial Condition at December 31, 1998 and 1997. Total
assets at December 31, 1998 were $735.5 million, an increase of $225.0 million,
or 44.1%, over the December 31, 1997 amount of $510.4 million. The primary
reason for the increase in total assets was the previously discussed acquisition
of AFSALA Bancorp, Inc. (AFSALA), which had total assets of $167.1 million at
the date of the acquisition.
Federal funds sold increased to $30.2 million at December 31, 1998 from $0
at December 31, 1997, due primarily to the balances acquired from AFSALA. In
addition, given the low interest rate environment that existed during most of
1998, the Company maintained greater liquidity at year-end 1998 as compared to
year-end 1997 to take advantage of any favorable movements in interest rates.
Securities available for sale increased by $38.6 million, from $205.8 million at
December 31, 1997 to $244.2 million at December 31, 1998, due primarily to the
$56.0 million in securities (at fair value) acquired from AFSALA. The net
decrease in securities of $17.6 million after consideration of the securities
acquired from AFSALA was due to the Company's decision to maintain greater
liquidity to take advantage of any movements in interest rates. Federal Home
Loan Bank of New York (FHLB) stock increased $3.9 million, or 119.2%, due to a
combination of purchases of additional stock of $3.4 million and the $565
thousand in FHLB stock acquired from AFSALA.
Loans receivable, net increased $139.8 million, or 49.7%, from $281.1
million at December 31, 1997, to $420.9 million at December 31, 1998, due
primarily to the $82.9 million in net loans (at fair value) acquired from
AFSALA. The majority of the loans acquired from AFSALA were one -to four-family
residential mortgage and home equity loans. The Company also experienced growth
in its own portfolio, primarily due to the purchase of $31.9 million in
residential real estate loans during the first and second quarters. The
remaining growth in the Company's loan portfolio was mainly in home equity loans
due to the offering of a product with low closing costs and competitive rates.
Premises and equipment, net increased $1.4 million due primarily to the
acquisition of assets from AFSALA.
The acquisition of AFSALA resulted in approximately $8.0 million in
goodwill, which represents the excess of the purchase price over the fair value
of the net assets acquired. Goodwill is being amortized over fifteen years using
the straight-line method. During 1998, $67 thousand of goodwill was amortized,
leaving a balance of $7.9 million at December 31, 1998.
Deposits at December 31, 1998 were $461.4 million, an increase of $128.1
million, or 38.5%, over the balance of $333.3 million at December 31, 1997. The
main reason for the increase was the deposits assumed in the acquisition of
AFSALA, which totaled $144.8 million (at fair value) at the acquisition date.
Excluding the AFSALA acquisition, deposits decreased $16.6 million, due
primarily to the competitive rate environment on time deposits and the Company's
use of borrowings as an alternative funding source.
Total borrowings (including FHLB overnight and term advances and securities
sold under agreements to repurchase) increased $62.3 million from year-end 1997
to year-end 1998. The only borrowings assumed from AFSALA were $1.4 million (at
fair value) in FHLB term advances. The primary increase in borrowings was in
securities sold under agreements to repurchase, which increased $53.2 million,
or 53.6%, from $99.3 million at December 31, 1997 to $152.4 million at December
31, 1997.
The proceeds from the securities sold under agreements to repurchase were
used mainly to fund the loan growth, including the purchase of the residential
real estate loans noted above. In addition, the Company borrowed $20.0 million
in adjustable rate FHLB term advances during 1998. See Note 10 of the Notes to
Consolidated Financial Statements for further information regarding the
Company's borrowings.
Shareholders' equity increased $24.7 million, or 40.3%, from $61.2 million
at December 31, 1997 to $85.9 million at December 31, 1998, due primarily to the
acquisition of AFSALA noted above. In connection with the acquisition, the
Company issued 1,337,207 shares of common stock. Of the 1,337,207 shares issued
in the acquisition, 1,327,086 were issued from the Company's treasury stock and
10,121 were newly-issued shares. The acquisition of AFSALA had the impact of
increasing shareholders' equity by $26.9 million. Other significant items
impacting shareholders' equity during 1998 were purchases of treasury stock
($4.1 million), cash dividends paid ($1.1 million), and net income for the year
($1.0 million).
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997.
Net Income. Net income decreased by $1.7 million, or 62.6%, for the year
ended December 31, 1998 to $1.0 million from $2.8 million for the year ended
December 31, 1997. Net income for the year ended December 31, 1998 was reduced
primarily as a result of increased non-interest expenses and a decrease in
non-interest income, offset in part by increased net interest income and a
decrease in the provision for loan losses. These and other changes are discussed
in more detail below.
Net Interest Income. Net interest income increased $620 thousand, or 3.9%,
to $16.5 million for the year ended December 31, 1998 from $15.9 million for the
year ended December 31, 1997. The increase in net interest income was primarily
due to an increase of $70.9 million, or 15.0%, in the average balance of earning
assets, offset by an increase in the average balance of interest-bearing
liabilities of $66.1 million, or 16.6%, and a decrease in the interest rate
spread from 2.58% for the year ended December 31, 1997 to 2.32% for the year
ended December 31, 1998.
Earning assets primarily consist of loans receivable, securities available
for sale, federal funds sold, FHLB of New York stock, and interest-bearing
deposits. Interest-bearing liabilities primarily consist of interest-bearing
deposits, FHLB advances and securities repurchase agreements.
The interest rate spread, which is the difference between the yield on
average earning assets and the cost of average interest-bearing liabilities,
decreased to 2.32% for the year ended December 31, 1998 from 2.58% for the year
ended December 31, 1997. The decrease in the interest rate spread is primarily
the result of the decrease in the average yield on earning assets being greater
than the decrease in the average cost of interest-bearing liabilities.
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 earning assets lags behind the growth in
interest-bearing liabilities. 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.
Interest and Dividend Income. Interest and dividend income increased by
approximately $3.4 million, or 9.6%, to $39.0 million for the year ended
December 31, 1998 from $35.6 million for the year ended December 31, 1997. The
increase was largely the result of an increase of $70.9 million, or 15.0%, in
the average balance of earning assets to $544.0 million for the year ended
December 31, 1998 as compared to $473.1 million for the year ended December 31,
1997. The increase in the average balance of earning assets consisted primarily
of increases in the average balance of loans receivable of $54.6 million, or
20.4%, securities available for sale of $11.9 million, or 6.12%, FHLB of New
York stock of $2.0 million, or 64.6 %, and federal funds sold and
interest-bearing deposits of $2.5 million, or 30.3%. Partially offsetting the
effects of the increase in the average balance of earning assets was a 36 basis
point decrease in the average yield on total earning assets.
The yield on the average balance of earning assets was 7.16% and 7.52% for
the years ended December 31, 1998 and 1997, respectively.
Interest and fees on loans increased $3.6 million, or 17.2%, to $24.6
million for the year ended December 31, 1998. This increase was primarily the
result of an increase in the average balance of net loans receivable of $54.6
million partially offset by a 21 basis point decrease in the average yield.
Interest income on securities available for sale decreased $478 thousand,
or 3.4%, to $13.5 million for the year ended December 31, 1998 from $14.0
million for the previous year. This decrease is primarily the result of a 65
basis point decrease in the average yield on securities available for sale
partially offset by an increase in the average balance of $11.9 million.
Interest Expense. Total interest expense increased by $2.8 million, or
14.2%, to $22.4 million for the year ended December 31, 1998 from $19.7 million
for the year ended December 31. 1997. Total average interest-bearing liabilities
increased by $66.1 million, or 16.6%, to $463.9 million in 1998 compared to
$397.8 million in 1997. During the same periods, the average rate paid on
interest-bearing liabilities decreased by 10 basis points to 4.84% in 1998 from
4.94% in 1997.
Total interest expense for the year ended December 31, 1998 increased
primarily due to an increase in the average balance of total borrowed funds to
$150.3 million from $98.9 million, partially offset by a decrease of 34 basis
points, to 5.73%, in the average rate paid for these funds during the year. The
increase in the average balance of borrowed funds was used primarily to fund the
increase in loans, including the purchase of loans noted above.
Provision for Loan Losses. The Company's provision for loan losses is based
upon its analysis of the adequacy of the allowance for loan losses. The
allowance is increased by a charge to the provision for loan losses, the amount
of which depends upon an analysis of the changing risks inherent in the Bank's
loan portfolio. 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 credit risk, historical loss experience, current
economic conditions, estimated fair value of underlying collateral,
delinquencies, and other factors. The provision for loan losses for the year
ended December 31, 1998 decreased $188 thousand to $900 thousand from $1.1
million for the year ended December 31, 1997. The decrease in the provision was
due primarily to the decrease in non-performing loans during the year from $3.3
million at December 31, 1997, to $2.9 million at December 31, 1998, a decrease
of 10.9%.
Non-Interest Income. Total non-interest income decreased by $675 thousand,
or 37.1%, to $1.1 million for the year ended December 31, 1998 from $1.8 million
for the year ended December 31, 1997 primarily due to net losses on securities
transactions of $165 thousand in 1998 compared to net gains of $775 thousand in
1997. This decrease in net gains (losses) on securities transactions was
partially offset by an increase in service charges on deposit accounts of $226
thousand from 1997 to 1998. The increase in service charges on deposit accounts
is primarily attributable to the restructuring of service charges on certain
deposit products, in addition to an increase in the number of deposit accounts
due to the merger.
Non-Interest Expenses. Non-interest expenses increased $2.9 million, or
23.7%, to $15.1 million for the year ended December 31, 1998 from $12.2 million
for the year ended December 31, 1997. Non-interest expenses in 1998 were
impacted by significant non-recurring expenses totaling approximately $1.7
million primarily related to costs associated with the merger of the two
companies, costs associated with the termination and consulting agreements
entered into with the former President and CEO, costs incurred to defend against
and settle legal actions initiated by a shareholder, and costs associated with
the core system conversion. These and other changes are discussed in more detail
below.
Salaries, wages and benefits expense increased by $307 thousand, or 5.0%,
due primarily to increased costs as a result of the merger, the opening of three
new branches during 1997, increased costs associated with the Company's ESOP, as
well as general cost of living and merit raises to employees. Management
believes that salaries, wages and benefits expenses may fluctuate in future
periods as a result of the costs related to the Company's ESOP, as the expense
related to the ESOP is dependent on the Company's average stock price.
During 1998, the Company incurred certain non-recurring termination
benefits totaling approximately $608 thousand. The non-recurring termination
benefits related to the termination and consulting agreements entered into with
the Company's former President and CEO, and severance packages for three former
officers.
Occupancy and equipment increased $270 thousand, or 17.5%, primarily due to
the acceleration of depreciation and amortization of equipment and leasehold
improvements as a result of the merger. In addition, rent and maintenance
expense increased as a result of the branch offices opened in 1997 and the four
additional branches acquired through the merger.
Data processing increased $520 thousand, or 44.5%, primarily due to
non-recurring expenses related to the core system conversion subsequent to the
merger. The non-recurring expenses relate to the conversion of the core system
(loans and deposits) and the termination of the network contract for automated
teller machine (ATM) processing. The non-recurring expenses associated with the
conversion of the core system and the termination of the ATM processing contract
were approximately $368 thousand. Also contributing to the increase in data
processing expense was the increase in the number of loan and deposit accounts
due to the merger.
Professional fees increased $306 thousand, or 71.3%, primarily due to
charges of $219 thousand related to legal costs incurred to defend against legal
actions initiated by a shareholder.
Real estate owned and repossessed assets expenses decreased $294 thousand,
or 82.8%, to $61 thousand in 1998 as compared to $355 thousand in 1997 primarily
due to a decrease in net costs associated with foreclosed real estate properties
and repossessed assets. This decrease was largely the result of a decrease of
$298 thousand, or 69.1%, in the average balance of real estate owned and
repossessed assets during the year.
Non-interest expenses for 1998 included the amortization of goodwill
totaling approximately $67 thousand. As noted previously, goodwill is being
amortized to expense over fifteen years using the straight-line method.
Other non-interest expenses increased approximately $1.1 million, or 43.4%,
to $3.6 million for the year ended December 31, 1998 when compared to 1997. This
increase was primarily due to merger-related costs which included advertising
related to promoting the new bank, the replacement of supplies and the write-off
of software duplication between the banks, additional courier services for check
processing due to the added branches, and an increase in postage due to special
mailings to depositors and shareholders related to the merger. In addition,
costs associated with the settlement of legal actions initiated by a
shareholder, and costs related to a one-time charge to substantially modify
repurchase agreements contributed to this increase.
Income Tax Expense. Income tax expense decreased by $1.0 million, or 60.4%,
to $670 thousand for the year ended December 31, 1998 from $1.7 million for the
year ended December 31, 1997. The decrease was primarily the result of the
decrease in income before taxes.
Results of Operations
Comparison of Operating Results for the 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.
Interest and Dividend Income. Interest and dividend income increased $3.2
million, or 9.9%, to $35.6 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 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 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 earning assets, mainly average securities available for sale which
increased in 1997 to 41.0% of total 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 earning
assets grew by $38.5 million, or 8.9%, to $473.1 million. The 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 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.
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.
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
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
in 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.
Asset Quality
The Bank's loan portfolio consists primarily of one-to four-family
residential mortgage and home equity loans, which are generally considered to
have less credit 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 declining as a percentage of the Bank's total loan
portfolio to 6.5% of total loans at December 31, 1998 from 10.8% and 13.8% at
December 31, 1997 and 1996, respectively. During the same period, the Bank's
portfolio of loans secured by one- to four-family residential mortgage and home
equity loans has grown as a percentage of the Bank's total loan portfolio to
84.3% of total loans at December 31, 1998 from 77.6% and 72.3% at December 31,
1997 and 1996, 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 Bank decided to dispose of certain non-performing and higher credit risk
performing assets in a bulk sale, as opposed to continuing to resolve the
problems on an asset specific basis. The bulk sale strategy was chosen in order
to accelerate the reduction in loan portfolio credit risk, reduce the drag on
earnings that resulted from carrying these assets, enhance overall asset quality
and better position the Bank to achieve its strategic goals.
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 and 1998,
dropping to 0.67% at December 31, 1997 and to 0.45% at December 31, 1998.
In addition, the Bank's ratios of non-performing loans to total loans and
the allowance for loan losses to non-performing loans have also improved. The
ratio of non-performing loans to total loans at December 31, 1998 was 0.68%
compared to 1.16% and 1.94% at December 31, 1997 and 1996, respectively. The
ratio of the allowance for loan losses to non-performing loans increased to
168.4% at December 31, 1998, compared to 117.1% and 70.5% at December 31, 1997
and 1996, respectively.
Market Risk
Interest rate risk 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's net interest income is sensitive to changes in interest rates,
as the rates paid on its interest-bearing liabilities generally change faster
than the rates earned on its interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates and increase
in periods of decreasing interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Bank manages its interest rate sensitivity and asset/liability
products through its asset/liability management committee. The asset/liability
management committee meets weekly to determine the rates of interest for loans
and deposits and consists of the President and Chief Executive Officer, the
Senior Vice President and Chief Commercial Lending Officer, the Senior Vice
President and Chief Consumer Lending Officer, and the Treasurer and Chief
Financial Officer. Rates on deposits are primarily based on the Bank's needs for
funds and on a review of rates offered by other financial institutions in the
Bank's market areas. Interest rates on loans are primarily based on the interest
rates offered by other financial institutions in the Bank's primary market areas
as well as the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including (i)
originating, for its portfolio, a large base of adjustable-rate loans, which
include residential mortgage and home equity loans, which at December 31, 1998,
totaled 23.8% of total loans, and (ii) maintaining substantial levels of federal
funds sold and debt securities with one to five year terms to maturity.
The committee manages the interest rate sensitivity of the Bank through the
determination and adjustment of asset/liability composition and pricing
strategies. The committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of its earning assets and to match, as
closely as possible, the maturities of earning assets with interest-bearing
liabilities.
The Bank is subject to interest rate risk to the extent that its
interest-bearing liabilities reprice on a different basis or a different pace
from its 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, 1998, 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.
NPV as % of PV
Net Portfolio Value of Assets
------------------------------- ------------------------------
Change NPV
in Rates $Amount $Change(1) $Change(2) Ratio(3) Change(4)
-------- -------- ---------- ---------- -------- ---------
(Dollars in thousands)
+400 bp 19,875 (56,041) (74)% 2.99% -732 bp
+300 bp 34,369 (41,548) (55) 5.03 -528 bp
+200 bp 49,099 (26,817) (35) 7.00 -331 bp
+100 bp 63,278 (12,638) (17) 8.79 -152 bp
0 bp 75,916 10.31
-100 bp 85,127 9,211 12 11.36 105 bp
-200 bp 94,711 18,795 25 12.41 210 bp
-300 bp 106,432 30,516 40 13.66 335 bp
-400 bp 118,319 42,403 56 14.89 458 bp
- - -------------------------------------------------------------------------------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by present value of total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, certain shortcomings are inherent in the preceding NPV
table since the data reflects hypothetical changes in NPV based upon
assumptions used by the OTS to evaluate the Bank as well as other institutions.
The experience of the Bank has been that net interest income declines with
increases in interest rates and that net interest income increases with
decreases in interest rates. Generally, during periods of increasing interest
rates, the Bank's interest rate sensitive liabilities would reprice faster than
its interest rate sensitive assets causing a decline in the Bank's interest rate
spread and margin. This would result from an increase in the Bank's cost of
funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield on earning assets would tend to reduce net interest income. The
Bank's interest rate spread decreased to 2.32% for the year ended December 31,
1998 from 2.58% for the year ended December 31, 1997. The reduction in the
interest rate spread was due primarily to the leveraging strategy employed by
the Company during 1998.
In times of decreasing interest rates, fixed rate assets could increase in
value and the lag in repricing of interest rate sensitive assets could be
expected to have a positive effect on the Bank's net interest income.
During 1998, proceeds from FHLB term advances and repurchase agreements
totaled approximately $162.6 million, offset by repayments of repurchase
agreements of approximately $89.4 million. These funds were primarily used to
fund the purchase of residential real estate loans and securities available for
sale, in addition to funding the home equity and residential real estate loan
growth during the year. Management believes that the strategy related to the
purchase of loans and securities with borrowed funds causes the bank's NPV to be
more sensitive to changes in interest rates. Although this strategy did not
expose the Company's net interest income and its net interest margin to an
unacceptable level of sensitivity to changes in interest rates in 1998,
management plans to de-emphasize this strategy in 1999.
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest and dividend income earned on average 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.
1998 1997 1996
--------------------------- ------------------------- --------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Inc./Exp. Rate Balance Inc./Exp. Rate Balance Inc./Exp. Rate
------- --------- ------ ------- --------- ------ ------- --------- ------
Earning Assets (Dollars in Thousands)
Loans receivable (1) ....................... $ 322,335 $ 24,623 7.64% $ 267,726 $ 21,011 7.85% $ 262,193 $20,557 7.84%
Securities available for sale (AFS) (2)..... 205,995 13,479 6.54% 194,111 13,957 7.19% 156,093 10,921 7.00%
Federal Home Loan Bank Stock ............... 5,048 364 7.21% 3,066 204 6.65% 2,013 130 6.46%
Federal funds sold and interest-
bearing deposits ......................... 10,632 507 4.70% 8,162 394 4.76% 14,218 740 5.12%
------- ------ ------- ------ ------- ------
Total earning assets ................... 544,010 38,973 7.16% 473,065 35,566 7.52% 434,517 32,348 7.44%
------- ------ ------- ------ ------- ------
Allowance for Loan Losses .................... (4,220) (3,846) (3,686)
Due from Brokers ............................. 5,265 7,121 14,221
Unrealized Gain/(Loss) on AFS Securities ..... 225 (884) (1,475)
Other Assets ................................. 15,926 16,150 15,616
------- --------- ---------
Total Average Assets ......................... $ 561,206 $ 491,606 $ 459,193
========= ========= =========
Interest-Bearing Liabilities
Savings deposits ........................... $ 103,513 3,119 3.01% $ 99,389 $ 3,016 3.03% $103,931 $ 3,162 3.04%
NOW deposits .............................. 25,410 549 2.16% 19,990 543 2.72% 19,124 527 2.76%
Certificates of deposit .................... 176,136 9,882 5.61% 172,319 9,882 5.73% 150,300 8,492 5.65%
Money Market Accounts ...................... 8,481 272 3.21% 7,159 204 2.85% 8,765 243 2.77%
Borrowed Funds ............................. 150,335 8,619 5.73% 98,927 6,009 6.07% 67,572 4,011 5.94%
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities ..... 463,875 22,441 4.84% 397,784 19,654 4.94% 349,692 16,435 4.70%
------- ------ ------- ------ ------- ------
Other Liabilities ............................ 34,590 32,757 36,255
------- ------ ------
Total Liabilities ............................ 498,465 430,541 385,947
Shareholders' Equity ......................... 62,741 61,065 73,246
------- ------ ------
Total Average Liabilities & Equity ........... $ 561,206 $ 491,606 $ 459,193
========= ========= =========
Net interest income ...................... $ 16,532 $ 15,912 $ 15,913
======= ======= ========
Interest rate spread ..................... 2.32% 2.58% 2.74%
====== ====== ======
Net earning assets ....................... $ 80,135 $ 75,281 $ 84,825
========= ========= =========
Net interest margin ...................... 3.04% 3.36% 3.66%
====== ====== ======
Average earning assets/Average
interest-bearing liabilities ........... 117.28% 118.93% 124.26%
========== ========== ==========
<FN>
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
(2) Securities available for sale exclude securities pending settlement.
</FN>
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest and
dividend income and interest expense for major components of 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 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.
----------------------------------------------------------------------------
1998 vs. 1997 1997 v. 1996
--------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ------- --------- -------- --------- -----------
Earning Assets (Dollars in thousands)
Loans receivable ..................... $ 4,154 $ (542) $ 3,612 $ 434 $ 20 $ 454
Securities available for sale (AFS) .. 1,018 (1,496) (478) 2,726 310 3,036
Federal Home Loan Bank Stock ......... 142 18 160 70 4 74
Federal funds sold and interest-
bearing deposits ................... 118 (5) 113 (298) (48) (346)
------- ------- ------- ------- -------- --------
Total earning assets ............. 5,432 (2,025) 3,407 2,932 286 3,218
------- ------- ------- ------- -------- --------
Interest-Bearing Liabilities
Savings deposits ..................... 124 (21) 103 (138) (9) (147)
NOW deposits ........................ 24 (18) 6 23 (6) 17
Certificates of deposit .............. 216 (216) -- 1,261 129 1,390
Money Market Accounts ................ 40 28 68 (46) 7 (39)
Borrowed Funds ....................... 2,926 (316) 2,610 1,902 96 1,998
------- ------- ------- ------- -------- --------
Total interest-bearing liabilities $ 3,330 $ (543) $ 2,787 $ 3,003 $ 216 $ 3,219
------- ------- ------- ------- -------- --------
Net interest income ................ $ 620 $ (1)
======= ========
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain, for each calendar
month, a daily average balance of cash and eligible liquid investments of not
less than 4% of the average daily balance of its net withdrawable savings and
borrowings (due in one year or less) during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Bank's average liquidity ratio was 31.97% and
27.15% at December 31, 1998 and 1997, respectively.
The Company's sources of liquidity include cash flows from operations,
principal and interest payments on loans, mortgage-backed securities and
collateralized mortgage obligations, maturities of securities, deposit inflows,
borrowings from the FHLB of New York and proceeds from the sale of securities
under agreements to repurchase.
While maturities and scheduled amortization of loans and securities are, in
general, a predictable source of funds, deposit flows and prepayments on loans
and securities are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Bank invests excess funds in
overnight deposits which provide liquidity to meet lending requirements.
In addition to deposit growth, the Company borrows funds from the FHLB of
New York or may utilize other types of borrowed funds to supplement its cash
flows. During 1998, borrowed funds from the FHLB of New York increased $7.7
million and borrowings under securities repurchase agreements ("repos")
increased $56.2 million. Since March 31, 1998, $100.0 million in callable repos
with the Federal Home Loan Bank have been added to borrowed funds while the
Company has reduced its obligation with other repo counterparties to take
advantage of the lower rates offered by the Federal Home Loan Bank. The Federal
Home Loan Bank repos all mature within 10 years with call dates ranging from one
year to five years and fixed rates that range from 5.01% to 5.59%. These repos
were used primarily to fund the origination and purchase of loans. At December
31, 1998 and 1997, the Company had $21.4 million and $12.3 million,
respectively, in outstanding term borrowings (advances) from the FHLB and $152.4
million and $99.3 million, respectively, in borrowings under securities
repurchase agreements. See Note 10 to the Consolidated Financial Statements for
further information regarding the Company's borrowings.
As of December 31, 1998 and 1997, the Company had $244.2 million and $205.8
million of securities, respectively, classified as available for sale. The
liquidity of the securities available for sale portfolio provides the Company
with additional potential cash flows to meet loan growth and deposit flows.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
banking industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Company's
commitments to make loans and management's assessment of the Company's ability
to generate funds.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At December 31, 1998, the Bank's capital exceeded each of
the regulatory capital requirements of the OTS. The Bank is "well capitalized"
at December 31, 1998 according to regulatory definition. At December 31, 1998,
the Bank's tangible and core capital levels were both $63.5 million (8.83% of
total adjusted assets) and its total risk-based capital level was $67.4 million
(21.99% of total risk-weighted assets). The minimum regulatory capital ratio
requirements of the Bank are 1.5% for tangible capital, 3.0% for core capital,
and 8.0% for total risk-based capital.
During 1998, the Company repurchased 215,320 shares of stock in open-market
transactions at a total cost of $4.1 million. However, upon consummation of the
merger with AFSALA Bancorp, Inc., the Company issued 1,337,207 shares of common
stock of which 1,327,086 shares were issued from the Company's treasury stock.
Impact of the Year 2000
The Year 2000 issue confronting the Company, its vendors, and its
customers, centers on the inability of computer systems to recognize the year
2000. Many existing computer programs and systems originally were programmed
with six digit dates that provided only two digits to identify the calendar year
in the date field. With the impending new millennium, these programs and
computers might recognize "00" as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institution
Examination Council has issued several interagency statements on Y2K project
management awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors with
respect to data exchange and the potential impact of the Y2K issue on their
customers, suppliers and borrowers. These statements also require each federally
regulated financial institution to survey its exposure, measure its risk and
plan to address the Y2K issue. In addition, the federal banking regulators have
issued safety and soundness guidelines to be followed by insured depository
institutions to assure resolution of any Y2K problems. The federal banking
agencies have assured that Y2K testing and certification is a key safety and
soundness issue in conjunction with regulatory exams and thus, that an
institution's failure to address appropriately the Y2K issue could result in
supervisory action, including the reduction of the institution's supervisory
ratings, the denial of applications for approval of mergers or acquisitions or
the imposition of civil money penalties.
The Company has formulated a plan addressing the Y2K issue and established
a seven member steering committee consisting of three officers and four
employees of the Bank. The steering committee meets monthly and reports on a
quarterly basis to the Board of Directors as to the Company's progress in
resolving any Y2K problems. The committee created an action plan that includes
milestones, budget, estimates, strategies, and methodologies to track and report
the status of the project. Members of the committee attended conferences to gain
more insight into the Y2K issue and potential strategies for addressing it.
These strategies were further developed with respect to how the objectives of
the Y2K plan would be achieved, and a Y2K business risk assessment was made to
quantify the extent of the Company's Y2K exposure. A Company inventory was taken
to identify and monitor Y2K readiness for information systems, including
hardware, software, and vendors, as well as environmental systems, including
security systems and facilities. The Company inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems, and
these Y2K-ready versions have been delivered, installed and have entered the
validation process. The action plan includes a validation phase designed to test
the ability of hardware and software to accurately process date sensitive data.
During the validation testing process to date, no significant Y2K problems have
been identified relating to any modified or upgraded mission critical systems.
During the assessment phase, the Company began to develop back-up or
contingency plans for each of its mission critical systems. The majority of the
Company's mission critical systems are dependent upon third party service
providers or vendors, therefore, contingency plans include using or reverting to
manual systems until system problems can be corrected or selecting a new vendor.
In the event a current vendor's system fails during the validation phase, and it
is determined that the vendor is unable or unwilling to correct the failure, the
Company will convert to a new system from a list of prospective vendors.
The Company has identified a worst case scenario that envisions the
possibility of the lack of power or communication services for a period of time
in excess of a day. Contingency planning is an integral part of the Company's
Y2K readiness plan. Key operating personnel are actively analyzing services that
will be supported during extended outages and preparing written plans and
procedures to train Bank personnel.
Until and after the Year 2000 rollover takes place, there can be no
assurance that Year 2000-related problems will not occur. Despite the Company's
efforts to identify and address Year 2000 issues, such issues present risks to
the Company, including business disruptions and financial losses.
The costs incurred by the Company during fiscal 1998 to address Year 2000
compliance were approximately $41 thousand. The Company estimates it will incur
up to approximately $125 thousand in direct costs during fiscal 1999 to support
its compliance initiatives. Although the Company anticipates that its systems
will be Year 2000 compliant on or before December 31, 1999, it cannot predict
with certainty the outcome or the success of its Year 2000 program, or that
third party systems are or will be Year 2000 complaint, or that the costs
required to address the Year 2000 issue, or that the impact of a failure to
achieve substantial Year 2000 compliance, will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Effect of Inflation and Changing Prices
The Company's consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
Recent Accounting Pronouncements
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in financial statements. Comprehensive income
represents the sum of net income and items of "other comprehensive income,"
which are reported directly in shareholders' equity, net of tax, such as the
change in the net unrealized gain or loss on securities available for sale.
While SFAS No. 130 does not require a specific reporting format, it does require
that an enterprise display an amount representing total comprehensive income for
each period for which an income statement is presented. In accordance with SFAS
No. 130, the Company has reported comprehensive income and its components for
1998, 1997 and 1996 in the consolidated statements of changes in shareholders'
equity. Accumulated other comprehensive income, which is included in
shareholders' equity, net of tax, represents the net unrealized gain or loss on
securities available for sale.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. For the Company, the statement became effective for its annual
financial statements for the year ended December 31, 1998. The Company engages
in the traditional operations of a community banking enterprise, principally the
delivery of loan and deposit products and other financial services. Management
makes operating decisions and assesses performance based on an ongoing review of
the Company's community banking operations, which constitute the Company's only
operating segment for financial reporting purposes. The Company operates
primarily in upstate New York in Montgomery, Fulton, Schenectady, Saratoga,
Albany, Otsego, Chenango and Schoharie counties and surrounding areas.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends and, to the
extent practicable, standardizes the financial statement disclosure requirements
applicable to such benefits. This Statement is applicable to all entities and
addresses disclosures only. The Statement does not change any of the measurement
or recognition provisions provided for in the applicable accounting standards.
The Company has provided the required disclosures under SFAS No. 132 in Note 12
to the consolidated financial statements.
In June 1988, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
Unaudited Consolidated Quarterly Financial Information
1998 1997
----------------------------------------- ------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except share and per share data)
Interest and Dividend Income ....... $9,009 $9,095 $9,955 $10,914 $8,675 $8,773 $8,827 $9,291
Net Interest Income ................ 3,862 3,848 4,085 4,737 4,020 4,008 3,881 4,003
Provision for Loan Losses .......... 225 225 225 225 363 275 225 225
Income (Loss) Before Taxes ......... 808 169 779 ( 55) 1,076 889 1,188 1,300
Net Income ......................... 446 97 478 10 652 572 736 800
Earnings per share - Basic ......... 0.12 0.03 0.13 0.00 0.16 0.14 0.19 0.21
Earnings per share - Diluted ....... 0.11 0.03 0.13 0.00 0.16 0.14 0.19 0.20
Average Shares Outstanding - Basic . 3,828,636 3,759,045 3,701,018 4,371,881 4,011,349 4,024,536 3,897,492 3,832,531
Average Shares Outstanding - Diluted 3,927,904 3,861,896 3,745,764 4,417,751 4,011,349 4,030,013 3,957,434 3,929,747
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,
1998 and 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Albany, New York
February 12, 1999
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31,
1998 1997
(In thousands)
Assets
Cash and due from banks ....................................... $ 9,225 5,628
Interest-bearing deposits ..................................... 3,390 4,631
Federal funds sold ............................................ 30,200 0
Cash and cash equivalents .............................. 42,815 10,259
Securities available for sale, at fair value .................. 244,241 205,808
Federal Home Loan Bank of New York stock, at cost ............. 7,215 3,291
Loans receivable, net ......................................... 420,933 281,123
Accrued interest receivable ................................... 4,115 3,734
Premises and equipment, net ................................... 4,537 3,121
Real estate owned and repossessed assets ...................... 399 143
Goodwill ...................................................... 7,923 0
Other assets .................................................. 3,294 2,965
Total assets ........................................... $ 735,472 510,444
Liabilities and Shareholders' Equity
Liabilities:
Deposits ................................................... 461,413 333,265
Federal Home Loan Bank overnight advances .................. --- 12,300
Federal Home Loan Bank term advances ....................... 21,410 ---
Securities sold under agreements to repurchase ............. 152,400 99,250
Advances from borrowers for taxes and insurance ............ 2,436 1,902
Accrued interest payable ................................... 1,426 819
Accrued expenses and other liabilities ..................... 4,494 1,706
Due to brokers ............................................. 6,000 ---
Total liabilities ...................................... 649,579 449,242
Commitments and contingent liabilities (note 14)
Shareholders' equity:
Preferred stock $.01 par value. Authorized 5,000,000 shares;
none issued at December 31, 1998 and 1997 ................ --- ---
Common stock $.01 par value. Authorized 15,000,000 shares;
5,432,371 shares issued at December 31, 1998 and 5,422,250
shares issued at December 31, 1997 ....................... 54 54
Additional paid-in capital ................................. 63,019 52,385
Retained earnings, substantially restricted ................ 26,356 26,458
Treasury stock, at cost (23,908 shares at December 31,
1998 and 1,115,832 shares at December 31, 1997) .......... (329) (12,585)
Unallocated common stock held by ESOP ...................... (2,818) (3,303)
Unearned RRP shares ........................................ (759) (1,533)
Accumulated other comprehensive income ..................... 370 (274)
Total shareholders' equity ............................. 85,893 61,202
Total liabilities and shareholders' equity ............. $ 735,472 510,444
See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
1998 1997 1996
(In thousands, except per share amounts)
Interest and dividend income:
Loans receivable ...................................... $ 24,623 21,011 20,557
Securities available for sale ......................... 13,479 13,957 10,921
Federal funds sold and interest-bearing deposits ...... 507 394 740
Federal Home Loan Bank stock .......................... 364 204 130
Total interest and dividend income ................ 38,973 35,566 32,348
Interest expense:
Deposits .............................................. 13,822 13,645 12,424
Borrowings ............................................ 8,619 6,009 4,011
Total interest expense ............................ 22,441 19,654 16,435
Net interest income ............................... 16,532 15,912 15,913
Provision for loan losses ................................ 900 1,088 9,450
Net interest income after provision for loan losses 15,632 14,824 6,463
Other income:
Service charges on deposit accounts ................... 1,012 786 764
Net (losses) gains on securities transactions ......... (165) 775 (102)
Other ................................................. 297 258 246
Total other income ................................ 1,144 1,819 908
Other expenses:
Salaries, wages and benefits .......................... 6,393 6,086 5,097
Non-recurring termination benefits .................... 608 --- ---
Occupancy and equipment ............................... 1,809 1,539 1,328
Data processing ....................................... 1,688 1,168 1,088
Correspondent bank processing fees .................... 147 126 116
Real estate owned and repossessed assets expenses, net 61 355 2,563
Professional fees ..................................... 735 429 540
Amortization of goodwill .............................. 67 --- ---
Other ................................................. 3,567 2,487 2,404
Total other expenses .............................. 15,075 12,190 13,136
Income (loss) before taxes ............................... 1,701 4,453 (5,765)
Income tax expense (benefit) ............................. 670 1,693 (1,929)
Net income (loss) ................................. $ 1,031 2,760 (3,836)
Basic earnings (loss) per share $ 0.26 0.70 (0.81)
Diluted earnings (loss) per share $ 0.26 0.69 (0.81)
See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996 (In thousands, except share and per share data)
Additional
Common paid-in Retained Treasury
stock capital earnings stock
Balance at December 31, 1995 .................. $ 54 52,127 28,272 ---
Comprehensive loss:
Net loss ................................... --- --- (3,836) ---
Other comprehensive income, net of tax:
Unrealized net holding losses on
securities available for sale arising
during the year (pre-tax $68)
Reclassification adjustment for net
losses realized in net income during
the year (pre-tax $102)
Other comprehensive income ................. --- --- --- ---
Comprehensive loss
Purchase of treasury shares (1,030,227 shares). --- --- --- (11,208)
Release of ESOP shares (52,964 shares) ........ --- 1 --- ---
Balance at December 31, 1996 .................. 54 52,128 24,436 (11,208)
Comprehensive income:
Net income ................................. --- --- 2,760 ---
Other comprehensive loss, net of tax:
Unrealized net holding gains on
securities available for sale arising
during the year (pre-tax $452)
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $775)
Other comprehensive loss ................... --- --- --- ---
Comprehensive income
Purchase of treasury shares (216,890 shares) .. --- --- --- (3,488)
Release of ESOP shares (50,561 shares) ........ --- 257 --- 0
Issuance of RRP shares (131,285 shares) ....... --- --- (306) 2,111
RRP shares earned ............................. --- --- --- ---
Cash dividends - $0.10 per share .............. --- --- (432) ---
Balance at December 31, 1997 .................. 54 52,385 26,458 (12,585)
Comprehensive income:
Net income ................................. --- --- 1,031 ---
Other comprehensive income, net of tax:
Unrealized net holding gains on
securities available for sale arising
during the year (pre-tax $908)
Reclassification adjustment for net
losses realized in net income during
the year (pre-tax $165)
Other comprehensive income ................. --- --- --- ---
Comprehensive income
Purchase of treasury shares (215,320 shares) .. --- --- --- (4,111)
Release of ESOP shares (48,498 shares) ........ --- 331 --- ---
RRP shares earned ............................. --- --- --- ---
Tax benefit related to RRP shares earned ...... --- 76 --- ---
RRP shares forfeited (29,331 shares) .......... --- --- --- (403)
Exercises of stock options (9,489 shares) ..... --- 5 --- 125
Acquisition of AFSALA Bancorp, Inc.(see note 2) --- 10,222 --- 16,645
Cash dividends - $0.25 per share .............. --- --- (1,133) ---
Balance at December 31, 1998 .................. $ 54 63,019 26,356 (329)
See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (continued)
Years ended December 31, 1998, 1997 and 1996 (In thousands, except share and per share data)
Unallocated Accumulated
common stock Unearned other
held by RRP comprehensive Comprehensive
ESOP shares income Total income(loss)
Balance at December 31, 1995 .................... (4,338) --- (100) 76,015
Comprehensive loss:
Net loss ................................... --- --- --- (3,836) $(3,836)
Other comprehensive income, net of tax:
Unrealized net holding losses on
securities available for sale arising
during the year (pre-tax $68) ....... (41)
Reclassification adjustment for net
losses realized in net income during
the year (pre-tax $102) ............. 61
Other comprehensive income ................. --- --- 20 20 20
Comprehensive loss .............. $(3,816)
Purchase of treasury shares (1,030,227 shares) .. --- --- --- (11,208)
Release of ESOP shares (52,964 shares) .......... 526 --- --- 527
Balance at December 31, 1996 .................... (3,812) --- (80) 61,518
Comprehensive income:
Net income ................................. --- --- --- 2,760 $ 2,760
Other comprehensive loss, net of tax:
Unrealized net holding gains on
securities available for sale arising
during the year (pre-tax $452) ...... 271
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $775) ............. (465)
Other comprehensive loss ................... --- --- (194) (194) (194)
Comprehensive income ............. $ 2,566
Purchase of treasury shares (216,890 shares) .... --- --- --- (3,488)
Release of ESOP shares (50,561 shares) .......... 509 --- --- 766
Issuance of RRP shares (131,285 shares) ......... --- (1,805) --- ---
RRP shares earned ............................... --- 272 --- 272
Cash dividends - $0.10 per share ................ --- --- --- (432)
Balance at December 31, 1997 .................... (3,303) (1,533) (274) 61,202
Comprehensive income:
Net income ................................. --- --- --- 1,031 $ 1,031
Other comprehensive income, net of tax:
Unrealized net holding gains on
securities available for sale arising
during the year (pre-tax $908) ...... 545
Reclassification adjustment for net
losses realized in net income during
the year (pre-tax $165) ............. 99
Other comprehensive income ................. --- --- 644 644 644
Comprehensive income ............. $ 1,675
Purchase of treasury shares (215,320 shares) .... --- --- --- (4,111)
Release of ESOP shares (48,498 shares) .......... 485 --- --- 816
RRP shares earned ............................... --- 371 --- 371
Tax benefit related to RRP shares earned ........ --- --- --- 76
RRP shares forfeited (29,331 shares) ............ --- 403 --- ---
Exercises of stock options (9,489 shares) ....... --- --- --- 130
Acquisition of AFSALA Bancorp, Inc. (see note 2). --- --- --- 26,867
Cash dividends - $0.25 per share ................ --- --- --- (1,133)
Balance at December 31, 1998 .................... (2,818) (759) 370 85,893
See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
1998 1997 1996
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) ......................................... $1,031 2,760 (3,836)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ...................... 848 652 558
Provision for loan losses .......................... 900 1,088 9,450
Provision for losses and writedowns on real
estate owned and repossessed assets ............. 7 171 877
Net (gains) losses on sale of real estate
owned and repossessed assets .................... (7) 38 1,260
Loss on sale of premises and equipment ............. --- --- 64
ESOP compensation expense .......................... 816 766 527
RRP expense ........................................ 371 272 0
Net losses (gains) on securities transactions ...... 165 (775) 102
Net amortization on securities ..................... 1,094 320 475
(Increase) decrease in accrued interest
receivable and other assets ..................... (17) 831 (3,316)
Increase (decrease) in accrued interest payable,
accrued expenses and other liabilities .......... 1,423 187 (1,201)
Net cash provided by operating activities 6,631 6,310 4,960
Cash flows from investing activities:
Proceeds from sales and redemptions of
securities available for sale .......................... 126,846 194,210 34,469
Purchases of securities available for sale ................ (157,188) (247,390) (192,647)
Proceeds from principal paydowns and
maturities of securities available for sale ............ 53,743 48,029 31,508
Net decrease in due to/from brokers ....................... --- --- (28,752)
Purchases of FHLB stock ................................... (3,359) (1,262) (137)
Purchases of loans ........................................ (31,888) --- 0
Proceeds from sales of loans .............................. --- --- 18,929
Net increase in loans made to customers ................... (26,391) (34,384) (28,685)
Purchases of premises and equipment ....................... (422) (1,004) (341)
Proceeds from sales of real estate owned and
repossessed assets ..................................... 270 631 2,519
Proceeds from the sale of premises and equipment .......... --- --- 25
Cash and cash equivalents acquired in acquisition,
net of cash paid ....................................... 24,996 --- ---
Net cash used in investing activities .............. (13,393) (41,170) (163,112)
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
1998 1997 1996
(In thousands)
Cash flows from financing activities:
Net (decrease) increase in deposits .............. $(16,533) 35,183 (13,157)
Net (decrease) increase in FHLB overnight advances (12,300) 6,300 6,000
Proceeds from FHLB term advances ................. 20,000 --- ---
Repayments of FHLB term advances ................. (35) --- ---
Proceeds from repurchase agreements .............. 142,575 66,570 193,770
Repayments of repurchase agreements .............. (89,425) (70,100) (90,990)
Increase in advances from borrowers for taxes and
insurance ..................................... 150 199 11
Purchases of treasury stock ...................... (4,111) (3,488) (11,208)
Exercises of stock options ....................... 130 --- ---
Dividends paid ................................... (1,133) (432) 0
Net cash provided by financing activities . 39,318 34,232 84,426
Net increase (decrease) in cash and cash equivalents ...... 32,556 (628) (73,726)
Cash and cash equivalents at beginning of year ............ 10,259 10,887 84,613
Cash and cash equivalents at end of year .................. $42,815 10,259 10,887
Supplemental disclosures of cash flow
information - cash paid during the year for:
Interest ......................................... $ 21,834 19,912 15,360
Income taxes ..................................... $ 1,429 1,770 306
Noncash investing and financing activities:
Net transfer of loans to real estate owned and
repossessed assets ............................... $ 386 268 2,203
Increase in amounts due to brokers from purchases of
securities available for sale .................... $ 6,000 --- ---
Fair value of non-cash assets acquired in acquisition $142,820 --- ---
Fair value of liabilities assumed in acquisition ..... $148,565 --- ---
Issuance of RRP shares ............................... $ --- 2,111 ---
Tax benefit related to vested RRP shares ............. $ 76 --- ---
RRP shares forfeited ................................. $ 403 --- ---
See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Ambanc Holding Co., Inc. (Ambanc or the Holding
Company), and its wholly owned subsidiaries, Mohawk Community
Bank, formerly known as Amsterdam Savings Bank, FSB (the Bank),
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 banking industry.
(b) Use of Estimates
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. In connection with the
determination of the allowance for loan losses, management
obtains appraisals for significant assets.
Management believes that the allowance for loan losses is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance 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. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments
about information available to them at the time of their
examination which may not be currently available to management.
A substantial portion of the Company's assets are loans secured
by real estate in the upstate New York area. Accordingly, the
ultimate collectibility of a considerable portion of the
Company's loan portfolio is dependent upon market conditions in
the upstate New York region.
(c) 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.
(d) Securities Available for Sale, Securities Held to Maturity 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 securities 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 in accumulated other comprehensive income. The Company
does not maintain a trading portfolio and at December 31, 1998
and 1997, the Company had no securities classified as 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, are stated at cost. The investment in
FHLB of New York stock is required for membership and is pledged
to secure FHLB borrowings.
Mortgage-backed securities, which are guaranteed by the
Government National Mortgage Association ("GNMA"), Freddie Mac
or Fannie Mae, represent participation interests in 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 or redeemed. The cost of securities is
adjusted for the amortization of premiums and the 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
statements of financial condition.
(e) Loans Receivable and Loan Fees
Loans receivable are stated at the unpaid principal amount, net
of unearned discount, net deferred loan fees and costs, and the
allowance for loan losses. Discounts are amortized to income
over the contractual life of the loan using the level-yield
method. Loan fees received and the related direct costs of
originations are deferred and recorded as yield adjustments over
the lives of the related loans using the interest method of
amortization.
Non-performing loans include nonaccrual 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 with respect to
interest income recognition. 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 nonaccrual loans is
dependent on the expectation of ultimate repayment of the loan.
If ultimate repayment of the loan is reasonably assured, any
payments received are applied in accordance with the contractual
terms. If ultimate repayment of principal is not reasonably
assured or management judges it to be prudent, any payment
received is applied to principal until ultimate repayment of the
remaining balance is reasonably assured. Loans are removed from
nonaccrual status when they are estimated to be fully
collectible as to principal and interest. Amortization of the
related deferred fees or costs is suspended when a loan is
placed on nonaccrual 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 portfolio, the level of non-performing
loans, past loan loss experience, the estimated value of
underlying collateral, and current and prospective economic
conditions. The allowance is increased by provisions for loan
losses charged to operations. Losses on loans (including
impaired loans) are charged to the allowance when all or a
portion of a loan is deemed to be uncollectible. Recoveries of
loans previously charged off are credited to the allowance when
realized.
(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 the 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 for impairment. 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, in-substance foreclosures, and repossessions.
A loan is classified as an in-substance 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 the
lower of fair value less estimated costs to sell or "cost"
(defined as the fair value at initial foreclosure or
repossession). When a property is acquired or identified as an
in-substance foreclosure, the excess of the loan balance over
fair value is charged to the allowance for loan losses.
Subsequent writedowns 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, 1998 and 1997, real estate owned and repossessed
assets consisted primarily of one-to-four family residential
properties, recreational vehicles and automobiles. The Company
had no in-substance foreclosures at December 31, 1998 or 1997.
(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.
(i) Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired for transactions accounted
for using purchase accounting. Goodwill is being amortized over
fifteen years using the straight-line method. Accumulated
amortization of goodwill amounted to approximately $67,000 at
December 31, 1998. Goodwill is periodically reviewed by
management for recoverability, and impairment is recognized by a
charge to income if a permanent loss in value is indicated.
(j) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers the
underlying securities to a third party custodian's account that
explicitly recognizes the Company's interest in the securities.
These agreements are accounted for as secured financing
transactions provided the Company maintains effective control
over the transferred securities and meets other criteria for
such accounting as specified in Statement of Financial
Accounting Standards (SFAS) No. 125. The Company's agreements
are accounted for as secured financings; accordingly, the
transaction proceeds are recorded as borrowed funds and the
underlying securities continue to be carried in the Company's
securities available for sale portfolio.
(k) Income Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under the asset and
liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to temporary differences between financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. 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 tax expense in the period that includes
the enactment date. The Company's policy is that deferred tax
assets are reduced by a valuation allowance 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 taxable temporary differences, historical income taxes
paid and estimates of future taxable income.
(l) Financial Instruments
In the normal course of business, the Company is a party to
certain financial instruments with off-balance sheet risk such
as commitments to extend credit, unused lines of credit and
standby letters of credit. The Company's policy is to record
such instruments when funded.
(m) Stock-Based Compensation Plans
The Company accounts for its stock option plan 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
Basic earnings per share (EPS) excludes dilution and is
calculated by dividing net income available to common
shareholders by the weighted average number of shares
outstanding during the period. Shares of restricted stock are
considered outstanding common shares and included in the
computation of basic EPS when they become fully vested. Diluted
EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as the
Company's stock options and unvested RRP shares) were exercised
into common stock or resulted in the issuance of common stock.
(o) Official Bank Checks
The Company's official bank checks (including expense checks),
which are drawn upon the Bank and are ultimately paid through
the Bank's Federal Reserve Bank of New York correspondent
account, are included in accrued expenses and other liabilities
in the consolidated statements of financial condition.
(p) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and
display of comprehensive income and its components in financial
statements. Comprehensive income represents the sum of net
income and items of "other comprehensive income," which are
reported directly in shareholders' equity, net of tax, such as
the change in the net unrealized gain or loss on securities
available for sale. While SFAS No. 130 does not require a
specific reporting format, it does require that an enterprise
display an amount representing total comprehensive income for
each period for which an income statement is presented. In
accordance with SFAS No. 130, the Company has reported
comprehensive income and its components for 1998, 1997 and 1996
in the consolidated statements of changes in shareholders'
equity. Accumulated other comprehensive income, which is
included in shareholders' equity, net of tax, represents the net
unrealized gain or loss on securities available for sale.
(q) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments. For the
Company, the statement became effective for its annual financial
statements for the year ended December 31, 1998.
The Company engages in the traditional operations of a community
banking enterprise, principally the delivery of loan and deposit
products and other financial services. Management makes
operating decisions and assesses performance based on an ongoing
review of the Company's community banking operations, which
constitute the Company's only operating segment for financial
reporting purposes. The Company operates primarily in upstate
New York in Montgomery, Fulton, Schenectady, Saratoga, Albany,
Otsego, Chenango and Schoharie counties and surrounding areas.
(r) Reclassifications
Amounts in the prior years' consolidated financial statements
are reclassified whenever necessary to conform to the current
year's presentation.
(2) Acquisition of AFSALA Bancorp, Inc.
On November 16, 1998, the Company acquired AFSALA Bancorp, Inc. (AFSALA)
and its wholly owned subsidiary, Amsterdam Federal Bank. At the date of
the merger, AFSALA had approximately $167.1 million in assets, $144.1
million in deposits, and $19.2 million in shareholders' equity. Pursuant
to the merger agreement, AFSALA was merged with and into Ambanc Holding
Co., Inc., and Amsterdam Federal Bank was merged with and into the
former Amsterdam Savings Bank, FSB. The combined bank now operates as
one institution under the name "Mohawk Community Bank".
Upon consummation of the merger, each share of AFSALA common stock was
converted into the right to receive 1.07 shares of Ambanc common stock.
Based on the 1,249,727 shares of AFSALA common stock issued and
outstanding immediately prior to the merger, the Company issued
1,337,207 shares of common stock in the merger. Of the 1,337,207 shares
issued in the merger, 1,327,086 were issued from the Company's treasury
stock and 10,121 were newly-issued shares. In addition, under the merger
agreement, the Company assumed unexercised, fully-vested options to
purchase 144,118 shares of AFSALA common stock, which converted into
fully-vested options to purchase 154,206 shares of Ambanc common stock.
See also Note 12(d).
The acquisition was accounted for using purchase accounting in
accordance with APB Opinion No. 16, "Business Combinations" (APB No.
16). Under purchase accounting, the purchase price is allocated to the
respective assets acquired and liabilities assumed based on their
estimated fair values. The acquisition of AFSALA resulted in
approximately $8.0 million in excess of cost over net assets acquired
("goodwill"). Goodwill is being amortized to expense over a period of
fifteen years using the straight-line method. The results of operations
of AFSALA have been included in the Company's 1998 consolidated
statement of operations from the date of acquisition.
In conjunction with the acquisition of AFSALA, premiums on securities,
loans, time deposits and FHLB term advances were recorded totaling
approximately $155,000, $1,459,000, $651,000 and $26,000, respectively,
in order to record these assets and liabilities at their fair values
based on market interest rates at the acquisition date. The premiums are
being amortized over the estimated period to repricing of the respective
items. For the year ended December 31, 1998, the impact on net income
from the net amortization of the premiums was not significant.
The following unaudited proforma combined consolidated financial
information gives effect to the November 16, 1998 acquisition of AFSALA
as if it had been consummated as of the beginning of 1998 and 1997,
respectively, after giving effect to certain adjustments, including (1)
the amortization of goodwill, (2) the elimination of the expense related
to AFSALA's ESOP and Restricted Stock Plan which terminated as of the
merger date, (3) the elimination of AFSALA's acquisition-related
expenses, and (4) the related income tax effects. The unaudited proforma
combined consolidated financial information does not reflect any
potential cost savings or revenue enhancements which may result from the
combination of operations of Ambanc and AFSALA and, accordingly, may not
be indicative of the results that actually would have occurred had the
acquisition been consummated at the beginning of the years presented, or
that may be obtained in the future.
Years ended December 31,
1998 1997
------------------------
(Unaudited)
(In thousands, except per share data)
Net interest income $ 21,154 21,209
Net income 1,491 3,639
Basic earnings per share 0.28 0.66
Diluted earnings per share 0.27 0.66
(3) 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
former Amsterdam Savings Bank, FSB. 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
consolidated financial statements. The Company utilized $26.0 million of
the net proceeds to acquire all of the capital stock of the former
Amsterdam Savings Bank, FSB.
As part of the conversion of the former Amsterdam Savings Bank, FSB, and
the former Amsterdam Federal Bank, liquidation accounts were established
for the benefit of eligible depositors who continue to maintain their
deposit accounts 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 accounts, 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 accounts. Except
for such restrictions, the existence of the liquidation accounts 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, 1998, the maximum amount that could have been
paid by the Bank to the Holding Company was approximately $18.7 million.
(4) 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
$2,378,000 and $1,123,000 at December 31, 1998 and 1997, 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 borrowings from the Federal Home Loan Bank of New
York.
(5) Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated
fair values of securities available for sale at December 31, 1998 and
1997 are as follows:
1998
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
U.S. Government and agency securities $ 83,665 400 (65) 84,000
Mortgage-backed securities .......... 96,140 253 (137) 96,256
Collateralized mortgage obligations . 62,000 244 (96) 62,148
States and political subdivisions ... 1,819 18 -- 1,837
------- ------- ------- -------
Total ..................... $ 243,624 915 (298) 244,241
======= ======= ======= =======
1997
------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
U.S. Government and agency securities $ 63,198 60 (113) 63,145
Mortgage-backed securities .......... 132,272 100 (386) 131,986
Collateralized mortgage obligations . 10,040 -- (129) 9,911
States and political subdivisions ... 755 11 -- 766
------- ------- ------- -------
Total ..................... $ 206,265 171 (628) 205,808
======= ======= ======= =======
The amortized cost and estimated fair value of debt securities available
for sale at December 31, 1998, by contractual maturity, are shown below
(mortgage-backed securities and collateralized mortgage obligations are
included by final contractual maturity). Expected maturities will differ
from contractual maturities because issuers 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 ................... $ 6,872 6,886
Due after one year through five years . 12,077 12,117
Due after five years through ten years 50,106 50,167
Due after ten years ................... 174,569 175,071
-------- --------
Totals .......................... $243,624 244,241
======== ========
The following table sets forth information with regard to sales of
securities available for sale for the years ended December 31:
1998 1997 1996
---- ---- ----
(In thousands)
Proceeds from sale .. $79,101 174,010 34,469
Gross realized gains 154 1,017 14
Gross realized losses 319 242 116
Securities available for sale with a carrying value of $163,169,000 at
December 31, 1998 and $111,153,000 at December 31, 1997 were pledged
to secure securities repurchase agreements.
(6) Loans Receivable, Net
Loans receivable consisted of the following at December 31, 1998 and
1997:
1998 1997
-------- -------
(In thousands)
Loans secured by real estate:
1 - 4 family ................................ $ 273,523 189,666
Home equity ................................. 83,949 30,246
Non-residential ............................. 23,506 26,585
Multi-family ................................ 4,165 4,152
Construction ................................ 3,600 2,081
--------- --------
Total loans secured by real estate 388,743 252,730
--------- --------
Other loans:
Consumer loans:
Auto loans ............................. 14,146 16,237
Recreational vehicles .................. 4,990 6,775
Other secured .......................... 6,289 1,781
Unsecured .............................. 3,712 1,847
Manufactured homes ..................... 385 494
--------- --------
Total consumer loans .............. 29,522 27,134
--------- --------
Commercial loans:
Secured ................................ 5,101 3,233
Unsecured .............................. 508 471
--------- --------
Total commercial loans ............ 5,609 3,704
--------- --------
Total loans receivable ............ 423,874 283,568
Deferred costs, net of deferred fees
and discounts ............................. 1,950 1,362
Allowance for loan losses ................... (4,891) (3,807)
--------- --------
Loans receivable, net ............. $ 420,933 281,123
========= ========
A summary of activity in the allowance for loan losses for the years
ended December 31 is as follows:
1998 1997 1996
------- ------- ------
(In thousands)
Balance at beginning of year .. $ 3,807 3,438 2,647
Provision charged to operations 900 1,088 9,450
Charge-offs ................... (1,226) (1,214) (8,718)
Recoveries .................... 295 495 59
Allowance acquired ............ 1,115 -- --
------- ------- -------
Balance at end of year ........ $ 4,891 3,807 3,438
======= ======= =======
The following table sets forth information with regard to
non-performing loans at December 31:
1998 1997 1996
------ ------ ------
(In thousands)
Non-accrual loans ......................... $1,610 1,876 3,123
Loans contractually past due 90 days
or more and still accruing interest .... 580 451 725
Restructured loans ........................ 714 931 1,031
------ ------ ------
Total non-performing loans ................ $2,904 3,258 4,879
====== ====== ======
There are no material commitments to extend further credit to
borrowers with non-performing loans.
Accumulated interest on the above non-performing loans of approximately
$118,000, $277,000 and $375,000 was not recognized as income in 1998,
1997 and 1996, respectively. Approximately $238,000, $192,000 and
$229,000 of interest on restructured and non-accrual loans was collected
and recognized as income in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired totaled approximately $328,000 and $769,000,
respectively, for which the related allowance for loan losses was
approximately $44,000 and $338,000, respectively. As of December 31,
1998 and 1997, 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, 1998, 1997 and 1996 was
approximately $688,000, $1,445,000 and $6,918,000, respectively. For the
years ended December 31, 1998, 1997 and 1996, the Company recognized
interest income on those impaired loans of approximately $78,000,
$15,000 and $110,000, respectively, which included $50,000, $0 and
$14,000, respectively, of interest income recognized using the cash
basis method of income recognition.
Certain directors and executive officers of the Company are customers of
and have other transactions with the Company in the ordinary course of
business. Loans to these parties are 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 less than 5%
of total shareholders' equity at both December 31, 1998 and 1997.
(7) Accrued Interest Receivable
Accrued interest receivable consisted of the following at December 31:
1998 1997
------ ------
(In thousands)
Loans $ 2,031 1,347
Securities available for sale 2,084 2,387
------- -------
$ 4,115 3,734
======= =======
(8) Premises and Equipment
A summary of premises and equipment is as follows at December 31:
1998 1997
------- -------
Land and buildings ........................... $ 3,342 2,362
Furniture, fixtures and equipment ............ 4,182 3,737
Leasehold improvements ....................... 1,614 1,100
Construction in progress ..................... 195 --
------- -------
9,333 7,199
Less accumulated depreciation and amortization (4,796) (4,078)
------- -------
$ 4,537 3,121
======= =======
Amounts charged to depreciation and amortization expense were
approximately $735,000, $606,000 and $501,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
(9) Deposits
Deposits are summarized as follows at December 31:
1998 1997
-------- --------
(In thousands)
Savings accounts (2.92%-3.00% at December 31, 1998
and 3.00% at December 31, 1997) ............. $136,921 97,591
-------- --------
Time deposits:
3.01 to 4.00% ............................... 1,806 1,011
4.01 to 5.00% ............................... 61,030 6,688
5.01 to 6.00% ............................... 140,676 154,377
6.01 to 7.00% ............................... 11,432 10,801
7.01 to 8.00% ............................... 13,061 10,455
-------- --------
228,005 183,332
-------- --------
NOW accounts (1.73%-2.75% at December 31,
1998 and 2.75% at December 31, 1997) ........ 38,814 22,718
Money market accounts (2.25%-4.87% at December 31,
1998 and 2.96% at December 31, 1997) ........ 21,359 6,877
Demand accounts (non-interest bearing) ........... 36,314 22,747
-------- --------
Total deposits ......................... $461,413 333,265
======== ========
The approximate amount of contractual maturities of time deposits for
the years subsequent to December 31, 1998 are as follows:
(In thousands)
Years ending December 31,
1999 $150,517
2000 57,742
2001 10,560
2002 4,581
2003 4,605
--------
$228,005
========
The aggregate amount of time deposits with a balance of $100,000 or
more was approximately $25.9 million and $17.9 million at December 31,
1998 and 1997, respectively.
Interest expense on deposits for the years ended December 31, 1998,
1997 and 1996, is summarized as follows:
1998 1997 1996
------- ------- -------
(In thousands)
Savings accounts .... $ 3,119 3,016 3,162
Time deposits ....... 9,882 9,882 8,492
NOW accounts ........ 549 543 527
Money market accounts 272 204 243
------- ------- -------
Total ....... $13,822 13,645 12,424
======= ======= =======
(10) Borrowed Funds
At December 31, 1998, the Company had a $26.2 million overnight line of
credit and a $26.2 million 30 day line of credit with the FHLB of New
York. As of December 31, 1998, the Company had no amounts outstanding on
these lines of credit. 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. As of December 31, 1997, the Company had borrowed
$12.3 million under these lines of credit. Under the terms of a blanket
collateral agreement with the FHLB, any outstanding balances are
collateralized by FHLB stock and certain qualifying assets not otherwise
pledged (primarily first-lien mortgage loans).
The Company also has longer-term advances with the FHLB totaling $21.4
million at December 31, 1998. These advances consist of the following:
(i) $20.0 million of interest-only, non-prepayable, adjustable rate
advances, with the interest rate tied to LIBOR and adjusted quarterly;
$10.0 million matures in July 2001 and $10.0 million matures in July
2003; and (ii) $1.4 million of adjustable rate amortizing advances with
interest rates ranging from 5.91% to 7.91% at December 31, 1998; final
maturities on these advances range from April 2000 to September 2004.
The following table presents the detail of the Company's borrowings and
weighted-average interest rates thereon for the years ended December 31,
1998, 1997 and 1996:
Securities
FHLB FHLB Sold Under
Overnight Term Agreements
Advances Advances to Repurchase
--------- -------- -------------
(Dollars in thousands)
1998:
Balance at December 31 ........ $ -- $ 21,410 $152,400
Average balance during the year 9,366 8,493 132,476
Maximum month-end balance ..... 38,800 21,446 165,150
Weighted-average interest rate:
At December 31 ........... -- 5.32% 5.48%
During the year .......... 5.49% 5.71 5.67
1997:
Balance at December 31 ........ $ 12,300 $ -- $ 99,250
Average balance during the year 3,667 -- 95,261
Maximum month-end balance ..... 14,400 -- 99,410
Weighted-average interest rate:
At December 31 ........... 6.38% -- 6.04%
During the year .......... 5.43 -- 6.01
1996:
Balance at December 31 ........ $ 6,000 $ -- $102,780
Average balance during the year 9,757 -- 57,815
Maximum month-end balance ..... 28,000 -- 102,780
Weighted-average interest rate:
At December 31 ........... 6.88% -- 5.96%
During the year .......... 5.35 -- 5.94
Information concerning outstanding securities repurchase agreements as
of December 31, 1998 is summarized as follows:
Securities Repurchase Agreements
--------------------------------------------------------
Accrued Weighted- Fair Value
Remaining Term to Repurchase Interest Average of Collateral
Final Maturity (1) Liability Payable Rate Securities (2)
------------------ ---------- -------- ---- --------------
(Dollars in thousands)
Within 90 days ........ $ -- -- -- $ --
After 90 days but
within one year .. 22,400 191 5.94% 24,411
After one year but
within five years 30,000 199 5.75 32,903
After five years but
within ten years . 100,000 836 5.30 107,086
-------- -------- ---- --------
Total ....... $152,400 1,226 5.48% $164,400
======== ======== ==== ========
(1) The weighted-average remaining term to final maturity was
approximately 7.0 years at December 31, 1998. At December 31,
1998, $115.0 million of the securities repurchase agreements
contained call provisions. The weighted-average rate at
December 31, 1998 on the callable securities repurchase
agreements was 5.37%, with a weighted-average remaining period
of 2.1 years to the call date. At December 31, 1998, $37.4
million of the securities repurchase agreements did not
contain call provisions. The weighted-average rate at December
31, 1998 on the non-callable securities repurchase agreements
was 5.82%, with a weighted-average remaining period of 1.8
years to the repurchase date.
(2) Represents the fair value of the securities which were
transferred, plus accrued interest receivable of approximately
$1.2 million at December 31, 1998.
At December 31, 1998, the "amount at risk" (defined as the excess of (i)
the carrying amount, or fair value, if higher, of the securities
transferred plus accrued interest receivable over (ii) the amount of the
repurchase liability plus accrued interest payable) with any individual
counterparty was less than ten percent of total shareholders' equity.
(11) Income Taxes
The components of income tax expense (benefit) are as follows for the
years ended December 31:
1998 1997 1996
------- ------- ------
(In thousands)
Current tax expense (benefit):
Federal .......................... $ 763 1,389 (1,893)
State ............................ 13 270 1
------- ------- ------
776 1,659 (1,892)
Deferred tax (benefit) expense ........ (106) 34 (37)
------- ------- ------
Total income tax expense (benefit) $ 670 1,693 (1,929)
======= ======= ======
Actual income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996 differs from expected income tax expense (benefit),
computed by applying the Federal corporate tax rate of 34% to income
(loss) before taxes, as a result of the following items:
1998 1997 1996
------- ------- -------
(In thousands)
Expected tax expense (benefit) $ 578 1,514 (1,960)
State taxes, net of Federal
income tax benefit ........ 1 178 1
Non-deductible portion of ESOP
compensation expense ...... 113 89 --
Other items, net ............. (22) (88) 30
------- ------- -------
$ 670 1,693 (1,929)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
1998 1997
------- -------
(In thousands)
Deferred tax assets:
Allowance for loan losses .................. $ 1,939 1,508
Deferred compensation ...................... 469 227
Unvested RRP shares ........................ 76 109
Purchase accounting adjustments ............ 237 --
Other deductible temporary differences ..... 148 105
------- -------
Total deferred tax assets ............. 2,869 1,949
------- -------
Deferred tax liabilities:
Tax bad debt reserve ....................... 174 216
Net deferred loan costs .................... 681 409
Defined benefit pension plan ............... 245 243
Property and equipment ..................... 91 113
Prepaid expenses ........................... 61 83
Purchase accounting adjustments ............ 626 --
Other taxable temporary differences ........ 107 18
------- -------
Total deferred tax liabilities ........ 1,985 1,082
------- -------
Net deferred tax asset at
end of year ........................ 884 867
Net deferred tax asset at
beginning of year .................. 867 901
------- -------
(17) 34
Net deferred tax asset acquired ............ 285 --
Initial net deferred tax liability
for purchase accounting adjustments ..... (374) --
------- -------
Deferred tax (benefit) expense for year $ (106) 34
======= =======
In addition to the deferred tax items shown in the table above, the
Company also had a deferred tax liability of approximately $247,000 at
December 31, 1998, and a deferred tax asset of approximately $183,000 at
December 31, 1997, relating to the net unrealized gain or loss on
securities available for sale.
There was no valuation allowance for deferred tax assets at December 31,
1998 and 1997, or change in the valuation allowance for the years ended
December 31, 1998, 1997 and 1996. Management believes that the
realization of the recognized net deferred tax asset at December 31,
1998 and 1997 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.
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in 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 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 state bad debt reserves at December 31, 1995
as the base-year amount and also provide for future additions to the
base-year reserve using the percentage of taxable income method.
In accordance with SFAS No. 109, the Company has not recognized deferred
tax liabilities with respect to the Bank's Federal and state base-year
reserves of approximately $5.2 million and $10.1 million, respectively,
at December 31, 1998, since the Company does not expect that these
amounts will become taxable in the foreseeable future. Under the tax
laws, as amended, events that would result in taxation of these reserves
include (i) redemptions of the Bank's stock or certain excess
distributions to the Holding Company, and (ii) failure of the Bank to
maintain a specified qualifying assets ratio or meet other thrift
definition tests for New York State tax purposes. The unrecognized
deferred tax liability at December 31, 1998 with respect to the Federal
base-year reserve was approximately $1.8 million. The unrecognized
deferred tax liability at December 31, 1998 with respect to the state
base-year reserve was approximately $598,000 (net of Federal benefit).
(12) Employee Benefit Plans
(a) Pension Plan
The Bank maintains a non-contributory pension plan with the RSI
Retirement Trust, covering substantially all employees age 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.
The following table provides a summary of the changes in the
plan's projected benefit obligation and the fair value of the
plan's assets for the years ended December 31, and a
reconciliation of the plan's funded status at December 31:
1998 1997
------ ------
(In thousands)
Changes in the projected benefit obligation:
Projected benefit obligation at January 1 ........... $ 4,508 4,060
Service cost ................................... 219 183
Interest cost .................................. 318 304
Benefits paid .................................. (224) (238)
Settlements .................................... -- (2)
Actuarial loss ................................. 435 201
------ ------
Projected benefit obligation at December 31 ......... 5,256 4,508
------ ------
Changes in the fair value of plan assets:
Fair value of plan assets at January 1 .............. 5,994 5,093
Actual (loss) return on plan assets ............ (10) 1,104
Benefits paid .................................. (224) (238)
Employer contributions ......................... -- 37
Settlements .................................... -- (2)
------ ------
Fair value of plan assets at December 31 ............ 5,760 5,994
------ ------
Funded status:
Funded status at December 31 ........................ 504 1,486
Unrecognized portion of net asset at transition ..... (39) (85)
Unrecognized prior service cost ..................... 9 12
Unrecognized net loss (gain) ........................ 131 (806)
------ ------
Prepaid pension asset recognized in other assets $ 605 607
====== ======
The following table provides the components of net periodic pension
cost for the years ended December 31:
1998 1997 1996
----- ----- -----
(In thousands)
Service cost - benefits earned during the year $ 219 183 187
Interest cost on projected benefit obligation 318 304 288
Expected return on plan assets ............... (471) (398) (362)
Amortization of unrecognized net asset at
transition ................................. (46) (46) (46)
Amortization of unrecognized prior service
cost ....................................... 3 3 3
Amortization of unrecognized net actuarial
gain ....................................... (22) -- --
----- ----- -----
Net periodic pension cost ............... $ 1 46 70
===== ===== =====
Prior service costs are amortized on a straight-line basis over
the average future service period of active plan participants.
Unrecognized net actuarial gains or losses in excess of 10% of
the greater of the projected benefit obligation or the fair
value of the plan assets are amortized over the average
remaining service period of active plan participants.
The assumptions used in the measurement of the Company's
projected benefit obligation and net periodic pension cost are
shown in the table below:
1998 1997 1996
----- ----- -----
Weighted-average assumptions at December 31:
Discount rate 6.50% 7.25% 7.75%
Rate of increase in future
compensation levels 4.50 5.00 5.50
Expected return on plan assets 8.00 8.00 8.00
(b) 401(k) Savings Plan
The Company 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. Prior to March 1,
1997, the Company matched 50% of employee contributions that
were less than or equal to 3% of the employee's salary. After
that date, there were no employee matching contributions. Total
expense related to the 401(k) plan during 1997 and 1996 was
approximately $5,000 and $38,000, respectively (none in 1998).
(c) Employee Stock Ownership Plan
As part of the conversion discussed in note 3, 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 Company common
stock 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, 1998 and
1997, the loan had an outstanding balance of $3.0 million and
$3.5 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, "Employers' Accounting for Employee Stock
Ownership Plans." 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 $816,000,
$766,000 and $527,000 of compensation expense related to the
ESOP during the years ended December 31, 1998, 1997 and 1996,
respectively.
The ESOP shares as of December 31, 1998 were as follows:
Allocated shares 103,525
Shares released for allocation 48,498
Unallocated shares 281,757
-----------
433,780
===========
Market value of unallocated shares
at December 31, 1998 $5,001,187
===========
(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 the grant date.
In addition, under the terms of the merger agreement with AFSALA
discussed in note 2, the Company issued 154,206 fully-vested
options with an exercise price of $12.97 in exchange for 144,118
fully-vested AFSALA options with an exercise price of $13.88.
The estimated fair value of these options was $9.95 per option.
The issuance of these options was included in the computation of
goodwill, with the offsetting credit to additional paid-in
capital.
A summary of the stock option activity for the years ended
December 31, 1998 and 1997 is presented below:
Weighted-Avg.
No. of Exercise
Shares Price
-------- ------
Granted on May 23, 1997 and
outstanding at December 31, 1997 373,974 $ 13.75
Exercised .............. (9,489) 13.75
Forfeited .............. (77,947) 13.75
Issued in acquisition .. 154,206 12.97
-------- ------
Outstanding at December 31, 1998 440,744 $ 13.48
======== ======
The following table summarizes information about the Company's
stock options at December 31, 1998:
Weighted-Avg.
Exercise Remaining
Price Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------
$12.97 154,206 8.4 years 154,206
13.75 286,538 8.4 years 84,005
--------- ---------
440,744 238,211
========= =========
All options have been granted at an exercise price equal to the
fair value of the common stock at the grant date. Accordingly,
no compensation expense 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 option life of 5
years. The estimated fair value of the options granted in 1997
was $5.30.
Pro-forma disclosures for the Company for the years ended
December 31, 1998 and 1997 are as follows:
(In thousands, except per share data)
1998 1997
---- ----
Net income:
As reported... $ 1,031 2,760
Pro-forma .... 740 2,533
Basic EPS:
As reported... 0.26 0.70
Pro-forma .... 0.19 0.64
Diluted EPS:
As reported... 0.26 0.69
Pro-forma .... 0.19 0.64
The full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro-forma net
income amounts presented above because compensation expense 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 stock options.
(e) Recognition and Retention Plan
On May 23, 1997, the Company's shareholders also 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 at the grant date was $13.75 per share and is
being amortized to expense on a straight-line basis over the
four year vesting period. During 1998, 29,331 unvested RRP
shares were forfeited and transferred to treasury stock at the
grant date fair market value of $13.75 per share.
(f) Postretirement Benefits
Certain postretirement health insurance benefits have been
committed to a closed group of 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
6.0% and 8.5%, respectively. There are no plan assets. The
estimated transition obligation at January 1, 1995 was $260,000.
The net periodic postretirement benefit cost in 1998, 1997 and
1996 was approximately $26,000 in each year.
(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 named 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 was
approximately $616,000 and $562,000 at December 31, 1998 and
1997, respectively, and is included in other liabilities in the
consolidated statements of financial condition. The cash
surrender value of the life insurance policies was approximately
$221,000 and $214,000 at December 31, 1998 and 1997,
respectively, and is included in other assets in the
consolidated statements of financial condition.
(13) Earnings Per Share
The calculation of basic EPS and diluted EPS is as follows:
Weighted
Net Average Per Share
Income Shares Amount
-------- --------- ---------
(In thousands, except share and per share data)
For the year ended December 31, 1998
Basic EPS
Net income available to common shareholders $ 1,031 3,916,047 $0.26
======== =====
Effect of Dilutive Securities
Stock options 49,043
Unvested RRP shares 24,155
---------
Diluted EPS
Net income available to common shareholders plus
assumed conversions $ 1,031 3,989,245 $0.26
======== ========= =====
Weighted
Net Average Per Share
Income Shares Amount
-------- --------- ---------
(In thousands, except share and per share data)
For the year ended December 31, 1997
Basic EPS
Net income available to common shareholders $ 2,760 3,940,867 $0.70
======== =====
Effect of Dilutive Securities
Stock options 24,285
Unvested RRP shares 16,374
---------
Diluted EPS
Net income available to common shareholders plus
assumed conversions $ 2,760 3,981,526 $0.69
======== ========= =====
Weighted
Net Average Per Share
Income Shares Amount
-------- --------- ---------
(In thousands, except share and per share data)
For the year ended December 31, 1996
Basic EPS
Net loss applicable to common shareholders $ (3,836) 4,761,393 $(0.81)
======== =====
Effect of Dilutive Securities
No dilutive securities during 1996
Diluted EPS
Net loss applicable to common shareholders $ (3,836) 4,761,393 $(0.81)
======== ========= =====
(14) 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.
The Bank was a defendant in an action brought by the current
owners of F. H. Doherty Associates, Inc., a company which the
Bank sold to the current owners. The action sought to rescind
the sale of stock, recover any additional capital contributions
made by the plaintiffs, as well as certain punitive damages and
indemnification on a potential claim. 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 pledged security. 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 on the demand account and standby
letter of credit.
During 1996, the Company received a cash payment of $233,000 for
its demand account balance, issued a new standby letter of
credit for $150,000 to the Superintendent, and cancelled the
initial standby letter of credit. Concurrent with the new
standby letter of credit, the Company was required to pay
$58,000 under the original standby letter of credit agreement,
which was charged against the reserve. Subsequently, the
$150,000 standby letter of credit was canceled and the Company
was released from any further liability in connection with its
agreement with the Superintendent. During 1997, the Bank
received approximately $45,000 from the Superintendent as a
partial recovery of the amounts previously charged off, which is
included in other income.
(c) Lease Commitments
The Company leases certain branch facilities and office space
under noncancelable operating leases. Minimum rental commitments
under these leases are as follows:
(In thousands)
Years ending December 31,
1999 $ 493
2000 281
2001 214
2002 152
2003 106
2004 and thereafter 816
----------------
$ 2,062
================
Amounts charged to rent expense were approximately $385,000,
$315,000 and $225,000 for the years ended December 31, 1998, 1997
and 1996.
(d) Off-Balance Sheet Financial Instruments 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 amounts 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.
Contract amounts of financial instruments with off-balance-sheet
credit risk as of December 31, 1998 and 1997 at fixed and variable
interest rates are as follows:
Fixed Variable Total
------- -------- -------
(In thousands)
1998:
Commitments to extend credit $12,004 514 12,518
Unused lines of credit ..... 2,665 3,375 6,040
Standby letters of credit .. -- 30 30
------- ------- -------
$14,669 3,919 18,588
======= ======= =======
1997:
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
======= ======= =======
The range of interest rates on fixed rate commitments was 6.50%
to 12.50% at December 31, 1998 and 5.50% to 8.75% at December
31, 1997. All variable rate commitments were at 8.75% at
December 31, 1998, and ranged from 6.75% to 7.25% at December
31, 1997.
(15) Fair Values of Financial Instruments
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.
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 assets and liabilities, and premises and
equipment. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates of fair
value. There also are significant intangible assets that the fair value
estimates do not recognize, such as the value of "core deposits" and the
Company's branch network.
Financial Assets and Liabilities
The specific estimation methods and assumptions used can have a
substantial impact on the resulting fair values ascribed to financial
assets and liabilities The following is a brief summary of the
significant methods and assumptions used:
Securities Available for Sale
The fair value of 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.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
one-to-four family residential loans, consumer loans and commercial
loans. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and non-performing
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.
The fair value for significant non-performing loans is based on
recent external appraisals and discounted cash flow analyses.
Estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and
specific borrower information.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings accounts, NOW
accounts and money market accounts, is the amount payable on
demand. The fair value of time deposits is based on the discounted
value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits with 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.
FHLB Advances and Securities Sold Under Agreements to Repurchase
The fair value of FHLB advances and securities sold under
agreements to repurchase 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 FHLB advances and securities sold
under agreements to repurchase 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
the carrying value due to the nature of the financial instrument
and the period within which it will be settled or repriced: cash
and cash equivalents, FHLB stock, accrued interest receivable,
advances from borrowers for taxes and insurance, accrued interest
payable and due to brokers.
The carrying values and estimated fair values of financial assets
and liabilities as of December 31, 1998 and 1997 were as follows:
1998 1997
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(In thousands)
Financial assets:
Cash and cash equivalents .................... $ 42,815 42,815 10,259 10,259
Securities available for sale ................ 244,241 244,241 205,808 205,808
FHLB of New York stock ....................... 7,215 7,215 3,291 3,291
Loans ........................................ 425,824 423,163 284,930 280,765
Less: Allowance for loan losses ........... (4,891) -- (3,807) --
--------- --------- --------- ---------
Loans receivable, net .............. 420,933 423,163 281,123 280,765
========= ========= ========= =========
Accrued interest receivable .................. 4,115 4,115 3,734 3,734
Financial liabilities:
Deposits:
Demand, savings, money market, and NOW
accounts ............................. 233,408 233,408 149,933 149,933
Time deposits ........................... 228,005 230,399 183,332 184,208
FHLB overnight advances ...................... -- -- 12,300 12,300
FHLB term advances ........................... 21,410 21,419 -- --
Securities sold under agreements to repurchase 152,400 153,340 99,250 98,706
Advances from borrowers for taxes and
insurance ............................... 2,436 2,436 1,902 1,902
Accrued interest payable ..................... 1,426 1,426 819 819
Due to brokers ............................... 6,000 6,000 -- --
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated based on the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current 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. The Company believes that the carrying value of
these off-balance sheet financial instruments equals fair value and the
amounts are not significant.
(16) Regulatory Capital Requirements
Office of Thrift Supervision (OTS) capital regulations require savings
institutions to maintain minimum levels of regulatory capital. Under the
regulations in effect at December 31, 1998, 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, 1998 and 1997, the Bank met
all capital adequacy requirements to which it was 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.
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1998 and 1997. 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.
1998 1997
----------------- -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollars in thousands)
Bank
----
Tangible capital .... $63,509 8.83% $49,722 9.88%
Tier 1 (core) capital 63,509 8.83 49,722 9.88
Risk-based capital:
Tier 1 ............ 63,509 20.73 49,722 23.42
Total ............. 67,351 21.99 52,390 24.68
Consolidated
------------
Tangible capital .... 77,600 10.68 61,476 11.99
Tier 1 (core) capital 77,600 10.68 61,476 11.99
Risk-based capital:
Tier 1 ............ 77,600 25.17 61,476 28.79
Total ............. 81,442 26.42 64,159 30.04
(17) Holding Company Financial Information
The Holding Company's statements of financial condition as of December
31, 1998 and 1997, and the related statements of income and cash flows
for the years ended December 31, 1998, 1997 and 1996 are presented
below. These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
Statements of Financial Condition
1998 1997
------ ------
(In thousands)
Assets
Cash and cash equivalents .......................... $ 3,516 1,046
Securities available for sale* ..................... 6,097 9,400
Loan receivable from subsidiary .................... 3,036 3,470
Accrued interest receivable ........................ 64 115
Investment in subsidiary ........................... 71,797 49,467
Other assets ....................................... 1,570 334
------ ------
Total assets ............................. $ 86,080 63,832
====== ======
Liabilities and Shareholders' Equity
Liabilities:
Security sold under agreement to repurchase** . $ -- 2,600
Other liabilities ............................. 187 30
Shareholders' equity ............................... 85,893 61,202
------ ------
Total liabilities and shareholders' equity $ 86,080 63,832
====== ======
* The Holding Company's securities available for sale consisted of
U.S. Government agency and mortgage-backed securities with a
contractual weighted-average maturity of 9.1 years (2.2 years to
call date) and 2.9 years (none callable) at December 31, 1998 and
1997, respectively.
** Weighted-average rate at December 31, 1997 was 5.91% with a
maturity date of February 20, 1998.
Statements of Income
1998 1997 1996
------ ------ ------
(In thousands)
Income:
Dividends from bank subsidiary ................. $ 5,000 -- --
Interest income ................................ 649 868 1,128
Other income ................................... 1 -- --
------ ------ ------
Total income .............................. 5,650 868 1,128
------ ------ ------
Expenses:
Interest expense ............................... 34 170 2
Net loss (gain) on securities transactions ..... -- 153 (1)
RRP expense .................................... 371 272 --
Other expenses ................................. 735 221 310
------ ------ ------
Total expenses ............................ 1,140 816 311
------ ------ ------
Income before taxes and effect of subsidiary earnings
and distributions .............................. 4,510 52 817
Income tax (benefit) expense ........................ (199) 21 328
------ ------ ------
Income before effect of subsidiary earnings and
distributions .................................. 4,709 31 489
Effect of subsidiary earnings and distributions:
Distributions in excess of earnings .......... (3,678) -- --
Equity in undistributed earnings (loss) ...... -- 2,729 (4,325)
------ ------ ------
Net income (loss) ................................... $ 1,031 2,760 (3,836)
====== ====== ======
Statements of Cash Flows
1998 1997 1996
-------- -------- --------
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) .............................................. $ 1,031 2,760 (3,836)
Adjustment to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Distributions in excess of subsidiary earnings ......... 3,678 -- --
Equity in undistributed (earnings) loss of subsidiary .. -- (2,729) 4,325
Net loss (gain) on securities transactions ............. -- 153 (1)
RRP expense ............................................ 371 272 --
Increase in accrued interest receivable and other assets (1,124) (274) (163)
Increase (decrease) in other liabilities ............... 157 (341) 371
-------- -------- --------
Net cash provided by (used in)
operating activities .................... 4,113 (159) 696
-------- -------- --------
Cash flows from investing activities:
Purchases of securities available for sale ..................... (7,998) (11,052) (19,985)
Proceeds from principal paydowns and maturities of securities
available for sale ........................................ 11,338 8,159 3,984
Proceeds from sales of securities available for sale ........... -- 7,515 1,796
Payments received on loan receivable from subsidiary ........... 434 434 434
Net cash acquired in acquisition ............................... 2,297 -- --
-------- -------- --------
Net cash provided by (used in) investing
activities .............................. 6,071 5,056 (13,771)
-------- -------- --------
Cash flows from financing activities:
Net (decrease) increase in securities sold under agreements to
repurchase ................................................ (2,600) (400) 3,000
Purchases of treasury stock .................................... (4,111) (3,488) (11,208)
Exercises of stock options ..................................... 130 -- --
Dividends paid ................................................. (1,133) (432) --
-------- -------- --------
Net cash used in financing activities ........ (7,714) (4,320) (8,208)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............. 2,470 577 (21,283)
Cash and cash equivalents:
Beginning of year ........................................... 1,046 469 21,752
-------- -------- --------
End of year ................................................. $ 3,516 1,046 469
======== ======== ========
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 1997 and 1998. 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.
Dividends
High Low Per Share
1997 First Quarter 14.875 11.125 $0.00
1997 Second Quarter 16.625 12.500 0.00
1997 Third Quarter 16.500 15.125 0.05
1997 Fourth Quarter 19.750 15.375 0.05
1998 First Quarter 19.375 16.750 $0.06
1998 Second Quarter 20.000 16.500 0.06
1998 Third Quarter 19.250 11.750 0.06
1998 Fourth Quarter 17.750 12.000 0.07
For information regarding restrictions on dividends, see Note 3 to the
Notes to Consolidated Financial Statements.
As of March 29, 1999, the Company had approximately 1,382 shareholders of record
and 5,315,463 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
Independent Auditors
KPMG LLP
515 Broadway
Albany, NY 12207
Telephone: (518) 427-4600
Investor Relations
Shareholders, investors and analysts interested in additional information may
contact:
Sandra Hammond, Assistant Vice President
Executive Asst./Investor Relations
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, 1998 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 28, 1999 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
Mohawk Community Bank Offices:
Corporate 11 Division Street
Amsterdam, N.Y. 12010
(518) 842-7200
Traditional Branches:
11 Division Street, Amsterdam, NY 12010
161 Church Street, Amsterdam, NY 12010
Route 30N, Amsterdam, NY 12010
Route 30 & Maple Avenue, Amsterdam, NY 12010
Riverfront Center, Amsterdam, NY 12010
Grand Union Plaza, Route 50, Ballston Spa, NY 12020
Village Plaza, Clifton Park, NY 12068
19 River Street, Fort Plain, NY 13339
Arterial at Fifth Avenue, Gloversville, NY 12078
5 New Karner Road, Guilderland, NY 12084
Supermarket Branches:
Price Chopper Supermarkets:
Sanford Farms Plaza, Amsterdam, NY 12010
873 New Loudon Rd., Latham, NY 12110
1640 Eastern Parkway, Schenectady, NY 12309
115 Ballston Avenue, Saratoga, NY 12866
Route 50, Saratoga, NY 12866
5631 State Highway 12, Norwich, NY 13815
Hannaford Supermarkets:
235 Fifth Avenue Ext., Gloversville, NY 12078
Route 28, Oneonta, NY 13850
Operations Center 35 East Main Street
Amsterdam, N.Y. 12010
DIRECTORS AND OFFICERS
Board of Directors
- - ------------------
(Ambanc Holding Co., Inc. and Mohawk Community Bank) Year appointed
to Bank Board
Lauren T. Barnett, Barnett Agency, Inc., Chairman of the Board 1966
John M. Lisicki, President & Chief Executive Officer 1998
Paul W. Baker, Retired, Morrison & Putman Music Store 1963
James J. Bettini, Vice President, Farm Family Insurance 1998
John J. Daly, Alpin Haus 1988
Robert J. Dunning D.D.S., Dentist 1972
Lionel H. Fallows, Retired, Lieutenant Colonel 1981
Dr. Daniel J. Greco, Retired, School Superintendent 1998
Marvin R. LeRoy, Jr., Alzheimers Association, Northeastern NY Chapter 1996
Charles S. Pedersen, Independent Manufacturers' Representative 1977
Carl A. Schmidt, Jr., Sofco, Inc. 1974
Dr. Ronald S. Tecler, Dentist 1998
John A. Tesiero, Jr., Owner, Construction Supply Business 1998
William A. Wilde, Jr., Amsterdam Printing and Litho Corp. 1966
Charles E. Wright, President, WW Custom Clad 1998
Executive Officers of Ambanc Holding Co., Inc. and Mohawk Community Bank
- - ------------------------------------------------------------------------
John M. Lisicki President/Chief Executive Officer
James J. Alescio Sr.Vice President/Treasurer/Chief Financial Officer
Benjamin Ziskin Sr. Vice President/Sr. Consumer Lending Officer
Thomas Nachod Sr. Vice President/Sr. Commercial Lending Officer
Robert Kelly Vice President/General Counsel/Secretary